BBTX4103 Taxation I

OUM Business School
BBTX4103
Taxation I
Copyright © Open University Malaysia (OUM)

BBTX4103
TAXATION I
Yusniyati Yusri
Noor Sharoja Sapiei

Project Directors: Prof Dato’ Dr Mansor Fadzil
Prof Dr Wardah Mohamad
Open University Malaysia
Module Writers: Yusniyati Yusri

Universiti Putra Malaysia
Noor Sharoja Sapiei

Universiti Malaya
Moderators: Noor Sharoja Sapiei

Universiti Malaya
Mohamad Afzhan Khan Mohamad Khalil

Developed by: Centre for Instructional Design and Technology

First Edition, August 2007

Second Edition, December 2012
Third Edition, April 2014
Fourth Edition, April 2015 (rs)
Copyright © Open University Malaysia (OUM), April 2015, BBTX4103
All rights reserved. No part of this work may be reproduced in any form or by any means
without the written permission of the President, Open University Malaysia (OUM).

Table of Contents
Course Guide xi-xvi
Topic 1 Introduction to Malaysian Taxation 1

1.1 What is Tax? 2
1.2 Historical Background 4
1.3 Criteria of Taxation 5
1.4 Objectives of Taxation 8
1.5 Taxation in Malaysia 9
1.5.1 Direct Taxes 9
1.5.2 Indirect Taxes 14
1.6 Sources of Tax Revenue Law 19
Summary 20
Key Terms 20
Self-Test 1 20
Self-Test 2 21
Topic 2 Malaysian Tax Administration 22

2.1 Inland Revenue Board (IRB) 23
2.1.1 Functions of IRB 24
2.2 Return and Assessment 26
2.2.1 Official Assessment System (OAS) 27
2.2.2 Self Assessment System (SAS) 28
2.3 Responsibilities of Individual Taxpayers 30
2.4 Responsibilities of Employers 31
2.5 Type of Assessment 33
2.6 Collections and Recovery of Tax 39
2.6.1 Payment of Tax 39
2.7 Appeals 41
2.8 Offences and Penalties 42
Summary 46
Key Terms 46
Self-Test 1 46
Self-Test 2 47

iv X TABLE OF CONTENTS
Topic 3 Scope of Charge 48

3.1 Scope of Charge 49
3.1.1 Categories of Scope of Charge for Tax 50
3.2 Types and Income Sources 52
3.3 Meaning of Chargeable Person 53
3.4 Year of Assessment for Individuals 54
3.5 Residence Status 55
3.5.1 How to Determine Residence Status? 56
3.5.2 Importance of Residence Status 60
Summary 61
Key Terms 61
Self-Test 1 61
Self-Test 2 62
Topic 4 Employment: Acquisition 65

4.1 Definition of Employment 66
4.1.1 Employer 68
4.1.2 Employee 69
4.1.3 Profession 70
4.1.4 The Importance to Differentiate Profession and 72
Employment
4.2 Acquisition From Employment Income 73
4.2.1 Income Deemed Derived from Malaysia 74
4.2.2 Foreign Income 77
Summary 78
Key Terms 78
Self-Test 1 79
Self-Test 2 80
Topic 5 Employment: Basis Period 81

5.1 Gross Income 82
5.2 Adjusted Income 84
5.2.1 Basis Period 85
5.2.2 Exempted Employment Income 86
5.2.3 Non-taxable Income 92
5.3 Exemption of Employment Income for the Non-Resident 94
Summary 95
Key Terms 95
Self-Test 1 96
Self-Test 2 96
Appendix 5.1 100

TABLE OF CONTENTS W v
Topic 6 Non-Business Income 101

6.1 Dividend 102
6.1.1 Income Classification 103
6.1.2 Derivation of Income 104
6.1.3 Deduction of Tax on Dividend Received 105
6.1.4 Basis of Assessment 106
6.1.5 Allowable Expenses 107
6.1.6 Foreign Dividend 108
6.1.7 Exempt Dividend 110
6.2 Interest 110
6.2.1 Classification of Income 111
6.2.2 Derivation of Interest Income 112
6.2.4 Allowable Expenses to be Deducted 114
6.2.5 Exemption of Interest Income 115
6.3 Rental Income 117
6.3.1 Introduction 117
6.3.2 Derivation of Rental Income 118
6.3.4 Allowable Expenses 120
6.3.5 Non-allowable Expenses 121
6.3.6 Capital Allowance 122
6.3.7 Rental Loss 122
6.3.8 Sources of Income 123
6.4 Royalty 124
6.4.1 Derivation of Royalty Income 124
6.4.2 Exemption for Royalty Income 125
6.5 Other Sources of Non-Business Income 126
6.5.1 Premium 126
6.5.2 Discount 127
6.5.3 Pension 127
6.6 Occupation of Premises for Non-Business Purposes 129
Summary 129
Key Terms 130
Self-Test 1 130
Self-Test 2 132
Topic 7 Business Income 134

7.1 Definition of Business 135
7.2 The Existence of Business/Trade 136
7.3 Derivation of Business Income 138
7.4 Basis Period for a Business 139
7.5 Gross Income from Business 141

vi X TABLE OF CONTENTS
7.6 Adjusted Income and Statutory Income of Business 142

7.7 Business Expenses 144
7.8 Cessation of Business 151
Summary 152
Key Terms 152
Self-Test 1 152
Self-Test 2 155
Topic 8 Capital Allowance ă Plant and Machinery 159

8.1 Definition of Plant and Machinery 160
8.2 Qualifying Plant Expenditure (QPE) 161
8.3 Types of Allowance 162
8.3.1 Initial Allowance 163
8.3.2 Annual Allowance 164
8.3.3 Balancing Charges / Allowances 165
8.3.4 Notional Allowance 167
8.4 Method for Unabsorbed Capital Allowance 169
8.5 Other Methods for Capital Allowance 170
8.5.1 Hire Purchase 170
8.5.2 Two Years Claw-back 172
8.5.3 Dual Purpose 173
8.6 Used Plant and Machinery (Para 2A, 2B, 2C) 173
Summary 174
Key Terms 175
Self-Test 1 175
Self-Test 2 176
Topic 9 Calculation of Individual Income Tax Payable 179

9.1 Unabsorbed Business Loss 181
9.2 Approved Donations 181
9.3 Tax Reliefs 182
9.3.1 Personal Relief 183
9.3.2 Spouse Relief 183
9.3.3 Child Relief 184
9.3.4 Life Insurance Premium and EPF 186
9.3.5 Purchase of Personal Computer 188
9.3.6 Other Reliefs 189
9.4 Tax Rates 190
9.5 Tax Rebate 192
9.5.1 Self-rebate 192
9.5.2 Religious Payment 193
9.5.3 Fees (Section 6C) 193

TABLE OF CONTENTS W vii
9.6 Dividend Credit 193

9.7 Separate and Joint Assessment 194
9.7.1 Joint Assessment 195
9.7.2 Separate Assessment 195
Summary 199
Key Terms 199
Self-Test 1 200
Self-Test 2 201
Topic 10 Taxation on Partnerships 208

10.1 Malaysia is Born through Partnership 209
10.1.1 Definitions 209
10.1.2 Types of Partners 210
10.1.3 Existence of a Partnership 211
10.1.4 Assessment of a Partnership 212
10.2 Computation of a Partnership Income 213
10.2.1 Provisional Adjusted Income 213
10.2.2 Divisible Income 214
10.3 Evaluation of PartnerÊs Income 215
10.3.1 Adjusted Income 215
10.3.2 Statutory Income 215
10.3.3 Computation of Capital Allowance 216
10.3.4 Changes in Partnership 218
10.4 Non-Business Income from Partnership 220
Summary 220
Key Terms 220
Self-Test 1 221
Self-Test 2 221
Answers 228

viii X TABLE OF CONTENTS

COURSE GUIDE

COURSE GUIDE W xi
COURSE GUIDE DESCRIPTION

You must read this Course Guide carefully from the beginning to the end. It tells
you briefly what the course is about and how you can work your way through
the course material. It also suggests the amount of time you are likely to spend in
order to complete the course successfully. Please keep on referring to the Course
Guide as you go through the course material as it will help you to clarify
important study components or points that you might miss or overlook.
INTRODUCTION
BBTX4103 Taxation I is one of the courses offered by OUM Business School at
Open University Malaysia (OUM). This course is worth three credit hours and
should be covered over 8 to 15 weeks.
COURSE AUDIENCE
This course is offered to all students taking the Bachelor of Accounting
programme.
As an open and distance learner, you should be acquainted with learning

independently and be able to optimise the learning modes and environment
available to you. Before you begin this course, please ensure that you have the
right course materials, understand the course requirements, as well as know how
the course is going to be conducted.
STUDY SCHEDULE
It is a standard OUM practice that learners accumulate 40 study hours for every
credit hour. As such, for a three-credit hour course, you are expected to spend
120 study hours. Table 1 gives an estimation of how the 120 hours could be
accumulated.

xii X COURSE GUIDE
Table 1: Estimation of Time Accumulation of Study Hours
Study
Study Activities
Hours
Briefly go through the course content and participate in initial discussions 3
Study the module 60
Attend 3 to 5 tutorial sessions 10
Online participation 12
Revision 15
Assignment(s), Test(s) and Examination(s) 20
TOTAL STUDY HOURS ACCUMULATED 120
COURSE OUTCOMES
By the end of this course, you should be able to:
1. Explain the tax system in Malaysia;
2. Distinguish the tax resident status for individual and corporate taxpayers;
3. State the types of business and non-business income;
4. Identify the types of deductible expenses, reliefs and rebates; and
5. Calculate the income tax payable for individual taxpayers.
COURSE SYNOPSIS
This course is divided into 10 topics. The synopsis for each topic is as follows:
Topic 1 covers the introduction of Malaysian tax system. In this topic, you are
exposed to the overview of tax system such as historical background, direct taxes
and indirect taxes.

COURSE GUIDE W xiii
Topic 2 is more detailed compared to Topic 1. In this topic, you are exposed to
the tax administrators such as the Inland Revenue Board (IRB)/Lembaga Hasil
Dalam Negeri (LHDN) and the Royal Customs Department (RCD), and at this
stage, you should be able to differentiate who is responsible to collect direct and
indirect taxes. You must also understand your responsibilities as a taxpayer.
Topic 3 covers tax compliance issues. In this topic, you are exposed to Section 3
of the Income Tax Act 1967, which discusses on the year of assessment, the types
of income, the residence status and the chargeable income.
Topic 4 describes employment income. This topic elaborates on the income from
employment and profession as well as foreign income. You should be able to
differentiate between income from employment and income from profession in
order to calculate the tax payable.
Topic 5 describes employment income, but at this point, further discussion is

needed. The topic covers gross income, adjusted income and relief.
Topic 6 deals with the derivation of non-business income. The types of the non-
business income are dividend, interest, rent, royalty and others.
Topic 7 focuses on business income. It covers the deductible and the non-deductible
expenditures and the relief for business income. Business income such as gross
income, adjusted income and statutory income are also discussed in this topic.
Topic 8 describes the capital allowances for plant and machinery, including the
determination of qualified plant expenditures (QPE), rates, types of allowances
that can be claimed and the residual expenditures.
Topic 9 is one of the most interesting topics. After studying this topic, you should
be able to calculate your tax payable on your own and of course, can comply
with the self-assessment system. In general, this topic will guide you on how to
derive your income tax payable by inserting the figures such as unabsorbed
business loss, approved donation, exemptions for individual, spouse, child and
insurance premium and contribution to EPF.
Topic 10 is the final topic, which covers taxation on partnerships. The topic
discusses the different types of partnerships, how to compute a partnership
business income, how to calculate each partner's income and analyse non-
business income from partnership.

xiv X COURSE GUIDE
TEXT ARRANGEMENT GUIDE

Before you go through this module, it is important that you note the text
arrangement. Understanding the text arrangement will help you to organise your
study of this course in a more objective and effective way. Generally, the text
arrangement for each topic is as follows:
Learning Outcomes: This section refers to what you should achieve after you
have completely covered a topic. As you go through each topic, you should
frequently refer to these learning outcomes. By doing this, you can continuously
gauge your understanding of the topic.
Self-Check: This component of the module is inserted at strategic locations

throughout the module. It may be inserted after one sub-section or a few sub-
sections. It usually comes in the form of a question. When you come across this
component, try to reflect on what you have already learnt thus far. By attempting
to answer the question, you should be able to gauge how well you have
understood the sub-section(s). Most of the time, the answers to the questions can
be found directly from the module itself.
Activity: Like Self-Check, the Activity component is also placed at various

locations or junctures throughout the module. This component may require you
to solve questions, explore short case studies, or conduct an observation or
research. It may even require you to evaluate a given scenario. When you come
across an Activity, you should try to reflect on what you have gathered from the
module and apply it to real situations. You should, at the same time, engage
yourself in higher order thinking where you might be required to analyse,
synthesise and evaluate instead of only having to recall and define.
Summary: You will find this component at the end of each topic. This component
helps you to recap the whole topic. By going through the summary, you should
be able to gauge your knowledge retention level. Should you find points in the
summary that you do not fully understand, it would be a good idea for you to
revisit the details in the module.
Key Terms: This component can be found at the end of each topic. You should go
through this component to remind yourself of important terms or jargon used
throughout the module. Should you find terms here that you are not able to
explain, you should look for the terms in the module.
References: The References section is where a list of relevant and useful

textbooks, journals, articles, electronic contents or sources can be found. The list
can appear in a few locations such as in the Course Guide (at the References

COURSE GUIDE W xv
section), at the end of every topic or at the back of the module. You are
encouraged to read or refer to the suggested sources to obtain the additional
information needed and to enhance your overall understanding of the course.
PRIOR KNOWLEDGE
No prior knowledge required.
ASSESSMENT METHOD
Please refer to myINSPIRE.
REFERENCES
Choong Kwai Fatt. (2010). Malaysian taxation: Principles and practice (16th ed.).
Petaling Jaya, Malaysia: Infoworld.
Faridah Ahmad & Loo Ern Chen. (2005). Fundamentals of Malaysian taxation.
Petaling Jaya, Malaysia: Pearson, Prentice Hall.
Income Tax Act 1967.
Jeyapalan Kasipillai. (2010). A guide to Malaysian taxation (1st ed.).

Kuala Lumpur, Malaysia: McGraw-Hill.
Mohd Rizal Palil. (2005). Aplikasi cukai korporat di Malaysia. Petaling Jaya,
Malaysia: Pearson, Prentice Hall.
Public Rulings of Inland Revenue Board.
Veerinderjeet Singh. (2005). Malaysian taxation: Administrative and technical

aspects (5th ed.). Kuala Lumpur, Malaysia: Longman.

xvi X COURSE GUIDE
TAN SRI DR ABDULLAH SANUSI (TSDAS) DIGITAL

LIBRARY
The TSDAS Digital Library has a wide range of print and online resources for the
use of its learners. This comprehensive digital library, which is accessible
through the OUM portal, provides access to more than 30 online databases
comprising e-journals, e-theses, e-books and more. Examples of databases
available are EBSCOhost, ProQuest, SpringerLink, Books24x7, InfoSci Books,
Emerald Management Plus and Ebrary Electronic Books. As an OUM learner,
you are encouraged to make full use of the resources available through this
library.

Topic  Introduction
1 to Malaysian
Taxation
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Define the meaning of tax;
2. Arrange the chronology and evolution of the Malaysian tax system;
3. Review the three principles of taxation established by Adam Smith;
4. Discuss the objectives of taxation;
5. Assess the taxes which fall under direct taxes; and
6. Assess the elements of indirect taxes.
 INTRODUCTION
Figure 1.1: Taxes

Source: http://webpages.csus.edu/~rk43/fees.htm
Let us look at Figure 1.1. Do you agree that we are exposed to tax almost every
day of our lives? The car, the clothes, the shoes that we use and many other items
consist of tax elements. Sadly, most of us do not realise this fact. Therefore, you

2  TOPIC 1 INTRODUCTION TO MALAYSIAN TAXATION
should be aware that taxation is one of the most important element in our
everyday life. In developing countries for example, revenues from taxes are used
to build schools, hospitals, highways and many other infrastructures.
How about taxation in our country? Is there any difference in Malaysian taxation
from other parts of the world? In Malaysia, the government relies heavily on tax
revenues in order to develop our nation. Do you realise that the facilities around
you are financed by your own money through tax payments? In other words, we
can say that some of the costs of developing our country were funded by you (i.e.
taxpayers). So, why must you vandalise the facilities which were built with your
own money? By realising this, you will surely agree that we should take good
care of the amenities and say ÂNoÊ to vandalism.
In this topic, we will discuss the definition of tax in general, historical

background of the Malaysian tax system, objective of taxation, direct taxes and
also indirect taxes. By the end of this topic, we hope that you would appreciate
the spirit of taxation and obtain clearer understanding of the Malaysian tax
system.
1.1 WHAT IS TAX?

Having an in-depth knowledge of tax would enhance your interest in this
subject. In line with that, you should take note that taxation in various forms
have existed before the first civilisation of mankind. If you could recall the
Malaysian history during the Malacca Sultanate, there were various kinds of
taxes imposed on the people. Of course, at that time, taxes were not paid with
money per se, but with gold and other kinds of valuables.
Today, you would probably agree if we say that many of these payments were
involuntary and had to be forced out of the taxpayers. The whole feudal system
of paying the landowner in kind (through goods and labour) is not really
different from todayÊs payments to the tax authorities. The only difference is that
nowadays the tax authorities prefer money payments instead of payment in kind.
So, what exactly is tax? As a starting point, let us have a look at what the Oxford
Dictionary has to say about tax:
Definition of Tax by Oxford Dictionary:

„A contribution levied on persons, property or business for the support of the
government.‰

TOPIC 1 INTRODUCTION TO MALAYSIAN TAXATION  3
Besides that definition, you could also define tax as:
„A compulsory exaction of money by a public authority for public purposes

enforceable by law.‰
OR
„The process of „raising money for the purposes of government by means of
contributions from individual persons.‰
The better way to understand the meaning of taxation is by examining the

characteristics of taxation. The High Court of Australia defines tax as a payment
that fulfils the six characteristics of taxation (see Figure 1.2 below). Each
characteristic should be understood fully so that one can appreciate the
importance of taxation.
Figure 1.2: Six characteristics of taxation
Below are the explanations of the tax characteristics:
(a) A Compulsory Payment

Tax is not compulsory for everybody. There are a number of requirements
that need to be fulfilled before any persons are required to pay tax, which
we will look into later on in the following section. Tax payments are only
compulsory for this group of so called „taxable persons‰. Those taxable
persons who fail to pay tax are subject to penalties because they are
violating the Income Tax Law.

(b) Money Raised for Government Purposes

The money from taxpayers is channelled towards fulfilling the needs of the
government to serve the public. It is the responsibility of the government to
use the money in any sector or any region in the best interest of the public.
(c) It Does Not Constitute Payment for Services Rendered by the Government
Taxation is not a payment in exchange of services rendered by the
government. In other words, it is not similar to a business transaction
where one seller provides services and the buyer has to pay for enjoying
that services. Thus, we cannot simply avoid paying taxes because we do
not get the level of services that we expected from the government.
(d) Not Penalties

Taxation also should not be viewed as penalties. Thus, we cannot claim that
we are good citizens and the government should not impose tax on us.
(e) The Exactions are Not Arbitrary

The determination of tax payable is not by chance or random. It is
determined using specific procedures by the Inland Revenue Board (IRB).
(f) The Exactions Should Not be Incontestable

One should understand that the amount of taxes imposed on him/her
could be challenged. However, this must be done using proper channels
and if the responsible government body is satisfied with the explanation
and proof provided by the taxpayer, the amount of taxes could be reduced.
1.2 HISTORICAL BACKGROUND

In this section, we will provide you with the background of our countryÊs tax
system. To begin with, do you know how taxation began in Malaya (as Malaysia
was then known)? Based on HeasmanÊs Report (1947), income tax (in itsÊ modern
form) was introduced by the British in the Federation of Malaya on 1 January
1948.
The taxation was in the form of the Income Tax Ordinance 1947. The provisions
of the Ordinance were based substantially on the Model Colonial Territories
Income Tax Ordinance 1922, which was designed for the British colonies at that
time. Similarly, the tax laws of many Commonwealth countries were initially
based on this legislative model.
You should also take note that the Income Tax Ordinance 1947 was subsequently
revoked by the Income Tax Act 1967, which came into effect on 1 January 1968.

This was because the 1967 Act actually consolidated the three laws of income
taxation which existed in Malaysia.
Table 1.1 should give you a better idea of the early Acts and its applications
according to states in Malaysia.
Table 1.1: Early Acts and its Applications According to States
Acts Application
Income Tax Ordinance 1947 Applicable to Peninsular Malaysia
Sabah Income Tax Ordinance 1956 Applicable to Sabah and Sarawak
Inland Revenue Ordinance 1960 Applicable to Sarawak only
Source: Singh (2005)
Referring to the above table, take note that since the formation of Malaysia in
1963, these three separate taxation laws of the territories continued to be in
existence until the introduction of the Income Tax Act 1967.
Although these Ordinances and all subsidiary legislations made under them
were formally revoked as of 1 January 1968, there were certain provisions which
were still allowed to be applied (as transitional provisions) to all three territories
(as stated in Schedule 9 of the Income Tax Act 1967).
1.3 CRITERIA OF TAXATION

After studying the Malaysian taxation background, you would surely wonder
what some of these taxation criteria are. Every country in the world must set its
criteria before designing the optimal tax system. In line with this, you should
note that there are a number of criteria or basic requirements that have been
suggested.
So, what should you do if you are the policy maker or the tax designer? As a
starting point, the federal policy makers and tax designers should look into the
important criteria of taxation before arriving at an optimal tax structure which
could be used to judge the performance of a tax system.
For a better picture on this matter, we encourage you to study the three broad
principles of taxation according to Adam Smith (1776). The three broad
principles of taxation are shown in Figure 1.3.

Figure 1.3: Adam SmithÊs principles of taxation
Referring to Figure 1.3, it is clear that SmithÊs three principles of taxation are very
brief. In order to obtain the optimum taxation system, additional principles such
as those in Figure 1.4 are suggested.
Figure 1.4: Additional principles of taxation
The explanations of each principle are as follows:
(a) Equity and Fairness

Equity and fairness principle means taxes levied should equally burden all
taxpayers in a similar economic situation.

(b) Efficiency and Neutrality

To achieve efficiency principle, the costs of determination and collection of
taxation should be the lowest possible. Neutrality means taxes should not
favour any taxpayer or group of taxpayer over another. It should be
designed to not interfere with or influence decision making.
(c) Simplicity
With regards to simplicity, tax assessment and computation should be
understood by an average taxpayer.
(d) Certainty
Certainty principle is achieved when the amount of tax that each taxpayer
needs to pay is not arbitrary but is certain.
(e) Flexibility
Tax system should be flexible and taxes should be enforced in a manner
that facilitates voluntary compliance as much as possible.
(f) Suitability
Taxes should be coordinated to ensure that neutrality and overall objective
of good governance are achieved.
(g) Fiscal Adequacy

Finally, under fiscal adequacy principle, taxes imposed should be just
enough to generate revenue in order to provide the necessary public
services to the community.
Looking at these criteria, you might think it is easy to attain them, but actually it
is not as easy as you think. You should note that besides the actual tax system of
a country, there is often a compromise in trade-offs between various criteria or
objectives.
ACTIVITY 1.1
Form a group of three and discuss the meaning of each criteria of
taxation.

1.4 OBJECTIVES OF TAXATION

In our earlier discussion, you have learned on certain criteria for taxation. On the
other hand, you should also realise that developing a tax system is not as simple
as building a house. As tax designers, we must carefully evaluate the
consequences of the tax system. By doing so, we could avoid any disagreement
from the taxpayers.
Based on the previous point, you surely would agree if we say that the objectives
of taxation are vital. This is due to the fact that objectives are the elements which
determine the success or failure of the system.
In line with this, we encourage you to study closely the main objectives of
taxation which are as follows:
(a) Collection of Revenue

Tax is the main source of revenue to finance governance expenditure
especially on the provision of public goods such as maintenance of the law
and order, and national defence.
(b) Efficiency
Tax policy will ensure that taxes are collected effectively and at minimum
cost to both the government and taxpayers.
(c) Macroeconomic Control

Tax policy is also used to regulate the private sector of the economy to
maintain the desired level of employment and increase economic
development/growth.
(d) Protection of Industries

Regulate the activities of specific areas of the private sector so as to
encourage activities that are beneficial to the country and discourage those
which are not desirable in the national interest.
(e) Redistribution of Income

Regulate the distribution of income and wealth between different types and
classes of citizens.
(f) Control of Consumption

Regulate specific activities of citizens which are thought to be undesirable,
such as drinking, smoking and gambling.

(g) Fairness and Equity

Ensure fairness and equity, i.e. the burden of tax is spread fairly and
equitably among taxpayers.
1.5 TAXATION IN MALAYSIA

Before we proceed further, what do you understand by taxation in Malaysia? Do
you think the Malaysian taxation is categorised into different types similar to the
British taxation?
Some of you might know and some might not be aware on this matter. To begin
with, we can say that there are two types of taxes in Malaysia:
(a) Direct tax; and
(b) Indirect tax.
These two types of taxes will be discussed further in the next section.
1.5.1 Direct Taxes

What are direct taxes? According to Merriam WebsterÊs online dictionary, direct
tax is a tax exacted directly from the taxpayer. Thus, direct taxes mean taxes,
which are paid directly by those on whom they are levied. There are four types of
direct taxes as shown in Figure 1.5.
Figure 1.5: Types of direct tax
In this section, we will discuss in detail the different types of direct taxes. To
begin with, let us study what is meant by income tax.

(a) Income Tax
Figure 1.6: Stress due to income tax
Most of you would probably regard paying income tax as a depressing part
of your life (see Figure 1.6). You may even wonder why you have to pay
them after all your sacrifice and hard work. It seems meaningless to you
and at the same time you feel that the government is taking advantage of
you.
The question is, „Do you really think that income tax is unnecessary?‰. In
order to answer that, we invite you to study closely some of the important
facts on income tax.
The Income Tax Act 1967 is the main Act that governs all income tax in
Malaysia. Income tax is levied on the income of any persons (including
individuals and companies), which is accrued or derived from Malaysia or
received by resident persons from outside Malaysia. There are two main
sources of revenue under the income tax, namely, personal income tax and
company tax.
Most of you are probably income earners who are categorised as salaried
individuals. Similarly, for those who have a sole proprietorship business,
you are also required to pay income tax for your business.
Based on the above explanation, we hope you realise how important

income tax is. You should also realise that the revenue from this tax is used
to build schools, hospitals and many other infrastructures for the citizens of
Malaysia.

(b) Real Property Gain Tax
Figure 1.7: Land and property
Figure 1.7 shows an example of land and property which also have its own
tax. In this section we will discuss further on what constitutes a real
property gain tax. Note that this kind of tax only relates to real property
transaction.
Real Property Gain Tax (RPGT) is a tax imposed on capital gains arising
from the disposal of any interest, option or other right in or over a land
situated in Malaysia. Section 2 of the Real Property Gain Tax Act 1976
(RPGTA 1976) defines real property as „any land or anything on the land
including lands, houses, ponds etc.‰. RPGT only applies to any disposal of
land in Malaysia either disposed by Malaysian or non-Malaysian. The gain
that arises from disposal of shares in a real property company is also
subjected to RPGT.
How do we compute the amount of tax to be paid for real property? Tax
payable will be calculated on chargeable gain which is the difference
between the acquisition price and disposal price.
In order to have a clearer picture on this matter, we encourage you to study

Table 1.2. With effect from 1 January 2010, the RPGT tax rates applicable for
the disposal of real properties assets are as follows.

Table 1.2: The Rates of Real Property Gain Tax
Individual/Permanent
Company
Residence
Disposed within 2 years after the acquisition
30% 30%
date
Disposed on the 3rd year after the acquisition
20% 20%
date
Disposed on the 4th year after the acquisition
15% 15%
date
Disposed on the 5th year after the acquisition
5% 5%
date or thereafter
Source: Inland Revenue Board MalaysiaÊs Website
(c) Stamp Duty

Many of you are surely familiar with the next type of tax. This third direct
tax is known as stamp duty. What is a stamp duty? Stamp duty is defined
as the tax collected by requiring the purchase of a stamp duty which is then
attached (usually on documents or publications).
Most of you may have paid the stamp duty before. Some of us need to pay
the stamp duty during the signing of a sale and purchase agreement when
buying houses, or when preparing an agreement for a study loan. The
assessment and collection of Stamp Duties is sanctioned by statutory law
which is now described as the Stamp Act 1949.
Stamp duty is levied on instruments listed in the first schedule of the

Stamp Act 1949. There are two types of duties, namely Âfixed dutiesÊ and
Âad valoremÊ duties. Fixed duties are imposed without any relation to the
amount expressed in the instrument while ad valorem duties is levied
based on the amount stated in the instrument. The Stamp Act 1949
provides the following:
(i) The Imposition of Ad Valorem Duties (that is, according to the

value) on:
 Instruments of transfer (implementing a sale or gift) of property

including marketable securities (meaning loan stocks and shares
of public companies listed on the Bursa Malaysia), shares of other
companies and of non-tangible property, for example book debts,
benefits to legal rights and goodwill;

 Instruments creating interests in property, for example

Tenancies and Statutory Leases;
 Instrument of security for monies including instruments creating

contracts for payment of monies or obligation for payment of
monies (generally described as „Bond‰); and
 Certain capital market instrument, for example, Contract Notes.
(ii) The Imposition of Fixed Duties on:
 A number of other legal, commercial, mercantile or capital

market instruments, for example, Power or Letter of Attorney,
Articles of Association of a Company, Promissory Notes, Policy
of Insurance etc.; and
 A duplicate, a subsidiary or a collateral instrument when it can

be shown that the original, principal or primary instrument has
been duly stamped.
(d) Petroleum Tax
Figure 1.8: PETRONAS logo
Let us take a look at Figure 1.8. We are sure that most of you know what
PETRONAS does. Do you know that there is a particular tax which has
been subjected to PETRONAS? This tax is known as the petroleum tax
which we will discuss further in this section.
The basis of Petroleum Income Tax is very similar to the Income Tax Act
(ITA) 1967. It is levied on the income from petroleum operations under the
Petroleum (Income Tax) Act 1967. This is the only tax imposed on income
from petroleum operations.
Firstly, income derived from the sale of crude oil and natural gas extracted
from Malaysia under a petroleum agreement entered into with either
PETRONAS or the Malaysia-Thailand Joint Authority (MTJA) (for special
joint development areas) would be subjected to petroleum income tax. In
this case, the petroleum income tax is assessed based on the income earned
in the preceding year.
Secondly, the income and dividends paid out from such income are not
subject to other income taxes. In Malaysia, for instance the extraction of
crude oil and natural gas is under the purview of PETRONAS under
Article 2 of the Petroleum Development Act 1974 [Act 144] whereby the
entire ownership in and the exclusive rights, powers, liberties and
privileges of exploring, exploiting, securing and obtaining petroleum
whether onshore or offshore of Malaysia is vested in PETRONAS.
Currently, the act of exploration, development and production of crude oil

and natural gas are actively undertaken and managed through petroleum
agreements. This model of production-sharing contracts is entered into
between PETRONAS and a number of international oil and gas companies
as well as with its subsidiary Petronas Carigali Sdn. Bhd.
Thus, in this case, the following are subjected to petroleum income tax:
(i) Petroliam Nasional Berhad;
(ii) Malaysia-Thailand Joint Authority (MTJA); or
(iii) Any other person carrying out the petroleum operations under a
production-sharing contract entered into with either PETRONAS or
MTJA.
1.5.2 Indirect Taxes

Have you ever heard of service taxes and sales taxes? Most of you have paid
these kind of taxes before that appear in almost every aspect of our lives. These
taxes are known as indirect taxes. How do you define indirect taxes? Indirect tax
is a tax, such as a sales tax or value-added tax that is levied on goods or services
rather than individuals and is ultimately paid by consumers in the form of higher
prices.
Indirect taxes are under the responsibility of the Royal Customs Department
(previously known as Royal Custom and Excise Department). In Malaysia,
indirect taxes used to be the main source of revenue for our government.

However, as economics and social structure changed, less importance were

placed on indirect taxes.
We encourage you to study the following examples or types of indirect taxes –

better known as sales tax.
(a) Sales Tax
Figure 1.9: An expensive car
Most of you are familiar with luxury and branded cars such as
Lamborghini (see Figure 1.9), Ferrari and so on. Some of you might dream
of owning such cars in the future. Do you know that the owner of luxury
cars spent about RM1,000,000 just on sales tax alone? Well, this is a true fact
and thus, we assure you the need to study this kind of tax closely.
As a starting point, letÊs reflect on your personal experience of buying a

new car. Whenever you purchase a car, you should be aware that in the
price quotation released by the dealers, there is a portion of sales tax for
that particular car. Now take a look at one example, the Perodua Kancil.
The sales tax for this car is about RM2500.
You should realise that under the Sales Tax Act 1972, sales tax shall be
charged and levied on all taxable goods as follows:
(i) Goods manufactured in Malaysia, by a taxable person and sold, used

or disposed off by him, otherwise than by sale or disposal to a
licenced manufacturer authorised by the Director General to acquire
such goods without payment of tax; and
(ii) Goods imported into Malaysia from outside Malaysia by any person
for home consumption.

Every person carrying a business as a manufacturer of taxable goods (i.e.

goods chargeable to sales tax) in Malaysia is required to obtain a licence for
sales tax purposes. Manufacturer with a turnover below RM100,000 is
exempted. A licenced manufacturer will have to comply with various
provisions of the Act including determination of sales tax purposes.
Sales tax only applies if the taxable goods are consumed in Malaysia. It is
not applicable on exported goods, sale of goods in free zone, licenced
warehouse, licenced manufacturing warehouse and the Joint Development
Area of Thailand-Malaysia. Schedule A, B and C in the Sales Tax
(Exemption) Order 1980 provides a list of goods, classes of persons and
manufacturers respectively that are exempted from payment of sales tax.
An example of exempted goods is equipment for manufacturing-related
services.
(b) Service Tax
Figure 1.10: Examples of fast-food restaurants
You are surely familiar with Kentucky Fried Chicken (KFC), McDonaldÊs
and other fast food outlets in the country (Figure 1.10). These restaurants
charge you with service tax for every purchase of a meal. This section will
take a closer look at what constitutes service tax.
To begin with, apart from income tax, service tax is one of the most
frequently paid tax by the customers. Hotels, resorts and fast food
restaurants are examples of companies that are allowed to impose service
tax on their customers. Service tax is charged in accordance with the
Service Tax Act 1975 on any taxable service provided by any taxable
person.
Service tax is charged and levied on customers who consume foods or

services in places such as restaurants, hotels, health centres or engaged in
professional services such as legal, audit and tax firms. In Malaysia,
businesses act as the service tax collectors. It is a single stage tax levied on

consumer at the consumption stage. Thus, it is also known as consumption

tax.
Service tax rate is fixed at 6% of the price of services or goods. Prior to the
year of assessment 2011, the rate was 5%. Similar to procedures in sales tax
collection, all taxable persons listed are required to apply for service tax
licence once the annual sales reach the prescribed threshold (if applicable).
No taxable persons are allowed to carry on the business unless it possesses
a service tax licence and no businesses can collect service tax from the
customer unless it has a licence.
(c) Custom Duties

Custom duties are levied on any goods imported or exported from
Malaysia under the Customs Act 1967. These duties can either be export
duties or import duties. Export duties are imposed on goods exported from
Malaysia. Duties are levied according to different categories of goods. For
example, crude petroleum is subject to export duty at a flat rate of 10%. On
the other hand, import duties are imposed on goods imported to Malaysia.
It is the duty of the importer or exporter to declare their goods.
Certain types of goods are exempted from customs duties under specific
exemption orders, for instance telephone answering machines, educational
equipment and photographic papers. There is also a prohibition order that
specifically prohibits specific goods to be imported to/exported from
Malaysia.
(d) Excise Duty

Excise duty is a form of tax levied on locally manufactured goods. The rates
for excise duty are either specific or ad valorem. Generally, excise duty is
levied based on the following broad groupings:
(i) Sugar and sugar confectionery;
(ii) Beverages, spirits and vinegar;
(iii) Tobacco;
(iv) Mineral fuels, mineral oils and product of their distillation,

bituminous substances and mineral waxes;
(v) Rubber, synthetic rubber, factice and articles thereof;
(vi) Toys, games and sports equipment;

(vii) Air-conditioning machines, refrigerators and refrigerating

equipment;
(viii) Electrical machinery and equipment (including TV broadcast

receivers); and
(ix) Motor vehicles.
Specific exemptions are granted on certain types of manufacturer like

beverages, petroleum oils and products etc. Generally, all excise duties
must be paid before the dutiable goods are removed from the licenced
factories.
The Goods and Services Tax (GST) will be implemented on 1 April 2015 to
replace the sales and service tax currently being imposed under the Sales Tax Act
1972 and the Service Tax Act 1975 respectively. The GST which is also known as
Value Added Tax (VAT) has been implemented in almost all advanced and
developing economies. Within the Asian countries, only Brunei, Laos, Malaysia
and Myanmar have yet to introduce the GST system.
The basis for introducing GST includes:
(a) To improve revenue collection for the government as GST would be more
comprehensive, transparent and effective;
(b) To increase the government tax base by having a broader group of

consumers as taxpayers;
(c) To reduce evasion among taxpayers as the GST system has an in-built cross
checking mechanism to ensure compliance; and
(d) To encourage greater foreign direct investments (FDI) as GST provides

opportunity for the government to lower corporate tax rates.
We hope the above explanation would help you clarify the differences between
direct taxes (e.g. income tax) and indirect taxes (e.g. service tax). You have
reached the final section of this topic. Now, we are going to look at and discuss
the sources of tax revenue law in detail.

1.6 SOURCES OF TAX REVENUE LAW

Do you know how important the sources of tax revenue law are? In Malaysia,
our revenue law is based on three important sources:
(a) Statute Law

The formal sources of revenue law in Malaysia is a statute law or legislation
which is the law enacted by the Parliament. Our statutes are mostly based
on the United Kingdom statutes but with amendments to suit our local
context. Examples of statute law in Malaysia are Income Tax Act 1967,
Petroleum (Income Tax) 1967, Real Property Gains Tax 1976, etc.
(b) Case Law

However, when the Act cannot solve any conflict between the taxpayer and
tax authority (as shown in Figure 1.11), the second source is the judgment
made in court, called the Âcase lawÊ.
Figure 1.11: Conflict between the taxpayer and tax authority
All previous cases decided by the judges would become case law. Any
disputes that cannot be solved by the statute would be referred back to
similar cases decided earlier, including cases from the United Kingdom and
other Commonwealth countries like India and Australia. Thus, case law is
the law that is not enacted but created through the decision of the courts.
(c) Guidelines/Rulings by the Inland Revenue Board (IRB)

For informal sources of law, the IRB would issue their own rulings and
guidelines which would usually be approved by the Ministry of Finance.
These are the important means for the public to understand the
interpretation of certain issues by the tax authority.

