INTRODUCTION

Investment income denotes passive income as no maintenance and support services needs to be
provided to generate such income. Investment income such as dividend, interest, rental has to be
computed individually to arrive at adjusted income of each investment source. No capital allowance
is available to investment income. Some people earned income from various sources and need to
understand what type of income that they earned to make it easier in taxation process.

Dividend represents distribution or payment out of profits to the company’s shareholders. It is

decided by the board of directors, to a class of its shareholders.

Interest refers to compensation for any delayed payment (loan) or refers to investment income.
Income earned through depositing money in savings programs, buying certificates of deposit (CDs)
or bonds, or lending your money.

Rental is the sums paid for the use or occupation of any premises or part thereof (example,
residential house, shop house, land) or for the hiring of any thing (example, plant, machinery,
furniture).

Royalty is a unit investment trust in which the trustee buys the rights to income from a natural
resource, such as oil or real estate, and distributes the profit to beneficiaries. It is paid as
consideration for the use or right to use.

Premium means the agreed price or consideration for assuming and carrying the risk or obligation.
It includes any additional charge or assessment payable under the contract, whether in one sum or
installments.

Discount refers to profits arising from discounting transactions. Such profit include the difference
between the face value of bills of exchange and their corresponding purchase price.

Pension is a periodical payment made to an individual who has permanently ceased to exercise an
employment. The recipient can be individual, his wife, child, relatives or dependents.

Annuity refers to an amount fixed under the terms of a will or investment which enables the
beneficiary or investor to receive a periodical payment for life or for a fixed term under a contract.

SOURCES OF INCOME

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Section 4. Classes of income on which tax is chargeable.
Subject to this Act, the income upon which tax is chargeable under this Act is income in respect of-
(a) gains or profits from a business, for whatever period of time carried on;
(b) gains or profits from an employment;
(c) dividends; interest or discounts;
(d) rents, royalties or premium;
(e) pensions, annuities or other periodical payments not falling under any of the foregoing
paragraphs;
(f) gains or profits not falling under any of the foregoing paragraphs.

Section 15. Derivation of interest and royalty income in certain cases.

(a) if responsibility for payment of the interest or royalty lies with the Government or a State
Government;

DIVIDEND INCOME
Basis Period
Will be subjected under Section 4(c) (non-business income) of the Income Tax Act 1967.
It will be taxed in the year of assessment which corresponds with the calendar year wherein the
date of dividend payments falls.

Allowable Expenses
Any revenue that incurred in generating dividend.
Example: interest expenses and management charge.
Only expenses “wholly and exclusively” incurred in producing the dividend are deductible
Example: interest expenses

Exemption
It is exempted from income tax in the hands of individuals if they are paid out of tax exempt
accounts.
Arise from any of the following:
(a) resident company under the Promotion of Investment Act 1986,
(b) resident company under the Income Tax Act 1967.
(c) foreign income received by a resident company (other than company carrying on
business of banking, shipping, insurance, sea and air transport).
(d) chargeable income for year of assessment 2000 (prior year basis).

Additional, dividends that also exempt from income tax in the hands of the recipients:
(a) distributed by co-operatives societies to members,

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 (b) received from an offshore company distributed out of income derived from an offshore
business activity or income exempt from tax, and
(c) declared out of the exempt income of close-end funds or venture capital companies.

Imputation system
Effective before year of assessment 2008.
Share holder may utilize the tax deemed to be deducted at source to offset his tax taxibility.
Share holder must gross up when they received net dividend by using this formula:
GROSS DIVIDEND = NET DIVIDEND
[1-tax rate (%)]

Single Tier System

Effective from year of assessment 2008.
Exempted in the hand of shareholders under Paragraphs 12B schedule 6.

Computation of Adjusted/Statutory Income

Shareholders are taxed at gross (re-grossing of dividends).
To avoid double taxation, the tax deducted at source by the company will be given as a credit to
the shareholders against income tax payable.
If not deductible, grossing up is done based on the notion that the amount received is net after tax
at 28%.
RM
Employment income xxx
Dividends (xxxx/0.72) xxx
Total income xxx
Less: Self relief (xxx)
Less: EPF & Insurance relief (max) (xxx)
ADJUSTED/STATUTORY INCOME xxx

INTEREST INCOME
Basis Period
Taxable under Section 4(c) (non-business income).
It is taxable in the year of assessment, which is coincides with the calendar year when it is first
receivable, unless it is advanced interest income or interest, which is received more than 5 years
after the end of the calendar year receivable.

Allowable Expenses
Only expenses “wholly and exclusively” incurred in producing the interest are deductible.
Include related interest and bank charges on loan taken to generate the interest income.

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Any unabsorbed expenses cannot be carried forward to future years of assessment.

Exemption
The types of exempt interest differ between resident and non-resident.
For resident individuals interest paid or credited in respect of:
Paragraph 19 schedule 6,
(a)savings certificate issued by the government,
Income tax (Exemption) (No. 36) Order 2000. PU. (A) 257/2000
(b)investment in premium savings certificate under the scheme of Bank Simpanan Nasional,
Income tax (Exemption) (No. 5) Order 2001. PU. (A) 220/2001
(c)bonds and securities issued by Pengurusan Danaharta Nasional Berhad within and outside
Malaysia,
Paragraph 35 schedule 6,
(d)securities or bonds issued or guaranteed by the government,
(e)debentures other than convertible loan stock approved by the Securities Commission,
(f)Bon Simpanan Malaysia issued by the Central Bank Negara Malaysia,
Income tax (Exemption) (No. 13) Order 2001. PU. (A) 310/2001
(g)non-convertible loan stocks paid oar credited by any listed company in Malaysia Exchange or
Securities Dealings and Automated Quotation Berhad,
Paragraph 34A schedule 6,
(h)Merdeka Bon issued by Bank Negara Malaysia,
Income tax (Exemption) (No. 6) Order 1998. PU. (A) 155/98
(i)interest or bonus from Bank Simpanan Nasional or Lembaga Tabung Haji,
Minister of Finance has especially exempted the following interest income from income tax,
(j)interest upon savings deposits up to RM100,000 with bank or finance companies registered
under the Banking and Financial Institutions Act 1989 or Islamic Banking Act 1983,
(k)interest upon saving deposits up to RM100,000 with Bank Pertanian, Malaysia Building Society
Bhd, a registered co-operatives and other institutions approved by the Minister,
Income tax (Exemption) (No. 12) Order 1996. PU. (A) 64/96
(l)interest upon fixed deposits or money deposits in any investment account up to RM100,000 and
not exceeding 12 months with the bank and financial institutions in (j) and (k) above,
(m)interest upon fixed deposits with tenures more than 12 months with bank and financial
institutions in (j) and (k) above,

5% withholding tax has been deducted from the non-exempt interest income, resident individuals
need not report the ensuing interest for income tax purposes.
Paragraph 33 schedule 6,
Non-resident individuals qualify for exemptions (a) to (h) mentioned above.

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Interest derived by them from Malaysia (other than accruing to a place of business in Malaysia)
and paid or credited by a person carrying on the business of banking in Malaysia and licensed
under the Banking and Financial Institutions Act 1989 is exempted from income tax.

Computation of Adjusted/Statutory Income

Difference between gross income and allowable expenses .
RM
Gross INTEREST Income xx
Less: Allowable expenses (xx)
ADJUSTED/STATUTORY INCOME xx

RENTAL INCOME
Basis Period
Taxable under Section 4(d) (non-business income).
May be assessed under Section 4(a) if the rental is derived from the minimum number of units
based on the Inland Revenue Board Guidelines.

It is generally taxed in the basis period first receivable.