 This introductory topic covers the fundamentals of Malaysian taxation. One

of the important things that you need to know is the philosophy behind the
tax system. Many of us do not appreciate the rationale of taxation.
 Apart from being a source of revenue for the government, tax is also an
instrument to bridge the economic gap between the rich and the poor.
 This topic also discussed the direct and indirect taxes. You should be aware
of the tax elements in each of these taxes, as well as the meaning of each
particular tax.
Ad Valorem Sales tax

Direct taxes Stamp duty
Indirect taxes Tax
Real property
1. Define what is meant by the term taxation.
2. List out the chronology and explain the evolution of the Malaysian tax
system.
3. The better way to understand the meaning of taxation is by examining the

characteristics of taxation. List down all the characteristics of taxation.
4. Identify and explain any FIVE of the tax principles that are required in
order to achieve the optimum taxation system.
5. The objectives of taxation determine the success or failure of the tax system.
Provide FOUR main objectives of taxation.

1. Tax is a contribution levied on person, property and business for the

support of government. Identify any FOUR characteristics of taxation.
2. Explain any THREE types of direct taxes.
3. Explain any TWO types of indirect taxes.
4. There are two main types of taxes in Malaysia, namely direct tax and
indirect tax. Differentiate the two and provide examples for each type of
tax.
5. In Malaysia, the revenue law is based on three important sources. Explain

any TWO of these sources.

Topic  Malaysian Tax
2 Administration
LEARNING OUTCOMES
1. Explain the responsibilities of IRB in administering the tax system;
2. Determine the responsibilities of taxpayers or employers;
3. Differentiate each types of assessment;
4. Explain the process of collection and recovery;
5. Illustrate the appeal processes; and
6. Analyse the errors and penalties in the Malaysian tax system.
 INTRODUCTION
In Topic 1 you have learnt the basics of Malaysian taxation. By now, you should
have a clearer picture of what tax is, as well as the criteria and objectives of
taxation. In addition, you should also be aware of the different types of taxation
and sources of tax revenue in Malaysia.
In this topic, we will have an overview of the tax administration in Malaysia. In

the previous topic we explained that there are two types of taxes, known as direct
and indirect taxes. However, some of you might not be aware that there are
different authorities that administer each tax class.

TOPIC 2 MALAYSIAN TAX ADMINISTRATION  23
Figure 2.1: Inland Revenue Board/Lembaga Hasil Dalam Negeri
Take a look at Figure 2.1. Most of you may be familiar with this government
agency. The Inland Revenue Board (IRB) or also known as the Lembaga Hasil
Dalam Negeri (LHDN) is the authority responsible for direct taxes such as the
individual and company taxation. The Royal Malaysian Customs Department
(RMCD) is another tax authority that manages all indirect taxes such as sales tax,
service tax and custom duties.
This topic will discuss on the functions of IRB, return and assessment, collection
and recovery, appeals and penalties of tax administration. We hope you will get
a better overview on the administration of Malaysian tax after exploring this
topic.
2.1 INLAND REVENUE BOARD (IRB)

We are sure that most of you are used to this name, Inland Revenue Board (IRB).
What exactly is IRB? The IRB is one of the main revenue collecting agencies of the
Ministry of Finance. The Department of Inland Revenue Malaysia became a
board on 1 March 1996.
What is the purpose of this establishment? The IRB was established in accordance
with the Inland Revenue Board of Malaysia Act 1995; not only to confer on it
more autonomy especially in financial and personnel management, but also to
improve the quality and effectiveness of tax administration in the country.
The IRB is also responsible for the overall administration of direct taxes as
illustrated in Figure 2.2.

24  TOPIC 2 MALAYSIAN TAX ADMINISTRATION
Figure 2.2: Administration of direct taxes by IRB
SELF-CHECK 2.1
1. Reflecting on your personal knowledge and experience, identify

who is responsible for the collection of direct and indirect taxes in
Malaysia.
2. Based on what you have learnt, name any two types of indirect
taxes.
2.1.1 Functions of IRB

In previous section, we have provided you with the general background on IRB.
However, it is not enough to only know the general information about IRB. You
should also be aware of the functions of IRB. The main function of IRB is to
administer all matters regarding the Malaysian taxation, for example:
(a) Developing and executing tax policy in Malaysia;
(b) Contacting taxpayers (personal and companies);
(c) Educating taxpayers through its counters and in mass media;
(d) Ascertaining and nurturing public compliance;

(e) Managing taxpayersÊ databases;
(f) Sending tax returns to taxpayers;
(g) Assessing tax returns; and
(h) Collection of tax payments.
With reference to the above, we can say that there are eight main functions of the
IRB. Apart from those functions, the general objective of the IRB is to create and
implement a tax management system which is effective, just and fair.
IRB has its own operational objectives as shown in Figure 2.3.
Figure 2.3: The operational objectives of IRB
ACTIVITY 2.1
In your opinion, has the IRB been successful in their objective to educate
the Malaysian taxpayers?

2.2 RETURN AND ASSESSMENT
Have you ever encountered this situation before? When are you required to
submit your tax return? This section will explain and clarify this matter.
Note that it is your responsibility to submit your tax return on time. Individual
taxpayers, for instance, normally need to submit the tax return no later than April
30 for every year of assessment.
According to Section 77(1) of the Income Tax Act 1967, the director general may
require you to forward a return of income in a prescribed form. This form
contains information which may be required for the purpose of ascertaining your
chargeable income for the year of assessment. This form is usually sent to you by
the IRB early in the year.
We encourage you to study the following example/situation as stated below:
Example
Ishak is a government servant who works in Putrajaya. He received the tax
return for the year of assessment 2013 sometime in January 2014. He must fill in
and submit the completed form no later than 30 April 2014.
Printed tax return forms will not be issued to taxpayers who used
the e-Filing system in the previous years. E-Filing services allow the taxpayers to
submit their tax return forms electronically via the internet. This service is
available for free. Initially, this application was introduced to corporate taxpayers
in 2003 and later it was expanded to individual taxpayers in 2004.
All tax return forms submitted through the e-filing application are protected by
PKI (Public Key Infrastructure) Technology. E-Filing users may file their tax
return forms electronically at any time from any location. Tax repayment will
also be processed at an earlier date if the tax returns are submitted electronically.
Table 2.1 shows the tax return forms for different taxpayers.

Table 2.1: Classification of Tax Return Form
Forms Taxpayers/Income Classification

Form B Individual receiving business income only
Form BE Individual receiving employment income only
Form C Companies and Joint Hindu Family
Form E Employer (showing remuneration paid to employees)
Form M Non-Resident Individual
Form P Partnership
Form T Trust, Association, Club and Society
We hope the above explanation has helped to improve your understanding on

tax return. In addition, we encourage you to study the following section on tax
assessment.
Previously, assessment is a calculation of taxable income by the IRB based on

information furnished by the taxpayer and at the Director GeneralÊs discretion.
However, self-assessment system has taken place for companies since 2001 and
salaried individuals since 2004. Therefore, tax assessment is no longer done by
the IRB but by the companies and salaried individuals themselves. The following
section briefly explains both systems.
ACTIVITY 2.2
1. Find out what is meant by the Joint Hindu Family.
2. Ahmad is an engineer who operates a sole proprietorship grocery at

home. Based on this situation, determine the tax return form that is
applicable to him.
2.2.1 Official Assessment System (OAS)

What constitutes the official assessment system in tax return and assessment?
What are the stages that you have to go through in this system? Read further to
find out.
Official assessment system simply means the assessment is made by the IRB and
a notice of assessment (also known as Form J) that is sent to the taxpayer stating
the amount of tax due for a particular year of assessment. Taxpayer would pay
based on this assessment.

As a starting point, forms are issued to the taxpayers at the beginning of each
year of assessment. Upon receiving the forms, taxpayers are required to follow
the steps shown in Figure 2.4.
Figure 2.4: Steps taken upon receiving the assessment form
2.2.2 Self Assessment System (SAS)

Next, let us take a look at the second system which is known as the Self
Assessment System (SAS). Have you come across this system before? What do
you think constitutes this system?
Starting from the year of assessment 2004, the Official Assessment System (OAS)
is no longer applicable to individual taxpayers. They are now assessed under the
new tax system known as the SAS.
SAS simply means the taxpayer makes the assessment. This system assumes the
taxpayer has the appropriate tax knowledge to calculate their income tax. In this
system, notice of assessment (Form J) would not be issued because the taxpayer
assessment is assumed to be the notice of assessment. Taxpayer would pay
income tax based on their computation.

We invite you to study the following explanation closely:
Figure 2.5: What is SAS?
SAS is essentially an approach whereby taxpayers are required to determine:
(a) Their taxable income;

(b) Compute their tax liability; and
(c) Submit their tax returns based on existing tax laws and policy
statements issued by the tax authorities.
The introduction of self-assessment basis of taxation involves a substantial

shift of responsibility to the taxpayers in terms of their compliance
obligations.
The onus would be placed firmly on them to understand the law, interpret the
law and apply it to their own situation. It is up to the taxpayers to compute
the tax that they owe, based upon the information they have provided on their
taxable income and allowable expenditure.
We hope the explanation above provides you with a clearer picture of the SAS.
You should also note that a notice of assessment would not be issued under the
SAS.
The tax return furnished by the taxpayers is deemed to be a notice of assessment.

Tax returns would, therefore, not be subjected to a detailed technical scrutiny by
the IRB as in the OAS.
Under the SAS, the revenue authorities would be involved in an expanded

programme of checking and verifying tax returns on a post-assessment basis.

This is particularly by way of tax audits and the implementation of a penalty

system to enforce compliance with tax law.
These will allow revenue officials to „enquire into returns‰ for the next six years
following the filing period. They will also be able to demand that a taxpayer
produce records that they may „reasonably require‰ for them to verify.
2.3 RESPONSIBILITIES OF INDIVIDUAL

TAXPAYERS
Do you ever wonder about your responsibilities as a taxpayer? In this section, we

will discuss some of your responsibilities as an individual taxpayer. Basically,
there are three categories of responsibilities for individual taxpayers, namely
income declaration, change of address and tax payment.
Firstly, let us take a look at the individual taxpayersÊ responsibilities on income

declaration.
(a) Income Declaration

What is your role in this matter? For your information, based on Section 77,
individual taxpayers are required to provide full information regarding
their income for each year of assessment. They are also responsible for
submitting their returns to the IRB within 30 days after receiving the return
forms.
(b) Change of Address

It is your responsibility to inform IRB regarding the change of address. A
new correspondence address, either temporary or permanent, must be
provided to the IRB.

Why do you need to provide IRB with your new mailing address? This is to
ensure that further communication between you and IRB can be continued.
This must be completed within three months of the change of address.
(c) Tax Payment

Make payment to the IRB in the event the monthly tax deduction falls short
of the tax assessed.
2.4 RESPONSIBILITIES OF EMPLOYERS
What are the employersÊ responsibilities as taxpayers? Are you aware that their
responsibilities are greater compared to individual taxpayers?
Based on Section 83, an employer is responsible to inform the IRB regarding the
following:

(a) New employees;
(b) Their addresses;
(c) Date of employment;
(d) End of employment of any employee; and
(e) Employees leaving Malaysia. If the employee is leaving Malaysia for

more than three months, the employer must:
(i) Inform the Director General of Inland Revenue (DGIR) by notice

in writing of the employee who is about to leave Malaysia (for a
period of more than three months) within one month before the
cessation of employment;
(ii) Retains all monies due to the employee until 90 days after the
DGIR has received the notice of the impending departure; and
(iii) On receipt of the tax clearance letter from tax authorities, the
employer may then release the monies so withheld to the
employee.
With effect from 1 January 1995, an employer is responsible to deduct an amount

of tax from their employees' monthly salary. This deduction is done through
Schedular Tax Deduction (STD) under the Income Tax (Deduction from
Remuneration) Rules 1994.
However, not all employees are involved in this STD as it is only meant for
employees whose income is more than a certain threshold.
We hope the explanation above has provided you with better understanding on
the issue of employerÊs responsibilities as a taxpayer. It is clear that employers
hold greater responsibilities not just for the company but also for their
employees. Employers have to fulfil every aspect mentioned above in order to
prevent legal action.

2.5 TYPE OF ASSESSMENT

Next, we are going to take a look at the type of assessment. To begin with, let us
explore what is meant by assessment in the following figure.
Figure 2.6: What is assessment?

Source: http://dictionary.reference.com/browse/assessment
Based on Figure 2.6, assessment is defined as an official act or process by which

the provisions of the Act are applied to the affair of a person to ascertain the
proper amount of tax payable by the person.
Currently in Malaysia, there are seven types of assessments as shown in

Figure 2.7.
Figure 2.7: Types of assessment in Malaysia

Let us explore the meaning of original assessment.
(a) Original Assessment

What is original assessment? Firstly, let us take a closer look at what
constitutes original assessment. You should bear in mind that original
assessment normally applies to all taxpayers in each year of assessment.
Prior to 2004, taxpayers who submit their returns to IRB (if accepted by the
director general) will prepare an assessment to determine the chargeable
income and the amount of tax payable. This net amount is derived after
deducting any rebate and tax credit which may be applicable. However, the
director general has the authority to reject the return form sent by the
taxpayers if there is doubt as to the accuracy or the completeness of the
return.
As a taxpayer, it is your obligation to declare your income every year of

assessment although you may think that you would not be taxed in that
particular year. Most taxpayers do not fill up the tax return because of this
assumption.
By doing this, it does not mean that you will not be assessed in the year of
assessment. If the director general is of the opinion that you should be
chargeable for tax, he may use his best judgment to estimate your
chargeable income according to your previous record of assessments and
payments.
(b) Additional Assessment

Do you know what the word „additional‰ stands for in the context of
additional assessment? „Additional‰ comes from the word „addition‰
which is defined as the act or process of adding or uniting. Thus, we can
say that „additional assessment‰ is applicable only when there is an extra
charge to be paid for by taxpayers.
Firstly, additional assessment is considered a rare situation compared to

original assessment. This is due to the fact that additional assessment only
applies if the following conditions occur:
(i) Where there is additional chargeable income earned by a taxpayer of

which the original assessment has not taken into account during
declaration in original assessment; or
(ii) The taxpayer had omitted certain income while making return and
was discovered by the director general after the Form J was issued; or
(iii) The tax charged on the original assessment is too low (may be error
in tax rates applied).
If one or more of the above reasons occur, an additional assessment will be

made. Based on the record, the low tax charged is normally due to
excessive set-off, misstating income, over-repayment of tax, resident status
or over-allowance of personal relief.
You might wonder then, how long can this type of assessment last? Section
91(1) states that additional assessment can be made within six years after
the end of the relevant year of assessment with effect from 1 January 1999.
However, there is an exception to the six-year limit whereby an additional
assessment can be made after this limitation in cases of fraud, wilful default
or negligence committed by a taxpayer.
(c) Reduced Assessment

Before we can define „reduced assessment‰, we need to understand what
the word „reduced‰ represents. As you are fully aware, the word
„reduced‰ comes from the root word, „reduce‰. „Reduce‰ can be defined
as an act to bring something down to a smaller extent, size, amount or
number.

The director general may, at his discretion, make a reduced assessment

where the taxpayer's chargeable income is less than what has been
assessed. In this case, it is a certain relief such as personal relief, child relief
and spouse relief to which the taxpayer is entitled to which have not been
deducted in his earlier assessment.
The amount of tax reduced or discharged can either be refunded to the

taxpayer or set off against the taxpayer's future tax payable. However, in
normal practice, tax credit will be given.
(d) Composite Assessment

Next, we will study on what is meant by composite assessment. To begin
with, let us have a look at what is meant by „composite‰. „Composite‰ is
defined as something which is made up of disparate or separate parts or
elements.
Composite assessment is an assessment issued by the director general

when a person fails to furnish a return in accordance to Section 77(l). In
addition, individuals who fail to give a notice of chargeability or make
incorrect returns on behalf of himself or another person will also be issued
a composite assessment.
A composite assessment may comprise the total amount of tax lost plus a
penalty amount. Taxpayers are not allowed to appeal on the composite
assessment. This is due the fact that the amount specified in composite

assessment is treated as tax payable for the purpose of collection under

Section 103 to 106.
In accordance with these sections, the government of Malaysia has the right
to collect the amount of tax payable. Besides that, the court through its
power could ignore any appeal which is related to composite assessment
[Section 106 (3)].
(e) Increased Assessment
Look at the picture above. Have you ever experienced this kind of
situation? If yes, how did you react to it? Nobody wants his or her tax to
increase but unfortunately payable tax does increase in certain
circumstances.
An increased assessment is issued when the taxpayer reaches an agreement

with the director general during the review of assessment, or when the
special commissioner or the court has decided that the issue is in dispute
and resulted in an increase in the tax payable. Most importantly, as a
taxpayer, you have no right to appeal against increased assessment.
(f) Advanced Assessment

What is advanced assessment? Under normal circumstances, an advanced
assessment may not be issued to you as a taxpayer. However, the director
general has the power to assess you (the taxpayer) in advance to prevent
the loss of revenue. This power is given under Section 92 of the Act. Section
92 provides that an advance assessment may be issued to a person under
specified situations as the following:
(i) Where a person ceases to possess a business source in a year of

assessment;
(ii) Where a person is about to leave Malaysia and his sources of income
are likely to cease upon leaving;

(iii) Where a person commences to receive employment income or Section

4(e) income;
(iv) Where a person ceases to possess a source of income;
(v) Where a person is chargeable to tax in respect of income from the

business of transporting passengers or cargo by sea or air; and
(vi) Where the basis period of a business or investment sources for a year
assessment does not coincide with the calendar year.
(g) Protective Assessment
Finally, what is protective assessment? Let us take a look at the above

picture. In what sense do you think that this type of assessment can be
protective?
To begin with, most of you may have never heard of „protective

assessment‰ before. Protective assessment is issued in order to prevent an
assessment from being barred by time. This usually happens when the
Inland Revenue BoardÊs officer carries out a tax investigation.
On the other hand, protective assessment may also be issued for two
persons who receive the same income. This situation occurs when the
director general is doubtful as to who should the taxpayer be for the same
income.

2.6 COLLECTIONS AND RECOVERY OF TAX

In the previous sections, we have discussed some aspects of the Malaysian tax
administration. The responsibility of collecting tax from taxable persons lies with
the collection branch of the IRB.
Prior to the year assessment 2004 (for individual taxpayers), IRB used the OAS
whereby taxpayers must complete and submit a tax return form to IRB. The
taxpayers have to wait for the issuance of a notice of assessment (Form J) from
IRB. Once Form J is received, payment must be made within thirty days from the
date of the service of notice. Taxpayers will be subjected to a fine of 5% to 10%, if
they fail to make the payment within the time limit.
However, starting from the year assessment 2004, IRB has changed from the OAS
to SAS for individual taxpayers. Under SAS, taxpayers are required to estimate
their income tax payable, pay income tax, revise estimation and submit the return
form within the specified time.
The return form which has been submitted is deemed as a notice of assessment.
Thus, the form should be submitted together with the amount of final tax that
should be paid to IRB.
2.6.1 Payment of Tax
Have you ever wondered how long can you take to pay tax? Tax must be paid
within 30 days after you have furnished your tax return. If you fail to settle the
tax within the specified time, a penalty of 10% on the amount will be imposed on
you.
In addition, a further penalty of 5% will be imposed (on the amount that should
be paid to IRB) if you still fail to pay the tax plus the amount of penalty after 60
days of the imposition of the 10% penalty.

The IRB collects tax using various methods. We encourage you to study closely
the following methods used by the agency collecting tax:
(a) Deduction of Tax from Emolument and Pensions

The first method is known as the deduction of tax from emolument and
pensions. Section 107 states that the director general will direct the person
by whom the income is payable to deduct taxes from any person who
received income under Section 4(e).
(b) Schedular Tax Deduction (STD)

Do you know that the government continuously faces difficulty in
collecting taxes from taxpayers? This is because many taxpayers refuse to
pay their taxes. Some people do not want to pay RM3,000 a year on taxes
but are willing to pay their monthly car instalments which is more than
that annually.
As a result, IRB has come up with a second method which is known as

Schedular Tax Deduction (STD). IRB introduced STD in January 1995 in
order to overcome the problem and facilitate the collection of tax. This is a
mechanism used by tax authority to collect taxes from employees on a
monthly basis despite the employee not submitting the return.
Thus, this has become the responsibility of the employer as mentioned

earlier. In other words, we can say that IRB receives the monies in advance.
(c) Payments by Instalment Scheme

Do you think the IRB is helpful? You may not be aware that the IRB
understands the taxpayersÊ financial problems.
In 1989, IRB has introduced one method to help taxpayers, known as the
payment by instalment scheme. This is a compulsory instalment scheme
which is applicable to all taxpayers except employees under the STD
system and individuals with tax liabilities not exceeding RM1,000.
The amount to be paid, timing and number of payment will be decided by

the director general by using a notice of instalment scheme. This notice will
be issued by IRB and if the taxpayer did not receive any notice of
instalment, they should notify IRB.

2.7 APPEALS
Reflect on the above scenario and your personal experience. Have you ever
appealed to a responsible party in IRB of your dissatisfaction with the notice of
assessment? Well, some of you might say „Yes‰, while others might say, „No and
I havenÊt got the slightest clue on this matter.‰ If yes, do you recall the processes
and outcomes that you have experienced earlier? For those who are not sure, we
encourage you to pay close attention to this section.
With the implementation of SAS, the return submitted is deemed as a notice of

assessment. If you (the taxpayer) are dissatisfied with the deemed notice of
assessment, you have the right to appeal if you have forgotten to claim certain
relief or you have made an error in the assessment.
The appeal must be made to the director general within 30 days from the date of
the notice of assessment. Upon receipt of the appeal, the director general will
review the assessment. There are four possible outcomes which you should be
aware of for this review. They are as follows:
Outcome 1
The Director General can have a written agreement with the taxpayer, or
Outcome 2
The Director General can have an oral agreement with the taxpayer, or
Outcome 3
The Director General can make a proposal to the taxpayer, or
Outcome 4
If there is no agreement, the taxpayer can (after six months) request the
Director General to forward the appeal to the Special Commissioner.

Bear in mind that all appeals must be made in writing. In a situation where the
appeal exceeds the date, the following procedure must be observed:
(a) Submit written application for an extension to appeal period (Form N) to
the Director General of Income Tax (DG).
(b) Within 21 days, the DG will inform whether the application is granted or
rejected.
(c) If the application is granted, proceed with the appeal.
(d) If DG rejected the application, the application would be forwarded to
Special Commissioner of Income Tax (SCIT) with the DGÊs reasons for not
granting the extension.
(e) The SCIT is an independent tribunal, which consists of panel members
appointed by the Yang di-Pertuan Agong to handle appeals.(f) You
may forward a written representation to SCIT and one of the SCIT will
decide. The decision of SCIT shall be final.
Although an appeal has been made, the tax payable must still be paid.
Otherwise, you will be subjected to penalties.
2.8 OFFENCES AND PENALTIES

IRB faces a lot of difficulties and obstacles in collecting taxes from individuals
and companies. Are you aware that failure to pay your taxes could result in
serious consequences/penalties? In extreme cases, you could even face jail time!
In this section we will study some of the offences and penalties for tax defaulters.
Offences may have occurred under the following circumstances:
Figure 2.8: Offences and penalties for tax defaulters

You should bear in mind that Figure 2.8 is just an overview of the offences and
penalties for tax defaulters. For detailed explanation on each offence or penalty,
we encourage you to study closely this particular section. Let us take a look at the
issue of taxpayers who fail to submit the return form.
(a) Failure to Submit Return Form

Are you aware of what might happen if you fail to submit the return form?
Under Section 112, anyone who fails to submit a return form within the
time given or fails to give notice that his/her income is subject to tax is
liable to:
However, that if you were abroad for a certain period of time, you must
declare your situation and fill up the tax return.
(b) False, Understated or Incorrect Returns
What do you think would happen to a person who makes a false

declaration? Will he be punished under the law?
With reference to Section 113, anyone who makes a false declaration or

submits an incorrect return by omitting or understating any income which
affects the chargeability to tax is liable to:

We hope you are clear on the seriousness of understating/providing false

declaration and incorrect return.
(c) Wilful Evasion (Section 114)

What is wilful evasion? Evasion is defined as an act or instance of escaping,
avoiding or shirking something. Let us have a look at the category of
person who wilfully commits evasion under Section 114.
This particular section states that whoever:
(i) Wilfully omits from a return, or segment; or
(ii) Makes false statements or entries in returns; or
(iii) Gives a false answer to a question asked, or
(iv) Prepares and maintains false books of account; or
(v) Makes use of any fraud;
shall be liable to:

(d) Barred from Leaving Malaysia
Have you ever wondered, what would happen to you if you leave or
attempted to leave the country without paying your tax?
Under Section 115, a taxpayer who has been issued a certificate in respect
of Section 104 on recovery of tax and is leaving or attempts to leave
Malaysia without paying the tax shall be liable to:
(e) Other Offences (Section 120)

Finally, according to Section 120, a person who fails to fulfil the director
general's requests, or fails to keep proper records or fails to submit
information regarding his employees shall be liable to:
What do you think of the tax offences and its respective penalties? Have
you ever committed any of the offences either purposely or accidentally?
We hope now that you have become a well-informed taxpayer and are
aware of the serious consequences and penalties.

ACTIVITY 2.3
Form a group of three. Give your opinion on the penalties and remedies
for tax offenders. By implementing each of the penalties, will it prevent
people from not paying their taxes? Discuss.
 Administering and collecting taxes from taxpayers is a difficult task. The tax
authorities will have to deal with all kinds of taxpayers every day.
 By now, you must have gained a good overview of the tax administration in
Malaysia.
 This topic also discussed the functions of IRB, return and assessment,
collection and recovery process, appeal and penalties.
 It is your responsibility as a taxpayer to ensure that the form is complete,

accurate and reflects your income in certain year of assessment.
 Failure to do so will lead to penalties, not only in terms of money, but also at
certain stage, imprisonment.
Direct taxes Penalties

Indirect taxes Tax return
Offences
1. List the responsibilities of the Inland Revenue Board (IRB) in administering

the tax system.
2. What are your responsibilities as a taxpayer or an employer?
3. Provide a brief explanation of the types of assessment in Malaysia.

4. Briefly explain the process of collection and recovery.
5. Illustrate the appeal process.
6. List some examples of errors and analyse these examples in line with the
penalties.
1. The final date to submit the tax return form to the Inland Revenue Board
(IRB) for the year of assessment 2013 is on 31 April 2014. Assuming that
your tax liability for the year of assessment 2013 is RM6,700, determine the
amount of penalty which would be imposed by the IRB if you only managed
to settle the tax on 15 October 2014.
2. When a dispute between a taxpayer and the tax authorities cannot be

resolved, it could be taken to the Special Commissioners and thereafter to
the court. What is the time limit for the case to be forwarded to the special
commissioners?
3. The special commissioners may take time to consider certain cases. Does the
Act permit the taxpayer who wishes to bypass the Special Commissioners to
go directly to the High Court?

Topic  Scope of
3 Charge
LEARNING OUTCOMES
1. Explain the scope of charge for taxation;
2. Analyse the types and sources of income with regards to taxation;
3. Describe who a chargeable person is;
4. Analyse the year of assessment for individual taxpayers;
5. Determine the residence status of an individual; and
6. Differentiate the general tax treatment between resident and non-
resident.
 INTRODUCTION
Let us reflect on Topic 2 where you have learnt about the Malaysian tax
administration. By now, you should have a clearer picture on what the Inland
Revenue Board is and some of its responsibilities. In addition, you have also
learnt about the responsibilities of taxpayers (i.e. individuals or employers); the
type of assessment; the processes of collection, recovery and appeal of tax; and
finally, the offences and penalties involved.
Before we go any further, let us examine the scope of charge in the Malaysian tax
system. In Malaysia, the law governing income tax is known as the Income Tax
Act 1967 (Act 53/1967).
You should note that a transaction must fall within the domain of „scope of
charge‰ as provided in Section 3 of the Act in order to be liable for income tax. If
it is not within the domain of Section 3, no income tax is due on the transaction.

TOPIC 3 SCOPE OF CHARGE  49
In this topic, we will discuss Section 3 of the Act which comprises the year of
assessment, types of income in general, sources of income and chargeable
persons. We will also discuss residence status, its determining factors and also its
importance.
3.1 SCOPE OF CHARGE

Before we discuss any further, you must have in-depth understanding of what
the content of Section 3 is. A transaction must fall within the domain of 'scope of
charge' as provided in Section 3 in order to be liable for income tax. If it is not
within the domain of Section 3, then no income tax is due. In short, it could be
said as being „tax-free‰.
For a clearer picture on this matter, we encourage you to study the following
Section 3 of the Act. This Section states:
Section 3 of the Act:

Subject to and in accordance with this Act, a tax to be known as income tax
shall be charged for each year of assessment upon the income of any person
accruing in or derived from Malaysia or received in Malaysia from outside
Malaysia.
Apart from the above, Section 3 sets out two circumstances whereby the income
tax liability arises, namely:
(a) The transaction must be „income‰ in nature and such income is accrued in
or derived from Malaysia; or
(b) The transaction must be „income‰ in nature and it is received in Malaysia

from outside Malaysia (foreign source income).
Income tax would be imposed by reference to the year of assessment (YA) upon a
person's income. Such a person is known as a chargeable person.

50  TOPIC 3 SCOPE OF CHARGE
3.1.1 Categories of Scope of Charge for Tax

Do you know what the categories of scope of charge are? Well, there are three
categories of scope of charge for tax. For a better picture, we encourage you to
study closely these categories which are stated as the following:
(a) Territorial or Derived Basis
Reflecting on the illustration above, have you ever wondered what is meant
by „territorial‰ basis? Well, according to Dictionary.com, „territorial‰ could
be defined as something of or related to the geographic area under a given
jurisdiction.
Thus, you should note that under this basis, all income that arises within a
particular territory or country would be taxable. On the other hand, income
which arises outside the border is not subjected to tax. Furthermore, any
income which arises from overseas and is brought back into the country
would also be free of tax.
From the year of assessment 2004, every individual residence, club and unit
trust taxpayer will be taxed on income under derived basis. Similarly, the
non-residents will be taxed under this basis.

(b) World Income Basis
Look at the above illustration. Do you think there is any difference between
world income basis and territorial basis?
All income are taxable. Hence, the question of remitting income into a
country is not relevant. This is due to the fact that the scope of charge is
based on the citizenship and residence status of a taxpayer.
On the other hand, this basis requires more resources in terms of

manpower for tax authorities. This is to ensure that taxpayers report their
worldwide income. You should be aware that companies in specialised
business industries such as insurance, banking, or air and sea
transportation will be taxed on their income under the world income basis.
(c) Derived and Remittance Basis

Do the words, „derived‰ and „remittance‰ give you a clue or a brief idea
on this type of basis? For your information, Dictionary.com defines
„derived‰ as to receive or obtain from a source or origin. Well, in this case
the source or origin would be a particular country. How about
„remittance‰? Well, according to Dictionary.com, „remittance‰ is defined
as the sending of money, cheques and so forth to a recipient at a distance
(i.e. overseas).
The understanding of both terms will help you to grasp an idea on this
basis. Not only income which has taken place in a particular country would
be taxable (as in derived basis) but also income which is brought into the
country from overseas. Apart from that, you should also note that prior to
the year of assessment 2004, individual residence taxpayers are taxable
under the derived and remittance basis.

3.2 TYPES AND INCOME SOURCES
Based on the illustration above and Section 3, we can say that the meaning of
„income‰ is not defined clearly but is merely categorised under Section 4 and
Section 4A. So then, what are the categories or types of income according to
Section 4? Well, for your information, the categories of income which are liable
for tax are stated in Table 3.1.
Table 3.1: Types of Income Which are Liable for Tax

Section Types of Income
4(a) Gains or profits from a business, for whatever period of time carried on
4(b) Gains or profits from an employment
4(c) Dividends, interest and/or discounts
4(d) Rents, royalties and/or premiums
Pensions, annuities or other periodical payments not falling under any of
4(e)
the foregoing paragraphs
4(f) Gains or profits not falling under any of the foregoing paragraphs
With regards to Section 4A, despite the provisions of Section 4 and subject to this
Act, the income of a person who is not a resident of Malaysia for the basis year
(for a YA) in respect of:
Section 4A:
(i) Amounts paid in consideration of services rendered by the person or his
employee in connection with the use of property or rights belonging to,
or the installation or operation of any plant, machinery or other
apparatus purchased from, such person;
(ii) Amounts paid in consideration of technical advice, assistance or services
rendered in connection with technical management or administration of
any scientific, industrial or commercial undertaking, venture, project or
scheme; or
(iii) Rent or other payments, made under any agreement or arrangement for
the use of any moveable property.

The above, are some of the incomes which are derived from Malaysia, hence are
chargeable for tax under this Act.
Although income has been classified into subsections (a) to (f) under Section 4
and subsections (i) to (iii) under Section 4A, they are not mutually exclusive. For
example, rental income is classified under Section 4(d), but at the same time it
can also be classified under Section 4(a). This is due to the circumstances that it
was received in the ordinary course of business.
The transaction must fall within either Section 4 or Section 4A, being income in
nature, before it is liable to income tax. However, take note that payment by way
of gift is not taxable on the recipient as it is not within the taxable sources as
listed by the legislation. A gift is a capital receipt. Thus, it is tax-free.
ACTIVITY 3.1
Decide under which subsections do your monthly salary, allowances and
yearly bonuses fall. If you have some income from direct selling, will it
fall under subsection (f)? Discuss.
3.3 MEANING OF CHARGEABLE PERSON
Let us ponder on the illustration given above. Who is a chargeable person?

According to Section 2 of the Act, „person‰ includes a company, a body of
persons and a sole corporation. Apart from that, „body of persons‰ is further
defined as an unincorporated body of individual (not a company), including a
Hindu joint family but excluding a partnership. In line with this, in the case of
partnerships, it is the individual partner who will be assessed to tax.

Next, we encourage you to study the following examples to gain a better picture
on this matter. The examples of body of persons would be:
(a) Trust;
(b) Clubs;
(c) Trade associations; and
(d) Cooperative societies.
One thing that you should bear in mind is the use of the word „includes‰ in
Section 2. This suggests that the definition of „person‰ is not exhaustive. This is
because the categories of person are not limited to what is defined in the Act.
Hence, it is crucial for you to establish the concept of „person‰ because of the
following:
(a) Such a person will be the chargeable person assessable for tax on his
income derived from such taxable activities; and
(b) The tax rate applicable to each category of chargeable person varies – some
are taxed at a flat rate while others are taxed at scaled or reduced rates.
3.4 YEAR OF ASSESSMENT FOR INDIVIDUALS
Now, we will discuss on the year of assessment, as mentioned above. From 1

January 2000, Malaysia has moved to current year assessment. This resulted in
the assessment of income tax being concurrent with the derivation of the income.
You should note that the calendar year coinciding with a year of assessment (YA)
shall constitute the basis year for that YA.

Self-assessment was fully implemented in YA 2004. With effect from YA 2004, the
income source of a person other than a company, trust body or cooperative
society will be on calendar year basis. This was done to facilitate the estimation of
income tax, payment of tax and submission of returns, which must be done by
taxpayers not later than 30 April or 30 June of the following year.
With effect from YA 2004, only a company, trust body and cooperative society
can have its basis period for a YA to be on a calendar year basis or non-calendar
year basis.
3.5 RESIDENCE STATUS

Do you think that the tax treatment for both residents and non-residents are
similar? As a starting point, the tax treatment for resident and non-resident are
different. Therefore, it is important for you to identify the resident and the non-
resident taxpayers.
To begin with, Dictionary.com defines „resident‰ as someone who lives at a

particular place for a prolonged period or was born there. A non-resident is the
opposite i.e. stays at a place for a short period of time or was born at a different
place.
The concept of „resident‰ is important in the Income Tax Act 1967. The resident
status is important for tax purposes because a tax resident is granted an overall
preference as opposed to a non-tax resident. For instance, a tax resident will pay
income tax based on the gradual rate from 0% to 26% whereas a non-tax resident
is subjected to pay income tax based on a flat rate of 26%. A tax resident is also
entitled to claim relief and rebates.
Tax resident is not granted automatically to Malaysian citizens and it has nothing
to do with a personÊs citizenship.

You should also know that the ascertaining an individual's resident status is a
purely quantitative test. In other words, we can say that it is determined by
reference to the number of days an individual is present in Malaysia during a
particular calendar year. For this purpose, part of a day is counted as one day in
Malaysia.
3.5.1 How to Determine Residence Status?

This part will clarify how you can determine a personÊs resident status. Section 7(1)
of the Act lays down four circumstances whereby an individual can be regarded as
a tax resident of Malaysia. These circumstances are stated in Table 3.2.
Table 3.2: Section 7 of Income Tax Act 1967
Section Situation
7(a) He/she is in Malaysia in that basis year for a period or periods amounting in
all to 182 days or more;
7(b) He/she is in Malaysia in that basis year for a period of less than 182 days and
that period is linked by or linked to another period of 182 or more consecutive
days (hereafter referred to in this paragraph as such period) throughout which
he is in Malaysia in the basis year for the YA immediately preceding that
particular YA or in that basis year for the YA immediately following that
particular YA:
Provided that any temporary absence from Malaysia:
(i) Connected with his service in Malaysia and owing to service matters or
attending conferences or seminars or study abroad;
(ii) Owing to ill health involving himself or a member of his immediate
family; and
(iii) In respect of social visits not exceeding 14 days in the aggregate;
shall be taken to form part of such period or that period, as the case may be, if
he is in Malaysia immediately prior to and after that temporary absence;
7(c) He/she is in Malaysia in that basis year for a period or periods amounting in
all to 90 days or more, having been with respect to each of any 3 of the basis
years for the 4 year of assessments immediately preceding that particular YA
either:
(i) Resident in Malaysia within the meaning of this Act for the basis year in
question; or
(ii) In Malaysia for a period or periods amounting in all to 90 days or more in
the basis year in question;
7(d) He/she is resident in Malaysia within the meaning of this Act for the basis
year for the YA following that particular YA, having been so resident for each
of the basis years for the 3 year of assessment immediately preceding that
particular YA.

For a better picture of the determination of residence status, refer to the following
examples:
Example 3.1:
Albert was in Malaysia on the following periods:
Year Period of Stay Number of Days

YA 2013 01.01.2013 – 25.10.2013 298
YA 2014 01.01.2014 – 30.05.2014 150
YA 2014 01.07.2014 – 31.08.2014 62
Thus, we can say that Albert has qualified as a tax resident for YA 2013 and 2014
under Section 7(1) (a) as the number of days he was in Malaysia amounted to 182
days or more in each YA.
Example 3.2:
Adam was in Malaysia on the following periods:

2010 01.10.2010 – 31.12.2010 92
2011 01.01.2011 – 31.08.2011 243
2012 01.01.2012 – 28.02.2012 59
2013 01.01.2013 – 31.05.2013 151
2013 01.09.2013 – 31.12.2013 122
2014 01.08.2014 – 31.08.2014 31
We can conclude that Adam has qualified as a tax resident for YA 2010 under
Section 7(1) (b) linked to the following year of assessment 2011 because:
(a) He was present in Malaysia for less than 182 days for the year 2010;
(b) There is a physical-link presence of 31/12/2010 and 01/01/2011; and
(c) He stayed in Malaysia for more than 182 consecutive days in 2011.
For the YA 2011 and 2013, Adam has qualified as a tax resident under Section
7(1) (a) as the number of days in Malaysia amounted to more than 182 days for
both YAs.

On the other hand, for the YA 2012 and 2014, Adam is not considered as a
Malaysian tax resident because the duration of stay was less than 182 days. In
addition, the duration is also not connected to or joined by a period of 182
consecutive days.
The next example could be thought-provoking. Let us take a closer look at it.
Example 3.3:
Samsul was in Malaysia on the following periods:

2010 01.04.2010 – 30.09.2010 183
2011 01.01.2011 – 30.03.2011 89
2012 01.02.2012 – 31.12.2012 334
2013 01.04.2013 – 30.10.2013 214
2014 01.08.2014 – 31.10.2014 92
Thus, his status as a resident for the particular YA is as follows:
Year Resident Status Section

2010 Yes 7(1)(a)
2011 No Not applicable
2012 Yes 7(1)(a)
2013 Yes 7(1)(a)
2014 Yes 7(1)(c)
From the table, we can say that Samsul was a Malaysian tax resident for the YA
2010 until 2014 except for YA 2011.
How about the YA 2011? Why was Samsul not considered as a resident on that
particular year?
ACTIVITY 3.2
Referring to Example 3.3, give your reasons on why the answers are
stated as the above.

After you have discussed the above, letÊs take a look at the next example on the
determination of residence status. The example goes as follows:
Example 3.4:
Munirah was in Malaysia on the following periods:

2009 01.01.2009 – 15.07.2009 196
2010 16.12.2010 – 31.12.2010 16
2011 01.01.2011 – 15.07.2011 196
2012 01.04.2012 – 15.07.2012 106
2013 No period of stay
2014 01.05.2014 – 31.12.2014 245
On 1 January 2015, Munirah left Malaysia for good to work in Thailand.
Based on the above information, we can conclude that the resident status for
Munirah is stated as the follows:
Year Resident Status Section

2009 Yes 7(1)(a)
2010 Yes 7(1)(b)
2011 Yes 7(1)(a)
2012 Yes 7(1)(c)
2013 Yes 7(1)(d)
2014 Yes 7(1)(a)
Now you can see that Munirah is still a tax resident although she did not stay in
Malaysia in the YA 2013. How can this be possible? Well, for your information,
under Section 7(1) (d) you may be a resident as long as you were a tax resident
for the immediate three preceding years and also a tax resident for the following
year. No period of stay in Malaysia is required.
ACTIVITY 3.3
Referring to Example 3.4, give your reasons on why the answers are
stated as the above.

3.5.2 Importance of Residence Status

As we can see, Section 7(1) provides a picture on the technical aspects of
residence status. Thus, we can say that it is slightly difficult to determine the
residence status of a person.
Why do you think it is so important then? Well, for you information, residence
status determines whether an individual is a resident or not for the basis year for
a year of assessment. In line with this, the tax treatment of a resident and non-
resident individual are listed in Table 3.3.
The differences between the tax treatment for a resident and non-resident
taxpayers can be summarised as follows:
Table 3.3: Differences between the Tax Treatment for Resident and Non-resident Taxpayer
Tax Matters Resident Non-resident

1. Scope of charge Income accrued/derived in Income accrued/
Malaysia, income received derived in Malaysia will
in Malaysia from outside be taxed
Malaysia will be taxed (up
to YA 2003)
2. Tax rate Progressive tax rate 0% to Flat rate at 26%
26%
3. Personal relief Yes No
4. Employment income Taxable regardless number Exempted if it satisfies
derived in Malaysia of working days the 60 days test
5. Rebate for chargeable Can claim RM400 tax rebate No rebate
income less than
RM35,000
6. Royalties from literacy Exemption No exemption
work
7. Withholding tax on Not applicable Withholding tax
contract payment, between 10% to 15%
interest, royalty
8. Interest from financial Taxed at 5% Exemption
institution and banks
9. Dividend income from Exemption No exemption
approved unit trust

 It is very important for us to know the fundamentals of our tax system

before we can move further.
 Basically, the Malaysian tax system is similar to the British tax system. We
started off this topic with the types of income, followed by the persons who
can be taxed and the residence status of taxpayers.
 It should be noted that although this topic is simple, yet it is highly

important because by knowing this topic well, we are certain you will be
capable of mastering this course.
Chargeable person Resident status

Resident Scope of charge
1. Describe Section 3 of Income Tax Act 1967.
2. What are the categories of income according to Section 4 and 4A of ITA?
3. Michael was in Malaysia on the following periods:

2013 01.01.2013 – 17.10.2013 290
2014 01.01.2014 – 30.05.2014 150
2014 01.07.2014 – 15.07.2014 15
For each year of assessment, please identify whether Michael is a resident

or not, and, which section is applicable to his case.

4. Siti was in Malaysia on the following periods:

2010 01.12.2010 – 31.12.2010 31
2011 01.01.2011 – 31.08.2011 243
2012 01.01.2012 – 01.07.2012 183
2013 01.01.2013 – 31.05.2013 151
2013 01.09.2013 – 31.12.2013 122
2014 01.08.2014 – 31.08.2014 31
For each year of assessment, please identify whether Siti is a resident or

not, and which section is applicable in her case.
5. Muthusamy was in Malaysia on the following periods:
Year Period of Stay

2010 01.12.2010 – 31.12.2010
2011 01.01.2011 – 08.07.2011
2012 01.02.2012 – 31.12.2012
2013 01.04.2013 – 30.10.2013
2014 01.08.2014 – 31.10.2014
Determine the number of days he stayed in Malaysia and his residence

status for each year of assessment.
1. What is the scope of charge to income tax in Malaysia for:
(a) An individual; and
(b) A company operating a business in a specialised industry (banking,

insurance, sea and air transportation)?
2. Jane Viera is a French citizen who is considering working in Malaysia. She

has approached you for advice in respect of her resident status.
You are required to advise her on the circumstances where an individual

can be regarded as a resident in Malaysia for Income Tax purposes.

3. Alan Clarke, an Australian citizen, was employed as an engineer by Tenaga

Sdn Bhd, a Malaysian company. His periods of stay in Malaysia were as
follows:

01.03.2008 – 02.08.2008 155
2008
01.12.2008 – 31.12.2008 31
2009 01.05.2009 – 16.11.2009 200
2010 01.09.2010 – 20.12.2010 111
2011 03.01.2011 – 30.04.2011 119
2012 01.06.2012 – 30.07.2012 60
2013 01.11.2013 – 31.12.2013 61
01.01.2014 – 31.03.2014 91
2014 11.04.2014 – 20.06.2014 71
01.07.2014 – 24.07.2014 24
On 1 April 2014, he returned to Australia for a 10-day holiday and on 20

June 2014, he rushed back to Sydney upon receiving news that his wife was
critically ill. He came back to Malaysia on 1 July 2014. In view of his wifeÊs
illness, Alan tendered his resignation and returned to Australia on 24 July
2014.
Based on the information provided, you are required to determine his

residence status for basis year 2008 to 2014. Provide an explanation as to
why you would regard him as a resident by referring to the relevant section
of the Income Tax Act 1967.
4. Norman, a consultant engineer from Singapore, worked for Power

Engineering Sdn Bhd for three years commencing on 10 December 2010,
the date of his first arrival in Malaysia. He left Malaysia permanently on 9
January 2014, one month after his contract ended. He was in Malaysia on
the following periods:

2010 10.12.2010 to 31.12.2010 22
01.01.2011 to 10.05.2011 130
2011 21.05.2011 to 03.07.2011 44
11.11.2011 to 30.12.2011 50
2012 01.06.2012 to 27.11.2012 180
2013 01.09.2013 to 31.12.2013 122
2014 01.01.2014 to 09.01.2014 9

He returned to his country for 10 days from 11 May to 20 May 2011 to be

with his son who was seriously ill.
Based on the information provided, determine NormanÊs residence status

for the relevant years and explain why you would regard him as a resident
by referring to the relevant section of the Income Tax Act 1967.
5. Paul Rooney first arrived in Malaysia on 1 November 2007 to commence

employment as a consultant. An analysis of his passport shows the
following:
Date Location Duration

01.11.2007 – 31.01.2008 In Malaysia 92 days
01.02.2008 – 30.06.2008 In London visiting families 150 days
01.07.2008 – 31.07.2008 In Malaysia 31 days
01.08.2008 – 30.11.2008 In Thailand for holiday 122 days
01.12.2008 – 31.03.2009 In Malaysia 121 days
01.04.2009 – 15.04.2009 In Hong Kong for holiday 15 days
16.04.2009 – 31.07.2009 In Malaysia 107 days
01.08.2009 – 30.11.2010 In London visiting families 487 days
01.12.2010 – 31.03.2011 In Malaysia 121 days
01.04.2011 – 14.04.2011 Management seminar in New 14 days
York
15.04.2011 – 15.07.2011 In Malaysia 92 days
16.07.2011 – 30.04.2012 In Indonesia for holiday 289 days
01.05.2012 – 31.07.2012 In Malaysia 92 days
01.08.2012 – 31.01.2014 In Las Vegas for holiday 1 year and 184 days
01.02.2014 – 15.08.2014 In Malaysia 196 days
On 15 November 2014, he left Malaysia permanently. Based on the

information above, you are required to determine:
(a) The residence status of Paul Rooney for the relevant years of
assessment, giving your reasons to support your answer.
(b) Name two advantages Paul Rooney would enjoy as a resident.

Topic  Employment:
4 Acquisition
LEARNING OUTCOMES
1. Define employment for purposes of taxation in Malaysia;
2. Explain the concept of employer, employee and the relationship
between employer and employee;
3. Differentiate between employment and profession;
4. Analyse the forms of taxable employment income derived in
Malaysia; and
5. Identify employment income received from overseas.
 INTRODUCTION
In previous topic, you learnt about the scope of charge in taxation. You should be
able to explain the types of income with regards to taxation. In addition, you
have also recognised who a chargeable person is, the residence status of
individuals, and the differences between tax treatment of residents and non-
residents.
Your understanding of the previous three topics is vital for this particular topic.
Here, you will take a closer look at what employment is from the perspective of
taxation in Malaysia. Generally, we believe that everyone knows what
employment is.
Nevertheless, in order to help you identify the types of taxable employment, we

are going to discuss a specific section specially meant for employment income
which is known as Section 4(b) of the Income Tax Act (ITA) 1967. From this topic,
you will understand better on employment income derived in Malaysia and
overseas.

66  TOPIC 4 EMPLOYMENT: ACQUISITION
However, before you explore this matter in more detail, you need to have a clear
picture on the definition of employment and the differences between profession
and employment with regards to the ITA 1967. In short, we can say that it is
important for you to understand this topic because it relates to other subsequent
topics.
4.1 DEFINITION OF EMPLOYMENT

What is meant by employment? According to Dictionary.com, employment is
defined as an occupation by which a person earns a living. Do you think the
definition given in Dictionary.com and ITA 1967 is similar? If yes, in what sense?
The ITA 1967 defines employment as follows:
Employment is said to be taken place when:
(a) The relationship of master and servant subsists; and/or
(b) Any appointment or office subsists, for which remuneration is payable.

Office is a position or post to a person and he can vacate and a new
person can be appointed to replace him.
Employee is defined as the servant and/or the holder of the appointment or

office and employer is defined as the person responsible for paying any
remuneration to the employee. That person and employee can be the same
person acting in different capacities.
In addition to the definition of employment based on Section 2, you should also

take note that employment is a preparation done to execute service performed by
an individual. Therefore, in an employment relationship, the employer or the
employee is related to each other. This situation can be symbolised in the
following Figure 4.1.

TOPIC 4 EMPLOYMENT: ACQUISITION  67
Referring to the above picture, you could say that an employer must have control
over his/her employees in terms of how they perform their duties. On the other
hand, you should not deny that as an employee, it is your responsibility to
execute your duties as required and instructed by your employer (see Figure 4.1)
as you are paid in the form of wages or salaries for the works which you have
performed.
Figure 4.1: Relationship between employer and employee
ACTIVITY 4.1
Give an example of an employer and an employee in an organisation that
you know. This will help you to better understand the concept of
relationship between employer and employee.

4.1.1 Employer
Who is an employer? According to Dictionary.com, an employer is a person or
business that employs one or more people especially for wages or salary. Now,
let us have a look at what the Act has to say with regards to this matter. In
relation to employment, an employer could mean the following:
(a) Where the relationship of master and servant subsists, the master; and
(b) Where the relationship does not subsist, the person who pays or is
responsible for paying any remuneration to the employee who has
employment, notwithstanding that person and the employee may be the
same person acting in different capacities.
By referring to the above definition, we can say that an employer is the master in
an employment agreement. An employer can be an individual or an entity.
You should bear in mind that an employer is responsible to control employees in

the execution of their work as instructed and paying them wages or salaries.
Recall the previous definition of an employer. Now let us take a closer look at the
definition given in (b). You should note that in (b), an employer is considered a
person who could possibly be an employee who performs certain duties. For
example, a lawyer who owns a legal firm will receive his salaries/wages based
on the legal work that he has done for the firm.

4.1.2 Employee
How do you define an employee then? Well, according to the Merriam Webster
online dictionary, an employee could be defined as a person working for another
person or a business firm for pay.
Now, let us have a look at what the Act has to say on this matter. In relation to
employment, employee could mean the following:
(a) Where the relationship of master and subsists, the servant; and
(b) If relationship that does not subsist, the holder of the appointment of office
which constitutes the employment.
Referring to above picture, employees are servants who deliver services to their
employers. In line with that, wages, salaries and allowances will be given when
services are rendered by you, the employee, as instructed by the employer. Some
of the examples of employees are nurses, teachers, lawyers and government
servants.
An employee can be appointed for a certain position subjected to the

employment. Before we discuss this matter further, let us look at Figure 4.2.

Figure 4.2: Higher management

Source: http://www.cartoonstock.com/directory/D/Director.asp
Figure 4.2 illustrates that even if you are a manager of a company, you are still
considered an employee for your companyÊs higher management.
Other employees include the following: director, secretary of club, treasurer,

trustee and executor of deceased personÊs estate. These are just a few examples.
Even though sometimes the master and servant relationship does not exist, these
people are appointed to perform their jobs and will be rewarded for their work.
4.1.3 Profession
What is profession? Do you think there are differences between profession and
employment? Well, from the taxation perspective, profession differs from
employment. For a better picture on this matter, we encourage you to study the
following perspective:

Profession (Section 4(a) & (b) of ITA 1967):

According to this perspective, profession is not taxable as stated in Section
4(b) ITA 1967 but it is taxable in accordance with Section 4(a) ITA 1967 which
refers to business income.
However, you should also note that profession is not clearly defined under the
Act. From The CIR vs Maxse (1991) (12 TC 41) case, profession should include
employment that requires intellectual skills or hand skills such as artistic carving
skills or surgeon knowledge and skills controlled by consumersÊ intellectual.
Thus in line with this, we can say that profession is different from employment. It
is also known as call or commodity sales.
A profession is a series of acts or chain agreements or a continuity of

employment. If wages or payments for an individualÊs employment are the result
of a series of acts or chain agreements and he/she moves from a place to another
willingly, he/she is considered as carrying out a profession, not an employment.
Therefore, in terms of taxation, rewards for an individual who works on his/her
own is part of business income and is considered taxable (Section 4(a), ITA, 1967).
Table 4.1 provides you with a better picture on the differences between
employment and profession.
Table 4.1: Principles to Identify Employment or Profession
Employment Profession
Control existence of employer Yes No
Employee replacement No Yes
Income or benefits received  Fixed rate salary  Wages as agreed upon
 Benefits: sick pay, tasks assigned
EPF contribution and
medical benefits.
Workplace and working hours Provided/stated Not provided/not stated
Shared risks of financial and No Yes
success
Appointment contract Contract of services Contract for services
Main criteria behind Perform characteristic test to ensure the transactions
transactions criteria

ACTIVITY 4.2
Explain the three principles which differentiate between employment

and profession.
4.1.4 The Importance of Differentiating Profession

and Employment
Why are the differences between profession and employment so vital? Well, we
can say that those two could make a big difference in terms of chargeable tax.
Thus, in this part we will take a closer look at the differences. To begin with, you
should note that an employment is taxable in accordance with the following
section:
Section 4(b), ITA, 1967:

(a) Tax exemptions will be given for gratuity and compensation for loss of
employment.
(b) For non-resident employee, exemptions for employment income
received will be exempted if the employment period is not more than 60
days in a calendar year.
(c) Income is taxable based on graduated tax rate.
(d) Scheduled tax deduction.
The above details should provide you with a better picture of taxation on
employment. How about the taxation for profession? In what sense does it differ
from that of employment?

Well, for your information, profession is taxable as business income, which is

stated in the following section:
Section 4(a) ITA 1967:

(a) Allocations of capital allowance is redeemable.
(b) Loss from current year is deductible (Section 44(2) ITA) as loss for basis
year from accumulated income. Loss is allowed to be carried forward
(Section 43(2) ITA), if not absorbed in the current year.
(c) Flexible deduction of expenses.
(d) Income from business is taxable based on fixed tax rate (25%).
(e) Option to choose scheduled tax deduction.
These two sections clarifies the importance of differentiating between profession

and employment. This is due to the fact that both have different characteristics in
terms of taxation.
ACTIVITY 4.3
By now, you should have a better understanding of employment and
profession. What are the three characteristics required in understanding
the importance of both employment and profession?
4.2 ACQUISITION FROM EMPLOYMENT

INCOME
Do you know under what conditions would employment income be taxed? For
your information, an employment income would only be taxed in Malaysia
under the following circumstances:
(a) The employment income is deemed derived from Malaysia [Section 13(2),
13(3)]; and
(b) The employment income is received in Malaysia from outside Malaysia by

a resident individual. This refers to foreign source employment income.

4.2.1 Income Deemed Derived from Malaysia

For employment income deemed derived in Malaysia [Section 13(2) and 13(3)
ITA 1967], the income is taxable notwithstanding:
 Employer is not in Malaysia.

 Employee is a non-resident.
 Salary and wage payments are not done in Malaysia.
 Employee income is not received in Malaysia.
(a) Section 13(2) ITA 1967

Now, we are going to take a closer look at Section 13(2) ITA 1967. The
Section states that:
Section 13(2) of ITA, 1967:

„Gross income in respect of gains or profits from an employment:
(a) For any period during which the employment is exercised in

Malaysia;
(b) For any period of leave attributable to the exercise of the

employment in Malaysia;
(c) For any period during which the employee performs outside
Malaysia duties incidental to the exercise of the employment in
Malaysia;
(d) For any period during which the person is a director of a company
and that company is resident in Malaysia for the basis year for a
YA and within that basis year that period or part of that period
falls; or
(e) For any period during which the employment is exercised aboard
a ship or aircraft used in a business operated by a person who is a
resident in Malaysia for the basis year for a YA and within that
basis year that period falls,
shall be deemed to be derived from Malaysia.‰

(i) Section 13(2)(a), ITA, 1967

The scope of this section covers employee who is working in
Malaysia. EmployerÊs location and source of income and employment
is not relevant for this subsection. If foreign company employs
employees to work in its branch in Malaysia, the employment income
is deemed derived in Malaysia even though the salary is being paid
out by parent company which is not in the country.
(ii) Section 13(2)(b), ITA, 1967

If an employee is doing his/her employment in Malaysia, any
employment income received for the period the employee is off for
work, is deemed derived in Malaysia. For this subsection, the
situation is similar to Section 13(2)(a), ITA, 1967 whereby the location
of employer and source of salary are not relevant.
This subsection also includes non-resident employee who executes

his/her employment in Malaysia, and off from work either to visit
home country or to go for vacation in other countries. The employee
is taxable in Malaysia for employment income received throughout
his/her vacation period as it relates to his/her work in Malaysia.
(iii) Section 13(2)(c), ITA, 1967

This subsection is meant for employment income in which works are
done outside Malaysia in line with employment in Malaysia. For
example, an engineer who works in Malaysia but has to go to
overseas for discussions with foreign engineers regarding an ongoing
projects to be managed in Malaysia. So the income received while in
overseas is also deemed derived from Malaysia.
Some of the employment income will be taxed twice, in Malaysia and

a foreign country. However, the taxation system in Malaysia offers
tax relief which is either bilateral relief or unilateral relief for foreign
income.
(iv) Section 13(2)(d), ITA, 1967

Rewards received from managing director who is a resident in
Malaysia is deemed derived in Malaysia. However, this subsection
differs from Section 13(2)(a)-(c) in which the director must not
necessarily be working in Malaysia. On one important condition, this
subsection is subjected to companies resident in Malaysia.

(v) Section 13(2)(e), ITA, 1967

This subsection is similar to Section 13(2)(d) in which employer status
is not important to determine whether employment income is
deemed derived in Malaysia or not. The location of employee to
perform his/her works is also not relevant for this subsection.
This subsection is subjected to income received by employees who

work in airline companies or shipping companies, resident in
Malaysia. For example, MAS, AirAsia, MISC, just to name a few.
Income of an individual derived from exercising an employment on

board a Malaysian ship (a sea-going ship registered under the
Merchant Shipping Ordinance 1952 but excludes a ferry, barge,
tugboat, supply vessel, crew boat, lighter, dredger, fishing boat or
other similar vessel) is exempted from income tax (para 34, Sch 6).
Table 4.2 shows the summary of Section 13(2) ITA.
Table 4.2: Summary of Section 13(2), ITA, 1967
Prerequisite
Employer is a
Subsection Section Description Work Done in
Resident
Malaysia by
Company in
Employee
Malaysia
13(2)(a) Employment done in Malaysia √
13(2)(b) Vacation relates to employment in
√
Malaysia
13(2)(c) Work outside Malaysia but in line
√
with work in Malaysia
13(2)(d) Managing director of resident
√
company in Malaysia
13(2)(e) Employment by resident in Malaysia
√
for shipping or airline companies
(b) Section 13(3) ITA 1967

Next, let us take a look at what Section 13(3) ITA 1967 has to say. The
Section states:

Section 13(3), ITA, 1967:

„Gross income in respect of gains or profits from an employment in the public
services or the service of a statutory authority shall be deemed to be derived
from Malaysia if the employee is a citizen‰:
(a) For any period during which the employment is exercised outside
Malaysia; or
(b) For any period of leave attributable to the exercise of the employment
outside Malaysia.
For government servants who are residents, employment income is

deemed derived in Malaysia even though the employment is carried out
outside Malaysia or their paid leave is related to employment not in
Malaysia.
SELF-CHECK 4.1
Decide whether these individuals will be taxed in Malaysia:
1. Maria Ariff is a resident but works as a stewardess with a foreign

airline company based in London.
2. Income received by Ir. Ahmad Fazley who occasionally had to go

to Dublin, Ireland for discussions with other engineers regarding
ongoing projects in Malaysia.
4.2.2 Foreign Income

With effect from year of assessment 2004, the distinction between Malaysian
derived or foreign source employment income is crucial as foreign source
employment income derived in Malaysia is now tax exempt by virtue of the
newly amended para 28, Sch 6.

ACTIVITY 4.4
1. In your opinion, what are the benefits from unilateral relief or

bilateral relief for Malaysian taxpayers?
2. Work in pairs. Discuss the impact of double taxation on Malaysian

taxpayers and suggest how to overcome it. You may use examples
to illustrate the situation.
 In this topic, we have discussed employment income for purposes of

taxation in Malaysia.
 At the beginning, you have been introduced to the definition of employer,

employee and also the relationship between employer and employee.
 It is vital for you to understand how to differentiate between employment

and profession as both differ from each other.
 There are two types of employment income; one is derived from Malaysia,
while the other is received from overseas. The sections discussed in this topic
are Section 13(2)(a)-(e) and Section 13(3) ITA 1967.
Double taxation Employer

Employee

1. Wan Zaleha Radzie is an engineer by profession. On weekends, she hosts a

talk show programme on TV3. She is required to report for duty from 12 to
2 pm to host the programme in which the themes are prepared by TV3, as
stated in the contract. She receives RM2,400 for the two hours work. TV3
also provides her with a wardrobe for the programme. Is she exercising an
employment? Explain.
2. Captain Aldrine, an Indonesian citizen, works as the captain of a vessel and

is paid in Jakarta, Indonesia. The vessel is owned by Mutiara Shipping Sdn
Bhd (a Malaysian tax resident company) and shuttles between Malaysia
and Indonesia. You are required to suggest a tax planning scheme to
mitigate Captain AldrineÊs taxes and advise him if he is liable for
Malaysian tax, if any.
3. Derrick Chia works for the Ralph Lauren Fashion Boutique in Paris. He has
been working there since 2013 but he returned to Malaysia from May till
July 2014. He also bought a Mercedes in 2014 using the employment
income that he received in Paris and brought it to Malaysia. From your
understanding, is he subjected to tax liability for the income represented by
his car? If so, justify your answer.
4. Mawie is a marketing manager for Felda Andak Bhd. He is required to

promote sales and marketing for six months in Malaysia, one month each
in Singapore, Thailand, Japan and China. Mawie is allowed to visit Prague,
Czech Republic for a month of paid leave. State whether he is taxable in
Malaysia and justify your answer according to the ITA, 1967.
5. Zain Azrai is the Managing Director for Rae Ltd (a resident company of
India) in charge of Malaysian branch operations and is paid in India. He is
not subjected to Malaysian tax. Is this statement true? Explain.

1. Explain the term employment as defined in the ITA 1967.
2. What is the significance of distinguishing between a profession from an

employment for income tax purposes?
3. List five characteristics to distinguish between income derived from

employment and profession.
4. Explain what are the provisions stated under Section 13(3) ITA 1967 on
derivation of employment income from Malaysia.
5. Professor Paul Moose, a well-known economics professor from Cardiff

University has been invited as a visiting professor in the Faculty of
Economics and Management at Universiti Putra Malaysia for 50 days. He
will, however, be in Malaysia for a total period of 70 days, as he wants to
spend the extra days visiting the country. For the employment in Malaysia
of 50 days, he will be paid RM30,000. Explain the tax liability of Professor
Paul Moose in respect of his employment in Malaysia.

Topic  Employment:
5 Basis Period
LEARNING OUTCOMES
1. Explain the concept of gross employment income;
2. Differentiate between gross income for business and employment;
3. Determine the types of gross income;
4. Assess the employment income in Malaysia;
5. Explain basis period, deductible expenses and non-taxable income;
and
6. Apply exemptions for employment income.
 INTRODUCTION
In the previous topic, we touched on employment from the scope of acquisition.
By now you should be able to explain the concept of employer, employee and
employment for the purpose of taxation. Apart from that, you have also learnt
that there are differences between employment and profession. In addition to
this, you have also studied the types of income, which are taxable and either
generated locally or overseas.
Your understanding on the previous topic will help you to comprehend this topic
better. In this topic, we will take a closer look on what employment is with
regard to basis period. Before we can go any further, you should have a clear
picture on the concept of gross employment income.

82  TOPIC 5 EMPLOYMENT: BASIS PERIOD
In Malaysia, employment income is chargeable to tax in accordance with Section

4(b), ITA, 1967. This topic is mainly about types of gross income, adjusted
income, deductible expenses and non-taxable income, and exemptions for
employment income.
5.1 GROSS INCOME
Do you know what is meant by gross income? Some of you might say YES and
some might shrug their shoulders as a sign of saying „NO‰. Merriam-Webster
Dictionary defines gross income as an individual's total personal income before
taking taxes or deductions into account.
Is the definition for gross income exhaustive then? What does the related section
has to say about this? Well, for your information gross income includes all
income as mentioned in Section 4(a) until Section 4(f) of the ITA, 1967. Thus, we
can agree that gross income is an amount of all income excluding capital income
which refers to gross amount before any deduction.
Now let us reflect on what we have learnt on employment. In line with this, you
should note that taxation for employment income is in accordance with Section 4
(b) ITA, 1967. According to Section 2, employment refers to:
Employment (based on ITA 1967):

(a) Relationship between master and servant; and
(b) Appointment or holding of an office for which remuneration is
payable.
Do you think there is any difference between income for employment and
business income? In what sense are they different? Let us take a closer look on
these types of income. As you can see, the employment income and business
income can be differentiated as shown in Table 5.1.

TOPIC 5 EMPLOYMENT: BASIS PERIOD  83
Table 5.1: Comparison between Employment Income and Business Income
Employment Income Business Income

Section 4(b), ITA, 1967 Section 4(a), ITA, 1967
Less deduction More deduction
No capital allowance Entitled to capital allowances
Basis year according to calendar year Basis year according to accounting period
Scheduled-tax deduction May choose for tax deduction
Next, we are going to take a look at the types of employment gross income. Gross
income received by an individual or an employee may arise from the following
as shown in Figure 5.1.
Figure 5.1: Types of employment gross income
SELF-CHECK 5.1
1. What is the meaning of employment income in accordance to

Section 2 of the ITA, 1967?
2. Name the gross income received under Section 13(1)(d) and

Section 13(1)(e).

5.2 ADJUSTED INCOME
According to Merriam-Webster dictionary, adjusted could be defined as

accommodated to suit a particular set of circumstances or requirements.
Well then, can we say that an adjusted income is something which has been set to
meet certain requirements? In order to find this, we encourage you to study this
section closely.
As a starting point, you should note that an adjusted income is the amount after
deducting allowable expenses from gross income. The following will help you on
how to calculate an adjusted income.
Based on Section 33 ITA, 1967:
ADJUSTED INCOME = GROSS INCOME – DEDUCTIBLE EXPENSES
You should also note that deductible expenses for employment income are quite
limited in comparison to business income. Examples of deductible expenses for
employment income include travelling and entertainment expenses incurred by
the employee. However, the deductions are only allowed up to the actual
amount of allowances provided by the employer.
Next, let us take a look at the basis period for employment income before we go
into detail on allowed deductible expenses and non-taxable income.

5.2.1 Basis Period
Let us ponder on the picture above. Why is the basis period so important for
employment income? Basis period is important to identify the income which will
be included in calculating gross employment income.
Next, let us have a look on what the Act has to say on this matter:
Section 25(1): If employment income cannot be correlated to basis period, it

should be determined only when it is received.
Section 25(2): If employment income can be correlated to basis period, the period
correlated should be determined as the basis period.
Section 25(3): If income related to service of at least 6 years back from the year
known by IRB, the year of assessment is year known minus 5.
However, if employment income known by IRB is less than 6 years,
the year of assessment refers to the year of employment income
received [Section 25(2) ITA].
Section 25(4): If employment income overlaps between 2 years of assessment, it

should be divided according to number of days in each year of
assessment of the employment income.

Section 25(5): If employment income relates to a period in the future or basis

period, the income should be considered as income for the year it
is received.
Section 25(6): If an employee who is leaving Malaysia in a basis year

and:
(a) Not a resident for the following basis year; and

(b) Not receiving pension for the following basis year; and
(c) Gross income from employment will cease to be
derived from Malaysia after he has left.
Therefore, income for basis period after leaving from Malaysia is accepted OR
taxpayers may choose not to refer to Section 25(6) ITA but instead decide on the
choice before leaving Malaysia.
5.2.2 Exempted Employment Income

In this section, we are going to take a look at the exempted employment income.
The section, which discusses this matter is stated as the following:
(a) Section 13(1)(a) ITA, 1967

Section 13(1)(a) comprises all income that is convertible into money. It
includes amount received in having or exercising an employment (not
necessarily from employer) for instance, tips to taxi driver. The amount
received can be referred to as services rendered in the past, present or
future.
Examples of income classified under this category are:
(i) Salaries and wages (including leave pay);

(ii) Bonus, commission and fees;
(iii) Reimbursement;
(iv) Utility bills;
(v) Gratuity;
(vi) Allowances; and
(vii) Employees Share Option Scheme – ESOS.

However, payment received as a reward for personal qualities (e.g.

marriage and passing exam) and payment to meet personal distress (e.g.
compensation for house damage) is not treated as employment income.
For a better understanding, let us study the differences between taxable

reward and non-taxable reward, which are related to this discussion as
presented in Table 5.2.
Table 5.2: Differences between Taxable Reward and Non-taxable Reward
Taxable Reward Non-taxable Reward
 Received periodically.  Received only once, not periodically.

 From 1999 onwards, it is calculated  Personal present from employer.
by dividing to 6 if service period is
 In accordance with para 25, 25A, 25B in
more than 5 years but if it is less than
Schedule 6:
5 years, it is divided accordingly to
the period.  Retired due to health problem; or
 Retired due to age of retirement as
governed by law with a condition
that an employer has served for at
least 10 years or more with the same
employer; or
 Rewards from public fund such as
teachersÊ fund.
SELF-CHECK 5.2
Referring to what you have learnt, differentiate between taxable and

non-taxable reward.
(b) Section 13(1)(b) ITA, 1967

Pondering at the previous explanation on what does a gross income consist
of (e.g. salary, commission, bonus, allowance), we can also say that gross
income includes rewards or benefits provided by employer, which are non-
convertible to monetary form.
Section 13(1)(b) comprises all income that is not convertible into money or
income that has no exact monetary value. Examples of income classified
under this category are car/fuel benefit, furnishing benefit, domestic
servants/gardener/driver and insurance premium.

However, a few benefits are exempted, for instance:
(i) Medical/dental treatment, childcare benefit;

(ii) Food and drinks provided/subsidised;
(iii) Goods and services offered at a lower price or at a discount;
(iv) Free transport;
(v) Hand phone; and
(vi) Leave passage – vacation fare within Malaysia not exceeding three
times and outside Malaysia not exceeding RM3,000 per family.
For Section 13(1)(b) income, the values of benefit are already specified by
the IRB. Below are the taxable benefits and the respective value specified by
the IRB for the benefits in kind:
(i) If a car is provided; the benefits to be assessed will be the value of

private use of the car and fuel provided. The annual value of private
usage is as following:
Cost of New Car (RM) Benefits Per Annum (RM) Fuel Per Annum (RM)
UP to 50,000 1,200 600
50,001 – 75,000 2,400 900
75,001 – 100,000 3,600 1,200
100,001 – 150,000 5,000 1,500
150,001 – 200,000 7,000 1,800
200,001 – 250,000 9,000 2,100
250,001 – 350,000 15,000 2,400
350,001 – 500,000 21,250 2,700
500,001 and above 25,000 3,000
The annual value of the motorcar benefit can be reduced to half of the
prescribed value if the car provided is more than 5 years old but the
value of petrol remains unchanged.
Now let us have a look at the following car (Figure 5.2). Most of you
may be familiar with this national car which was introduced in 2006.

Figure 5.2: Proton Satria Neo

Source: http://www.munzir.net/satria-neo3.jpg
How about the car below (Figure 5.3)? Now, let us compare this
brand-new car and the older model of Malaysian car in terms of
taxation. Will the owner of the two different cars pay the same
amount of tax?
Figure 5.3: Proton Wira

Source: http://wildasia.net/images/products/380/EX_wira1_5.jpg
(ii) If household furnishings are provided, the annual value of the benefit
are as follows:
Types of Benefits in Kind (BIK) Annual Value of BIK

Semi-furnished with furniture in the lounge, dining room RM840
or bedroom (RM70 per month)
Semi-furnished with furniture and one or more of the RM1,680

following: air conditioners, curtain and carpet (RM140 per month)
Fully furnished benefits plus one or more of kitchen RM3,360

equipment: crockery, utensils and appliances (RM280 per month)
Service charges and other bills such as for water, electricity Service charges and bills
and telephone paid by the employer

(iii) Other taxable benefits include:

Driver RM7,200
Domestic servant RM4,800
Gardener RM3,600
Next, we are going to take a look at Section 13 (1) (c) of the ITA, 1967. Do
you know what this section is all about? Well, it explains about the taxes
which you have to pay if you are provided with a form of accommodation
or equivalent by your employer. What are those taxes? What do you have
to know with regard to this?
In order to answer these questions, let us study the following section

closely:
(c) Section 13(1)(c) ITA, 1967

Accommodation benefit is also taxable in the form of accommodation
value provided by employer to employees. Accommodation here can be
either a house or hotel/ hostel.
The value of a house is either a defined value, which is equivalent to rental

value/rateable value/economic rent or 30% of the Section 13(1)(a) income,
whichever is lower. On the other hand, the value of a hotel/hostel is 3% of
the Section 13(1)(a) income.
However, these rules do not apply to director of controlled companies

where the taxable accommodation value is defined value of the
accommodation. In the case where accommodation are shared or occupied
less than a year, the value of accommodation should be apportioned
according to the period of accommodation provided.
Calculation for the value is in accordance with Section 32(2) and 32(3), ITA,
1967:
(i) Section 32(2)(a) – accommodation provided for employee or

managing director or controllable company.

(ii) Section 32(2)(b) – accommodation provided in the form of:
 Hostel, hotel or similar premises;
 House in plantation area or jungle; and
 Non-taxable area as approved by local authority.
(iii) Section 32(3)(a) – accommodation provided for director (not

managing director) of controllable company.
(iv) Section 32(3)(b) – if accommodation period provided less than 12

months.
(v) Section 32(3)(c) – if accommodation provided is shared with other

employees under the same employer.
From the above discussion, we hope that you are clear with taxable
accommodation value and important matters with regard to the subject
being discussed.
Now let us study closely what Section 13 (1) (d) ITA, 1967 is all about. For
your information, this Section 13 is stated as the following:
(d) Section 13(1)(d) ITA, 1967

Section 13(1)(d) constitutes a contribution by employer to unapproved
funds, schemes or societies and income received from unapproved funds.
All these incomes will be fully assessed in the year of withdrawal.
Income assessable under Section 13(1)(d) include:
(i) Contribution by employer to unapproved scheme or society; and

(ii) Interest and bonus from unapproved savings.
As you can see, the above section touches on the alternative type of gross
income. The next section which is known as Section 13 (1) (e) ITA, 1967 will
discuss further on the alternative type of gross income.
(e) Section 13(1)(e) ITA, 1967

Compensation for loss of employment includes wages/salary in lieu of
notice, compensation for breach of contract of service, payment for the
release of employerÊs obligation under the contract of service, ex-gratia
payment and amount received under restrictive covenant.

Compensation for loss of employment is totally exempted if the reason for

cessation of employment is due to ill health. Partial exemption is given of
RM10,000 for each completed year of service with the same employer in the
same group.
Gross income due to compensation for loss of employment is taxable.
5.2.3 Non-taxable Income

We have discussed on taxable income on the previous section. Have you ever
wondered the types of income which are non-taxable? What are the differences
between taxable income and non-taxable income? Do these differences have a
significant impact in terms of taxation?
Well, in order to find those out, we are going to take a look on non-taxable
income with regard to this specific section. As a starting point, let us study the
following sections:
(a) Section 13(1)(b) ITA, 1967

Incomes in the form of benefits that are non-taxable include:
(i) Goods and services for daily usage given or sold by employer;
(ii) Free bus transportation for employees to workplace;
(iii) Food and beverages provided at workplace;
(iv) Vacation fare; and
(v) Personal computer.
Besides that, fan and water heater are considered as part of accommodation,
so both will not be taxable.
(i) Utilities
Benefit value which refers to amount paid by employer for service
charge, phone bills, electricity bills and water bills.
(ii) Insurance Premium

Benefit value that relates to annual premium amount paid by
employer (life insurance).
The next section will give you examples of non-taxable income. Let us take
a look at the following type of income.

(b) Section 13(1)(d) ITA, 1967

Contribution made by employer to approved fund such as EPF is classified
as capital and will not be taxable.
(c) Section 13(1)(e) ITA, 1967
Do you think it is true? Well for your information, the answer would be a
big YES. This fact is stated in Section 13(1) (e) ITA, 1967.
Now let us study closely the following section with regards to the
exemption for compensation of losing employment:
(i) Full exemption of compensation due to illness or weakness from age;

or
(ii) Maximum RM10,000 exemption annually for every year of full

service with the same employer or with companies in a group, with
effect from 1.7.2008.
Does the exemption rate show any increment or decline from time to time? This
is another question which you might have been wondering for quite some time.
Well for your information, prior to 1.7.2008, the amount of exemption was
RM6,000 for the years of assessment 2003 to 2008; RM4,000 for the years of
assessment 1987 to 2002; and RM2,000 for the years of assessment up to 1986 for
each completed year of service. With effect from the year of assessment 2009, the
exemption has been increased to RM10,000 annually.
We hope that you are clear on the types of incomes which are non-taxable. We
also hope that you are able to analyse their (i.e. non-taxable incomes) differences
with taxable-incomes from the previous section. It is also clear that the
differences of both has a great impact in terms on taxation.