Rental received in advance is assessable in the basis period of receipt,

Allowable Expenses
Only expenses “wholly and exclusively” incurred in producing the rental income are deductible.
i. cost of repairs and maintenance of the property;
ii. insurance premium on fire/burglary;
iii. cost of supervision and rental collection;
iv. cost of obtaining tenant to replace the old tenant;
v. interest paid on loan facility taken to finance the property;
vi. cost of renewing rental agreement and other miscellaneous expenses.
Initial expenses are not deductible. Example: advertisement to find tenant, legal fee on rental
agreement.

Computation of Adjusted/Statutory Income

Properties of the person can be grouped in the following categories:
(a)resident properties;
(b)shop-house or commercial properties; and
(c)vacant land.

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Capital allowance are not deductible in arriving at statutory rental income as the letting of property
is treated as a non-business resource.
If the property qualifies as an industrial building, industrial allowance can be claimed.
RM REMARKS
Rental income xxx
less: repainting (xxx)
built in cup-boards - Capital in nature
legal costs (xxx) Disallowed if incurred on first tenant
commission (xxx) Disallowed if incurred on first tenant
quit rent (xxx)
management fees (xxx)
ADJUSTED/STATUTORY INCOME xxx sec 4(d) of ITA 1967

ROYALTY INCOME
Basis Period
Assessed under Section 4(d) (non-business income).
Royalty is derived from Malaysia if any of the following conditions is met:
(a)responsibility for payment lies with Government or State Government;
(b)responsibility for payment lies with a resident person; and
(c)royalty is charged as an outgoing or expenses against Malaysia income.

Will be deemed derived in Malaysia if Section 15 is satisfied.

Malaysia derived royalty is taxable in the year of assessment which coincides with the calendar
year wherein the royalty is receivable.

Allowable Expenses
Only expenses “wholly and exclusively” incurred in producing the royalty income are deductible.
These would include costs relating to editing, typing or proofreading the draft material.

Exemption
TYPE OF ROYALTY EXEMPTION (UP TO RM)
Paragraph 32 Schedule 6: 6000
(a) royalty from publication, use or the right to use any artistic work
(other than original painting) and from recording disc or tapes.
Paragraph 32A Schedule 6: 12000

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 (b) royalty from translation of books and literary work at the specific
request of the Ministry of Education or the Attorney General's
Chambers
Paragraph 32B Schedule 6: 20000
(c) royalty in respect of publication of, or the work, any original
painting or musical compositions.
Paragraph 32C Schedule 6: Full exempted
(d) income in respect of cultural performance approved by the
Minister.
Paragraph 32D Schedule 6: Full exempted
(e) an individual resident in Malaysia, being payment in respect of any
musical composition.

Computation of Adjusted/Statutory Income

RM
Gross Royalty Income xx
Less: Cost of material (xx)
Cost of commercializing (xx)
ADJUSTED/STATUTORY INCOME xx

From the YA 2004, researchers are given 50% tax exemption on royalty receive from their
researches findings.

PREMIUM INCOME
Basis Period
Assessed on a receipt basis under Section 4(d) of the Income Tax Act 1967.

Landlord able to obtain the receipt on demand.

Taxed in the year of assessment which corresponds with the calendar year wherein the premium is
received.
Allowable Expenses
Premiums paid for Keyman policy on the life of the chief executive officer with the company (as the
beneficiary) would be not be a deductible expense as the company had acquired an asset.
Reference can be made to Public Ruling 2/2003.

Computation of Adjusted/Statutory Income

RM
Gross premium income xx
Less: Allowable expenses (xx)
ADJUSTED/STATUTORY INCOME xx
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DISCOUNT INCOME
Basis Period
Taxable under section 4(c) of the Income Tax Act 1967 in the year of assessment which
correspond with the calendar year within which the bill of exchange either mature or are sold,
whichever earlier.

Allowable Expenses
Only expenses “wholly and exclusively” incurred in producing the discount are deductible.