5.3 EXEMPTION OF EMPLOYMENT INCOME

FOR THE NON-RESIDENT
Understanding gross income and adjusted income is important. However, at the

same time you should be aware of the exemptions of employment income for
non-resident. Do you know what kind of exemptions could you receive as an
employee? Well this section will specifically explain to you on those exemptions.
For your information, besides deductible expenses to reduce taxable amount,

there are a few things which may lower taxable income referred to as the amount
exempted from being taxable. Hence, you may refer to Schedule 6 of the ITA,
1967 as a reference. Schedule 6 is stated as the following:
Schedule 6 of the ITA, 1967:
Para 21: employment income for non-resident will be exempted from being
taxable if:
(a) Income is for a period of less than 60 days in a basis year; or
(b) Income for a continuous period of not more than 60 days which overlap
with 2 consecutive basis years; or
(c) Income for a continuous period of not more than 60 days which overlap
with 2 consecutive basis years and for a continuous period not exceeding
60 days.

ACTIVITY 5.1
Assuming that you are working in a different organisation; form a group

of four. Give your opinion on the exemptions of your employment
income. Point out the differences with each other.
You will later find out that exemptions differ from one employee to
another of different organisations. Decide whether you agree or disagree
with this statement. Give your reason(s) and supporting evidence(s).
 Employment income is one of the most important sources of income which

contributes to the country's development. It is also a source of income for the
Government besides incomes from business, rental, dividend and others.
 Gross income is an amount of all income excluding capital income which

refers to gross amount before any deduction.
 An adjusted income is the amount after deducting allowable expenses from

gross income.
 Basis period is important to identify the income which will be included in

calculating gross employment income. You should also remember best that
the basis period of assessment year is vital to determine the amount of
taxable income.
 Besides that, you should be able to understand allowable expenses which are
deductible and non-taxable income which is vital to calculate the adjusted
income.
Allowance Having or performing

Bonus Reward
Commission Salary
Gross Income Wage

1. Gross income may be received from five sources. Name them in accordance
to Section 13(1)(a) till Section 13(1)(e), of the ITA, 1967.
2. Differentiate between employment income and business income.
3. Ken Watanabe, a citizen of Japan residing in Thailand, is a director of

Textile Sdn Bhd which is a company resident in Malaysia. He received
directorÊs fees of RM15,000 per annum from the company. He spends a
total of 45 days in 2014 in Malaysia attending the companyÊs Board of
Directors Meeting. State, with reasons whether the directorÊs fees received
by Mr. Watanabe are subject to tax in Malaysia or not.
4. State the conditions under which retirement gratuity is fully exempted

from tax under the Act.
5. Adrian is employed as a vice president of a multinational company in

Malaysia and his salary is RM230,000 per annum. Adrian is provided
with a furnished bungalow for which the company pays rent amounting
to RM87,000 per annum.
Adrian is not provided with a company car but he has been given the
option of:
(i) A driver provided by the company; or
(ii) The reimbursement of the driverÊs salary amounting to RM12,800

per annum.
State, with reasons and supporting calculations, which of the above option
should Adrian choose from a tax perspective.
Question 1
Please read the following case carefully. You are required to calculate the total
employment income for the assessment year of 2014.

Dr. Cruz Beckham is from United Kingdom. On 31 December 2013, he came to

Malaysia with his family to work for a 3-year contract starting from 1 January
2014. He worked at Sri Medic Gleneagles Centre in Kuala Lumpur as a surgeon
specialist.
According to his offer letter, he will be paid a monthly salary of RM10,000,

entertainment allowance of RM500 per month, one-month-bonus annually. On
top of that, he will receive a fully furnished 3-room apartment, a servant, a car
inclusive of fuel and return flight tickets for family vacation.
Additional Information:
(a) Bonus of RM10,000 for the year end 31 December 2014 received on 18
December 2014.
(b) RM1,700 monthly rental expenses paid by his employer inclusive of RM200
for furnishings. Dr. Cruz Beckham moved in on 1 January 2014.
(c) Utilities expenses at the apartment directly paid by employer in 2014 for
RM2,000.
(d) Monthly servant salary paid by employer, RM300 starting from January
2014.
(e) RM100,000 spent by employer in 2013 to buy a new car for Dr. Cruz
Beckham. It was meant for personal use once he started working.
(f) Dr. Cruz Beckham hired a driver since he was not familiar with roads in
Kuala Lumpur with a salary of RM400 per month. He tried to request from
IRB to deduct the driverÊs salary from his employment income.
In December 2014, he went to Brunei Darussalam and Indonesia for family

vacation with his wife and two children. The return tickets paid by
employer are as follow:
Brunei Indonesia
Dr. Cruz Beckham and wife RM400 each RM550 each
One son and one daughter RM200 each RM350 each
(g) Dr. Cruz Beckham paid medical bills for his family in 2014. However, his
employer eventually paid him RM500 for it.
(h) Three quarters of entertainment allowance was meant for official matters.

(i) In 2014, special attire amounting to RM200 for a surgeon was prepared for
Dr. Cruz Beckham.
Question 2
Musa, aged 53, is the factory Manager of Best Motor Sdn Bhd which
manufactures electronic components for the local market and for export. He has
been working with Best Motor Sdn Bhd for the past 15 ½ years.
Due to the economic recession, Best Motor Sdn Bhd has to cut its production by
half and has therefore offered a voluntary separation scheme (VSS) to some of its
employee including Mr. Musa. He chose the VSS on 31 October 2014 and was
paid 10½ months of his last drawn salary as a compensation for the loss of his
employment.
Other details of his remuneration for 2014 are as follows:
RM
Salary 12,000 per month
Incentive bonus 18,000 (1 ½ month salary)
Travelling allowance 500 per month
Air passage for him and his family:
– Kuching 2,500
– Pulau Redang 1,800
– Padang, Indonesia 5,600
Rental of fully furnished accommodation (1/5 of 7,500 per month (inclusive of
the accommodation is used to entertain the RM2,500 for furniture)
companyÊs guest)
Utility paid by company 4,000
Dental expenses for him and his family 2,500
Car (7 years old) 150,000 (cost when new)
Fuel 4,800
In addition to the above, the company also provided Mr. Musa with a driver
(with a salary of RM1,000 per month) and a servant (with a salary of RM850 per
month). The company also paid for his life insurance premium amounting to
RM4,500 per year. During the year, his second child was hospitalised in Subang
Jaya Medical Centre. The hospitalisation costs amounting to RM8,800 was paid
by the company.

You are required to compute the gross employment income of Mr. Musa for the
year assessment 2014.
Appendix 5.1
VALUE OF BENEFITS IN KIND
Prescribed Value of Motorcar and its Related Benefits
Annual Value of Benefit Fuel Per Annum

Cost of Cars When New
(RM) (RM)
Up to RM 50,000 1,200 600
RM 50,001 – RM 75,000 2,400 900
RM 75001 – RM 100,000 3,600 1,200
RM 100,001 – RM 150,000 5,000 1,500
RM 150,001 – RM 200,000 7,000 1,800
RM 200,001 – RM 250,000 9,000 2,100
RM 250,001 – RM 350,000 15,000 2,400
RM 350,001 – RM 500,000 21,250 2,700
RM 500,001 and above 25,000 3,000
Prescribed Value of Household Furnishings, Apparatus and Appliances

Semi-furnished with furniture in the lounge, dining room RM840
or bedroom. (RM70 per month)
Semi-furnished with furniture and one or more of the RM1,680

following: air conditioners, curtains and carpet. (RM140 per month)
Fully furnished benefits plus one or more of kitchen RM3,360

equipment: crockery, utensils and appliances. (RM280 per month)
Service charges and other bills such as for water, electricity Amount paid by the
and telephone. employer

Prescribed Value of Other Benefits
Types of BIK Annuals Value of BIK

Gardener 3,600
Domestic servant 4,800
Driver 7,200

Topic  Non-Business
6 Income
LEARNING OUTCOMES
1. Identify types of non-business income assessable to tax;
2. Determine the gross income for dividend, interest, rental and
royalty;
3. Explain allowable expenses for each non-business income;
4. Calculate adjusted income from dividend, interest, rental and
royalty; and
5. Summarise the exemption entitled for each non-business income.
 INTRODUCTION
In the previous topic, we have talked about the basis period of employment and
the concept of gross employment income. In addition to that, you should also
realise that there are differences between gross income for business and
employment. We have also discussed what employment income is, the basis
period of employment income and exemptions for employment income in the
context of Malaysia.
The purpose of the previous topic is to enlighten you on important matters in

gross and employment income. What you have learnt in the previous topic will
be beneficial as you explore this topic. Here, we will discuss on non-business
income in terms of taxation.

102  TOPIC 6 NON-BUSINESS INCOME
For your information, incomes which are assessable to tax under Section 4(b),
4(c), 4(d) and 4(e) are categorised as non-business income. Section 4(b)
employment income has been covered in the two earlier topics. In this topic, you
will study closely on incomes such as dividend, interest, discount as stated in
Section 4(c) and rental, royalties and premiums in Section 4(d). In addition to
this, we will go through Section 4(e) which touches on incomes such as pension,
annuity and alimony. Any incomes which do not fall under Section 4(a) to 4(e)
will be assessed under Section 4(f).
6.1 DIVIDEND
Figure 6.1: What is dividend?
Do you know what a dividend is? Well, for your information the above is one of
the definitions of dividend. For a clearer picture on this matter, we encourage
you to study this section in detail.
Firstly, in determining whether dividends received are part of our chargeable

income or not, we need to understand what dividend income means. Dividend
can be defined as a distribution or payment out of profits or any undistributed
profits of a company to its shareholders. The distribution depends on the ratio
that has been fixed by the company and it can be in terms of money or other
property.
Dividend is considered an income because the payment is made from the

company capital fund. Therefore, when the payment of dividend is made, it will
directly reduce the companyÊs asset. In addition, when the company declares
dividend to the shareholders, the obligation to pay exists and the company must
pay the declared dividend in the future. This scenario supported that
shareholders who received dividend from the company, will have extra income
and this income will be chargeable to tax.

TOPIC 6 NON-BUSINESS INCOME  103
However, you should also be informed that what was discussed earlier focused
on cash dividend and dividend in specie only. Other types of dividend received
by shareholders, for example, bonus shares do not fall under this discussion
because they are not classified as an income but merely as returns on capital.
Do you know what the reasons are? The reasons are stated as the following:
(a) The issuance of bonus shares will not reduce the companyÊs assets to
shareholders;
(b) The total number of shares owned by shareholders are still the same after
the issuance of bonus shares; and
(c) There was no outflow of dividend from retained earning of the company.
Apart from that, the distribution of assets due to liquidation of a company is also
not an income to the shareholders. Why then? Well, the reason is simple. This is
because the assets received by the shareholders are just a compensation payment
or in other words getting back their capital/investment from the company.
Therefore it does not contribute to the shareholdersÊ income.
In addition you should also note that, the right issues to shareholders at a
premium which is lower than market value will not be chargeable to tax. What is
the benefit of the right issues then? Well, the right issues will increase the
shareholdersÊ investment, therefore they are regarded as capital transaction
rather than revenue transaction that will increase the shareholders income.
Similar to the share buyback transaction; it is not a dividend distribution to
shareholders. It is just the companyÊs effort to increase the price of its share in the
market.
6.1.1 Income Classification
Do you know how incomes are classified according to the Income Tax Act 1967?
In order to have a better understanding on this matter, let us discuss this
classification in more detail.

After we have determined whether dividend received is an income or not, we

must also identify whether that dividend is the main income of a business or is it
just an income from other sources of income (not a business income).
Now let us take a closer look on the classification of income. If dividend received
is from the business main activities, therefore it is classified as an income under
section 4(a) of the Income Tax Act 1967, which is known as the business income.
However, if the dividend is not from the business main activities, it falls under
Section 4(c) of the Income Tax Act 1967 as a dividend income.
6.1.2 Derivation of Income
Let us look back on what the word „derive‰ (i.e. the root word for „derivation‰)
represents. Well according to Merriam-Webster Dictionary, derive could be
defined as to receive or obtain from a source or origin. In this case, we are going
to have a look at the source or the origin of income.
Firstly, the taxable dividends in the hands of shareholders is within the scope of
derivation of dividend income should be accounted for. You should also note
that the derivation of dividend income from Malaysia is based on the residence
status of the company which declared the dividend at the date the dividend is
paid, credited or distributed to the shareholders.
This means that the dividend is considered derived from Malaysia if it was paid,
credited or distributed by a resident company. According to Section 8(b) and (c)
of the Income Tax Act 1967, a company is considered a Malaysian resident
company when its management and control are based in Malaysia.

SELF-CHECK 6.1
1. Which type of dividend is assessable to tax under the Income Tax

Act 1967?
2. What types of dividend are not taxable under Malaysian Income

Tax Act?
3. In which situation is the dividend income is said to be deemed

derived from Malaysia?
6.1.3 Deduction of Tax on Dividend Received
Do you know how much of your dividend will be deducted for tax? What is the
specific deduction rate then? Well, you might be surprised to know that
beginning from 2008, profits will be taxed at the company level and the dividend
received by shareholders would be exempted from tax.
A major tax proposal in 2008 Budget is the introduction of the single-tier income
tax system, replacing the imputation system previously in place.
Under the single-tier system, companies are no longer required to deduct tax on
dividends paid to shareholders. The corporate tax paid on a companyÊs profits
will be a final tax and dividends distributed to shareholders will be exempted
from tax.

Under the previous imputation system (year 2008 and before), the tax treatment
on dividend income is as follows:
All dividends received by shareholders will be subject to 28% of tax rate

which is complied with Section 108 (1) the Income Tax Act 1967.
Thus, we can say that the dividend received by the shareholder is net of tax.
On the other hand, in calculating the individual income tax, you should note
that the dividend received should be grossed up. The reduction in dividend
income received by the shareholders will be used as tax credit to reduce the
total tax payable (Section 110-off set).
What happens if the tax payable is nil? What should you do in this case? Well,
you should know that in the case where tax payable is nil, the tax credit will
be refunded by the tax authority. However in practice, the tax credit will be
brought forward and it is used to reduce tax liability in the future year of
assessment. Here we can see that the deduction of tax on dividend received is
seen as pre-payment by the shareholders to tax authorities.
Practically, the company which pays the dividend will send the dividendÊs
warrant together with the cheque to the shareholders. This warrant will have
the information regarding the payment of dividend which includes
information on the gross dividend, tax deduction on dividend and the net
dividend paid to shareholders.
6.1.4 Basis of Assessment

Next, we are going to take a look at the basis of assessment. The three important
aspects which constitute the basis of assessment are as follows:
(a) Basis Period

When the dividend is paid, credited or distributed to shareholders in a
basis year, it will be assessed in that year (the relevant year).
The next aspect which you need to take serious note of is the year of
assessment. Let us study what are the important issues with regard to this
matter.

(b) Assessment Year

With effect from the year of assessment 2000, the basis to assess dividend
income is a calendar year. This is applied to all taxpayers except for
company, trust body, and co-operative society. For these groups of
taxpayers, the assessment year is according to their financial year end.
(c) Date of Payment

According to Section 23 (b) of the Income Tax Act 1967, the date of
payment of dividend is when the receiver has the right and control over the
cash or fund which represents the dividend income. The following are
some of the points you need to consider:
(i) Paid, on the day when cash or cash equivalent is transferred or sent
by the company;
(ii) Credited, on the day the company recorded the payment in its
account; or
(iii) Distributed, on the day it is transferred or sent by the company.
Thus, you should realise that it is important to know the date when the dividend
is paid, credited or distributed by the company because it will determine the
basis period the dividend will be assessed. On the other hand, the date when the
shareholder received the dividend is not relevant.
6.1.5 Allowable Expenses
What are the allowable expenses for the dividend? The expenses which relate to
dividend income can only be deducted when they fulfil the requirements under
Section 33 of the Income Tax Act 1967 „wholly and exclusively‰.

The allowable expenses include interest expense, management charge and others
if loan is taken to finance the investment. Expenses incurred which exceed the
dividend income cannot be carried forward to the next year of assessment. This is
because it is regarded as a permanent loss.
On the other hand, are there any expenses which could not be deducted for this
purpose? Well, yes there are some that could not be deducted by any means.
Expenses like commission for agent, brokerage fees or legal fees are not allowed
to be deducted from dividend income. This is due to the fact that these expenses
relate to capital transaction activity and not revenue activity.
6.1.6 Foreign Dividend
With effect from the year of assessment 2004, foreign dividends received by
person chargeable to tax are exempted from tax except for company in a
specialised industry (i.e. banking, insurance and air and sea transportation).
This type of company is subjected to the world income scope, meaning that all
income received in Malaysia or received from outside Malaysia is taxable. In line
with this, it is important for us to look whether there is a double tax agreement
between these two countries.
This is important in determining whether that dividend is subject to withholding

tax, credit bilateral tax or credit unilateral tax. The amount recognised is the
amount received before withholding and not the net amount received in
Malaysia.

Now, let us take a look on how you can calculate bilateral credit. The calculation
according to Section 132 is stated as the following:
Calculation for Bilateral Credit – Section 132
The lower between:
Foreign Income
1.  Malaysian Tax payable before relief
Total Income
or
2. Foreign Tax payable on foreign income
Next, we are going to study the calculation for unilateral credit relief. The
calculation is stated as the following:
Unilateral Credit Relief
The lower between:
Foreign Income
1.  Malaysian Tax payable before relief
Total Income
or
2. 50% of Foreign Tax payable on foreign income
ACTIVITY 6.1
In your opinion, is the above formula relevant to an individual taxpayer?
Give a reason to support your stand.

6.1.7 Exempt Dividend

Do you know the examples of the dividend incomes that are exempted? Well in
order to find this out, let us study the following list:
(a) Dividend paid, credited or distributed by cooperative society.

(b) Dividend paid from exempt income from unit trust and unit trust
property.
(c) Dividend paid from exempt income from venture capital company.
(d) Dividend paid from exempt income from account which enjoyed the
tax incentives for resident company under Investment Promotion Act
1986.
(e) Dividend paid from account which enjoyed tax incentive for resident
company under Income Tax act 1967, such as Reinvestment allowance,
Shipping incentives, and offshore insurance Incentives.
(f) Dividend paid from exempt tax for foreign income received in Malaysia
by resident company.
(g) Dividend paid out of tax exempt account arising from foreign income
received in Malaysia by a resident company (except banking, insurance
and air and sea transportation) or unit trust.
(h) Dividend paid using exempt income from chargeable income existed in
the year of assessment 2000 (Prior Year Assessment).
6.2 INTEREST
Sometimes it is confusing to exactly know which interest one refers to. Well,
according to Merriam-Webster Dictionary, interest could be defined as the profit
in goods or money that is made on invested capital.

After you are clear on what interest is, let us take a look at the classification of
income.
6.2.1 Classification of Income

Interest income could be separated into two categories namely investment
income and business income. The following section will explain to you on this
matter.
Interest is chargeable under Section 4(c), Income Tax Act 1967 if the interest
income is recognised as an investment income and not a business income. With
effect from the year of assessment 2004, the interest income for company, unit
trust and society will be assessed according to financial year end respectively.
For other chargeable person such as individual taxpayer, interest income will be
assessed according to the calendar year.
However, the interest income will be assessed as the business income under
Section 4(a) if:
Section 4(a):
(a) It is received from trading debts;
(b) It is received from the ordinary course of business activity; and
(c) It is enjoyed by company in specialised industry such as bank and

insurance company.
In the 2013 budget, Section 4B was introduced which stated that interest income
can only be treated as business income under Section 4(a) if the debenture,
mortgage or other sources to which the interest relates form part of the stock in
trade of a business of a person or if the interest is receivable by a person from a
business of lending money.

Hence, effective from year of assessment 2013, all interest income will be
assessed as the investment income under Section 4(c), unless the interest income
is in respect of:
Section 4(a):
(a) A debenture, mortgage or other source which forms part of the stock in
trade of a business carried on by a person; or
(b) A loan granted in the course of carrying on the business of lending of
money and the business is one which is licensed to lend money under
any written law.
6.2.2 Derivation of Interest Income
This section will explain to you on where the interest income comes from. Any
interest income received by any person is subjected to the Malaysian taxation if:
(a) Interest income is received in Malaysia; or

(b) Interest income is received in Malaysia from outside Malaysia.
Now we will take a closer look on the interest income which is derived from
Malaysia. What are the important issues with regard to this matter? For your
information, Section 15 of the Act states that the interest income is deemed
derived from Malaysia if:
Section 15 of the Act:

(a) The responsibility for payment lies with Government or state
government;
(b) The responsibility for payment lies with a person who is resident in
Malaysia; and
(c) The interest is charged as an outgoing or expense against any income
accruing in or derived from Malaysia.

Payment of Interest by Resident Individual to Non-resident

For your information, any payment made by resident individual is not
necessarily regarded as received in Malaysia. We need to look at whether the
loan is used in Malaysia to generate income in our country. If the loan is used to
generate income in Malaysia, although the lender is a non-residence, the interest
income is deemed to be derived from Malaysia. On the other hand, if the receiver
is a non-resident, he is subject to withholding tax of 15%.
SELF-CHECK 6.2
1. Can interest income be assessed as business income Section 4(a)?
2. In what way IRB collect tax on interest income derived from

Malaysia which is received by non-resident?

Next, we are going to take a look at the basis of assessment for the interest
income. Let us study closely on what constitutes the basis of assessment.
The basis period of interest income for non-business, unit trust or social body is
based on a calendar year. For a company, the basis year is the financial year end.
Now, take a look at what the Act has to say in this matter:
(a) Section 27(1), states that the interest income is assessable when it is first
become receivable. Interest income received in a basis year will be assessed
in the same year of received.
(b) Section 29(1) „Received‰ means individual has the right or authority to
obtain the interest income on demand.

According to Section 27(2)(a), if the interest income overlaps two or more basis
period, the interest will be distributed evenly to the relevant period.
Furthermore, according to provision (b) Section 27(2), in order to prevent the
government to bare the losses from the overlapping basis period more than five
years, before the interest income become known by the Director General, the
interest income is deemed to have accrued evenly over the part of the
overlapping period which did not elapse.
For your information, under Section 27(2)(c), if overlaps and wholly elapsed
more than 5 years, the interest income shall be treated as gross income which
began 5 years before the beginning of the year assessment before it became
known by Director General. Meanwhile Section 27 (3) discuss on interest income
received in advance. If it is received for more than one basis period, it would not
be apportioned but it is treated as gross income of the period in which it is
received.
6.2.4 Allowable Expenses to be Deducted
Do you know what the allowable expenses for the interest income are? Are they
similar with respect to the allowable expenses for dividend? Let us find out the
answer in this section.
The general provision under Section 33 of the Income Tax Act 1967, states that if
the expenses are „wholly and exclusively‰ incurred in producing the gross
interest income, they are allowed to be deducted from the gross income.
Where loan was made for the purpose in getting the interest income, thus the
interest expense relating to the loan is allowable to be deducted from gross
interest income in determining the adjusted income from interest.

6.2.5 Exemption of Interest Income

This section will explain to you on the exemption of interest income. As a start,
let us have a look on what the following Para 35, has to say with regard to this
matter:
Para 35, Schedule 6 of ITA 1967:

Schedule 6 of ITA, 1967 deals with exemptions of income tax. Paragraph 35 of
Schedule 6 is regarding the exemption of interest paid or credited to any
individual, unit trust and listed closed-end fund. It includes:
(a) Securities or bonds issued or guaranteed by the Government; or

(b) Debentures, other than convertible loan stock approved by Securities
Commission; or
(c) Bon Simpanan Malaysia issued by Bank Negara Malaysia.
This order was effective from the year of assessment 2003 and subsequent
year of assessment.
Next, let us study the exemption order which is stated as the following:
Exemption Order
Resident individual are subjected to 5% withholding tax on gross interest
income from deposits with licensed banks and finance companies and this is a
Âfinal taxÊ. Thus, resident individual will not be taxed again on the interest
income. However, the following interest income will be exempted from tax by
the Minister of Finance:
(a) Any bank or financed company licensed under Banking and Financial
Institution Act 1989 (BAFIA) or Islamic Banking Act 1983 on saving or
fixed deposit (less than one year) not exceeding RM100,000;
(b) Any registered cooperative society;
(c) Bank Simpanan Nasional;
(d) Bank Pertanian Malaysia;

(e) Lembaga Urusan Tabung Haji;

(f) Malaysia Building Society Berhad; and
(g) Any other institutions approved by the Minister.
In the case of savings that exceed RM100,000, withholding tax of 5% will only
applied to interest income earned in excess of RM100,000.
Last but not least, the following are some of the exemptions on the interest
income which you should pay close attention to:
(a) Interest paid or credited on Certificates issued by Government.
(b) Premium from investment in Premium Saving Certificate under Bank

Simpanan NasionalÊs scheme.
(c) Interest received from bond and securities issued by Pengurusan

Danaharta Nasional Berhad within or outside Malaysia.
(d) Interest received from non-convertible bond by any listed company in

MESDAQ.
(e) Interest received from Merdeka Bond issued by Bank Negara Malaysia.
(f) Interest received by non-resident company from securities issued by the

government and from non-convertible Islamic Securities or debenture
issued in Ringgit Malaysia and approved by Securities Commission.
With effect from 30 August 2008, all interest income received by individuals from
moneys deposited in all approved financial institutions in Malaysia will be tax
exempt. Reference is made to Income Tax (Exemption) (No. 7) Order 2008. This
exemption will benefit the taxpayers with deposits exceeding RM100,000 in
banking and financial institutions.

6.3 RENTAL INCOME
Figure 6.2: Rental properties
Referring to Figure 6.2, most of you are familiar with rental income. Some of you
might have rented your house, car and/or shop as a resource of income. In
addition to this, we are going to explain to you on the important issues with
regard to this matter. To begin with, let us have a look at the general background
of rental income as explained in the following subsections.
6.3.1 Introduction
According to Section 2 of the Income Tax Act 1967, rental income can be defined
to include any sum received for the use or occupation of any premises or for the
hiring of any things. Rental income includes rent from moveable and
immoveable properties.
For your information, rent income falls under Section 4(d) of the Income Tax Act
1967; if it is classified as an investment income. On the other hand, you should
bear in mind that rents could also fall under Section 4(a) – as a business income.
In this case, you should be informed that the IRB has issued a Public Ruling (PR)
1/2004 on 30 June 2004 that states the characteristics and probabilities to charge
rental income as a business income.

According to the Public Ruling PR 1/2004, rental income can be assessed as

business income when a person owns a minimum unit of properties as the
following:
Types of Properties Minimum Units Owned

 Factory 1
 Warehouse 1
 Office/shopping complex
 The whole complex 1
 Standard lot 4
 Shop house 4
 Residential properties 4
 Mixture of properties 4
This means that if a taxpayer owns a minimum number of the above properties
and has sources of income from those properties, the income will be assessed as a
business income under Section 4(a) and not as investment income under Section
4(d).
6.3.2 Derivation of Rental Income
There is no specific provision in the Act regarding the derivation of rental

income. How can we determine whether the rental income is derived from
Malaysia or otherwise? Basically, when we are able to determine the location of
the rental properties, thus the income received for renting that properties would
be said to have been derived from Malaysia.

For your information, the determination of rental income sources can be analysed
as the following:
Immoveable Properties
Rental income is deemed derived from Malaysia when the location of the
landed properties is in Malaysia although:
(a) The owner is outside Malaysia; or

(b) The rental agreement is signed outside Malaysia.
Movable Properties
Usually, movable properties relates to the leasing of factory and machine. The
derivation of rental income depends on the place where the properties are
used.
(a) Place of where the business of lessor is carried on in Malaysia

If the place where the business of lessor is carried on in Malaysia,
therefore the rental income accrued in Malaysia or received by the lessor
is taxable under Section 4(a) as a business income.
(b) Place of where the business of lessor is carried on outside Malaysia

Income received by foreign lessor is subject to withholding tax and it is
derived from Malaysia.
Let us have a closer look on what constitutes the basis of assessment for the
rental income. With effect from the year of assessment 2004, rental income
received by a company, a trust body and a club will be assessed according to the
financial year end.

On the other hand, other persons such as individual taxpayers will be assessed
using the current calendar year. Rental income will be assessed on receipt basis
i.e. when the rental income first becomes receivable (Section 27(1)). In this case,
„received‰ means the individual has the right or authority to obtain that income
on demand.
Next, we are going to study on two important aspects in the basis of assessment.
These aspects are stated as the following:
Advance Rental Income

According to Sec. 27(2) of the Income Tax Act 1967, this is assessable in the
year of receipt, although it is subject to refund.
Tax Planning
It is normal when we rent a house, we as the owner of the house will collect
some deposit in advance as a guarantee for any damages that might happen
during the tenancy period. This deposit is not assessable. However, when the
deposit is used for the purpose of ÂrentÊ it will be assessable at the time of
conversion from deposit to rents payments. In the rental agreement, it is
important to clearly define the words ÂrentÊ and ÂdepositÊ as deposits is not
included in the rental income of the owner.
SELF-CHECK 6.3
Why do we need to differentiate between these two terms, rental

income and deposit?
6.3.4 Allowable Expenses

This section will illustrate whether there are differences in the allowable
expenses for rental income with other types of incomes.
Expenses which are allowable to be deducted from the rental income must be
„wholly and exclusively‰ incurred in producing the rental income and it must be
revenue in nature. Such allowable expenses are stated as the following:
(a) Cost of repair and maintenance;

(b) Insurance premium on fire/burglary;
(c) Cost of supervision and collection of rent;
(d) Cost of obtaining new tenant to replace the old tenant;
(e) Interest paid on loan taken to finance the property;
(f) Cost of renewing rental agreement;
(g) Assessment charge;
(h) Quit rent when rental is commenced; and
(i) Cost during temporary non-occupation.
Temporary Non-occupation
Referring to the subject matter above, it should be noted that when rental income
exist, any expenses incurred in the period of temporary non-occupation of the
premises are allowable to be deducted from the gross rental income.
6.3.5 Non-allowable Expenses

Now let us study the non-allowable expenses for rental income. The cost
incurred in obtaining the first tenant such as advertising expenses, commission,
legal fees for rental agreement with first tenant are not valid for deduction. These
kind of costs are regarded as capital expenditure.
Next, we will look at the following expenses with regard to this matter:

6.3.6 Capital Allowance
The capital allowance of the rented property cannot be claimed, when the rental
income is assessed under Section 4(d).
Now itÊs time to consider, when or in what condition could you claim the capital
allowance? Only rental income assessed under Section 4(a) business income is
entitled to claim capital allowance. However, as the tenant had used the premise
as an industrial building, itÊs now considered that the industrial building
allowances will be given against the rental income even though the rental income
is assessed under Section 4(a).
6.3.7 Rental Loss
Expenses that Relate to Gross Income Received in Advance

When gross income is received in advance, it will be assessed in the basis
year. However, expenses that relate to gross income received in advance and
incurred in a future basis period is not allowable to be deducted from the
gross income in that period. Such expenses are to be related back to the basis
period in which the gross income is assessed to tax.
Note that when rental expenses incurred in one basis year exceeded the gross
rental income received in that basis year, the excess cannot be offset against other
sources of income in the same year or carried forward to the subsequent year.

In that case, it should be clear that the losses are permanent losses. This provision
is only applied to rental income which is assessed under Section 4(d). However,
the above provision is not applicable for rental income assess under Section 4(a).
How about other types of income? LetÊs take a business income for an example.
Can we counterbalance business income with other source of income? Well, the
answer would be a BIG YES. The reason is that the business income can offset its
losses against other source of income in the same year or carried forward the
unabsorbed losses to the subsequent year.
6.3.8 Sources of Income

What are the sources of income for rental? IRB has issued a guideline to restrict
the rental income to be assessed as an investment source. In this case, each
category of property will be assessed separately as a separate source.
Well then, what are the sources for rental income? Shop lots, shop houses and
other business premises constituted a single source. On the other hand,
residential properties such as houses and flats are considered as another separate
source. Last but not least, the vacant land is also considered as another source.
When there is a deficit in the rental income, the deficit cannot be offset against
income from other rental source. In this case, the deficit is regarded as a
permanent loss.
SELF-CHECK 6.4
What are the advantages of assessing rental income under Section 4(a)
business income compared to Section 4(d) rental income as an
investment income?

6.4 ROYALTY
Most of you associate the word „royalty‰ with royal family. However, do you
know what the term „royalty‰ stands for in taxation? According to Merriam-
Webster Dictionary, „royalty‰ could be referred to as a share in the proceeds paid
to an inventor or a proprietor for the right to use his or her invention or services.
Next, let us take a closer look on how royalty is defined in accordance to taxation:
Royalty is a lump sum payment paid as consideration for the use of, or the
right to be used:
(a) Copyright, artistic or scientific works, patents, designs or models,

plans, secret processes or formulae, trademarks or tapes for radio or
TV broadcasting, motion picture films, film or video tapes to be used in
Malaysia.
(b) Know-how or information concerning technical, industrial, commercial

or scientific knowledge, experience or skills.
6.4.1 Derivation of Royalty Income

What are the important issues surrounding the derivation of royalty income? The
royalty income received in Malaysia will be charged to tax if:
(a) Royalty income is derived from Malaysia; or

(b) Received in Malaysia from outside Malaysia (applies to individual resident,
companies in specialised industries, trust, cooperative societies).

Royalty will be assessed according to the financial year end for a company, a unit
trust or a cooperative society. For individual taxpayers, it will be assessed
according to a calendar year. Similar to other types of income, the allowable
expenses to be deducted must satisfy the requirement stated under Section 33
and 39 as being „wholly and exclusively‰ incurred for the purposes of deriving
the royalty income.
6.4.2 Exemption for Royalty Income

Do you know the examples of the royalty incomes which have been exempted?
This section will explain more on the exemption for royalty income. As a start, let
us have a look on what the following Para 32, has to say with regard to this
matter:
Schedule 6 of the Income Tax Act 1967, „Para 32‰ discussed types of royalty
received which is exempted from tax:
(a) Royalty from publication, used or right to be used any artistic work and
royalty from recording tapes or compact disk (CD): Such individual
entitled for exemption of RM10,000 for that basis year.
(b) Payment received by individual resident in respect of translation of

books or literary work on request by Ministry of Education or Attorney
GeneralÊs Chambers, exempted to the amount of RM12,000 (Para 32A).
(c) Payment received by individual resident in respect of publication of, or

the used of or the right to use any literary work or any original painting
entitled for exemption of RM20,000 for the that basis year. (Para 32B).
(d) Total Income in respect of cultural performance approved by the

Minister by resident individual for that basis year but excludes the
income received by him from his formal employment (Para 32C).
(e) Musical composition up to RM20,000 (YA 2000) (Para 32D).
(f) Honorarium payment in respect of service provided for the purposes of

validation, moderation or accreditation of franchised educational
programmes in Higher Learning Institution is tax-exempt. (YA 2004)
(Para 32E).
(g) Public Ruling 94/2004 – 50% exemption of the statutory income in

relation to Scientific research which has been commercialised.

6.5 OTHER SOURCES OF NON-BUSINESS

INCOME
What do you understand about other sources of non-business income? In this
section, we will be looking into premium, discount and pension.
6.5.1 Premium
According to Merriam-Webster Dictionary, a premium could be defined as a sum

of money or bonus paid in addition to a regular price, salary or other amount.
Premium is assessable under Section 4(d). Premium is a payment paid to acquire

right under a tenancy. The premium receiver or landlord who received premium
income would be assessed under Section 4(d) in addition of rental income. For
the tenant, premium paid is a capital expenditure and it is not allowable for
deduction from the rental income.
Does premium and rental income differ from each other? The answer is a big
YES. Premium and rental incomes are different from each other. You should
understand that premium will only be received once but rent will be
continuously received until the rental agreement ceases. Besides that, premium is
assessable on receipt basis and it is derived from Malaysia if the lease of the
immoveable properties is in Malaysia.

6.5.2 Discount
Discount is assessable under Section 4(c).
Do you know where does a discount come from? A discount arises when the bills
of exchange are purchased below their face value. What is the bill of change
then? The bill of exchange refers to a promissory note such as note payable and
note receivable. When the bills of exchange are purchased at their face value, the
buyer is said to buy the bill on discount and when the maturity date comes, the
buyer will get payment at the amount equal to the face value. Next, what do you
call the difference between face value and the amount purchased? It is known as
a discount.
Any profit arising from discounting transaction and any profit accrued by
holding the bill until maturity or sale before maturity are assessable to tax.
However, you should bear in mind that discount does not include the one which
is allowed by the trader on the purchase of goods and the one which is received
from creditors for early payment.
The derivation of discount is when it is realised (upon maturity or date of sale).

Discount is only assessed on a calendar year basis similar to interest.
6.5.3 Pension
What is a pension? Well, pension is a periodical payment made to individual
who has permanently ceased to exercise an employment. Who are paying this
pension and to whom? For your information, the payer of the pension is the
employer and it may be paid contractually or voluntarily to his or her employee.
You should also note that besides employee, pension income can be paid to the
employeeÊs wife and children.

Now let us refer to Figure 6.3:
Figure 6.3: Pension
Pension income is assessable under Section 4(e) of the Income Tax Act 1967. Does
your pension entitle you to tax deduction then? When periodic received from
pension is converted to lump sum withdrawal, the lump sum withdrawal
becomes a capital receipt and is not taxable.
(a) Derivation of Pension

What are the important issues surround the derivation of pension? A closer
analysis of this section is required. Pension is said to be derived from
Malaysia if the payer is the following:
(i) Working for the Government or State Government; or

(ii) Resident in Malaysia.
(b) Exemption of Pension

Do you know the conditions when a pension could be exempted? As a
start, let us have a look on what the following Paragraph 30 has to say with
regard to this matter:
Paragraph 30 of Schedule 6, of the Income Tax Act 1967, states that

when pension received on retirement at the age of 55 or compulsory age
of retirement, the pension is exempted from tax. However there are a
few conditions to be complied with:
(i) The pension must be derived from Malaysia;
(ii) The recipient has reached the age of 55 or compulsory age or retire
due to ill health;
(iii) The pension is paid out from an approved fund; and
(iv) The receiver must exercise his former employment in Malaysia.

6.6 OCCUPATION OF PREMISES FOR

NON-BUSINESS PURPOSES
Section 11 of the Act states that if a person occupies premises in Malaysia not for
business purposes, that person is deemed to have a source of income and his
income is taxable under Section 4(f).
What does it mean by „the occupation of premises‰ then? The phrase, „occupies
premises‰ means that a person has the right to occupy those premises. Note that
the source only exists if the premises are furnished.
However, starting from the year of assessment 2003, source of income under
Section 11 of the Income Tax Act 1967, states that the occupation of premises for
non-business purposes are exempted from tax.
 In this topic, we have discussed on the income received by a person from

other sources stated under Section 4(c), (d) and (e). Section 4(c) is for
dividend and interest income classified as an investment income, while
Section 4(d) covers income from renting activities and royalties.
 These types of income can also be assessed under business income under
Section 4(a).
 Therefore, we must be certain under which section these income are

classified.
 This is due to the fact that there are expenses which we can claim if the
income is assessed under business income.
 Apart from that, there are other privileges, which are not in existence when
the income is assessed under investment income such as capital allowance
and losses. These can be brought forward to the next year of assessment.

Allowable expenses Moveable properties

Dividend Pension
Foreign dividend Premium
Gross income
1. State five types of dividend received by a person which are exempted from
tax under the Act.
2. Robert Ram, a resident individual would like to invest some money into the
Bank and Financial Institution. He understands that he may subject to the
withholding tax of 5%. Propose six schemes that he can invest without
exposure to the withholding tax provisions.
3. Merbuk Sdn Bhd is a Malaysian incorporated company and is resident in

Malaysia for income tax purposes. Its only source of income is the
manufacturing operations carried on in Malacca. Merbuk Sdn Bhd is a
wholly owned subsidiary of Matsuko (Singapore) Ltd, a company
incorporated in Singapore.
During the year ended 31 December 2014, Matsuko Ltd, granted Merbuk a
loan to finance its manufacturing operations. The total interest payable to
Matsuko (Japan) Ltd, amounted to RM147,500 and this was charged to the
profit and loss account of Merbuk Sdn Bhd.
Based on the above information, you are required to state, with reasons,
whether the interest of RM147,500 is derived from Malaysia and how it
would be taxed (if applicable) under the Income Tax Act 1967.

4. Hazim owns an apartment, which is let out for rent. The statement of
income and expenditure for the year ended 31 December 2014 is as follows:
RM RM
Rental income (Jan-Dec 2014) 26,300
Advance rental (Jan-Feb 2015) 2,500
Deposit (refundable) 1,000
29,800
Expenses:
Mortgage loan interest 12,200
Quit rent 350
Assessment and rates 750
Penalty for late payment of assessment and quit rent 100
Cost of tiling the cement floor of the kitchen 2,200 15,600
Net rental income 14,200
The accumulated rental loss brought forward from previous year was RM2,800.
You are required to determine the adjusted rental income for Hazim for
year of assessment 2014.
5. Maria is a teacher at SMK Ampang, teaching Additional Mathematics. She

loves reading novels. Sometimes, during her free time, she also writes. In
year 2014, she managed to complete her first novel. From the publication of
her novel, she received RM27,000 as royalty on 30 November 2014.
You are required to calculate the amount of royalty income for Maria that is
subject to tax and explain the exemption (if any) that she is entitled to.
6. As an approved tax agent, you have been engaged by Eric Tan to prepare
his tax return for year of assessment 2014. Eric Tan provides you with the
following information:
RM
Dividend income:
Celcom Bhd (net after 25% tax) 2,160
Malaysia Building Society Bhd (cooperative society) (gross) 2,000
SingaporeÊs dividend (remitted) 3,700

Interest income:
Saving deposit with a licensed bank in Malaysia (withholding tax 950
deducted)
Unconvertible loan stock issued by a Malaysian public listed company 5,000
Convertible loan stock issued by a Malaysian public listed company 4000
Based on the above information, you are required to calculate the amount of
Section 4(c) income for Eric Tan.
1. Denso Ltd. a company incorporated in Japan has business operations in

Malaysia, Singapore and Thailand. Over the years, the directors of the
company conducted the business affair in Japan and once a while in
Singapore. On 1 June 2014, the board of the directors held their first
meeting in Kuala Lumpur and on 31 October 2014 they held another
meeting in Johor Bharu. Both meetings discussed major decision of the
companyÊs affair. During the financial year ended 31 March 2014 the
company paid dividends as follows:
Date Paid Amount (RM)

15 May 2014 2 million
31 October 2014 3 million
Based on the above information, you are required to explain the tax
implication arising from the above situation, whether the dividend
received by shareholders will be taxed or not.
2. Maryam placed a 6-month fixed deposit RM55,000 in Maybank Finance

Berhad. The deposit matured on 30 November 2013. The interest received
by Maryam amounted RM8,500 but is payable on 5 January 2014. On what
basis period is the interest assessed? Is Maryam liable to tax on interest
income of RM8,500?

3. Hasni Hassan received RM3,000 per month for his houses in Subang Jaya
and Bangi Perdana which he rented out since 2012. He incurred the
following expenses during the year 2014.
RM
Quit rent 700
Assessment rates 1500
Insurance Premium on theft and fire 300
Bank repayment including interest of RM7,000 20,500
Repair and maintenance of the two houses 700
Replacement of gates and tiles for the house at Subang Jaya 4,900
Installation of air conditioner for the house at Bangi Perdana 2,500
Based on the above information, you are required to compute the adjusted
rental income for Hasni for the year of assessment 2014.
4. Aina is employed as an assistant accountant in a multinational company in

Skudai. Her hobbies include singing and traditional cultural dancing. She
normally participates whenever there is a tourist promotion in Johor
Baharu, organised by the Ministry of Tourism and Culture. She also
received some payment after the show. In year 2014, she received RM5,500
from the cultural performance approved by the ministry.
Based on the above information you are required to advice and explain to
Aina, as to whether she is liable to tax on the amount RM5,500.

Topic  Business
7 Income
LEARNING OUTCOMES
1. Identify the indicators in determining the constitution of trade;
2. Analyse the test used in distinguishing capital expenditure with
revenue expenditure;
3. Explain allowable expenses and prohibited expenses for business;
4. Calculate the adjusted business income; and
5. Calculate the statutory business income.
 INTRODUCTION
In the recent topic, we have looked at the types of non-business incomes which
are assessable for tax. In line with this, you should be able to determine the gross
incomes, the allowable expenses and the exemptions for each dividend, interest,
rental and royalty. In addition, we have also learnt on how to calculate the
adjusted income.
The previous topic clarified the important matters with regards to non-business
incomes. What you have learnt in the recent topic would prove beneficial and
inter-related with this topic. In this topic, we will touch on business income with
regards to taxation.
By now you should know that a business can be run by an individual, joint
venture or setting up a company. In general, there are three types of business
entities: sole proprietorship, partnership and company. For sole proprietorship
and partnership, the business income will be taxed on individual taxation basis,
it means the income of the business is the income of the owner.

TOPIC 7 BUSINESS INCOME  135
You should also note that business income is assessable under Section 4(a). The
owner of the business will be taxed on his income from Sections 4(a) to 4(f) (if
any) using a scheduler tax rate. However for companies, the business income will
be taxed on a flat tax rate of 25%.
7.1 DEFINITION OF BUSINESS

What is a business? Well, according to Law.com dictionary, a business could be
defined as any activity or enterprise entered into for profit.
Section 2 of the Act defines business to include profession, vocation, trade and
every manufacture, adventure or concern in the nature of trade but excludes
employment. The word „business‰ has a broad meaning and it is always used in
association with trade, profession and vocation.
To determine whether a sum received arises from a business or a non-business

source, the definition of „business‰ may be viewed from these perspectives:
(a) Profession;
(b) Vocation;
(c) Trade and manufacture; and
(d) Adventure or concern in the nature of trade.
Now let us discuss these perspectives in detail. To begin with, we will take a look
at the meaning of profession.
(a) Profession
The word profession is not defined by the Act but normally involves the
use of intellectual skill or other skills by a person. Simple examples of
professions would be the like of singers, entertainers, doctors, painters and
many more. Usually individual who are performing his or her profession
have control over their skills and knowledge.
(b) Vocation
The word vocation is also not defined by the Act. Vocation has been stated
to mean the way in which a person passes his life. A person who makes a
living even through systematic betting is following a vocation. Thus, any
profit derived from the vocation such as betting is assessable under Section
4(a) on business income.

136  TOPIC 7 BUSINESS INCOME
(c) Trade
What is a trade? A trade involves something in the nature of a commercial
undertaking whereby buying and selling are the most evident
characteristics. A trade must have the following features:
(i) It involves trading activities where buying and selling goods

occurred.
(ii) Consists of a series of transaction, continuously happen, repetitive
buying and selling activities or manufacturing and selling.
(iii) The intention of transaction is to make profits.
(d) Adventure or Concern in the Nature of Trade

What is the adventure or concern in the nature of trade? The Act does not
define the meaning of adventure or concern in the nature of trade. Thus, it
always carries a broad interpretation.
Apart from that, you should also note that a trade would generally involve
a venture in the form of a commercial undertaking that includes producing,
manufacturing or buying and selling products or the offering of services
for a reward.
7.2 THE EXISTENCE OF BUSINESS / TRADE

Do you realise it is not easy to determine the existence of a business (trading
activity)? There are few things to be considered as indicators that constitute
„trade‰. These indicators are known as badges of trade.
Let us take a look at what badges of trade are. The following are some of the
considerations that you should pay close attention to with regards to the matter
discussed:

(a) Subject Matter of the Transaction

Firstly, you should take note that the subject matter of the transaction must
be analysed to determine whether the incomes received are revenue in
nature or merely a capital gain.
What if it is a capital gain? A capital gain will not be taxable under the
Income Tax Act 1967. If the subject matter is treated as a trading stock, then
the sale of it would be subjected to income tax. However, if your subject
matter is treated as capital assets used in the operations, the sale of that
assets is regarded as capital received thus it will not be subjected to income
tax.
(b) Intention of the Business Transaction

Do you know why intention is so vital in a business? Well, for your
information a business is said to exist when there is an intention to profit
from its transaction.
What are the important issues surrounding this? Basically, when the
subject matter (assets) is acquired for the purpose of profit-making, the
profit from realisation of the subject matter will be treated as income in
nature; thus it will be taxable.
(c) The Frequency of Transaction

How about the frequency of transaction? A business must have some
repetition of series of actions. The repetitive transaction is an evidence of
the existence of business activity or trade.
The frequency of transaction on the same type of property might indicate

the taxpayerÊs purposes in purchasing were to resell for profit. Therefore,
you should be informed that the proceeds from the transaction will be
taxable. On the other hand, isolated transaction (transaction which rarely
occurs) can also be treated as revenue if the transaction happened for the
purpose of making profit for a business.
(d) Length of Ownership

Next, we are going to touch on the length of ownership. What is the
important issue that surrounds it? Generally, you should note that if an
asset is realised within a short period after acquisition, such realisation of
an asset would likely be considered as constituting a trade.
When the length of ownership of assets (period between purchase and sale
of asset) is longer, the realisation of the assets would likely to be considered
as an investment and not a trading.

(e) Nature of Entity

Do you think that the nature or motive of business is vital? Well, you
should realise that it is easier to infer the motive of a partnership or a
company is for profit making, but for an individual it is harder to
recognise. However, if the individual registered his/her business, this
would likely be an inference of a profit making motive.
(f) Alteration to Property

You should note that if improvements are made to property during the
duration of ownership for the purpose of making it more marketable, such
alteration would constitute as a badge of trade. However, if the alteration is
for the purpose of increasing the capital value of the assets, any gain
realised may not be considered as arising from a trade. Thus, you should
take note it is more to capital gain.
7.3 DERIVATION OF BUSINESS INCOME
Do you remember the derivation of non-business incomes from the previous

topic? Now, let us take a look whether the derivation of business incomes are
similar to the former.
As a starting point, you should note that Section 12(1) of the Income Tax Act 1967
states that gross income of any person shall be deemed derived from Malaysia
when the business is carried on in Malaysia. Apart from that, you should know
that any gross income which is not attributable to operation of the business
carried on outside Malaysia is deemed derived from Malaysia.
With effect from the year assessment 2001, income from operation of business
carried outside Malaysia would not be taxed in Malaysia, because it is not
derived from Malaysia (foreign income) although the income is remitted into
Malaysia. However, this is not applicable to company under specialised industry
(i.e. banking, insurance, air and sea transportation business).

In order for a business to be taxed in Malaysia, we must establish the evidence

whether the following exists:
(a) The existence of a business source;

(b) The business profit is income in nature and not a capital gain; and
(c) The business income is derived from Malaysia.
For your information, in determining whether the business operation is carried

on in Malaysia, at least one of the following conditions must be fulfilled:
(a) Contract is concluded in Malaysia;

(b) Stocks are maintained in Malaysia;
(c) Passing of ownership and risk of trading stocks in Malaysia;
(d) Sale proceeds received in Malaysia; or
(e) Services rendered in Malaysia.
ACTIVITY 7.1
In your opinion, why is it important for us to determine the existence of a

business and why must we determine where the business income is
derived from?
7.4 BASIS PERIOD FOR A BUSINESS

In Topic 6, we have touched on the basis period for non-business incomes. How
about the basis period for business incomes? The basis period for an individual
taxpayer is based on the calendar year i.e. from 1 January to 31 December of each
year.
With effect from the year of assessment 2004, companies, unit trusts and clubs
can choose to have their basis year either based on calendar year or financial year
of a business. However, if a business is run by an individual, the basis period for
his/her business income shall be based on the calendar year, because the
business income is the ownerÊs income. Therefore, it should be aggregated with
other owner-related incomes according to Sections 4 (b) to 4(f).
(a) Commencement of Business

It is important for you to determine the date when a business starts. This is
due to the following reasons:
(i) Pre-commencement expense is not deductible (permanent loss);

(ii) Capital allowance is only given once the business commences its
activity; and
(iii) Selection of basis period (year end of business or calendar year).
A business is said to start its operations when the company is in a position

to start its production. Note that activities such as assembly works,
purchase of plants and machineries and entering into agreements with
suppliers are merely preparatory to the commencement of business. Hence,
any expenses incurred before a business starts are not allowed to be
deducted from the business income.
(b) Single or Separate Business

You are also required to determine whether you are running one or two
businesses at the same time. This is important for the utilisation of capital
allowance. The capital allowance from one business cannot be set-off
against the income from other businesses.
Whether a new activity relates to the existing business or new business

would depend on the nature and interdependence of such activities. For
instance, if you operate a cyber café business activity and want to extend
the activity of selling books/magazines in your business premise, are you
regarded as practising a single or two separate businesses?

The nature and interdependence of such activities is important. Selling

books or magazines that are related to your cyber café business is
considered as a single business and you are just extending your business
activities. However, if you operate a totally different type of activity such as
opening a restaurant in addition to your cyber café premise, you are
considered as running two separate businesses.
SELF-CHECK 7.1
Why is it important for us to determine whether we are running one or

two separate businesses?
7.5 GROSS INCOME FROM BUSINESS
The gross income from a business must be in terms of revenue receipts. The
income must be received from circulating assets.
However, gross income resulting from past expenses would be treated as gross
income. For example, the income received from an insurance claim. This income
would be assessed as business income if the premium insurance expenses are
charged against revenue of the business.
The following shall also be treated as gross income from business:
(a) All debts arising in the course of carrying on the business [Section 24(1)];
(b) Market value of any stock in trade withdrawn for personal use of the
proprietor [Sec. 24(2) & (3)];

(c) Dividend income from a share dealing company [Sec. 24(4)];
(d) Interest income of banks, financial institutions and money lenders [Sec.
24(5)]; and
(e) Bad debt written off in previous year and was subsequently recovered [Sec.
30(1)].
7.6 ADJUSTED INCOME AND STATUTORY

INCOME OF BUSINESS
Do you know how to calculate an adjusted income and a statutory income? In
order to do that, let us study the following details:
(a) Adjusted Income

An adjusted income of a business is derived by deducting the allowable
expenses from gross business income or by adding the non-allowable
deduction from net income of a business.
(b) Statutory Income

A statutory income of a business is arrived by deducting capital allowance,
unabsorbed capital allowance and balancing allowance from adjusted
business income and adding the balancing charge (if any) to the adjusted
business income.
The following table shows the format on how adjusted and statutory
incomes of a business are calculated:

Section 4(a) - Business income
Format A
Gross income from business XXXX

Less: Revenue expenses (xxx)
Bad debt (xxx)
Others allowable expenses (xxx)
Double deduction (xxx)
Special deduction (xxx) (xxxx)
Adjusted income from business XXXX

Add: Balancing charge xxx
Less: Capital allowance (xxx)
Unabsorbed capital allowance (xxx) (xxxx)
Balancing Allowance XXXX
Statutory income
Format B
Net profit from business XXXX

Add: Non-allowance expenses: xxx
Depreciation xxx
Domestic or private expenses xxx
Leave passage for employee xxx
Contribution to unapproved scheme xxx
Other prohibited expenses [Sec. 39(1)] xxx xxx
Less: Double deduction (xxx)
Adjusted income from business XXXX

Add: Balancing charge xxx
Less: Capital allowance (xxx)
Unabsorbed capital allowance (xxx)
Balancing Allowance (xxx) (xxxx)
Statutory income XXXX

7.7 BUSINESS EXPENSES

In order to arrive at the adjusted income from a source of a business, a deduction
is made from the gross income.
Reflecting on your experience, do you know what types of expenses are involved
in the business? Section 33 Income Tax Act (ITA) 1967 provides the general types
of expenses which qualify for deduction and Section 34 ITA 1967 specifies the
types of business expenses which qualify for deduction, whereas Section 39 ITA
1967 lists down types of expenses which are prohibited for deduction.
Sections 33 and 39 are general statutory provisions. Therefore, they could be

applied to any source of income besides business income.
Before we move on to study the types of expenses which are allowable for
deduction, we need to determine whether the expenses are capital expenditure or
revenue expenditure.
Capital Expenditure and Revenue Expenditure

We need to distinguish between capital expenditure and revenue expenditure as
only revenue expenditure can be deducted from gross income of a business. On
the other hand, although capital expenditure satisfies Section 33Ês „wholly and
exclusively‰ test, it is prohibited from deduction under Section 39 of the Act.
However, there is no specific definition of capital or revenue expenditure in the

Act. What is capital expenditure and what is revenue expenditure depends on
the facts of each case. However, certain principles or tests can be carried out to
distinguish between capital expenditure and revenue expenditure.

Now let us take a look at these principles or tests which are provided below:
(a) The Once-and-for-All Test

Generally, a payment that is spent once and for all, i.e. a lump sum
payment is regarded as capital expenditure. Revenue expenditure is a
payment that recurs every year or repetitively. However, not all lump sum
payment is regarded as capital expenditure i.e. payment of gratuity to a
retired employee.
(b) The Enduring Benefit Asset Test

Any expense incurred in bringing assets into existence for long term is
usually classified as capital expenditure.
(c) Fixed Capital and Circulating Capital

Any expense that relates to the fixed capital or fixed assets is generally be
treated as capital expenditure while expenses relating to circulating capital
is treated as revenue expenditure.
(d) Business Structure versus Process

When expenses incurred relates to a business structure it is considered as
capital expenditure. However when the expenses incurred relates to a
business process it is regarded as revenue expenditure.
(e) Initial Expenditure

Initial expenditure usually refers to the expenditure incurred before the
commencement of a business. Thus, these expenses are capital in nature.
SELF-CHECK 7.2
1. What is the difference between capital expenditure and revenue

expenditure?
2. Why must we distinguish between these two expenditures?

Next, let us study the general deduction under the Income Tax Act 1967. In order
to do that, you can refer to the following sections:
(a) General Deduction under Section 33 ITA 1967

Generally, before expenses are allowed to be deducted, we must ensure
that the following conditions have been fulfilled:
(i) Each business source has to be accounted separately because

expenses that specifically relates to the business is allowable;
(ii) The scope of expense refers to „outgoing and revenue expenses‰;
(iii) The expenses have to be „wholly and exclusively‰ incurred in the

production of gross income from that business source; and
(iv) The expenses have been incurred (paid, payable or becoming

payable).
Below are some examples of expenses which are allowed for deduction
from gross business income:
(i) Interest expense on money borrowed;
(ii) Rental expenses for occupying and using the properties and incurred
for the purposes of producing gross income; and
(iii) Repair and renewals. However, repair expenses incurred on

acquisition are not allowed to be deducted because these are usually
for the purpose to endure the benefit of these assets. Expenses
incurred to replace old assets with new ones are also not deductible.
(b) Disallowed Expenses or Prohibited Expenses under Section 39(1) ITA 1967
How about disallowed or prohibited expenses? It is important to know this
if you are handling or managing a business of any nature. This section will
explain the types of disallowed or prohibited expenses. They are stated as
the following:

Disallowed Expenses or Prohibited Expenses Under Section 39(1) ITA 1967:
(i) Domestic or Private Expenses

Domestic or private expenses are expenses which relate to an ownerÊs or
traderÊs private residence such as owner wages and salary, contribution
to ownerÊs EPF, private telephone bill and others.
(ii) Expenditure Not Wholly Incurred in the Production

Such expenditure includes charitable subscription, donation to political
parties and wages or salaries paid to family members. However, there
are types of donation which are allowed to be deducted from the total
aggregate income of taxpayer [income from Sections 4(a) to 4(f)].
Donations that are allowable for deduction are as follows:
 Cash donation to approved institution and government. However,

cash donation to approved institution is limited to 7% (individual
taxpayers) and 10% (corporations) of the aggregate business
income;
 Cash donation to approved libraries limited to RM20,000;
 Cash or goods donation to public facilities;
 Cash or in kind of medical equipment for health care facility;
 An amount equal to the value of painting donated to the National

Art Gallery; and/or
 An amount equal to the value of artefact, manuscript or painting

donated to the government.
(iii) Capital withdrawn or any sum employed as capital.
(iv) Payment to any pension, provident saving or funds which is not an

approved scheme.
(v) Qualifying mining, agriculture, forest, prospecting and farm expenditure.
(vi) Expenses to non-resident, where withholding taxes were not deducted

by the payer.
(vii) Sum payable for the use of a license or permit to extract timber from
forest.

(viii) Restriction to bonus payment. This paragraph was deleted with effect
from year of assessment 2002.
(ix) Failure to remit deduction from Contract Payment under Sec. 107A of
the Act.
(x) Failure to remit deduction from Special Classes of Income under Sec.
109A of the Act.
(xi) Lease rental in respect of passenger vehicles used in business.
(xii) Leave passage provided to employee within or outside Malaysia is not

deductible. However, leave passage within Malaysia from 1/6/2003 and
31/5/2004 shall be given double deduction.
(xiii) Entertainment expenses provided for employee. Entertainment is

defined under Sec. 18 to include:
 The provision of food, drink, recreation or hospitality; and
 The provision of accommodation or travel in connection with or for
the purpose of facilitating entertainment of the kind mentioned
above.
However, a public ruling (3/2004) was issued on 8 November 2004 in

respect of entertainment expenses. With effect from the year of
assessment 2004, 50% from entertainment expenses incurred on clients
by company or employee is allowed to be deducted.
Some exceptions as provided in Sec. 39(1)(l) where entertainment

expenses which are wholly related to sales in the production of gross
income will be given full deduction. The list of expenditures is as
follows:
 Entertainment incurred on employee only, such as annual dinner
and other event which involve only the employees. If the event
involved non-employees only 50% is allowed to be deducted.
 Expenses incurred by business which involve entertaining activities
such as hotel and restaurant businesses.
 Expenses related to promotional gift at foreign trade fairs.

 Expenses related to promotional sample.
 Expenses related to entertainment for cultural event to promote

business.
 Entertainment related „wholly to sales‰. „Wholly to sales‰ means

entertainment directly related to sales provided to customer, dealers,
distributor except supplier. Examples of these entertainment
expenses include:
 Food and drinks for the launch of a new product;
 Redemption vouchers given for purchases made;
 Discount vouchers, shopping vouchers, concert or movie
tickets, meal or gift vouchers and cash vouchers; and
 Free gifts for purchases exceeding a certain amount.
After you have studied the general business deduction, let us have a look at the
specific ones. The specific deductions are stated as the following:
(a) Specific Business Deduction under Section 34 of the ITA 1967
(i) Bad debt and doubtful debts from trading activities. The Act only
allows two types of debt to be deducted: bad debt that has been
written off and specific provision for bad debt. General provision is
non-allowable.
(ii) Employer contribution to approved scheme is deductible.
(iii) Legal and professional expenses incurred by business are allowable

expenses. However, these expenses must not result from business
fault and not because of violation of the law. If the expenses incurred
are due to violation of the law, such expenses are not deductible.
(iv) Loss from advance payment made to employees is allowable

expenses.
(v) Expenses incurred on Key-man insurance
 Key-man is an important person in the business. Some

businesses will buy a life insurance policy on the key-man. The
premium paid for this insurance is allowable to be deducted

from gross income if the policy has no element of investment and

the beneficiaries go to the employer/company and it is not
insured on director of a controlled company, partners in
partnership or sole proprietor. Proceeds received from such
policies will be assessed as part of business income.
(vi) Expenditure incurred by employer on the provision of equipment for

disable employees for the performance of their duties will be given
full deduction.
(vii) Expenditure in respect of translation/publication of cultural, literary,

professional, scientific or technical books in Bahasa Malaysia which
have been approved by the Dewan Bahasa dan Pustaka (DBP).
(viii) Contribution to public libraries with a maximum amount of up to

RM100,000 for each year of assessment.
(ix) Expenses incurred on the provision of child care centre for the
benefits of employees.
(x) Social responsibility payment.
(xi) Expenses incurred on musical and cultural group approved by the

minister.
(xii) Expenditure incurred on the provision of practical training to

resident individual who is not an employee of the business.
(b) Specific Deduction – Gazette Order
(i) Expenditure relates to information technology, starting from the year

of assessment 2000 to current year of assessment.
(ii) Cost incurred on developing websites for businesses starting from the
year of assessment 2002. The deduction is spread over five years of
assessment.
(iii) Expenses incurred on the employment of unemployed graduates will

be given double deduction. This incentive was made available in the
year of assessments 2004 to 2005. Graduates must be registered with
the Economic Planning Unit and employed on or after 13/9/2003.
(iv) Retrenchment payment is not deductible.

(v) Expenses incurred for Annual General Meetings (AGMs) are not
deductible.
(vi) Compensation to employee for dismissal of employment is

deductible.
7.8 CESSATION OF BUSINESS
A business can stop its operation temporarily or permanently. When a business is

temporarily ceased, and the owner intends to continue the operations sometime
in the future, it may still incur some expenditure expenses. These expenditures
will be treated as follows:
(a) Revenue expenses are deductible in arriving at adjusted income;
(b) Any current year loss can be off set against aggregate income;
(c) Excess of the current year loss can be brought forward to future year to be
off set against any business income;
(d) Capital allowance would continue to be claimed; and
(e) Unabsorbed capital allowance can be carried forward to be off set against a
particular source of business income.
However, when a business ceases its operations permanently, revenue expenses

would not be deductible and it is regarded as a permanent loss. In this case, an
unabsorbed capital allowance is a permanent loss and any distributions of assets
are capital receipts.

 In this topic, we have discussed mainly on business income for the purpose
of taxation in Malaysia, and the allowable and non-allowable expenses for
business income.
 At the beginning of this topic, you have learnt on how to determine the
existence of a business activity. It is important to determine the existence of a
business or a trade because not all transactions fall under business income.
 Some transactions can result in capital gains which are not taxable under the
Income Tax Act.
 You should be able to differentiate between capital expenditure and revenue

expenditure incurred by a business.
 Capital expenditure is the expenditure which is not allowed to be deducted

for tax purposes although it is deducted from the business revenue in order
to come up with the business profit.
Adjusted income Statutory income

Allowable expenses Trade
Profession
1. List and explain the indicators in determining the constitution of trade.
2. Why is it important for us to determine the existence of a business and why

must we determine where the business income is derived from?
3. Identify the importance of determining the date of commencement of a

business.
4. Under the Act, a person can have more than one business. Explain why it is
important to determine whether a person has a single or separate
businesses.

5. Mohan is an accountant by profession and lives in Penang. In 2013, he

bought 10 lots of shares from Binariang Bhd., a company listed in Bursa
Malaysia. In June 2014, he sold five lots of these shares when the market
price increased. From this activity, he made a total gain of RM75,000.
Explain with reasons whether the RM75,000 gain is liable for income tax.
6. List five types of expenses which are prohibited from deduction from gross
business income.
7. What does it mean by domestic or private expenses?
8. State, with reasons, whether each of the following expenses is deductible

for income tax purposes:
(a) Refreshment expenses incurred by a company for holding a „Family

Day‰ for its employees and their families.
(b) Expenses incurred by a trading company in constructing a new-and-

improved roof for its office building. The expenses of repairing the
old roof would have been higher.
(c) Insurance premium paid by a manufacturing company in respect of

insurance policies against fire and loss of profit.
(d) Fines amounting to RM4,500 paid by a transport company for

repeated offences of speeding and overloading. Such practice is
necessary due to the need to meet deadlines set by clients.

9. Hazim Roslan owns a trading business. He has furnished the following

information to you. You need to help Hazim to determine his adjusted and
statutory income for that year of assessment.
Business Income: Innova Trading Co. RM

Net profit business 50,000
Gross dividend 3,000
Profit from sale of van 2,000
Capital allowance - current year 2,000
Balancing allowance 700
Balancing charge 800
Unabsorbed losses brought forward 45,150
10. Zahar has three businesses. He submitted the following information for the
year ended 31 December 2014.
Trading business RM
Adjusted losses (RM25,000)
Unabsorbed losses c/f (RM5,500)
Unabsorbed capital allowance c/f (RM4,500)
Restaurant business
Adjusted income RM15,800
Balancing allowance RM5,200
Capital allowance RM2,500
Bookstore business
Balancing charge RM3,600
Capital allowance RM4,700
Compute the business income for Zahar for the year of assessment 2014
and explain the treatment for unabsorbed losses and unabsorbed capital
allowance.

1. Salleh Bajuri owns a wholesale business which operates from rented

premises. He has a 10-year lease on the premise and paid a premium of
RM7,000 in order to obtain the lease. His profit and loss account for the
year ended 31 December 2014 is as follows:
RM RM
Gross profit for the year 52,618
Add: Dividend income (net) 1,800
Gain on sale of office equipment 300 2,100
54,718
Less: Expenses
Wages (Note 1) 19,280
Rent, rates and insurance (Note 2) 6,915
Electricity 4,328
Telephone (Note 3) 1,650
Repair (Note 4) 2,286
Printing and advertising 1,250
Motor expenses (Note 5) 5,712
Legal and professional expenses (Note 6) 3,000
Sundry expenses (Note 7) 4,777
Bad and doubtful debt (Note 8) 860
Bank charges and interest 2,765
Lease premium amortisation 700
Depreciation 8,749 (62,272)
Net loss for the year (7,554)
Notes:
(1) Wages include RM10,800 for Salleh (who works full-time for the
business) and RM1,000 for his son (who does not work for the
business at all).
(2) Rent, rates and insurance includes SallehÊs private medical insurance
premium of RM414.
(3) It has been agreed that one sixth of the telephone costs relate to
private use.

(4) Repair includes RM750 for the cost of essential repairs to newly
acquired second-hand forklift truck which could not be used until
repairs had been carried out.
(5) Motor expenses are as follows:
RM
Vehicle servicing and repairs 1,165
Fuel and oil 2,815
Loss on disposal of motor vehicle 422
Road tax and insurance 610
Fine for speeding by Salleh 700
5,712
(6) Legal and professional expenses are as follows:
RM
Fees relating to renewal of lease 500
Debt collection 1,500
Accountancy fees 1,000
3,000
(7) Sundry expenses are as follows:
RM
Entertaining customers 630
Entertaining supplier 150
Staff annual dinner 650
Donation to a political party 400
Leave passage for Salleh and family 2,947
4,777
(8) Trade debt of RM500 was written off during the year. The provision
for general and specific debts was RM200 and RM160 respectively.
(9) Capital allowance for the year is RM1,500.
Based on the information, you are required to compute SallehÊs statutory

income from business, starting from the net loss for the year of assessment
2014.

2. Sanjukta Choudry has been working for Phileo Bank since 1 January 2004.
However, on 30 March 2014, she accepted a Voluntary Separation Scheme
(VSS) offered by the company and received a compensation amounting to
RM75,000. She used the compensation money to open an online business
called „Chika Chick‰, selling childrenÊs clothing.
Chika Chick profit and loss account for the year ended 31 December 2014 is
as follows:
Note RM RM
Sales 77,350
Cost of sales 1 (56,440)
20,910
Add: Other income 2 185
21,095
Less: Remuneration 3 3,500
Repair and maintenance 4 780
Marketing 5 1,482
Freight charges 6 152
Financial charges 120
Entertainment 7 1,168
Motor vehicle expenses 8 770
Utilities 644
(8,616)
Profit before taxation 12,479
Notes:
(1) Cost of sales includes clothes costing RM700 donated to an approved

orphanage. The selling price was RM1,000.
(2) Other income is in respect of a royalty received from tape recording

during 2014. During her spare time, she recorded classical Indian
songs and received RM185 as royalties.
(3) Remuneration consists of RM2,500 for Sanjukta, the owner who

works full-time for the business and RM1,000 for her husband, who
works part-time during weekends.
(4) Repairs and maintenance includes cost of maintaining computers

used in the business amounting to RM550 and her childrenÊs
computer amounting to RM230.

(5) Marketing includes the expenditure of RM500 on participation in an

international online trade fair held in Kuala Lumpur. Both the trade
fair and the businessÊs participation were approved by the Minister of
International Trade and Industry. The aim of the trade fair was to
promote exports.
(6) The freight charges are for shipping costs of clothes ordered from
supplier.
(7) Entertainment expenses of RM1,168 comprising of leave passages to

Sabah and Sarawak for Sanjukta and her husband.
(8) Motor vehicle expenses consist of depreciation amounting to RM470;

and fine of RM300 for traffic offences committed by Sanjukta.
(9) The capital allowances for the year of assessment 2014 amounting to
RM166.
Based on the information provided, you are required to compute Chika

ChickÊs statutory income from the business starting from the net profit of
the year, for the year of assessment 2014.

Topic  Capital
8 Allowance –
Plant and
Machinery
LEARNING OUTCOMES
1. Define plant and machinery;
2. Identify the qualifying plant expenditures;
3. Analyse the different types of allowance;
4. Discuss the methods for unabsorbed capital allowance; and
5. Identify the qualifying plant expenditures for used plant and
machinery.
 INTRODUCTION
In previous topic, you have studied on business income with regards to taxation.
You should be able to identify the indicators in determining the constitution of
trade. You have also analysed the tests which are used to differentiate capital and
revenue expenditure and also learnt on how to calculate the adjusted business
income and statutory business income.
Previous topics should have strengthened your understanding on both non-

business and business income. What you have learnt will prove beneficial and
interrelate with this topic on capital allowance.
Have you ever heard of capital allowance? Do you know that in order to
determine the adjusted income for business, asset depreciation is not allowed to
be deducted? However, taxation regulation requires such deduction to determine
160  TOPIC 8 CAPITAL ALLOWANCE – PLANT AND MACHINERY
the taxable business income or better known as capital allowance. This allowance
is provided for those who are carrying on a business and incurred plant
expenditure in the business.
Capital allowance is an annual deduction which is allowable to calculate

statutory income for business. You will also take a look at examples of assets
used in the business such as plant, machinery, office equipment, vehicle,
industrial building and others.
8.1 DEFINITION OF PLANT AND MACHINERY
Do you know what plant and machinery refers to? According to Dictionary.com,
a „plant‰ also means the equipment, including fixtures, machinery, tools, and
often the buildings necessary to carry on any industrial business. Meanwhile
„machinery‰ was defined as an assemblage of machines or mechanical
apparatuses.
The Income Tax Act 1967 does not provide any definition of the term „plant and
machinery‰. However, in a decided case, it was stated that plant and machinery
include:
Plant and Machinery:

„Whatever apparatus used by a businessman to carry out his business but
does not include his stock-in-trade which he buys or makes for sale, but all
goods and chattels, fixed or moveable, live or dead, which he keeps for
permanent employment in his business.‰

TOPIC 8 CAPITAL ALLOWANCE – PLANT AND MACHINERY  161
Case laws have concluded that plant and machinery include assets which
perform a function for the running of a business. Examples of plant and
machinery include factory equipment, heavy machinery, motor vehicles, office
equipment and computer system. The plant and machinery must not be part of
the premises, must be used to carry out the business and must not be stock-in-
trade.
8.2 QUALIFYING PLANT EXPENDITURE (QPE)

To determine capital allowance which can be claimed for certain assets used in
business, taxpayers must first determine the qualifying plant expenditure (QPE).
Qualifying expenses refers to capital expenditure incurred to acquire the assets to

be used for the purpose of a business. In accordance to paragraph 2, Schedule 3
Income Tax Act 1967; it includes, among others:
(a) The expenditure incurred for the alteration of an existing building for the
purpose of installing the machinery or plant and other expenditure
incurred incidentally to the installation;
(b) Expenditure incurred on preparing, cutting, tunnelling or levelling land for

the purpose of preparing a site for the installation of plant which does not
exceed 10% of the aggregate of the cost of installation and cost of plant;
(c) Expenditure incurred on fish pond, animals pen, chicken houses, cages,
building (other than those used wholly or partly for the living
accommodation of a director, an individual having control of that business
or individual who is a member of the management, administrative or
clerical staff engaged in the business), and other structural improvements
of land which are used for the purposes of poultry farms, animal farms,
inland fishing industry or other agricultural or pastoral pursuits.

The qualifying expenditure for motor vehicles (paragraph 2, Schedule 3 Income

Tax Act 1967) is restricted to RM50,000. The restriction is for non-commercial
motor vehicles. In other words, it is not licensed by the appropriate authority for
commercial transportation of goods or passengers. However starting from the
year of assessment 2001, based on the Finance Act 2000, the qualifying
expenditure has been increased to RM100,000 with the following conditions:
(a) Total cost of the motor vehicle does not exceed RM150,000;
(b) The car has not been used prior to purchase; and
(c) The car is purchased from 28 October 2000 onwards.
Commercial vehicles licensed for commercial transportation of goods or

passengers, such as lorry, truck, taxi, van and bus are not subjected to the
restricted amount of RM100,000.
SELF-CHECK 8.1
Name five examples of qualifying plant expenditures.
8.3 TYPES OF ALLOWANCE
Capital allowance claim by a taxpayer comprises initial and annual allowances.

Other types of allowances are notional and balancing allowances. This section
will discuss what is meant by each of these allowances (see Figure 8.1):

Figure 8.1: Types of allowance
As a starting point, let us discuss what is meant by the first allowance which is
known as the initial allowance.
8.3.1 Initial Allowance

What is initial allowance? What does the word initial suggest to you? According
to Dictionary.com, initial could be defined as the first or something pertaining to,
or occurring at the beginning. We hope this definition would shed some light on
this matter.
Initial allowance is claimable on the first year the taxpayer incurred the
qualifying expenditure. The initial allowance claimable is 1/5 or 20% of the
expenditure. We can say that initial allowance is a one-off allowance to be
claimed. Normally, the bigger the cost of an asset, the higher the initial
allowance.
The following conditions need to be satisfied in order to claim for initial

allowances:
(a) The cost has been incurred;

(b) The asset was used for the purpose of the business; and
(c) The person was the owner of the asset at the end or during the basis period.
The initial allowance can be claimed on asset bought and sold in the same year
provided that it was used in the business prior to disposal.