Exemption
discount or profit received from sale of bonds or securities issued within and outside Malaysia
effective from Y/A 1999.

Computation of Adjusted/Statutory Income

RM
Gross discount income xx
Less: Allowable expenses (xx)
ADJUSTED/STATUTORY INCOME xx

PENSION INCOME
Basis period
Assessed under Section 4(e) (non-business income) per calendar year basis.
Taxable in the year of assessment which coincides with the calendar year wherein the pension is
receivable.

Allowable Expenses
Only expenses “wholly and exclusively” incurred in producing the pension are deductible.

Exemption
Paragraph 30 Schedule 6:
Pension is derived from Malaysia.
Recipient is 55 years old or reach compulsory age of retirement OR due to ill-health.
Pension is paid from an approved fund/scheme/society.
Former employment is in Malaysia.

Paragraph 30A Schedule 6:

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Gratuity or pension is derived from Malaysia.
Attained the age of 55 years old when retired OR due to ill-health.
Exemption is restricted to one pension only (if a person receives more than one pension) being the
higher or highest one.
Others:
Wound and disabilities of army members.
Widows and orphans of army members.

Computation of Adjusted/Statutory Income

RM
Gross pension income xx
Less: Allowable expenses (xx)
ADJUSTED/STATUTORY INCOME xx

ANNUITY INCOME
Basis Period
Assessed on a receipt basis under Section 4(e) of the Income Tax Act 1967.

Assessability does not depend on whether the recipient received such amount or not.
Annuity normally accrues to individuals, the annuity will be chargeable to income tax in the year of
assessment which correspond with the calendar year that the annuity is receivable.

Allowable Expenses
Only expenses “wholly and exclusively” incurred in producing the annuity are deductible.

Computation of Adjusted/Statutory Income

RM
Gross annuity income xx
Less: Allowable expenses (xx)
ADJUSTED/STATUTORY INCOME xx

OTHER INCOME TO FALL UNDER SECTION 4(F), INCOME TAX ACT 1967
It all about requirement that the items included in its scope must be income from gains or profits,
which are ejusdem generis (the same general class) with the preceding paragraphs [(a) to (e)]
though not falling precisely within any one of them.
Example of periodical payments: alimony and sums payable under a separation order.

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COMPREHENSIVE ILLUSTRATION/EXAMPLE
Encik Shahruddin is a retired fireman at the age of 57 at the year of 2008. He received the
following income in the year of 2009,
RM
1.Gross Dividend income 175,000
2.Gross Interest income 19,000
3.Gross Rental income 24,000
4.Gross Royalty income 20,000
5.Gross Premium income 22,000
6.Gross Discount income 13,000
7.Gross Pension income 15,500
8.Gross Annuity income 25,000

Additional information,
1.royalty received when compose music for Rimba Bara band.
2.He incurred interest of RM45,000 in 2009 on a term loan to partly finance the acquisition of the
dividend.
3.In order to secure the tenancy, Shahruddin repainting and repairing circuit in his apartment at
costs RM2,000 and RM5,000 respectively.

Compute the statutory income for the year of assessment 2009 of Encik Shahruddin.

Encik Shahruddin
Statutory income for the year 2009
RM RM
Dividend income 175000
Less: interest incurred (45000)
Net dividend income 130000
Interest income 19000
Rental income 24000
Less: repainting (2000)
Management fee (5000)
Net rental income 17000
Royalty income exempted
Premium income 22000
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Discount income 13000
Pension income exempted
Annuity income 25000
Statutory income 226000

REFERENCES
Text book
Farouk.A.M, Ali.H.M, Ibrahim.H.B, Farouk.U.K, Personal Income Tax In Malaysia, first edition, Mc
Graw Hill Education, 2006.

Kasipillai.J, A Comprehensive Guide to Malaysian Taxation, Mc Graw Hill Education, 2007.

From internet
http://www.kpmg.com.my

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