No allowance shall be made to a person in relation to an asset and a business, if

at the end of the basis period:
(a) He was not the owner of the asset; or

(b) It was not in use for the purpose of the business; or
(c) Where the asset was disposed by him in that period, he was not the owner
of the asset or it was not in use for the purpose of the business at some time
in that period, prior to its disposal.
ACTIVITY 8.1
What is the rate of initial allowance for:
(a) A vehicle?
(b) An office equipment?
(c) A plant and machinery?
8.3.2 Annual Allowance

Next, let us take a closer look at the second type of capital allowance which is
known as the annual allowance.
An annual allowance is given on every qualified year starting from the first year
the asset is purchased and used until the final year whereby the capital allowance
is given. Annual allowance is claimable when a person has for the purpose of his
business:
(a) Incurred qualifying plant expenditure in relation to an asset;

(b) Uses the asset for the purpose of the business; and
(c) At the end of the basis period for a year of assessment he was the owner of
the asset. Capital allowances cannot be claimed on assets purchased and
sold in the same year.
Table 8.1 provides a summary of initial and annual allowances.
Table 8.1: Capital Allowance
Year Capital Allowance Rate

First year Initial allowance 20% of cost
(purchase year) Annual allowance Fixed rate of cost
Following years Annual allowance Fixed rate of cost until the overall cost is
written-off
The rate of annual allowance would depend on the type of asset:
Types of Asset Rate of Annual Allowance (%)

Office equipment, furniture and fitting 10
General plant and machinery 14
Heavy machinery/Motor vehicles 20
Computer hardware and software 40
Other special assets 10
8.3.3 Balancing Charges / Allowances

Do you know what balancing charges or allowances are? Balancing adjustments
arise when a qualifying asset is disposed for a consideration. When an asset is
disposed and the residual expenditure at the date of its disposal exceeds its
disposal value, the amount of excess is known as balancing allowance equal to
the amount of the excess. The balancing allowance will reduce the businessÊ
adjusted income to arrive at the statutory income (see Figure 8.2).
Figure 8.2: Disposal of assets – balancing allowance

When an asset is disposed and its disposal value exceeds the residual
expenditure at the date of its disposal, the amount of excess is known as
balancing charge. The balancing charge shall not exceed the total of all
allowances made to him in relation to that asset. Notional allowance is excluded
from the computation of the balancing charge. The balancing charge will increase
the businessÊ adjusted income to arrive at the statutory income (see Figure 8.3).
Figure 8.3: Disposal of assets – balancing charges
ACTIVITY 8.2
At the date of disposal:
(a) If residual expenditure > disposal value

(b) If residual expenditure < disposal value
Identify which one of the excess amounts equals to balancing

charge/allowance.
Computation of balancing allowance and balancing charge are shown in

Figure 8.4.

Figure 8.4: Computation of balancing allowance and balancing charge
8.3.4 Notional Allowance

Next, let us study closely the fourth and the final type of allowance namely the
notional allowance. You should know that plant and machinery which are not
used for a period of time will also be given an annual allowance called the
notional allowance. This allowance is subjected to certain criteria which includes
that the plant and machinery must be kept in good condition even though they
are not being used.
If say within the unused period, the plant and machinery is sold, the balancing
charge is included but it is only limited to the amount of capital allowance given,
excluding notional allowance.
Now, take a look at the following example of notional allowance computation:
Mutiara Impian Manufacturing Bhd makes up its accounts to 31 of March

annually. The company acquired a processing machine on 1/7/2010 for
RM80,000. Notional allowance was computed for the year of assessment (YA)

2012 as the processing machine was not used for the business. The company
disposed the processing machine on 30/3/2014 for RM83,000.
Computation of capital allowance for the processing machine would be:
RM RM
YA 2011 (1/4/2010 – 31/3/2011)
Qualifying expenditure 80,000
Initial allowance (20%*80,000) (16,000)
Annual allowance (14%*80,000) (11,200) (27,200)
Residual expenditure 52,800
YA 2012 (1/4/2011 – 31/3/2012)

Notional allowance (14%*80,000) (11,200)
YA 2013 (1/4/2012 – 31/3/2013)

Annual allowance (14%*80,000) (11,200)
YA 2014 (1/4/2013 – 31/3/2014)

Annual allowance (14%*80,000) (11,200)
Sales proceeds (83,000)
Balancing charge 63,800
In this example, you should note that this company is restricted to actual
allowance claim of RM49,600 (16,000 + 11,200 + 11,200 + 11,200) excluding
notional allowance in the year of assessment 2012.
Although the balancing charge computed is RM63,800 but it is restricted to

RM49,600 (total of capital allowance claimed). Notional allowance is excluded in
the computation of balancing charge.
Using the above information, note that if the sales proceed is RM15,000, there
would be a balancing allowance of RM4,200 (RM19,200 – RM15,000).

Notes:
Capital allowances should be calculated based on the basis period in which the
assets were purchased and not on the date the asset was purchased. Students
must match each basis period end to the tax year it ends in, according to the
rules. As per the example above, the company closes its accounts on 31 March
annually. The purchase of a processing machine on 1/7/2010 fell under the year
of assessment 2011 as the basis period was between 1/4/2010 – 31/3/2011 for
that particular year of assessment.
In order to qualify for capital allowances, an asset must be in use at the end of the
basis period. Once an asset is in use at the end of the basis period, a full year
capital allowance is calculated and granted without restriction.
ACTIVITY 8.3
Addie Norman set up a manufacturing company, Velvet Manufacturing

Berhad five years ago. The companyÊs financial period is from 1 May till
30 April annually.
Plant and machinery was acquired on 9/12/2010 for RM100,000. On

19/5/2012, an office equipment was purchased for RM50,000. A vehicle
was then purchased on 3/3/2014.
Notional allowance was computed for the year of assessment 2014 as

plant and machinery were not used for the business and disposed of on
30/4/2014 for RM59,800.
You are required to compute the capital allowances for this company.
8.4 METHOD FOR UNABSORBED CAPITAL

ALLOWANCE
An unutilised capital allowance available to be carried forward is in accordance
to paragraph 75 of the Income Tax Act 1967. When the amount of capital
allowances in any one year, exceeds the amount of adjusted income plus
balancing charge for that year, the excess shall be carried forward to the next year
and all subsequent year of assessments until the excess amount is fully set off
against the same business source.

Capital allowances can only be used to set off against adjusted income from that
particular business source which means the allowance in respect of one business
cannot be used in calculating the statutory income of another business. If the
business cease to exist (permanent cessation), such unabsorbed capital
allowances would be lost as it cannot be given to another business source.
8.5 OTHER METHODS FOR CAPITAL

ALLOWANCE
Figure 8.5: Alternative methods for capital allowance
There are three alternative methods for capital allowances namely hire purchase,
two years claw-back and dual purpose (see Figure 8.5). In the following section,
we will discuss each method in detail. To begin with, let us take a closer look at
the first method known as hire purchase.
8.5.1 Hire Purchase

Firstly, you should bear in mind that for taxpayers who acquire an asset via a
hire purchase agreement, the capital allowance will be accounted for the
instalments paid. LetÊs take a look at the following example:
Siew Lynn bought a machine through a hire purchase agreement on 1/1/2011.

The cash price of the machine was RM80,000. She paid a deposit of RM11,000 on

1/1/2011. According to the hire purchase agreement, she has to pay RM1,500
monthly for 60 months starting from 1/2/2011.
Monthly Capital Expenditure Calculation

RM RM
Deposit payment 11,000
Monthly instalment (1,500*60 months) 90,000 101,000
Deduct: Cash price (80,000)

21,000
Monthly interest of hire purchase = 21,000/60 = RM350 per month

So, monthly capital expenditure is = RM1,500 – RM350 = RM1,150 per month
Machine Capital Allowance Calculation

RM RM
Cost 80,000
YA 2011
Deposit Payment (1/1/2011) 11,000
Capital instalment 12,650 (23,650)
Initial allowance 4,730

Annual allowance (23,650*14%) 3,311 (8,041)
YA 2012
Capital instalment (1,150*12) 13,800
29,409
Initial allowance (13,800*20%) 2,760
Annual allowance (23,650 + 13,800)*14% 5,243 (8,003)
YA 2013
35,206
Annual allowance (51,250*14%) 7,175 (9,935)
(23,650 + 13,800 + 13,800 = 51,250)
YA 2014

39,071
Annual allowance (51,250 + 13,800)*14% 9,107 (11,867)
8.5.2 Two Years Claw-back
When a qualifying asset is disposed in less than two years except for reason of
death from the date of acquisition, the Director General of the Inland Revenue
Board may direct the allowances claimed for that qualifying assets to be
disallowed by way of a balancing charge.
For a clearer picture, let us take a look at the following example.
Adeline Lily purchased a new car worth RM100,000 on 21/10/2013 and

claimed capital allowances (initial and annual allowance) amounting to
RM40,000 [(20% + 20%)*RM100,000] in YA 2013. On 30/6/2014, she disposed
the car for RM80,000.
The asset was disposed within 2 years from the date of acquisition. The capital
allowances claimed (RM40,000) in YA 2013 would be clawed back as
balancing charge in the YA 2014. In other words, the business statutory
income for YA 2014 would increase by RM40,000.
We hope the above example provides you a better understanding of this topic.

ACTIVITY 8.4
Tommy Lee bought a new NAZA Sutera worth RM50,000 in October

2012. He claimed capital allowances (initial and annual allowance) in YA
2012. After almost two years using the car, he thought of changing to a
new car launched by NAZA, a four-wheel drive that costs almost
RM100,000. He disposed his Sutera on 19/11/2014 at RM30,000.
Advise Tommy Lee on how to adopt the two years claw-back method.
8.5.3 Dual Purpose

When plant and machinery are partly used for business and personal purposes,
the amount of allowance shall be determined by the Director General based on
the circumstances of each case.
The full amount of the initial and annual allowances must not be deducted in
arriving at the residual expenditure. It is the proportionate allowances inclusive
of balancing allowances applicable to business that would be deducted from the
adjusted income in arriving at the statutory income.
Balancing charge would not be restricted except for the overriding restriction that
the balancing charge must not exceed the actual allowances given to a person in
respect of a particular asset.
8.6 USED PLANT AND MACHINERY (PARA

2A, 2B, 2C)
With effect from year of assessment 1992, the qualifying expenditure for used
plant and machinery is either the market value or net book value of the asset. The
circumstances of used asset and the respective qualifying expenditure are as
follows:
Para Circumstances Qualifying Expenditure

2A Plant or machinery which was in use for Market value of the plant or
a non-business purpose prior to being machinery on the day it was brought
used for the purpose of the business. into use for the purpose of the
business.

2B Plant or machinery which was in use Market value or net book value,
during a period when either the person whichever is lower, on the day the
or any of his income was exempted from exemption ceases.
tax and the machinery or plant continues
to be used in respect of a business of his
immediately after the exempt period.
2C Machinery or plant which was in use for Market value or net book value,
a business outside Malaysia and is whichever is lower, on the day it is
brought into use for the purpose of a brought into use in Malaysia.
business in Malaysia.
There is no initial allowance available in all the situations described above. Only
annual allowances at the prescribed rate would be applicable (Para 13A,
Schedule 3).
ACTIVITY 8.5
In your opinion, what is the relevance of having capital allowance for
taxpayers?
 Case laws have concluded that plant and machinery include assets which
perform a function for the running of a business.
 Qualifying expenses refers to capital expenditure incurred to acquire the

assets so they can be used for the purpose of a business.
 There are a few types of allowances such as initial, annual and notional
allowances.
 An unutilised capital allowance available to be carried forward is in

accordance to paragraph 75 Income Tax Act 1967. When the amount of
capital allowances in any one year exceeds the amount of adjusted income
plus balancing charge for that year, the excess shall be carried forward to the
next year and all subsequent year of assessments until the excess amount is
fully set off against the same business source.

Annual allowance Notional allowance

Dual purpose Two years claw-back
Initial allowance
1. Explain the tax treatment of deductible revenue expenses and qualifying

capital expenditure.
2. State the conditions that must be satisfied in order to qualify for capital
allowances.
3. Differentiate between initial, annual and notional allowances.
4. What is the treatment for unabsorbed capital allowance?
5. ABC Sdn Bhd starts its business on January 2009. It prepares its accounts to
31 December annually. The expenditure incurred on office equipment in
the year 2009 was RM67,000. In March 2012, ABC Sdn Bhd purchased a
new Honda City costing RM99,000 under the name of its staff. The car was
used in the company business but it was subsequently sold to its staff in
December 2014 for RM45,000.
Compute capital allowance and balancing charge/allowance for ABC Sdn.

Bhd. for the year of assessment 2014.

1. Intan Sabrina has the following assets in her boutique business:
Details of Asset Motor Van Office Equipment Furniture

Qualifying Expenditure RM75,000 RM22,000 RM10,000
Year incurred 2010 2009 2009
Rate of Annual Allowance 20% 10% 10%
Compute the capital allowances for all assets for the relevant years of
assessment up to the year of assessment 2014.
2. Benson Bukhari (Trading) Sdn Bhd operates an instant food business. It

closes its account on 31 December each year.
The following expenditure was incurred for the year ended 31 December
2014:
(i) The company acquired a multi-purpose vehicle for business purposes

amounted to RM200,000; and
(ii) A hire purchase of a Proton Perdana as detailed out below:
RM
Cost of car 120,000
Less: deposit (20,000)
Hire purchase finance 100,000
Hire purchase interest 40,000
Total sum repayable 140,000
The total sum is repayable in 25 equal monthly instalments with

effect from 1 May 2014. The car was involved in an accident on 1
December 2014 and had to be written off. The company received an
insurance compensation for RM90,000.
Based on the above information, you are required to compute the capital
allowances, balancing allowance/charge and residual expenditure for the
3. Bulan Sdn Bhd owns the following assets:

Assets Date of Purchase Cost (RM) Rate for Annual Allowance

Machine 30 September 2009 100,000 14%
Computer 1 October 2010 10,000 40%
Additional information:
(a) In April 2013, the machine was sold at RM55,000 and a new machine
was purchased on hire purchase basis costing RM220,000. The cash
price is RM180,000 and the company paid a deposit of RM20,000. The
balance will be paid each month starting from 1 May 2013 for 80
months.
(b) On 30 June 2012, the computer was traded-in for a new van. The cash
paid for the new computer was RM4,500. The trade in value was
RM4,000.
Based on the above information, compute the capital allowances, balancing

charges and balancing allowances (if any) for Bulan Sdn Bhd for all
relevant years of assessment until the year of assessment 2014.
4. Jaya Sdn Bhd is an engineering company with the financial year ending 30
December annually. Assets that were brought forward from the year of
assessment 2013 are as follows:
Assets Cost (RM) Residual Expenditure Brought Forward (RM)

Office Equipment 12,000 7,200
Projector 23,000 13,800
The projector was disposed on 17 July 2014 for RM26,000.
In 2014, Jaya Sdn Bhd acquired additional assets for the business as follows:
Assets RM
Motor car 183,050
Computers 45,000
Printer 8,000
The printer was acquired in January 2014. However, it was found to be

unsuitable for use and was sold on 16 August 2014 for RM5,500.
The rates of initial and annual allowances are as follows:

Initial Annual
Assets Allowance Rate Allowance Rate
(%) (%)
Plant and machinery – general 20 14
Motor vehicles and heavy machinery 20 20
Computers, information technology and 20 40
computer software
Office equipment, furniture and fittings 20 10
Based on the information provided, you are required to:
(a) State the residual expenditure of each asset that were brought
forward from the year of assessment 2013 and the qualifying plant
expenditure for each of the assets acquired during the year.
(b) Calculate the initial and capital allowances for all business assets for
the year of assessment 2014 and state the residual expenditure of each
asset at the end of the year of assessment 2014.
(c) Calculate the balancing allowance or balancing charge with respect to

the assets disposed in 2014.

Topic  Calculation
9 of Individual
Income Tax
Payable
LEARNING OUTCOMES
1. Explain unabsorbed business loss;
2. Analyse the tax reliefs, tax rates and rebates;
3. Differentiate between joint and separate assessment;
4. Assess the dividend credit; and
5. Compute the individual income tax payable.
 INTRODUCTION
In the previous topic, capital allowances of plant and machinery were covered.
Referring to that topic, you should be able to define what plant and machinery is.
Apart from that, you have analysed the qualifying plant expenditure (QPE). Not
to forget, you have studied the various types of allowances with regards to the
subject matter.
The recent topic should provide you with a practical knowledge on capital
allowances. We sincerely hope that, what you have learnt would be beneficial
and helpful in your lives. In this topic, we are going to study the computation of
individual income tax payable.
Do you know how to compute your income tax payable? Have you computed
one before? In this topic, you will be introduced to the computation of individual
income tax payable. You will comprehend on items to be considered in
calculating individual income tax. Deductions for individual include approved
donations to be deducted from aggregate income, reliefs to be deducted from
180  TOPIC 9 CALCULATION OF INDIVIDUAL INCOME TAX PAYABLE
total income and rebates to be deducted from tax liability. You will also become
aware of the better choices between separate and joint assessment.
Table 9.1 shows the guideline on how to compute the individual income tax
payable:
Table 9.1: Guideline to Compute Individual Income Tax Payable
RM RM
BUSINESS INCOME
Net Profit for the year 5X

Add: Disallowed expenditure X
Capital expenditure X
Less: Expenditure qualified for double deduction (X)
Capitalised income (X)
Non-business income (X) (X)
ADJUSTED INCOME 4X
Add: Balancing charge X
5X
Less: Balancing allowance (X)
Capital allowance (current year) (X)
Capital allowance (carried forward) (X) (3X)
STATUTORY INCOME 2X
Less: Unabsorbed business loss (X)
X
Add: NON-BUSINESS INCOME
Salary X
Dividend, interest, and discount X
Rental, royalty and premium X
Pension and annuity X
Occupation of premises for non-business purposes X
Payment received from outside Malaysia X
Other profits X 7X
AGGREGATE INCOME 8X
Deduct : Current Year Business Loss (X)
Donation (X)
TOTAL INCOME 6X
Deduct: Reliefs (X)
CHARGEABLE INCOME 5X
INCOME TAX LIABILITY

On the first RM X
On the next RM X
2X
Less: Rebates (X)
TAX PAYABLE X

TOPIC 9 CALCULATION OF INDIVIDUAL INCOME TAX PAYABLE  181
9.1 UNABSORBED BUSINESS LOSS

It is known that losses arise when total expenditure exceeds total income. The
current year business loss is deductible from the aggregate income. The reason
for this is simple; it is to reduce the taxpayerÊs burden. However, if the total loss
is more than the aggregate income for that current year, the difference is known
as unabsorbed business loss. It is business loss from previous years that has not
been utilised. Now let us take a look at the following picture.
Unabsorbed business loss from previous year will be deducted from the current
year statutory income. If there is not enough statutory income to absorb the loss,
it will be carried forward to the following year. Unabsorbed business loss can be
carried forward indefinitely (forever) but can only be set off against business
source income.
9.2 APPROVED DONATIONS
To begin with, what is donation? According to Merriam-Webster Dictionary,

donation is an act or instance of presenting something as a gift, grant or
contribution. Well in this case, donation is a form of expenditure which may
reduce the amount of taxable income for an individual.
The next question that you should ask yourself, „Is every single donation subjected
to deduction?‰ Well the answer is NO. Not all donations are allowed to be
deducted from income. What are the criteria or types of donations which could be
subjected to deduction then? The donation should be part of the expenditures as
listed by the IRB and receipts must be provided to verify the claim.
Now, let us study the following for a better understanding of allowed donations:
(a) Cash donation to government, state government, local authority or

approved institution or organisation as defined in Section 44(7) of the Act.
(b) Donation of artefacts, manuscript or painting to Government or State

Government, the value would be determined by the Department of
Museums and Antiquities or the National Archives.
(c) Cash donation (restricted to RM 20,000) for the provision of library facilities
to public or school libraries, university or colleges.
(d) Cash or in kind (value to be determined by the relevant local authority) for
the provision of facilities in public places for the benefit of the disable
persons.
(e) Cash or medical equipment (value to be certified by Ministry of Health) up

to an amount of RM 20,000 for the approved health care facility.
(f) Donation of painting (value to be determined by the National Art Gallery

or State Art Gallery) to the National or State Art Gallery.
SELF-CHECK 9.1
Name two examples of approved donations.
9.3 TAX RELIEFS

Relief is available to an individual who is a resident of Malaysia in a particular
year of assessment. The amount of relief to each resident individual varies
according to circumstances. The entitlement conditions for each relief must be
satisfied to minimise income tax liability and prevent taxpayers to escape from
paying tax.
Well then, what do the tax reliefs consist of? Tax reliefs among others consist of
deductions for individual, wife, children, insurance premium and EPF. Thus, we
will explain each type of reliefs individually in the next sections.

If the total amount of tax relief exceeds total income for a specified year of
assessment, the surplus will not be carried forward to the following assessment
year. Therefore, in this situation, there is no taxable income, tax payable, or in
simple words, taxable income is equal to zero.
Now, we will take a closer look at the first type of tax reliefs known as the
personal or individual relief.
9.3.1 Personal Relief

Firstly, let us study what is meant by personal relief. According to Section 46
(1)(a) Income Tax Act 1967, personal relief means each resident individual or
Hindu joint family will be given RM9,000 in respect of himself or for that Hindu
joint family. This applies to a spouse who chooses to assess tax separately.
In addition to the amount allocated for personal relief as mentioned above,

Section 46(1) (e), Income Tax Act 1967 provides that a disabled person will be
given an additional RM6,000 relief. Hence, disable individuals will receive a
personal relief of RM15,000 (see Figure 9.1).
Figure 9.1: Personal relief
9.3.2 Spouse Relief

Next, the second type of exemption which is known as the spouse relief. Do you
know what a spouse relief is? Most importantly, do you know what constitutes
this kind of relief?
With reference to the Section 47(1), (2) and (3) Income Tax Act 1967, if your
spouse is living together with you (i.e. as his wife or her husband) in the relevant
basis year, you are entitled to a spouse relief of RM3,000. The spouse relief would
not be granted if your spouse has her/his own income assessed separately. An

additional RM3,500 would be given to the husband/wife if the spouse is a

disabled person.
Furthermore, in a joint assessment, the spouseÊs income will be aggregated and

assessed with the husband/wife income. In this situation, the spouse relief of
RM3,000 will be given to the husband/wife.
This situation could be illustrated in the following Figure 9.2.
Figure 9.2: Spouse relief
9.3.3 Child Relief

The third type of deduction is known as child relief. So what are the differences
between the previous two types of reliefs with this one? In Section 48(9) Income
Tax Act 1967, an individual who is a resident for the basis year for a year of
assessment will be entitled to claim child relief under any of the following
circumstances:

Section 48(a) Income Tax Act 1967:
(a) Pays for the maintenance of an unmarried child who at any time in that
basis year is under the age of 18;
(b) Pays for the maintenance of an unmarried child, who at any time in that
basis year is receiving full-time instruction at any university, college,
school or other similar educational establishment. The age of the
unmarried child is not important;
(c) Pays for the maintenance of an unmarried child, who at any time in that
basis year is serving under articles or indentures with a view to
qualifying in a trade or profession in one of the following manners;
(i) Pays for any part-time education which is received by the child
and relates to that trade/profession;
(ii) Pays any premium in connection with those article ship or

indentures; and
(iii) Cost of other payment in connection with those article ship or

indentures.
The age of unmarried child is not important; and
(d) Pays for the maintenance of an unmarried child if it is proved to the

satisfaction of the Director General that the child is physically or
mentally disabled. The age of the unmarried child is also not important.
The concept of child is vital in this matter. Below are the possible definitions of a
„child‰:
(a) A legitimate child of the individual or his wife; or

(b) A stepchild of an individual (inclusive of his wifeÊs); or
(c) A child adopted by the individual or his wife in accordance with any
law.
Referring to the above definitions, the step/adopted child can be either of the
husband or wife. The law need not be Malaysian law. In the case of adoption, a
mere statutory of adoption is not sufficient and would not be recognised by law.

Next, how can you define an unmarried child? Well, an unmarried child
generally means a child who has never been married or does not have a husband
at the time in question.
Basically, the amount of child relief is RM1,000 for each child. The number of
children qualified for child relief is not restricted. However, the child relief for
disabled children is different from the former. How do they differ from each
other then? Well, the child relief for disabled children is RM5,000 for each child
and it also not restricted on the number of children.
Besides that, in the event of child who is over the age of 18 years old and is
studying in Malaysia, a maximum of RM4,000 deduction is available. If the child
is studying overseas, with effect from the year of assessment 2006, the parents
will also be eligible for the same amount of relief amounted to RM4,000 (see
Figure 9.3).
Figure 9.3: Child relief
9.3.4 Life Insurance Premium and EPF
Figure 9.4: Employee Provident Fund (EPF)

Source:
http://img54.photobucket.com/albums/v165/fizdane/logo/corporate/gov/kwsp.jpg

The next exemption which we are going to touch on is life insurance premium
and EPF. If you look at the above logo (Figure 9.4), most of you would surely
recognise this organisation. Do you know what EPF stands for? Well, basically
EPF stands for the Employee Provident Fund.
With effect from the year assessment 2005, a maximum relief of RM6,000 is given
to a resident individual for the year of assessment if the person has:
(a) Paid any premium for any life insurance or deferred annuity (inclusive of
Takaful Insurance);
(b) As an employee or as a self-employed person within the meaning of the

Employees Provident Fund Act 1991 made or suffered the making of a
contribution to an approved scheme or the Employees Provident Fund
(EPF) as the case may be; or
(c) Made or suffered the making of any contribution under any written law
relating to widowsÊ and orphansÊ pensions or under any approved scheme
within the meaning of any such law.
In a joint assessment, a deduction of the aggregate amount of the payments of

premiums, or contributions or both made by the wife/husband or a deduction of
RM6,000 whichever is the least will be available to the spouse. In other words, we
can say that the payment by the wife/husband is deemed payment by the
spouse.
In accordance to Section 49(1) (C) Income Tax Act 1967 which explains on EPF
annuity premiums, a resident individual who utilises the amount in the EPF to
purchase an annuity insurance policy determined by the EPF Board shall be
allowed a deduction of RM1,000 for premium paid on such insurance policy.
However, any premium paid by the wife/husband shall be deemed paid by the
spouse if they chose joint assessment. The maximum relief for EPF annuity is
RM1,000.
Figure 9.5 provides a concise explanation on this issue.

Figure 9.5: EPF contributions and life insurance premiums
9.3.5 Purchase of Personal Computer
Figure 9.6: Personal computers
What if you purchase a personal computer as the above (Figure 9.6)? Does it
involve any relief in one way or another? Well, the answer would be YES in
certain circumstances. This will be discussed in more detail.
A relief of RM3,000 maximum shall be granted to an individual for a year of

assessment in respect of a purchase of a personal computer. The claim has to be
supported by prove of a receipt. No reliefs would be given for the next three
successive years and the computer must not be used for business.

9.3.6 Other Reliefs

(a) Medical Expenses for Parents
A relief limited to RM5,000 is given to the resident individual for spending
on the welfare of their parents. Effective from year of assessment 2011,
medical expenses for parents are extended to include care for parents at
home, day care and old folks care centres.
If the spouse elects for joint assessment, the relief on her/his parentsÊ
medical expenses would not be given. Only the taxpayerÊs parents are
entitled for the above relief. The medical expenses relief on spouseÊs
parents is only given if the spouse opts for a separate assessment. A receipt
must be provided to verify the claim.
(b) Basic Supporting Equipment (for Disabled)

A relief limited to RM5,000 is given to the resident individual for
purchasing of any necessary basic supporting equipment for himself, wife,
child or parent. However, a receipt must be provided to verify the claim.
(c) Course Fee for Self-improvement

A relief limited to RM5,000 is given to the resident individual for paying
fees to acquire skills in any institutions recognised by the Government
(institutions licensed by the Ministry of Education). However, a receipt
must be provided to verify the claim.
(d) Serious Disease

A relief limited to RM5,000 is given to the resident individual in respect of
medical expenses incurred on the taxpayer or on his spouse or child who is
suffering from a serious disease. Serious disease includes AIDS,
ParkinsonÊs disease, cancer, renal failure, leukaemia and other similar
diseases.
A complete medical examination expenses on a taxpayer, spouse or child is

also included under serious disease relief. However, the maximum of
RM500 is allowed to be claim for every year. However, a receipt must be
provided to verify the claim.
(e) Purchase of Books

A relief limited to RM1,000 is given to the resident individual for purchases
of books, journals, magazines and other similar types of publication for the
purpose of enhancing his knowledge or his spouse or child knowledge.
Receipts must be provided to verify the claim.

(f) Educational or Medical Insurance

A relief limited to RM3,000 is given to the resident individual for
purchasing educational or medical insurance for himself, spouse or
children. Receipts must be provided to verify the claim.
(g) Broadband Subscriptions Fees

A relief of RM500 maximum is given to a resident individual for the fees
paid on broadband subscriptions. The broadband tax relief incentive is
effective from January 2010 to 2012. Receipts must be provided to verify the
claim.
(h) Saving in Skim Simpanan Pendidikan Nasional (SSPN)

Net saving in Skim Simpanan Pendidikan Nasional (SSPN) for child with a
maximum relief of RM6,000.
(i) Purchase of Sports and Exercise Equipment

Purchase of Sports and exercise equipment including all types of racquets
and balls, treadmills, exercise bikes and air walkers with maximum relief of
RM300.
9.4 TAX RATES

Now, let us have a look at the tax rates. As a starting point, tax rates apply to all
residents of Malaysia during the basis year for the year of assessment 1993 and
subsequent years. Therefore, these rates are applicable for individuals and the
rates could differ to one another depending on whether they are resident or not.
The advantages for resident are that the taxable amount is based on the total
income and the graduated tax rate. The non-resident is subjected to fixed rate of
26%. Table 9.2 will provide you with a better picture on the income tax rate.

Table 9.2: Income Tax Rates for Resident Individuals YA 2013 & 2014
Chargeable Income
Calculations (RM) Tax Rate (%) Tax Payable (RM)
(RM)
0 - 2,500 On the first 2,500 0 0
2,501 - 5,000 On the next 5,000 0 0
5,001 – 10,000 On the first 5,000 0
On the next 5,000 2 100
10,001 - 20,000 On the first 10,000 100
On the next 10,000 2 200
20,001 - 35,000 On the first 20,000 300
On the next 15,000 6 900
35,001 - 50,000 On the first 35,000 1,200
On the next 15,000 11 1,650
50,001 - 70,000 On the first 50,000 2,850
On the next 20,000 19 3,800
70,001 - 100,000 On the first 70,000 6,650
On the next 30,000 24 7,200
Exceeding 100,000 On the first 100,000 13,850
On the next RM 26 ⁄⁄⁄.
Next, let us take a look at the following example on how to calculate tax liability:
Example:
Compute the amount of tax liability for following chargeable income:
(a) RM25,000.00
(b) RM73,000.00
(c) RM155,000.00

Answers:
(a) On the first RM20,000 = RM300.00

On the next RM5,000 @ 6% = RM300.00
RM600.00
(b) On the first RM70,000 = RM6,650.00

On the next RM3,000 @ 24% = RM720.00
RM7,370.00
(c) On the first RM100,000 = RM13,850.00

On the next RM55,000 @ 26% = RM14,300.00
RM28,150.00
ACTIVITY 9.1
1. Marissa Dania is a chartered accountant working in a multinational

oil and gas company located in Jalan Ampang, Kuala Lumpur. You
are required to compute her tax payable, if her chargeable income
for the year of assessment 2014 is RM122,400.
2. If Swee LinÊs chargeable income tax is RM2,499, is she liable to pay

tax?
9.5 TAX REBATE

What is a tax rebate? Before you can define that, you need to understand what
the meaning of „rebate‰ is in general. Well, according to Merriam-Webster
Dictionary, rebate could be referred to as a return of part of the original payment
for some service or merchandise. In a simple sense, a rebate could refer to a
partial refund. A rebate is given as a deduction against income tax liability to
arrive at the income tax payable.
9.5.1 Self-rebate
When a chargeable income of a person is less or equal to RM 35,000, a rebate of
RM400 would be given to him/her. In case of joint assessment, where chargeable
income is less than RM35,000, both husband and wife is entitled for rebate of
RM400 each, a total of RM800.

9.5.2 Religious Payment

How about the rebate for religious payment such as zakat fitrah? A rebate shall
be granted for a year of assessment for any zakat fitrah or any other Islamic
religious dues payment of which is obligatory and paid in the basis year of that
year of assessment.
However the payment must be evidenced by receipts issued by an appropriate

religious authority established under any written law.
9.5.3 Fees (Section 6C)

Foreign expatriates (resident or non-resident) who made any fees payment to the
government in the basis year for that year of assessment for the issuance of
employment pass, visitor pass (for temporary employment) or work permit
would be given a tax rebate on such fees paid. The tax rebate on such fees is
deducted against income tax payable but before Sections 110, 132 or 133 reliefs.
9.6 DIVIDEND CREDIT

What is dividend credit? Dividend credit is a deduction according to the Section
110. Dividend credit relates to tax for the dividend received from certain
investments.
Normally, the dividend received by an investor is taxed but in calculating taxable

income, it should be in the gross value. In tax computation, the tax which is
subjected to dividend will be deducted from the tax payable.
However, with effect from year of assessment 2008, dividend income received by
individual resident will be exempted from income tax. Therefore, there will not
be any computation for dividend credit under Section 110 in the current tax
computation.

9.7 SEPARATE AND JOINT ASSESSMENT
Do you know what the difference between separate and joint assessment is? In
order to give you a clue on these types of assessment, the words „separate‰ and
„joint‰ need to be reviewed. Merriam-Webster Dictionary defines „separate‰ as
to keep apart or divide by an intervening barrier or space. On the other hand,
„joint‰ could be defined as sharing or acting in common.
The given definitions should shed some light on this matter. As mentioned
earlier, for husband and wife, they may choose to either do a separate or a joint
assessment. In line with this, if you and your wife chose the joint assessment,
your total income is accumulated and the tax is assessed on either you (i.e.
husband) or your wife. On the other hand, if the husband and wife decided to do
a separate assessment, the tax payable will be calculated separately.
Both husband and wife may use this opportunity for tax planning in order to
reduce tax burden. If both of them have their own income, they may either
choose to do a separate or joint assessment, based on the lower total tax liability.
What are the advantages of practising joint assessment? The joint assessment is
advisable if the husband or wife income is less than the amount of relief available
to their spouse, as the total tax burden will be reduced. However, if the husband
and wife income is greater than the spouse relief, they are both encouraged to do
separate assessment in order to get maximum reliefs. The following will illustrate
to you what is meant by this.

9.7.1 Joint Assessment

What are the conditions or the requirements to qualify for a joint assessment? To
qualify for joint assessment, one should fulfil the following conditions:
(a) The wife and husband must be living together and did not in the basis year
cease to live together or to be husband and wife of each other;
(b) The wife (or husband) must have total income to be aggregated with her
(his) husband (wife);
(c) The wife (or husband) must agree to be assessed with her (his) spouse, by
completing the relevant part of his (her) tax return; and
(d) If the wife (or husband) is a non-resident for the year of assessment, she
(he) must be Malaysian citizen.
Similar with the reason for choosing joint or separate assessment, your decision
to elect for joint assessment under the name of the husband or wife should be
based on the amount of tax payable between the two options. Obviously, one
should choose the lower tax payable. The difference in tax payable arises because
assessment under the husband or wife would attract different amount of reliefs.
9.7.2 Separate Assessment

What about separate assessment? Let us study this type of assessment closely. As
a general rule of thumb, husband and wife with a total income of more than
RM3,000 each are encouraged to opt for a separate assessment. Why? What is the
benefit of such assessment? Well, this is due to the fact that the deductions for
both will be much more as compared to joint assessment.
For example, if taxpayers decided to do joint assessment, they will get an

additional RM3,000 for spouse relief. However, if they choose to be assessed
separately, the wife and husband will get RM9,000 each for personal relief.
Therefore, for those who are smart, they will plan wisely to reduce their tax
burden and do some research before deciding on whether to choose separate or
joint assessment. However, the separate assessment may not always be better
than the joint assessment.

ACTIVITY 9.2
In your case, which one is better, separate assessment or joint
assessment? Why do you say so? Justify your stand.
Now take a look at this example for a better understanding on this topic.
Example:
Samy Velloo is a Malaysian tax resident. He is employed by Maju Berhad, a

Malaysian company. He lives with his wife, Uma Rani and his three children (all
under 18 years old). Uma Rani works with a private company in Kuala Lumpur.
For the year of assessment 2014, their income are as below:
Income RM
Samy Velloo 5,000 per month
Uma Rani 2,500 per month
They both also pay for life insurance, RM3,000 for Samy Veloo and RM1,000 for
his wife.
Besides that, their EPF contributions are as follows:
EPF Contribution RM
Samy Velloo 7,200 per annum
Uma Rani 3,600 per annum
Calculate the tax payable for Samy Velloo and his wife for the year of assessment,
2014 using the two methods of:
(a) Separate Assessment

(b) Joint Assessment

Answers:
(a) Separate Assessment
Tax Computation for Year of Assessment 2014
Samy Velloo Uma Rani

RM RM
Income (RM5,000 x 12; RM2,500 x 12) 60,000 30,000
Less: Reliefs
Personal (9,000) (9,000)
Child (RM1,000 x 3) (3,000) -
EPF and Life Insurance (maximum) (6,000) (4,600)
Taxable Income 42,000 16,400
Tax liability:
First RM 35,000 1,200
Next RM 7,000 x 11% 770
First RM 10,000 100

Next RM 6,400 x 2% 128
1,970 228
Less: Rebate - (400)
Tax Payable 1,970 -
Total of tax payable for Samy Velloo and his wife is:
Total of tax payable = RM1,970 + RM0

= RM1,970

(b) Joint Assessment
Tax Computation for Year of Assessment 2011
Samy Velloo & Wife

RM
Income (RM60,000 + RM30,000) 90,000
Less: Reliefs
Personal 9,000
Wife Relief 3,000
Child Relief 3,000
EPF and Life Insurance (maximum) 6,000
Chargeable Income 69,000
Tax liability:
On the first RM50,000 2,850
On the next RM19,000 x 19% 3,610
Tax Payable 6,460
ACTIVITY 9.3
1. E-filing, introduced by IRB to taxpayers in Malaysia, was fully

implemented in 2007. This system has its pros and cons. What is
your opinion on the new filing method?
2. Work in pairs. Calculate your income tax individually. Once you

have completed, ask your friend to double check your calculation
for any mistakes. Now, with all the information available, you are
required to calculate joint assessment between you and your
partner. Look at the difference in the amount of tax liability.

 From this topic, you can now compute your own tax payable. We have learnt
on computation of income tax payable using two methods, separate
assessment and joint assessment between husband and wife.
 There are also items on reliefs and rebates which we have been covered in
this topic.
 Both relief and rebates will eventually reduce the amount of tax a person
would pay. However, it is being set off against different amount in
calculating income tax.
 Relief is set off against the total income and rebates are set off against income
tax liability.
 Tax planning should be undertaken thoroughly in order to reduce tax

payable especially between husband and wife as they have the options to
either choose separate or joint assessment.
 Different amount of tax payable for different assessment used has been
shown in the example earlier. Taxpayer would then be able to choose the
lower amount of the two assessments.
Adjusted income Statutory income

Aggregate income Taxable income
Business income Total income
Dividend credit
Non-business income

1. Identify all the reliefs and rebates available for Maya Mardiana, a single
parent who has one daughter. Her expenditures for the year of assessment
2014 are as listed below:
(a) Beginning of the year, she spent RM10,509 for her fatherÊs operation
fees and medical expenditures. Her father is a chain smoker who
suffers from lung cancer.
(b) She paid RM1,423 of zakat for her income.
(c) Her EPF contribution was RM3,157 and premium paid for life
insurance was RM1,320.
(d) At the end of the year, her daughter was admitted to a private
hospital for high fever. Her daughterÊs medical fees was RM3,500.
2. Tengku Salman Al-Farisi has five children, three boys and two girls. Below
are the details:
First child: His name is Tengku Addam Al-Farisi. He is 25 years old in

2014 and is a final year student at Universiti Kebangsaan
Malaysia (UKM) pursuing a Bachelor in Accounting. He is
SalmanÊs child from the previous marriage. Mr. Salman
incurred RM3,600 for the childÊs maintenance.
Second child: Her name is Tengku Anna Natasya Al-Farisi. She is 23

years old in 2014 and has been studying in University of
Canterbury, New Zealand since October 2012 on a
governmentÊs scholarship. However, Salman still incurred
RM2,400 for the childÊs maintenance during the year.
Third child: His name is Tengku Azzuan Al-Farisi. He is 21 years old in

2014 and got married on 31.12.2014. He was pursuing a
diploma course in Interior Design at University of
Technology MARA, Shah Alam in 2014. Salman incurred
RM4,000 for his maintenance during the year.

Fourth child: His name is Tengku Ariss Al-Farisi. In 2014, he is 20 years

old. He is a disabled child. During the year, Salman
incurred RM4,000 to purchase a wheel chair and other
necessary basic supporting equipment for the childÊs use.
Maintenance cost was RM8,000.
Fifth child: Her name is Tengku Arra Maisara Al-Farisi. She is 16 years
old in 2014 and is attending a boarding school, Sekolah Seri
Puteri located in Cyberjaya. Mr. Salman incurred RM2,400
for her maintenance during the year.
You are required to calculate the total amount of child relief for Tengku
Salman Al-Farisi for his five children, for the year of assessment 2014.
3. Compute the income liability for the following chargeable income:
(a) RM2,451.99
(b) RM25,555.55
(c) RM88,888.88
(d) RM234,779.20
(e) RM333,333.33
4. Explain on the conditions that need to be satisfied by a wife/husband to

elect for joint assessment.
1. As an approved tax agent, you have been engaged by Eric Tan to prepare
his tax return for year of assessment 2014. Eric Tan provided you with the
following information:
(a) He has been employed by Twintrak Sdn Bhd as an engineer since

1 July 2007. Details of his remuneration package are as follows:
(i) A fixed monthly salary of RM6,000.
(ii) Annual contractual bonus of two monthsÊ salary by the

company in February of the following year.

(iii) Accommodation in a fully furnished bungalow, the rental

which was RM4,000 (including the rental of furniture RM1,000)
per month paid by the employer (Inland Revenue has assessed
the benefits in kind for the furniture to be RM280 per month).
(iv) Utility expenses for the accommodation.
(v) A domestic servant was employed by the company at RM600

per month for Eric Tan and his family.
(b) He is married with four children:
(i) The eldest, James (born on 31 July, 1987) is currently in the third
year degree programme at the University of London and has
been awarded a scholarship of RM48,000 per annum. James
became disabled after a car accident on 14 April 2012.
(ii) The second child, Joanna (born on 24 March, 1989) is currently

studying at the University of Malaya and was married on 25
December, 2014.
(iii) The third child, Jason, 17 years old studying at Sekolah

Menengah Sri Hartamas.
(iv) The fourth child, Sabel is only 5 years old and has been legally
adopted since 2008.
(c) His wife, Jane Tan was employed by Mobilecom Sdn Bhd until April
30, 2014 when she had to retire due to ill health, after having worked
with the company for nine years. Prior to that, her company paid
RM20,000 for her medical expenses. Subsequent to her retirement, she
started a bookshop business on 1 June, 2014. Details of the businessÊs
income is as follows:

Kedai Buku Glory

RM RM
Gross income 70,000
Less: Expenses
Salary and wages 10,500
JaneÊs salary 5,000
Entertainments to clients 2,600
Utilities 1,500
Depreciation 7,200
Shop rental 12,000
Donation to school (approved) 2,000 40,800
Net profit 29,200
Capital allowance computed for the year is RM4,200
(d) Eric Tan is the chairman of an approved charitable organisation. On

31 October, 2014 he donated medical equipment, a dialysis machine
worth RM25,000 to this organisation. His wife also donated to the
organisation books costing RM450 and cash amounting to RM500.

Other information pertaining to the year ended 31 December, 2014

supplied by Eric Tan is as follows:
Eric Tan Jane Tan

(RM) (RM)
EMPLOYMENT INCOME
Twintrak Sdn Bhd

Salary 72,000 -
2013 bonus received 28 Feb, 2014 10,000 -
2014 bonus received 28 Feb, 2015 12,000 -
Utility expenses 4,500
Mobilecom Sdn Bhd

Salary - 60,000
Gratuity - 50,000
Dividend Income:
Celcom Bhd (net) - 7,200

Malaysia Building Society Bhd
(co-operative society) (gross) - 3,500
SingaporeÊs dividend (remitted) 3,700
Interest Income:
Saving deposit with a licensed bank in Malaysia

(withholding tax deducted) 950 475
Unconvertible loan stock issued by a Malaysian
Public listed company - 200
Convertible loan stock issued by a Malaysian
Public listed company 400 700
Lottery winnings 5,000 -
Expenditures:
Employees Provident Fund contribution 8,300 6,600
Life insurance policies:

Capital sum insured 200,000 50,000
Premium paid 6,400 4,000

Expenditure on childrenÊs education:

James 3,000 -
Joanna 6,000 -
Jason 4,100 -
Sabel 2,800
Subscription to the Institute of Engineers 1,000 -

Rental paid to employer by Eric Tan 6,000 -
Medical expenses (evidenced by receipts):

On himself 500 -
On his wife 3,500 -
On his children 1,200 -
On his parents 4,800 -
Education insurance (evidence by receipts):

On children 3,800 1,200
On Eric TanÊs brother 1,100 -
Supporting equipment bought for James 6,200 -

Purchase of personal computer 4,600 -
Based on the information provided you are required to compute the

income tax payable, if any by Eric Tan and his wife for the year of
assessment 2014, assuming that Jane Tan did not elect for combined
assessment but elected to claim relief for the youngest child, Sabel.
2. Zainal Awang retired from Government services on 31 March 2014, on his

56th birthday. After retirement, he commenced employment with Makmor
Construction Sdn Bhd on 1 May 2014 at a monthly salary of RM6,000.
Zainal is married to Zaidah Ahmad, an accountant with Sime Darby Bhd
for many years. Her salary was RM4,800 per month. She also receives
monthly travelling and entertainment allowance of RM400 and RM500
respectively. Zaidah claimed that she spent RM3,200 travelling from her
office to clientsÊ offices and RM6,800 on entertaining clients.

The following information applies to Zainal and Zaidah:
Zainal
Makmor Construction provided him with a new company car costing
RM120,000 (inclusive petrol) and driver. The car was delivered to him on 1
July 20144. Other income and benefits provided to Zainal from 1 May 20144
to 31 December 2014 are as follows:
Salary RM6,000 per month

Entertainment allowance RM500 per month (only 2/3 is allowed by
IRB)
DriverÊs salary RM900 per month
Fuel expense RM5,500
Medical and dental expenses RM3,400
ZainalÊs income from government service:

Salary from January to March 2014 RM15,000
Pension from April to December 2014 RM27,000
Retirement gratuity RM75,000
Zaidah
Zaidah owned one house in Shah Alam that was rented out. This house
was bought in June 2007 and has been rented out since 2009. The details for
rental income and expenses for year 20144 are as follows:
Rental per month RM3,200

Rental deposit: refundable RM5,000
Rental expenses:
Assessment and quit rent RM2,800
Fire and theft insurance RM1,500
Renovation cost RM10,000
Repainting RM3,500
Replacement of broken window RM1,800

Additional information in respect of the year ended 31 December 20144 are

as follows:
Zainal Zaidah
(RM) (RM)
Dividend income:
 Pioneer dividend from Pioneer Status Bhd 2,000 -
 From Kerjasama Cooperative Society - 1,800
 From Renong Bhd. (gross) - 10,000
Donation to approve institutions:

 Cash 6,368 3,000
 Furniture (at cost) 12,000 -
Reliefs claimed:
 Supporting equipment for disabled parents - 6,000
 Medical expenses incurred in respect of:
 ZainalÊs parents 5,900 -
 ZaidahÊs parents - 2,200
 Contribution to EPF 7,000 6,000
 Life insurance premium paid 6,000 2,500
 Health/medical insurance premium paid 3,500 2,800
 Purchase of books 480 790
 Zakat and fitrah 4,780 3,200
Zainal and Zaidah have five children. The eldest child, Nur Adillah (aged
24) is a final year student in Glasgow University, UK. In 2014, the amount
expended for her education was RM14,000. The second child, Danial (aged
21) is a student at UPM. The third child, Nur Safia (aged 19) is studying for
her Diploma at Sunway College. The other two children are below 12 years
old in 2014.
Based on the above information, you are required to:

(a) Compute the tax payable by Zainal and Zaidah for the year of
assessment 2014 using separate assessment.
(b) Compute the income tax liabilities, if any, of Zainal and Zaidah for the
year of assessment 2014 under joint assessment (Zaidah elected for
joint assessment).
(c) Based on your computation above, advice Zainal and Zaidah on
whether they should or should not elect for joint assessment.

Topic  Taxation on
10 Partnerships
LEARNING OUTCOMES
1. Define partnerships and existence of a partnership;
2. Identify the different types of partnerships;
3. Compute a partnership business income;
4. Calculate each partnerÊs income from a partnership; and
5. Analyse non-business income from partnership.
 INTRODUCTION
Do you know that partnerships have existed since pre-historic time? The reasons
for their existence at that time are for food and protection. As civilisation
developed so did partnerships. In the West, partnerships were formed mainly for
capital and risk sharing, as insurance was not yet in existence. In Muslim
countries, partnership was a solution to avoid paying or receiving interest that is
forbidden. Partners that contributed capital into the business will be
compensated with sharing of profit. Nowadays partnerships are very common.
We can see partnerships everywhere. Even a marriage is called a domestic
partnership as husband and wife share the responsibilities and rewards though it
cannot be translated into monetary value.
This topic will introduce you to the fundamental concepts and type of partners in
a partnership. These concepts and terms are important to the understanding of
what partnership taxation is all about. In addition, you will be able to compute
the partnership business income and each partnerÊs income from a partnership.
Moreover, you will later learn the non-business income from partnership.

TOPIC 10 TAXATION ON PARTNERSHIPS  209
10.1 MALAYSIA IS BORN THROUGH

PARTNERSHIP
Malaysia is Born through Partnership
Peninsular Malaysia became an independent

nation called Malaya in 1957. When the British
flag was finally lowered in Kuala Lumpur's
Dataran Merdeka in 1957, Tunku Abdul Rahman
became the first Prime Minister of Malaya
(picture).
Earlier in the 1950's, he and other leaders had formed a political alliance of the
three main ethnic parties: the United Malays National Organisation, the Malayan
Chinese Association, and the Malayan Indian Congress. This three-party
partnership, known as the Alliance, was the forerunner of the National Front that
is Malaysia's most powerful political organisation today.
(Source: http:www.kiat.net)
10.1.1 Definitions
A partnership in general terms is defined as a legal relationship which subsists
between two or more persons who carry on a business in common with the
objective of making a profit.
In accordance to Section 2 Income Tax Act 1967, partnership is specifically

defined as „an association of any kind between parties who have agreed to
combine any of their rights, powers, property, labour or skill, for the purpose of
carrying on a business and sharing the profits there from‰.
SELF-CHECK 10.1
Try to describe any experience that you encountered with any partnership
business. Name the partnership and the types of business dealings. In
your opinion, what kind of business is normally a partnership?

210  TOPIC 10 TAXATION ON PARTNERSHIPS
10.1.2 Types of Partners

Partnership is further classified into the following types (see Figure 10.1):
Figure 10.1: Types of partners
The following Table 10.1 further describes the characteristics of the different
types of partners.
Table 10.1: Characteristics of the Five Types of Partners
Types of
The Characteristics
Partners
Full  Partners that contribute capital to the partnerships.
 Share the profit and losses of the partnerships.
 Actively engaged in the partnership business.
 Income from the partnership is taxed under Section 4(a) Business
Income.
Salaried  Partners that do not contribute capital to the partnerships.
 Do not share any partnership losses.
 With or without a share of profits of partnerships.
 Draws a salary from the partnership business.
 Income from the partnership is taxed under Section 4(b) Employment
Income.
Sleeping  Partners that do contribute capital to the partnerships.
 Does not participate in the activities of the partnership business.

 Merely receives a share of the partnership profits.

Income.
Limited  Subscribes to a fixed amount of capital for the partnership.
 Not actively engaged in the management of the business.
Income.
Corporate  A company may become a partner of a partnership business.
Income.
SELF-CHECK 10.2
If you are to become a partner in a partnership, what type of partner

would you like to be? Please state the reasons for choosing one over
another.
10.1.3 Existence of a Partnership

For a partnership to exist, at least one of the main criteria below must be satisfied.
They are:
(a) Formal agreement between the parties;
(b) Partnership is registered with the Registrar of Businesses/Corporation;
(c) Partnership is registered with any appropriate professional body;
(d) Partnership maintains its own bank account and partners are the cheque
signatories;
(e) Partnership names are shown on the organisationÊs business stationery, its
trade premises and in the trade directories;
(f) Agreement on the basis of sharing the profits and losses of the
partnerships; and/or
(g) Agreement on the basis of contributing capital to the partnerships.

SELF-CHECK 10.3
Daisy and Rose are best friends. They are also students at OUM. Both of
them are in the same Taxation II class for the semester. They always do
their studies together. Does a partnership exist in this situation?
After graduation, both of them decided to become tax agents. Each of

them contributed RM100 for the tax agent licence and advertisement cost.
They verbally agreed that they will equally share the profit and losses
from the partnership business. Does a partnership exist in this situation?
10.1.4 Assessment of a Partnership

The assessment of a partnership is similar to a sole proprietorship. The
partnership business is not taxed. The profit or losses of partnerships will be
passed through to the individual partners. The allocation will be based on the
partnership agreement. In the absent of any profit sharing agreement, the profit
and losses will be divided proportionately in accordance with the capital
contributions. The individual partners will then report the partnership returns in
their individual income tax returns. The partnership share of profit or losses will
be assessed under section 4(a) Business Income of the individual partner.
Therefore, the tax treatment of a partnership could be summarised as follows:
(a) Partnership is not a chargeable person for income tax purposes;

(b) The chargeable person is the individual partner of a partnership;
(c) Each partner of the partnership is individually assessed to tax on his share
of the partnershipÊs profit; and
(d) Income tax is levied on the individual partners on their share of business
income.
The basic steps in establishing each partnerÊs share of the partnership income will
be discussed in the next section.

Siti and Sara are partners in a cafe business called S2S Cafe. Each of them
contributes RM50,000 to the partnership. They will share the profit and losses
equally. If S2S Cafe make a profit of RM40,000 for the year, the partnership as
an entity pays no income tax. Rather, both Siti and Sara will be individually
assessed to tax on their share of partnershipÊs profit. Siti and Sara will each
report their partnership income of RM20,000 in their individual income tax
return. The income will be assessed under Section 4(a) Business Income.
10.2 COMPUTATION OF A PARTNERSHIP

INCOME
In the following sections, you will learn about the computation of a partnership
income which includes provisional adjusted income and divisible income.
10.2.1 Provisional Adjusted Income

The partnership provisional adjusted income is calculated before we are able to
compute the individual income for partners. The net profit of the partnershipÊs
accounts is adjusted to take into account the disallowed expenses which include
the remunerations and benefits provided to partners. Disallowed expenses are
expenses that are not wholly and exclusively incurred for the production of gross
income. Examples are private and domestic expenses. Depreciation is also
disallowed because for taxation purposes capital allowance is given instead.
Remunerations and benefits normally given to partners include partnerÊs
salaries, partnersÊ private expenses charged to the partnership and interest on
capital contributed by partners.

Computation of the partnershipÊs provisional adjusted income is as shown

below:
RM RM
Net profit per partnership's accounts XX
Add:
Non-deductible expenses XX
Partner's private or domestic expenses XX
Partner's salaries XX
Interest on capital XX
PROVISIONAL ADJUSTED INCOME XX
XX
10.2.2 Divisible Income

The next step is to calculate the divisible income of the partnership. Divisible
income is the partnership income that is allowed to be divided among partners.
The provisional adjusted income as above plus partnerÊs salaries, partnersÊ
private expenses charged to the partnership and interest on capital contributed
by partners equals to divisible income.
Computation of the partnershipÊs divisible income is as shown below:
Provisional adjusted income XX

Less:
PartnersÊ private or domestic expenses XX
PartnersÊ salaries XX
Interest on capital XX
DIVISIBLE INCOME XX
XX

10.3 EVALUATION OF PARTNER’S INCOME

In the following sections, you will learn how to evaluate a partner's income in a
partnership. You will also learn about adjusted income, statutory income,
computation of capital allowance and computation of the provisional adjusted
income or loss when there is change in partnership.
10.3.1 Adjusted Income

The adjusted income of an individual partner for a year of assessment refers to
the share of divisible income, remunerations and benefits from the partnership. If
a partnership incurs losses, the divisible loss will also be allocated to respective
partners based on the profit sharing ratio (refer to Format 1.1).
10.3.2 Statutory Income

Statutory income is obtained after deducting capital allowances from the
partnership adjusted income (refer to Format 1.1). The statutory income from the
partnership business will be assessed under Section 4(b) income and will be
aggregated with other income in order to calculate the chargeable income for the
individual income tax.
Format 1.1: Evaluation of each partnerÊs share of the Partnership Income
Partner Mr A Mr B Mr C Total
Profit sharing ratio 1Î5 2Î5 2Î5
Divisible income XX XX XX XX
Salary XX XX XX XX
Interest on capital XX XX XX XX
Private expenses XX XX XX XX
ADJUSTED INCOME XX XX XX XX
Less: Capital allowances (XX) (XX) (XX) (XX)
STATUTORY INCOME XX XX XX XX

10.3.3 Computation of Capital Allowance

Capital allowance is a specific provision given by the Inland Revenue to take into
account the deterioration or reduction of value of an asset. Thus, depreciation
(which also represents the amount of deterioration/reduction of value of an
asset) is not allowed to be deducted from income. This is because it may vary due
to different method or rate used by different company. Capital allowance
eliminates this problem.
The rate for calculating capital allowance is specified by the IRB. It is different
according to the type of asset. For example, motor vehicle initial and annual
allowance is 20%, office equipment, furniture and fittings initial allowance is 20%
and annual allowance is 10%.
The capital allowance will be allocated to respective partners based on profit

sharing ratio at the end of the basis period. There will be no time apportionment
even though there is a change in profit sharing ratio during the basis period.
Only partners that are still in existence at the end of the basis period will be given
the allowance.

ACTIVITY 10.1
The statement of profit and loss of the partnership, Cheryl & Daniel
Auditing, for the year ended 30 December 2014 is as follows:
RM RM
Gross income 200,000
Less: Revenue expenses (all tax deductible) (80,000)
Depreciation (20,000)
PartnerÊs salaries
Cheryl 20,000
Daniel 10,000 (30,000)
70,000
Interest on capital contribution
Cheryl 1,000
Daniel 1,500 (2,500)
67,500
Private expenses
Cheryl 3,000
Daniel 5,000 (8,000)
59,500
Cheryl and Daniel each shares the partnership profit in equal proportion.
Capital allowances for year of assessment 2014 amounted to RM20,000
Compute the Statutory Income in respect of the partnership business for

the individual partners Cheryl and Daniel.

10.3.4 Changes in Partnership

Changes in partnership occur when:
(a) There is a change in profit sharing ratio;

(b) A new partner is admitted; and/or
(c) A partner leaves a partnership/retirement.
The computation of the provisional adjusted income or loss for the partnership is
the same as before. The apportionment of a divisible income will be on time basis
based on the existing profit sharing ratio before the changes occurred. After the
changes, the apportionment will be based on the current profit sharing ratio.
Partnership business is treated as continuing if there is at least one person who

was a partner in the old partnership and the partnershipÊs year end is the same as
the old partnership.
ACTIVITY 10.2
The partnership of Puteri and Anita commenced on 1/1/2008 and

accounts are prepared to 31 December annually. The partnership
agreement provided for the following:
Interest on capital 10% per annum for each partner

PuteriÊs capital contribution RM100,000
AnitaÊs capital contribution RM150,000
Salary:
Puteri RM1,500 per month
Anita RM3,000 per month
Share of divisible income/(loss):
Puteri 1/3
Anita 2/3
On 30/6/2006, Puteri left the partnership and withdrew her accumulated

capital and profits up to that date. On 1/7/2014, Johan joined the
partnership and the new partnership agreement provided the following:

Interest on capital 10% per annum for each partner

AnitaÊs capital contribution RM150,000
JohanÊs capital contribution RM150,000
Salary:
Anita RM3,000 per month
Johan RM3,000 per month
Share of divisible income/(loss):
Anita 1/2
Johan 1/2
The partnershipÊs trading; profit and loss account for the year ended
31.12.2014 is as follows:
RM
Sales Revenue 10,250,000
Less: Cost of Sales (9,100,000)
Gross Profit 1,150,000
Add: Other income 330,000
1,480,000
Less: Expenses (1,150,000)
Net profit for the year 330,000
Included in general overheads are:
PartnerÊs salary RM63,000
PartnerÊs interest on capital RM27,500
Depreciation on fixed asset RM25,800
Capital allowances for year of assessment 2006 RM40,400
Calculate the statutory income of each partner from the partnership for

10.4 NON-BUSINESS INCOME FROM

PARTNERSHIP
Non-business income from partnerships or also known as other income includes
dividends, interests, discounts, rentals, royalties and premiums. Normally, it will
be computed separately and the adjusted income from non-business income is
apportioned in accordance with profit sharing ratio.
 The topic illustrates many aspects of partnership taxation.
 Partnership is a legal relationship of persons with the intention of making

profit.
 Partners are a member of a partnership which includes full, salaried,

sleeping, limited and corporate partners.
 Partnership is not a chargeable person for income tax purposes.
 Assessment of partnership profit is on the individual partner.
 Apportionment of profit and losses is on time basis and based on the profit
sharing ratio.
 Apportionment of capital allowances is based on profit sharing ratio and

partners existence at the end of the basis period.
 Changes in partnership occurs when there is a change in profit sharing ratio,

a new partner is admitted or a partner leaving a partnership.
Adjusted income Partners

Capital allowance Partnership
Depreciation Provisional adjusted income
Divisible income Statutory income

1. What is meant by partnership in accordance to the Income Tax Act 1967?

How is it different with general perceptions of a partnership?
2. State under what classes of income (Section 4 Income Tax Act, 1967) the
following partners would be subject to tax in respect of their income from a
partnership business. Give brief explanations of the nature of their
participation in the partnership:
(a) Full partner;

(b) Salaried partner; and
(c) Sleeping partner.
3. State the characteristics which must be present in a relationship between

persons before a partnership (as defined in the ITA) is said to exist.
4. Explain briefly how a partnership is assessed to tax and who is responsible

for filing up the partnership return.
5. Explain briefly the treatment for partnershipÊs losses.
1. Ahmad and Abdul are partners in a printing business. Net profit for the
year ended 31 December 2014 is RM50,000. The expenses for the year
amounted to RM25,000. All of the expenses are tax deductible except for
depreciation of RM3,000. The partnership agreement stated that Ahmad
and Abdul are each to be paid an annual salary of RM5,000 and interest on
capital amounting to RM2,500 for Ahmad and RM1,000 for Abdul. The
capital allowances computed in accordance with prescribed rates are
RM3,000 and donations made to approved institutions are RM500. Profits
are shared equally.
Required:
Calculate the provisional adjusted income, divisible income and partnersÊ
statutory income from the partnership.

2. A, B and C are partners in ABC Enterprise which manufactures chairs. The

terms stipulated in the partnership agreement are as follows:
Capital Contributed Share of Profit/Loss Salary Per Month

A 200,000 50% 2,000
B 50,000 30% 3,000
C nil 20% 5,000
The statement of profit and loss for the year ended 31 December 2014 was
as follows:
RMÊ000 RMÊ000
Turnover 4,135
Cost of manufacturing
Opening stock 310
Purchases 2,000
Direct labour 800
Closing stock (280)
2,830
Gross profit 1,305
Less Expenditure 150
Payroll 25
Factory maintenance 120
Transport 52
Depreciation 18
*Entertainment (customers) 65
Utilities 25
Interest on partnersÊ capital at 10% 120
Salaries to partners
Total expenditure 575
Net profit before tax 730

* The entertainment expenses are wholly and exclusively incurred during

the basis period in the production of gross income.
Required:
Compute the provisional adjusted income and divisible income of the
partnership for the year of assessment 2014 and show the allocation to
Partners A, B & C. You should start your computation with the net profit
before tax figure.
3. Rafidah, Yuen and Kamala are in a partnership business called 3R3. The
profit sharing ratio for Rafidah, Yuen and Kamala are 2/5, 2/5 and 1/5
respectively. The profit and loss account for the year ended 31 December
2014 is set out below:
RM RM
Gross profit 250,000
Less:
Business expenses (50,000)
Interest on capital:
Rafidah 1,200
Yuen 1,800
Kamala 3,000 (6,000)
PartnersÊ salaries:
Rafidah 20,000
Yuen 22,000
Kamala 18,000 (60,000)
Net profit per account 134,000
The business expenses were inclusive of the following:

Depreciation RM6,000
Renovation cost of YuenÊs apartment RM2,000
General provision for bad debts RM7,000
Donations to approved institutions RM2,000
Capital allowances due for the year of assessment 2014 amounted to RM2,500.

Required:
Compute the adjusted income, capital allowances and approved donations
allocable to each partner.
4. Khairy, Sammy, and Leong are partners in the partnership business of

selling heavy machineries. The partnership accounts for the year ended 31
December 2014 are as follows:
Notes RM
Sales 3,200,000
Less: Cost of sales (2,378,000)
Gross profit 822,000
Less: PartnersÊ salary a (168,000)
Interest on capital b (255,000)
Other tax deductible expenses (219,000)
Depreciation (30,000)
Add: Rental income 120,000
270,000
Less: Approved donation (15,000)
Notes to tax computation:
The partnership agreement provides the following:
(a) Salary
Khairy RM3,800 per month
Sammy RM4,200 per month
Leong RM6,000 per month

(b) Interest on capital

Interest on capital was calculated at 10% per annum. The respective
capital contribution of the partners is as follows:
RM
Khairy (no change during the year) 600,000
Sammy (no change during the year) 1,400,000
Leong
As at 1 January 2014 300,000
Additional capital on 1 August 2014 600,000
As at 31 December 2014 900,000
(c) Partnership profit were shared as follows:

Khairy 1/6
Sammy 2/6
Leong 3/6
(d) Capital allowances for the year of assessment 2014 were RM90,000.
(e) Unabsorbed business losses available to the individual partner are as

follows:
RM
Khairy 90,600
Sammy 60,400
Leong 62,000
Required:
(a) Compute the partnership provisional adjusted income from business.
(b) Compute the divisible income from business of the partnership.
(c) Compute the Total Income of each partner for the year of assessment
2006.

5. Raja and his fiancee, Suki are partners in a firm of accounting. The
partnership agreement provides for Encik Raja to be paid a salary of
RM150,000 per annum, and interest on capital of RM1,000 per annum; and
for Suki to be paid salary of RM120,000 per annum and interest on capital
of RM1,500 per annum. For the period of 1st January 2006 to 30th June 2014
their profit/loss sharing ratios were 50% to Raja and 50% to Suki.
For the period of 1st July 2014 to 31th December 2014 the profit/loss
sharing ratios were changed to 30% to Raja and 70% to Suki. The amount
for salary and interest on capital remained the same throughout. The
partnership closes its annual accounts on 31th December.
The profit and loss account of the partnership for the year ended 31.12.
2014 is as follow:
Notes RM RM RM
Gross profit 1 810,000
Less:
Business expenses 2 190,000
PartnersÊ salaries:
Raja 150,000
Suki 120,000 270,000
Interest on capital:
Raja 1,000
Suki 1,500 2,500 (462,500)
Net profit for the accounts 347,500
Notes:
1. The gross profit includes the following dividend income:
Date Received Amount (RM)

3 July 2014 3,800 (gross)

2. The business expenses included:
Depreciation RM31,100
Approved donation paid in May 2014 RM2,900
Payment of private expenses for Raja RM44,400
Cost of renovations to SukiÊs house RM52,600
3. Capital allowance for the year of assessment 2014 amounted to RM32,

500.
4. Suki owns a house which was rented out in 2014. The adjusted rental
income for the year ended 31 December 2014 amounted to RM8,800.
Required:
(a) Compute the partnershipÊs provisional adjusted income and divisible

income for the year ended 31 December 2014.
(b) Determine each partnerÊs aggregate income from the partnership

source for the year of assessment 2014.

228  ANSWERS
Answers
TOPIC 1: INTRODUCTION TO MALAYSIAN TAXATION
Self-test 1
1. Meaning of tax:
Oxford Dictionary defines tax as:

„A contribution levied on persons, property or business for the support of
the government‰.
Other definition of tax includes:

„A compulsory exaction of money by a public authority for public
purposes enforceable by law‰
„The process of raising money for the purposes of government by means of

contributions from individual persons‰
2. The chronology and evolution of the Malaysian tax system.
Income tax was introduced by the British into the Federation of Malaya (as
Malaysia was known then) with effect on 1 January 1948. This was in the
form of the Income Tax Ordinance 1947. The provisions of the Ordinance
were based substantially on the Model Colonial Territories Income Tax
Ordinance 1922 which was designed for the British Colonies at that time.
The tax laws of many Commonwealth countries were initially modelled on
this legislation.
The Income Tax Ordinance 1947 was subsequently repealed by the Income
Tax Act 1967 which came into effect on 1 January 1968. The 1967 Act
consolidated the three laws of income tax which were then in existence in
Malaysia.
3. The characteristics of taxation include:

 The money is raised for government purposes;
 The payments are not penalties;
 It is a compulsory payment;
 The exactions do not constitute payment for services rendered;

ANSWERS  229
 The exactions are not arbitrary; and

 The exactions should not be incontestable.
4. Principles of taxation are as follows:
(a) Equity and Fairness

Equity and fairness principle means taxes levied should equally
burden all taxpayers in similar economic situation.
(b) Efficiency and Neutrality

To achieve efficiency principle, the costs of determination and
collection of taxation should be the lowest possible. Neutrality means
taxes should not favour a taxpayer or a group of taxpayer over
another. Taxes should not be designed to interfere with or influence
decision making.
(c) Simplicity
Tax assessment and computation should be able to be understood by
an average taxpayer.
(d) Certainty
Certainty principle is achieved when the amount of tax that each
taxpayer needs to pay is not arbitrary but ought to be certain.
(e) Flexibility
Tax system should be flexible and taxes should be enforced in a
manner that facilitates voluntary compliance to the maximum extent
possible.
(f) Suitability
Taxes should be coordinated to ensure that neutrality and the overall
objective of good governance is achieved.
(g) Fiscal Adequacy

Finally, under fiscal adequacy principle, taxes imposed should be just
enough to generate revenue in order to provide the necessary public
services to the community.

230  ANSWERS
5. The main objectives of taxation are as follows:
(a) Collection of Revenue

Tax is the main source of revenue to finance governance expenditure
especially on the provision of public goods such as maintenance of
the law and order, and national defence.
(b) Efficiency
Tax policy would ensure that taxes are collected effectively and at
minimum cost to both the government and taxpayers.
(c) Macroeconomic Control

Tax policy is also used to regulate the private sector economy to
maintain the desired level of employment, and increase economic
development and growth.
(d) Protection of Industries

Regulate the activities of specific areas of the private sector so as to
encourage activities which are beneficial to the country and to
discourage activities which are not in the national interest.
(e) Redistribution of Income

Regulate the distribution of income and wealth between different
types and classes of citizens.
(f) Control of Consumption

Regulate specific activities of citizens which are thought to be
undesirable, e.g. drinking, smoking, gambling.
(g) Fairness and Equity

Ensure fairness and equity, i.e. the burden of tax is spread fairly and
equitably among taxpayers.
(h) Support of Voters

Ensuring that the Government in power will continue to get the
support of voters.

ANSWERS  231
Self-test 2
1. The explanation of tax characteristics:
(a) A Compulsory Payment

Tax is not compulsory to everybody. There are a number of
requirements that need to be fulfilled before any person is required to
pay tax which will be explained in the later section. Tax payments are
only compulsory for this group of so called „taxable persons‰.
Taxable persons who fail to pay tax are subject to penalties because
they are violating the income tax law.
(b) Money Raised for Government Purposes

Monies from taxpayers are channelled toward fulfilling the needs of
the government to serve the public. It is the governmentÊs
responsibility to use the money in any sector or region in the best
interest of the public.
(c) It Does Not Constitute Payment for Services Rendered by the

Government
Taxation is not payment in exchange of services provided by the
government. In other words, it is not similar to a business transaction
where one seller provides services and the buyer has to pay to enjoy
that services. We cannot simply avoid paying taxes just because we
do not get the level of services that we expect from the government.
(d) Not Penalties

Taxation should not be viewed as penalties. Thus, we cannot claim
that we are good citizens and therefore the government should not
impose taxes on us.
(e) The Exactions are Not Arbitrary

The determination of tax payable is not by chance or random. It is
determined using specific procedures by the Inland Revenue Board
(IRB).
(f) The Exactions Should Not Be Incontestable

One should understand that the amount of tax imposed on him or her
could be challenged. However, this must be done using a proper
channel and if the responsible government body is satisfied with the
explanation and proof provided by the taxpayer, the amount of taxes
will be reduced.

232  ANSWERS
2. Taxes which fall under direct taxes:
(a) Income Tax

Income Tax Act 1967 is the main act that governs income tax in
Malaysia. There are two main sources of revenue under this kind of
tax namely personal income tax and company tax. I am sure most of
us are income earners, categorised as salaried individual. Owners of
sole proprietorship businesses are also subject to income tax.
(b) Real Property Gains Tax

This tax relates to real property transaction. Section 2 of the Real
Property Gains Tax Act 1976 (RPGT) defines real property as „any
land or anything on the land including lands, houses, ponds etc.‰.
RPGT applies to any disposal of land in Malaysia which is disposed
either by a Malaysian or a non-Malaysian. Tax payable will be
calculated on chargeable gain which is the difference between the
acquisition price and disposal price.
(c) Stamp Duty

The assessment and collection of stamp duties are sanctioned by
statutory law now described as the Stamp Act 1949.
The Stamp Act 1949 provides for:
(i) The imposition of Ad Valorem Duties (that means, according to

the value) on:
 Instruments of transfer (implementing a sale or gift) of

property including marketable securities (meaning loan
stocks and shares of public listed companies on the Kuala
Lumpur Stock Exchange), shares of other companies and of
non-tangible property, for example, book debts, benefits to
legal rights and goodwill;
 Instruments creating interests in property, for example

Tenancies and Statutory Leases;
 Instrument of security for monies including instruments

creating contracts for payment of monies or obligation for
payment of monies (generally described as "Bond"); and
 Certain capital market instrument, for example contract

notes; and

ANSWERS  233
(ii) The Imposition of Fixed Duties on:
 A number of legal, commercial, mercantile or capital

market instruments, for example, Power or Letter of
Attorney, Articles of Association of a Company,
Promissory Notes, Policy of Insurance etc; and
 A duplicate or a subsidiary or a collateral instrument when

it can be shown that the original or principal or primary
instrument has been duly stamped.
(d) Petroleum Tax

Income derived from the sale of crude oil and natural gas extracted
from Malaysia under a petroleum agreement entered into with either
PETRONAS or the MTJA for special joint development areas would
be subject to the petroleum income tax. Petroleum income tax is
assessed on the income earned in the preceding year.
The income and dividends paid out from such income are not subject
to other income taxes. In Malaysia, extraction of crude oil and natural
gas is under the purview of PETRONAS under Article 2 of the
Petroleum Development Act 1974 [Act 144] whereby the entire
ownership in, and the exclusive rights, powers, liberties and
privileges of exploring, exploiting, winning and obtaining petroleum
whether onshore or offshore of Malaysia is vested in PETRONAS.
Currently, the exploration, development and production of crude oil

and natural gas are actively being undertaken and managed through
petroleum agreements or production sharing contracts entered into
between PETRONAS and a number of international oil and gas
companies as well as with its subsidiary Petronas Carigali Sdn Bhd.
3. Indirect tax elements:
(a) Sales Tax

In general, sales tax shall be charged and levied on all taxable goods
as follows:
(i) Manufactured in the Federation, by a taxable person and sold,

used or disposed of by him, otherwise than by sale or disposal
to a licensed manufacturer authorised by the director general to
acquire such goods without payment of tax; and
(ii) Imported into the Federation by any person for home

consumption.
234  ANSWERS
(b) Service Tax

Other than income tax, service tax is one of the most frequently paid
by many of us. Hotels, fast food restaurants such as KFC and
McDonalds are companies that are allowed to impose service tax on
customers. Service tax shall be charged and levied in accordance with
Service Tax Act 1975 on any taxable service provided by any taxable
person.
4. Direct and Indirect Taxes:
(a) Direct tax is a tax paid directly by those on whom it is levied. This tax
is collected directly from the taxpayer.
(b) Indirect tax is a tax generally collected via a third party. This means
that the taxpayer is not paying the tax to tax authority but they pay
the tax that is already inclusive in the value of the goods bought.
5. Sources of Revenue Law in Malaysia
(a) Formal sources of revenue law in Malaysia is a Statute Law or

legislation which is the law enacted by Parliament. For income tax,
the source of law is the Income Tax Act 1967.
(b) However, when the Act cannot solve any dispute between the
taxpayer and the tax authority, the second source is the judgment
made in court cases, which we call the "case law". Case law is
unenacted law created through the decisions of the courts.
(c) For informal sources of law, IRB will issue its own Rulings and
Guidelines which are usually approved by the Ministry of Finance.

ANSWERS  235
TOPIC 2: MALAYSIAN TAX ADMINISTRATION

Self-test 1
1. The responsibilities of IRB in administering the tax system include:
(a) Developing and executing tax policy in Malaysia;

(b) Contacts with taxpayers (personal and companies);
(c) Educating taxpayers through its counters and in mass media;
(d) Ascertain and nurturing public compliance;
(e) Managing taxpayersÊ databases;
(f) Sending tax returns to taxpayers;
(g) Assessing tax returns; and
(h) Collection of tax payments.
2. Responsibilities as taxpayers or employers:
Responsibilities of individual taxpayers:
(a) Income Declaration

Based on Section 77 ITA 1967, individual taxpayers are responsible to:
(i) Give full information regarding their income for each year of
assessment; and
(ii) Responsible to submit their returns to the IRB within 30 days

after receiving the return forms.
(b) Change of Address

It is the taxpayerÊs responsibility to inform the IRB regarding the
change of address. This must be done within three months of the
change of address.
Responsibilities of an Employer
Based on Section 83, an employer is responsible to inform the IRB on
the following:
(i) New employees;

(ii) Their addresses;
(iii) Date of employment;
(iv) Cessation of employment of any employee; and

236  ANSWERS
(v) Employees leaving Malaysia. If the employee is leaving

Malaysia for more than three months, the employer is
responsible to withhold a certain amount of money for the
purpose of income tax.
With effect from 1 January 1995, an employer is responsible to deduct an

amount of tax from their employees' monthly salary through Schedular Tax
Deduction (STD) under Income Tax (Deduction from Remuneration) Rules
1994. Not all employees are involved in this STD; only employees with
income more than the given threshold are involved.
3. Brief explanation on each type of assessment in Malaysia.
Type of Assessment Brief Explanation

Original Assessment This type of assessment normally applies to all taxpayers in each
year of assessment.
Additional Additional assessment normally applies in the following

Assessment conditions:
 Where there is additional chargeable income earned by a

taxpayer of which the original assessment has not been taken
into account during the declaration in the original assessment;
or
 The taxpayer had omitted certain income while making
returns and was discovered by the Director General after the
returns was submitted; or
Reduced Assessment A reduced assessment will be done where the taxpayer's
chargeable income is less than what has been assessed.
Composite If a person fails to furnish a return in accordance with Section 77(l),
Assessment fails to give notice of chargeability, or makes an incorrect return on
behalf of himself or another person; a composite assessment may
be issued where total amount is made up of tax lost and a penalty
may be imposed.
Increased Assessment An increased assessment is issued as a result of the determination.
Advanced Section 92 provides that an advance assessment may be issued to a
Assessment person under specified situations:
(i) Where a person ceases to possess a business source in the

year of assessment.
(ii) Where a person is about to leave Malaysia and his sources of
income are likely to cease.
Protective Protective assessment is issued in order to prevent an assessment
Assessment from becoming time barred.

ANSWERS  237
4. The process of collection and recovery:
(a) Deduction of Tax from Emoluments and Pensions

Under Section 107, the Director General will direct the person by
whom the income is payable to deduct taxes from any person who
received income under Section 4(e).
(b) Schedular Tax Deduction (STD)

This system was introduced with effect from 1 January 1995 to
facilitate the collection of tax. STD is a mechanism to collect tax from
employees on a monthly basis notwithstanding that the employee has
not submitted the return.
(c) Payments by Instalment Scheme

Under this scheme, the Director General has the right to direct the
timing and amount of tax instalments such as five bi-monthly
instalments starting from 1 January or 1 February, depending on the
tax file reference number.
5. The Process of Appeal

The appeal must be made in writing to the Director General within 30 days
from the date of the notice of assessment. Upon receipt of the appeal, the
Director General will review the assessment.
There will be four possible outcomes to this review, as stated below:
Outcome 1 – The Director General can have a written agreement with

the taxpayer; or
Outcome 2 – The Director General can have an oral agreement with the
taxpayer; or
Outcome 3 – The Director General can make a proposal to the taxpayer;

or
Outcome 4 – If there is no agreement, the taxpayer after 6 months can

request the Director General to forward the appeal to the
Special Commissioner.

238  ANSWERS
6. Some example of errors along with the penalties.
Offences Penalties
Failure to submit  A fine of not less than RM200 and not more than RM2,000,
return or
 Imprisonment not exceeding six months or both.

False, Understating  A penalty of not less than RM1,000 and not more than
or Incorrect Returns RM10,000.
 In addition, a penalty of double the amount of tax

undercharged due to incorrect return may be imposed too.
Wilful Evasion  A fine of not less than RM1,000 and not more than RM20,000
or
 Imprisonment of not exceeding three years or both and a

special penalty of treble the amount of tax undercharged.
Barred from Leaving  A fine of not less than RM200 and not more than RM2,000 or
Malaysia
Other offences  A fine of not less than RM200 and not more than RM2,000 or
Self-test 2
1. Computation of tax penalties:
RM
Tax payable 6,700
Penalty for late payment (30 days)
(after 30 May 2013; 10%) 670
Total amount due 7,370
Penalty for late payment

(60 days after 30 June 2013: 5%) 368.50
Total amount due 7,738.50
**Maximum penalty imposed is 15.5%

ANSWERS  239
2. The time limit for the case to be forwarded to the Special Commissioners is
six months. Taxpayer may request the DG to forward the appeal to the SC
and DG has to submit an unresolved case to SC within 12 months of the
receipt of a notice of appeal. (Sec. 102).
3. No. Such procedure is not permitted. Taxpayer cannot bypass the Special
Commissioners and go direct to the High Court. The proper forum for any
tax appeal is to go to the SC. Any subsequent appeal to the court would
only be allowed based on the deciding orders of the Special
Commissioners.
TOPIC 3: SCOPE OF CHARGE

Self-test 1
1. Section 3 of the Act provides:
„Subject to and in accordance with this Act, a tax to be known as income
tax shall be charged for each YA upon the income of any person accruing in
or derived from Malaysia or received in Malaysia from outside Malaysia.‰
Section 3 sets out two circumstances where income tax liability arises:
(a) The transaction must be „income‰ in nature and such income is

accrued in or derived from Malaysia; or
(b) The transaction must be „income‰ in nature and it is received in

Malaysia from outside Malaysia (foreign source income).
Income tax would be imposed by reference to a YA upon a person's

income. Such person is known as a chargeable person.
2. Classes of income on which tax is chargeable under Sections 4 and 4A are:

240  ANSWERS
Section 4 Types of Income

Gains or profits from a business, for whatever period of time carried
(a)
on
(b) Gains or profits from an employment
(c) Dividends, interest or discounts
(d) Rents, royalties or premiums
Pensions, annuities or other periodical payments not falling under
(e)
any of the foregoing paragraphs
(f) Gains or profits not falling under any of the foregoing paragraphs
3. Michael qualifies as a tax resident for YA 2013 – Section 7(1)(a) but not in
2014 as his number of days in Malaysia amounted to 165 days only.
4. SitiÊs resident status:
 Siti qualifies as a tax resident for YA 2010 under Section 7(1)(b).
 For YA 2011, YA 2012 and YA 2013, Siti qualifies as a tax resident

under Section 7(1)(a) as the number of days in Malaysia is more than
182 days for both periods.
 For YA 2014, Siti is not a Malaysian resident as the number of days of

her stay is less than 182 days and is not connected to or joined by a
period of 182 consecutive days.
5. Number of days Muthu stayed:
YA Period of Stay Number of Days

2010 01/12/2010 – 31/12/2010 31
2011 01/01/2011 – 08/072011 190
2012 01/02/2012 – 31/122012 334
2013 01/04/2013 – 30/10/2013 214
2014 01/08/2014 – 31/10/2014 92

ANSWERS  241
Resident statuses for the particular year of assessments are:
YA Resident? Section
2010 Yes 7(1)(b)
2011 Yes 7(1)(a)
2012 Yes 7(1)(a)
2013 Yes 7(1)(a)
2014 Yes 7(1)(c)
Self-test 2
1. The scope of charge to income tax in Malaysia for:
(a) An Individual
 With affect from YA 2004 all residence individual, taxpayer will

be taxed on income under the territorial or derived basis.
 Non-resident will also be taxed under this basis.
 Under this basis, all income arising within a particular territory

or country would be taxable. Income arising outside the border is
not subject to tax.
 Furthermore, any income arising overseas and brought back into

the country would also be free of tax.
(b) A Company Carrying a Business in Specialised Industry (Banking,

Insurance, Sea and Air Transport)
 A company carrying a business in specialised industry (banking,

insurance, sea and air transport) will be taxed on its income
under the world income basis.
 All income (wherever arising) is taxable.
 The question of remitting income into a country is not relevant.
 The scope of charge is based on the residence status of a

taxpayer.

242  ANSWERS
2. An individual can be regarded as a resident in Malaysia for income tax

purposes:
(a) Section (7)(1)(a) – The person is a tax resident if he is present in

Malaysia in that basis year for period(s) of more or equal to 182 days;
(b) Section (7)(1)(b) – Present in Malaysia for  182 days and that period
is linked by/to a period of  182 consecutive days;
(c) Section (7)(1)(c) – Present in Malaysia for a period(s) of  90 days and

three out of four immediately preceding the basis year he is either a
resident or present in Malaysia for  90 days; and
(d) Section (7)(1)(d) – Resident in the following year and the three
immediately preceding years.
3. Alan ClarkÊs resident status:

YA Days in Malaysia Resident Status
2007 186 Resident – Sec 7(1)a
2008 106 Non-resident
2009 200 Resident-Sec. 7(1)a
2010 111 Resident-Sec. 7(1)c
2011 119 Resident-Sec. 7(1)c
2012 60 Resident-Sec. 7(1)d
2013 61 Resident-Sec. 7(1)d
2014 186 Resident-Sec. 7(1)a
4. NormanÊs resident status:
YA Days in Malaysia Resident Status

2010 22 Resident- Sec. 7(1)b
2011 224 Resident- Sec. 7(1)a
2012 180 Non resident
2013 122 Resident- Sec. 7(1)c
2014 9 Non resident

ANSWERS  243
5. (a) Paul RooneyÊs resident status
Year Period in Malaysia No of Days Resident Status Section

2007 01/11/2007 - 31/12/2007 61 NR -
2008 01/01/2008 - 31/01/2008 93 NR -
01/07/2008 - 31/07/2008
01/12/2008 - 31/12/2008
2009 01/01/2009 - 31/03/2009 197 R 7(1)(a)
16/04/2009 - 31/07/2009
2010 01/12/2010 - 31/12/2010 31 R 7(1)(b)
2011 01/01/2011 - 31/03/2011 182 R 7(1)(a)
15/04/2011 - 15/07/2011
2012 01/05/2012 - 31/07/2012 92 R 7(1)(c)
2013 - - R 7(1)(d)
2014 01/02/2014 - 15/08/2014 197 R 7(1)(a)
(b) As a resident individual, he would enjoy the following tax advantages:

(i) He would be eligible for personal reliefs and rebates; and
(ii) He would be taxed at graduated rates.
TOPIC 4: EMPLOYMENT ACQUISITION

Self-test 1
1. Wan Zaleha Radzie is exercising an employment with TV3 although she
only works for two hours per week. The following characteristics are
present:
(a) Master and servant relationship exists;

(b) She is subjected to the instructions of TV3, thus the control of
employer exists;
(c) The necessary tools such as topics to discuss, clothing and other
equipment are prepared by TV3; and
(d) There is no financial risk undertaken by her.
2. According to Section 13(2)(e), Mutiara Shipping Sdn Bhd is a tax resident in

Malaysia. Therefore employment income derived by Captain Aldrine shall

244  ANSWERS
be deemed derived from Malaysia and the income will be taxed using a flat
rate of 28% without any relief.
However, Captain Aldrine is subjected to para 34, Schedule 6 for

exemption if he is sure that the vessel used to ply between Indonesia and
Thailand is a Malaysian ship.
3. In Standard Live Assurance Co vs Allan (4 TC 446), the court established

the principle that what is received need not be in forma specifica but that
anything equivalent to money or which can be turned into money will do.
Based on the scenario in question, the car value will be considered as a

foreign source employment income received in Malaysia from outside of
Malaysia in accordance to Section 3 ITA 1967. The income will not be taxed
as foreign source income received by virtue of the newly amended para 28,
Schedule 6.
4. MawieÊs employment income is deemed to be derived from Malaysia and

he is subjected to tax in accordance with Section 13(2)(a) for seven months:
Malaysia, Section 13(20)(b) for one month: Prague, Czech Republic and
Section 13(2)(c) for four months: Singapore, Thailand, Japan, China.
5. A Malaysian branch of a company originating from India will be treated as

a non-resident company in Malaysia. Therefore, the fee that was paid to
him is classified as a non-resident income and thus, Section 13(2)(d) ITA
1967 is not applicable.
Since Zain Azrai is exercising an employment in Malaysia, in accordance to

Section 13(2)(a) ITA 1967, he is subjected to tax for the fee that he has
received.
Self-test 2
1. Employment is said to have taken place when:
(a) The relationship of master and servant subsists; and/or
(b) Any appointment or office subsists, for which remuneration is

payable. An office is a position or post to a person where he can
vacate and a new person can be appointed to replace him.

ANSWERS  245
2. Significance of distinguishing between a profession from an employment:
(a) Profession is assessed under Section 4(a) business income while

employment is assessed under Section 4(b) employment income.
(b) Tax exemptions will be given for gratuity and compensation for loss
of employment.
(c) For a non-resident employee, exemptions for employment income

received will be exempted if employment period is not more than 60
days in a calendar year.
(d) Income is taxable based on tax rate by stages.
(e) Loss from profession can be carried forward to the following year of
assessment while the loss from employment cannot. Scheduled tax
deduction.
3.
Control existence of
Yes No
employer
Employee Replacement No Yes
Income or benefits  Fixed rate salary  Wages as agreed
received  Benefits: sick pay, EPF upon tasks
contribution and assigned
medical benefits.
Work place and Not provided/not
Provided/stated
working hours stated
Shared risks of financial
No Yes
and success
Appointment contract Contract of services Contract of services
Main criteria behind Perform characteristic test to ensure the transactions
transactions criteria

246  ANSWERS
4. According to Section 13(3) ITA 1967, „gross income in respect of gains or

profits from an employment in the public services or the service of a
statutory authority shall be deemed to be derived from Malaysia if the
employee is a citizen‰:
(a) For any period during which the employment is exercised outside
Malaysia; or
(b) For any period of leave attributable to the exercise of employment

outside Malaysia.
For a government servant who is a resident, the employment income is

deemed derived in Malaysia even though the employment is done outside
Malaysia or paid leave which relates to the employment outside Malaysia.
5. Income received by Professor Paul Moose RM30,000 is deemed to be

derived from Malaysia and he is subjected to tax in accordance with Section
13(2)(a). The tax rate for Professor Paul Moose depends on his residence
status in Malaysia. For the employment income derived in Malaysia of 50
days, he will be entitled for exemption under Schedule 6 paragraph 21 and
22 ITA 1967.
TOPIC 5: EMPLOYMENT: BASIS PERIOD

Self-test 1
1. Gross income may be received from five sources in accordance to Sections
13(1)(a) to 13(1)(e) ITA 1967:
(a) Section 13(1)(a) : Cash

(b) Section 13(1)(b) : Benefits in kind
(c) Section 13(1)(c) : Accommodation value
(d) Section 13(1)(d) : EmployerÊs contribution to unauthorised fund
(e) Section 13(1)(e) : Compensation for loss of employment
2. Differences between employment and business incomes are:
Employment Income:
 Section 4(b) ITA 1967
 Less deduction
 No capital allowance
ANSWERS  247
 Basis year according to calendar year

 Scheduled-tax deduction
Business Income:
 Section 4(a) ITA 1967
 More deduction
 Entitled to capital allowance
 Basis year according to accounting period
 May choose for tax deduction
3. Ken Watanabe
Section 13(2)(d) - any income received by the director of a company

resident in Malaysia is deemed derived from Malaysia.
 Thus the income received by Ken Watanabe is taxable under Malaysian

ITA.
 Schedule 6 para 21 – for exemption on employment income less than

60 days is not applicable to the director of company.
4. Fully exempt gratuity is given under Schedule 6, para 25 ITA 1967: gratuity
received due to:
 Retirement due to ill-health; or
 Retirement at the age of 55 or compulsory age of retirement/

termination of contract for government servant; and
 Must have serviced more than 10 years with the same employer; or
 Gratuity paid using a public fund.
5. Adrian should do the following:
 Adrian should choose option (i) as this option will result in a reduction
in his gross income of RM13,080 (RM254,280– RM241,200), thus,
resulting in tax savings.
 Under option (i) Adrian will be assessed in respect of the driver as a

benefit-in-kind under Section 13(1)(b) Income Tax Act, on the
prescribed value of RM7,200, a lesser amount compared to option (ii).

248  ANSWERS
 Under option (ii) Adrian will be assessed in respect of the driver as a

prerequisite, on the full value of RM15,600 under Section 13(1)(a).
 As a prerequisite, it will also further increase the value assessed for the
living accommodation under Section 13(1)(c).
The following tax computation will illustrate the point:

Option (i) Option (ii)
(RM) (RM)
Section 13(1)(a) Salary 180,000 180,000
Driver (perquisite) 15,600
180,000 195,600
Section 13(1)(b) Driver (prescribed value) 7,200
Section 13(1)(c)
Lower of:
Defined value RM60,000; or
30% x RM180,000 54,000
30% x RM195,600 58,680
Gross income 241,200 254,280

ANSWERS  249
Self-test 2
1. Dr. Cruz Beckham
Dr. Cruz Beckham – Year of Assessment 2014
Sec. 13(1)(a)
Salary 10,000 X 12 120,000
Entertainment allowance 500 X 12 6,000
Bonus 10,000 10,000
136,000
Sec. 13(1)(b)
Furniture 2800 X 12 3,360
Utilities 2,000
Servant 300 X 12 3,600
Car 3600 + 1200 4,800
Tickets: Indonesia (550X2) + (350X2) 1,800
Brunei (400X2) + (200X2) 1,200
Less: exemption (3,000)
Special work attire Exempted
13,760
Sec. 13(1)(c)
30% X 13(a) 30% X 136,000 40,800
Fixed value 1,500 X 12 18,000
Lower 18,000
Gross Income 167,760
Minus : Deductible expenses
Entertainment expenses 500 X 12 X 3
4 ¾ (4,500)
Adjusted Income 162,300
Notes:
1. A driverÊs salary is not a benefit from employer.
2. Compensation by employer for medical bills is exempted from

taxation.

250  ANSWERS
2. Gross employment income of Musa for the YA 2014.
Sec. 13(1)a RM RM
Salary (RM12,000 x 10 Months) 120,000

Bonus 18,000
Allowance 5,000
143,000
Sec. 13(1)b
Air passage (outside MÊsia RM5,600 – 2,600

RM3,000) 2,800
Furniture (280 x 10 months) 4,000
Utility paid by employer Exempted
Dental expenses 2,083
Car (RM5,000/2 x 10/12 months) 6,000
Driver (RM7,200 x 10/12 months) 3,750
Premium Insurance (RM4,500 x 10/12 4,000
months) 1,250
Servant (RM400 x 10 months) Exempted
Fuel (RM1,500 x 10/12 months)
Hospitalisation fees
26,483
Sec. 13(1)c – Accommodation
Defined value
(RM5,000 x 10 months x 4/5) = RM40,000
OR
30% of Sec. 13(1)a
30% x RM143,000 = RM42,900
Lower amount 40,000
Sec13(1)e – Compensation for loss of employment

RM12,000 x 10.5 months 120,000
(-) exemption RM10,000 x 15 years (150,000)
-
Gross income from employment 209,483

ANSWERS  251
TOPIC 6: NON-BUSINESS INCOME

Self-test 1
1. Five types of dividend received by a person which are exempted from tax
under the Act are:
(a) Dividend paid, credited or distributed by a co-operative society;
(b) Dividend paid from exempt income from a unit trust and unit trust
property;
(c) Dividend paid from exempt income from a venture capital company;
(d) Dividend paid from exempt income from an account which enjoyed
tax incentives for resident company under Investment Promotion Act
1986; and
(e) Dividend paid using exempt income from chargeable income existed
in YA 2000 (Prior Year Assessment).
2. Resident individuals are subject to 5% withholding tax on gross interest

income from deposits with licensed banks and finance companies.
However, the following interest income will be exempted from tax by the
Minister of Finance:
(a) Any bank or financed company licensed under Banking and Financial
Institution Act 1989 (BAFIA) or Islamic Banking Act 1983 on saving
or fixed deposit (less than one year) not exceeding RM100,000;
(b) Any registered cooperative society;
(c) Bank Simpanan Nasional;
(d) Bank Pertanian Malaysia;
(e) Lembaga Urusan Tabung Haji; and
(f) Malaysia Building Society Berhad.

252  ANSWERS
3. Matsuko (Singapore) Ltd, is a non-resident company deemed to have

derived the interest income from Malaysia on any one of the following
grounds:
(a) The interest expense is borne by a Malaysian resident company e.g.

Merbuk Sdn Bhd and the loan is used to finance manufacturing
operations in Malaysia – Section 15(b); or
(b) The interest expense is deductible against income accruing in or

derived from Malaysia – Section 15(c).
As such, the interest would be taxed by way of withholding tax of

15% of the gross amount upon paying or crediting the amount of
RM147,500 to Matsuko (Singapore) Ltd.
4. HazimÊs statutory rental income:
Sec. 4(d)- Rental Income
Rental income 26,300

Advance rental 2,500
Deposit (refundable) N/A
28,800
Less: Allowable Expenses
Mortgage Loan Interest 12,200
Quit rent 350
Assessment and rates 750
Penalty for late payment N/A
Cost of tiling cement floor N/A
Total expenses (13,300)
Adjusted rental income 15,500
Accumulated rental loss N/A
Statutory rental income 15,500
5. Maria:
Sec. 4(d): Royalty income
Royalty received RM27,000

(-) exemption (RM20,000)
Maria is entitled for exemption maximum amount of RM20,000, as stated in

Schedule 6, paragraph 32B: exemption in respect of publication of any
literary works.

ANSWERS  253
6. Sec. 4(c): Dividend, Interest or Discount computation
RM
Dividend Income
Celcom Berhad Exempt
Malaysian Building Society Exempt
Singapore's Dividend Exempt
Nil
Interest Income
Convertible loan stock-listed Co. RM 4,000
Unconvertible loan stock-listed Co. Exempt
Savings deposits with licenced bank Exempt
4,000
Total Dividend and Interest 4,000
Self-test 2
1. Derivation of dividend income from Malaysia is based on the residence
status of the company which declared the dividend at the date the
dividend is paid, credited or distributed to the shareholders.
Denso Ltd is a company incorporated in Japan and will only be deemed a

resident in Malaysia for tax purposes in basis year 2014 stating from 1 June
2014 when the director meetings discussed major decisions of the
companyÊs affairs (management and control is held in Malaysia).
Prior to 1 June 2014, Denso Ltd is not a resident in Malaysia, thus the
dividend paid on 15 May 2014 of RM2 million will not be taxable in
Malaysia because it is not derived from Malaysia. Dividend paid on 31
October 2014 of RM3 million will be liable for tax because it is derived from
Malaysia (paid by the resident company). However, since the Malaysian
Government has adopted a single tier tax system, the dividend income
received by Denso Ltd will be exempted.
2. The interest income will be assessed in the basis year 2013 although it is
received in 2014. This is because the interest income first becomes
receivable in year 2013.
However Maryam will be exempted from tax on her interest income

because interest income from any bank or financed company licensed
under Banking and Financial Institution Act 1989 (BAFIA) or Islamic
Banking Act 1983 on savings or fixed deposit (of less than one year) not
exceeding RM100,000 is exempted from tax by the Minister of Finance.

254  ANSWERS
3. Hasni Hassan – Sec. 4(d) – Rental Income Computation
RM RM
Rental income (3,000 x 12) 36,000
Less: Allowable Expenses

Quit Rent 700
Assessment rates 1,500
Insurance Premium on theft and fire 300
Bank interest 7,000
Repair and maintenance of the two houses 700
Total expenses (10,200)
Adjusted rental income 25,800
4. Aina is not liable for tax on the amount of RM5,500. This is because an
income in respect of cultural performance approved by the Minister by a
resident individual for that basis year is exempted under Para 32C,
Schedule 6 ITA 1967.
TOPIC 7: BUSINESS INCOME

Self-test 1
1. The indicator is determining the constitution of trade:
(a) Subject Matter of the Transaction

If the subject matter is treated as a trading stock used for resale, it will
infer that a business has a motive for profit making. Thus, the
proceeds from the sale of it would be subject to income tax.
(b) Intention of the Business Transaction

Where the subject matter (assets) was acquired for the purpose of
profit-making, the trading activity might happen in the future for the
purpose of profit. Thus, a business activity exists.
(c) The Frequency of the Transaction

The repetitive transaction is an evidence of the existence of business
activity or trade. The frequency of transaction on the same kind of
property might be presumed that the taxpayerÊs purpose in
purchasing these properties was to resell for profit. Therefore,
proceeds from the transaction will be taxable.

ANSWERS  255
(d) Length of Ownership

Generally, if an asset is realised within a short period after
acquisition, such realisation of an asset would likely be considered as
constituting a trade.
(e) Nature of Entity

It is easier to infer that the motive of partnership or a company is for
profit making, but to an individual it is hardly known. However, if
the individual registers his business, this would likely be an inference
of a profit making motive.
(f) Alteration to Property

If improvements have been made to the property during the duration
of ownership for the purpose of making it more marketable, such
alteration would constitute as a badge of trade. However, if the
alteration is for the purpose to increase the capital value of the assets,
any gain realised may not be considered as arising from a trade. It is
more to capital gain.
2. It is important to determine the existence of a business because not all

transactions and activities constitute business activity. Some transactions are
just isolated transactions. Thus, any income from the transaction is not a
business income but it is a capital gain. Capital gain will not be subjected to
ITA 1967.
We must determine where the business income is derived from because

only income derived from Malaysia will be liable to Malaysian income tax.
3. It is important for us to determine the date when a business starts. This is

due to the following reasons:
(a) Pre-commencement expense is not deductible (permanent loss);

(b) Capital allowance is only given once the business commences its
activity; and
(c) Selection of basis period (year end of business or calendar year).
4. It is important to determine whether we are running one or two businesses

for utilisation of capital allowance. Capital allowance from one business
cannot be set-off against income from other businesses.

256  ANSWERS
5. The gain of RM75,000 would not be liable to income tax because the
transaction is not a business transaction. The receipt of RM75,000 would
constitute capital gain which is not subjected to income tax.
6. The types of expenses which are prohibited to be deducted from gross

business income would include:
(a) Domestic or private expenses;

(b) Expenditure not wholly incurred in the production;
(c) Capital withdrawn or any sum employed as capital;
(d) Payment to any pension, provident fund or any fund which is not an
approved scheme;
(e) Qualifying mining, agriculture, forest, prospecting and farm
expenditure; and
(f) Expenses to non-resident, where withholding taxes were not
deducted by the payer.
7. Domestic or private expenses are expenses which relates to the ownerÊs or

traderÊs private residence such as owner wages and salary, contribution to
ownerÊs EPF, private telephone bill and others.
8. (a) Deductible expenses, the expenses incurred is for the staff

entertainment; and
(b) Not deductible, as it does not represent maintenance expense and the
roof is the improved one which is permanent in nature. The cost
would be capital in nature and should be classified as capital
expenditure and qualified for capital allowance.
(c) Allowable as it is wholly and exclusively incurred in the production

of income. It is a revenue expenditure.
(d) Not deductible, as fines due to breaking the law are not considered as
trading transaction and thus it is not deductible.

ANSWERS  257
9. Business income for Hazim for the YA 2014.
RM RM
Sec. 4(1)(a) - Business Income
Net profit business 50,000
(Less) Non-business income:
Gross dividend (3,000)
Profit from sale of van (2,000)
Adjusted income 45,000
Add: Balancing charge 800
45,800
Less: Balancing allowance (700)
Capital allowance (2,000)
Statutory business income 43,100
Less: Previous year business losses (max) (43,100)
Adjusted Statutory business income NIL
Business losses carried forward 2,050
10. Business income for Zahar for the YA 2014.
RM RM
Sec. 4(1)(a)- Business Income
Trading business NIL
Income
Restaurant business
Less: Balancing allowance (5,200)
Capital allowance (2,500)
Bookstore Business
Add: Balancing charge 3,600
9,400
Less: Capital allowance (4,700)
Aggregate Statutory business income 12,800
Less: Unabsorbed losses c/f (4,500)

Total Business income 8,300

258  ANSWERS
Unabsorbed capital allowance (RM4,500) can be carried forward to be set

off against trading business income for future year of assessments.
Unabsorbed capital allowance cannot be off set against other business
income.
Self-test 2
1. SallehÊs business income for year assessment 2014.
Net loss for the year (7,554)

Less: Dividend Income 1,800
Gain on sale of office equipment 300
(9,654)
Add back: Non-allowable expenses
Salary – Salleh 10,800 11,800
–SallehÊs son 1,000 nil
Rent, rates and insurance (private medical) 414
Telephone 275
Repair (initial repair) 750
Motor exp: - Loss on disposal 422
Fine for speeding 700
Legal and professional expenses nil
Sundry expenses: – Entertaining supplier (50%) 75
– Donation 400
– Leave passage 2,947
Provision for general debt 200
Lease premium amortisation 700
Depreciation 8,749
27,432
Adjusted business income 17,778
Statutory Business income 16,278

ANSWERS  259
2. Sanjukta Choudry
Chika Chicks
Computation of Statutory Income for the YA 2014
Note RM RM
Section 4(a) Business Income
Net Profit for the Period: 8,337
Add: Costs of sales – Donation 1 700
9,037
Less: Other income
Royalty Income 2 (185)
8,852
Add: Disallowed expenses
Salary to Sanjukta 3 2,500
Salary to SanjuktaÊs husband 3 nil
Repair and maintenance 4 230
Freight charges 6 nil
Leave passage 7 1,168
Motor exp: – Loss on disposal 8 470
– Fine for traffic offences 8 300 4,668
13,520
Less:
Marketing expenses – Double deduction 5 (500)
Less: Capital allowance (166)
TOPIC 8: CAPITAL ALLOWANCE – PLANT AND

MACHINERY
Self-test 1
1. Allowable revenue expenses are deducted in arriving at the adjusted
income, while no deduction is available for qualifying capital expenditure.
Where there is a business source of income, a form of tax relief known as

capital allowance is available in respect of the qualifying capital
expenditure incurred. Capital allowance is made up of initial and annual
allowances. It is deducted from the adjusted income to arrive at the
statutory income.

260  ANSWERS
In the event of non-availability of adjusted income or insufficient adjusted

income, the unabsorbed capital allowance will be carried forward to the
following year of assessment to be set off from the adjusted income of the
same source of business income.
2. In order to qualify capital allowances, the taxpayer must:
(a) Carry on a business;

(b) Have incurred qualifying expenditure;
(c) Use that asset in the business;
(d) Own the asset at the end of the basis period or prior to disposal;
(e) Make an election in writing to claim capital allowances.
3. Initial allowance is claimable on the first year the taxpayer incurred the
qualifying expenditure. Initial allowance claimable is 1/5 or 20% of the
expenditure. Initial allowance is a one-off allowance to be claimed.
Annual allowance is allowance given on every qualified year starting from

the first year the asset is purchased and used until the final year where
capital allowance is given. Annual allowance plus initial allowance is called
capital allowance.
Notional allowance is an annual allowance given to plant and machinery

which are not used for a period of time. This allowance is subjected to a
certain criteria which includes that the plant and machinery must be kept
in good condition even though they are not being used.
4. Unutilised capital allowance available to be carried forward is in

accordance to para 75, Income Tax Act 1967. Where the amount of capital
allowances in any one year exceeds the amount of adjusted income plus
balancing charge for that year, the excess shall be carried forward to the
next year and all subsequent YAs until the excess amount is fully set off
against the same business source.

ANSWERS  261
5.
Office Equipment Car
RM RM
Qualifying expenditure 67,000 50,000* restricted amount
YA 2009 (YE 31/12/2009)
Initial allowance (20%) (13,400)
Annual allowance (10%) (6,700)
YA 2010 (YE 31/12/2010)

YA 2011 (YE 31/12/2011)

YA 2012 ( YE 31/12/2012)
Initial allowance (20%) - (10,000)
Annual allowance (10%) : (20%) (6,700) (10,000)
Residual expenditure 26,800 30,000
YA 2013 (YE 31/12/2013)

Annual allowance (10%): (20%) (6,700) (10,000)
Residual expenditure 20,100 20,000
Y/A 2014 (YE 31/12/2014)

Annual allowance (10%) (6,700) nil
Sales proceeds 45,000

Balancing charge 25,000

262  ANSWERS
Capital allowances for YA 2014:
Office equipment RM6,700

Motor vehicles nil
RM16,700
Balancing charge for YA 2014 = RM25,000
Self-test 2
1. The capital allowance computation should be as follows:
Car Office Equipment Furniture

AA rates 20% 10% 10%
QE - 75,000 - 22,000 - 10,000
YA 2009 - - - - - -
IA - - 4,400 - 2,000 -
AA - - 2,200 (6,600) 1,000 (3,000)
RE - - - 15,400 - 7,000
YA 2010 - - - - - -
IA 15,000 - - - - -
AA 15,000 (30,000) - (2,200) - (1,000)
RE - 45,000 - 13,200 - 6,000
YA 2011 - - - - - -
AA - (15,000) - (2,200) - (1,000)
RE - 30,000 - 11,000 - 5,000
YA 2012 - - - - - -
AA - (15,000) - (2,200) - (1,000)
RE - 15,000 - 8,800 - 4,000
YA 2013 - - - - - -
AA - (15,000) 10% (2,200) 10% (1,000)
RE - Nil - 6,600 - 3,000
YA 2014 - - - - - -
AA - - - (2,200) - (1,000)
RE - - - 4,440 - 2,000

ANSWERS  263
2.
RM
Lorries and van
Qualifying capital expenditure 200,000
Less:
Initial allowance 20% (40,000)
Annual allowance 20% (40,000)
Proton Perdana
Deposit 20,000
Instalments (100/25*8) 32,000
52,000
Qualifying capital expenditure (restricted to) 52,000

Less:
Initial allowance 20% (10,400)
41,600
Disposal (52/120*90,000) (39,000)
Balancing allowance 2,600
3. Machine
YA Qualifying Expenditure RM 100,000 Capital allowance

2010 Initial Allowance 20% (20,000)
Annual allowance 14% (14,000) RM34,000
Residual expenditure RM66,000
2011 Annual Allowance 14% (RM 14,000) RM14,000

2012 Annual Allowance 14% (RM 14,000) RM14,000

2013 Sold 1/4/2013

Sales proceed RM55,000
Balancing charge RM17,000

264  ANSWERS
New Machine
Capital
YA Qualifying Expenditure: (QE)
allowance
2013 Deposit RM20,000
Instalment (RM2500 x 4) RM 10,000
RM30,000
Initial allowance (RM 6,000)

Annual Allowance 14% (RM4,200) RM10,200
Residual Expenditure RM19,800
2014 Instalment (RM2500 x 12) New QE RM30,000

Initial allowance (RM 6,000)
Annual Allowance 14% (RM4,200) RM10,200
RM19,800
Computer
Capital
YA 2012 Qualifying Expenditure: (QE) RM 10,000
allowance
Initial allowance 20% (RM2,000)
Annual allowance 40% (RM4,000) RM6,000
YA 2013 Trade in 30/6/13 RM4,000

Balancing charges/allowances Nil
Since the disposal took place within two years of acquisition, therefore
capital allowance given will be taken back and treated as taxable balancing
charge.

ANSWERS  265
4. Jaya Sdn Bhd
Office Delivery Motor

Projector Computer Printer
Equipment Truck Car
RM RM RM RM RM
Cost 12,000 23,000 120,850 183,050 45,000 8,000
(a) YA2014
RE 7,200 13,800
QPE 120,850 50,000 45,000 8,000
(b) YA2014
IA 20% 24,170 10,000 9,000 1,600

AA 10% 20% 20% 40%
1,200 24,170 10,000 18,000
R.E. 6,000 72,510 30,000 18,000
(c) Disposal assets
R.E. 13,800 6,400

Disposal (26,000) (5,500)
value
Balancing allowance (charge) (12,200) 900
Restricted to actual allowance given (9,200)
(23,000 – 13,800)

266  ANSWERS
TOPIC 9: CALCULATION OF INDIVIDUAL TAX PAYABLE

Self-test 1
1. (a) Medical expenditure for parents is part of allowable deductions but it
is restricted to a maximum amount of RM5,000.
(b) Zakat is a rebate and will be deducted from tax liability.
(c) EPF contribution and life insurance premium are limited to RM6,000.
(d) One needs to identify whether it is a serious disease or not. In this
case, high fever is a serious disease. Therefore, Maya is able to claim
relief on the expenditure incurred. Maximum relief would be
RM5,000.
Total amount of reliefs = RM6,000 + RM4,477 + RM 3,500 = RM13,977
Total of rebate = RM1,423
2. The child relief available for Tengku Salman Al-Farisi would be:
RM
First child: Tengku Addam Al-Farisi 4,000
(restricted to a maximum of RM4,000)
Second child: Tengku Anna Natasya Al-Farisi 4,000
Third child: Tengku Azzuan Al-Farisi -

(married – no child relief)
Fourth child: Tengku Ariss Al-Farisi 5,000

(disabled child)
Fifth child: Tengku Arra Maisara Al-Farisi 1,000

14,000
3. (a) Tax payable = 0
(b) Tax payable for income tax payable of RM25,555.55:
RM
On the first RM20,000.00 300.00
On the next RM5,555.55 @ 6% RM333.33
RM633.33

ANSWERS  267
(c) Tax payable for income tax payable of RM 88,888.88:
RM
On the first RM70,000.00 6,650.00
On the next RM18,888.88 @ 24% 4,533.33
11,183.33
(d) Tax payable for income tax payable of RM 234,779.20:
RM
On the first RM100,000.00 13,850.00
On the next RM134,779.20 @ 26% 35,042.59
48,892.59
(e) Tax payable for income tax payable of RM 333,333.33:
RM
On the first RM100,000.00 13,850.00
On the next RM233,333.33 @ 26% 60,666.66
74,516.66
5. To opt for joint assessment, one should fulfil the following conditions:
(a) Husband and wife living together; wife here means a woman who is
regarded by virtue of any law or custom as the wife of a man or as
one of his wives. The fact that she has gone through any
religious/other ceremony is not important. Living together is based
on "intention" rather than "geographical" concept. A wife is presumed
to live together with husband unless separated by court order, deed
of separation or where separation is likely to be permanent. They
must live together as husband and wife in the basis year and did not
in that basis year cease to live together as husband and wife.
(b) Wife (or husband) must have total income to be aggregated with her
(his) husband (wife).
(c) If wife (or husband) is a non-resident for the year of assessment, she
(he) must be a Malaysian citizen.
(d) Wife (or husband) must make the election to have her (his) income
jointly assessed in his husbandÊs (wifeÊs) name, by completing the
relevant part of his tax return

268  ANSWERS
Self-test 2
1.
Eric Tan
Tax Computation for the Year of Assessment 2014
RM RM
Sec. 4(b): Employment Income
Sec. 13(1)a: Cash

Salary 72,000
Bonus 2014 12,000
84,000
Sec. 13(1)b: Benefit in kind

Utility 4,500
Furniture (RM280 * 12) 3,360
Domestic Servant (RM400 * 12) 4,800
12,660
Sec. 13(1)c: Accommodation
The lower of:
Defined value (RM3000 * 12) or; 36,000
30% from Sec 13(1)a: RM84,000 25,200
Choose the lower amount 25,200
Gross employment income 121,860
Less: Allowable expenses:

Subscription to Engineer's Institute 1,000
Rental paid 6,000 (7,000)
Adjusted employment income 114,860
Sec 4(c): Dividend, Interest or Discount
Dividend Income
Singapore's Dividend Exempt
Interest Income
Convertible loan stock-Listed Co. 400
Savings deposits with licensed bank Exempt
Total Dividend and Interest 400
Sec. 4(f): Other Income

Lottery winning Non
taxable
Total Aggregate Income 115,260

ANSWERS  269
Less: Donation: Medical equipment (RM25,000) (20,000) Max

Total Income 95,260
Less: Reliefs:
Self 9,000
EPF + Premium for Life Insurance 6,000 (Max)
Insurance for education and medical
His children 3,000
On his brother Not
allowed
Medical expenses:
Himself, wife and children Not (Not for
allowed critical
disease)
His parent 4,800
Supporting equipment 5,000 (Max)
Child relief:
1st. James (disable) 5,000
2nd. Joanna (married) Not
available
3rd. Jason 1,000
Personal PC 3,000 (Max)
(36,800)
Tax liability
On the next on RM 8,460 @ 19% 1,607.4
Tax Payable 4,457.4
Jane Tan
RM RM
Sec 4(a): Business Income
Net profit 29,200

Add: Non-allowable Expenses:
Jane's salary 5,000
50% Entertainment to clients 1,300
Depreciation 7,200
Donation 2,000
15,500
Adjusted business income 44,700

270  ANSWERS
Sec 4(b): Employment Income
Sec. 13(1)a: Cash

Salary 60,000
Gratuity (ill health) Exempt
60,000
Medical expenses RM20,000 Exempt
Gross employment income 60,000
Less: Allowable expenses Nil
Sec. 4(c): Dividend, Interest or Discount
Dividend Income
Celcom Berhad Exempt
Malaysia Building Society Exempt
Nil
Interest Income
Saving deposit in M'sian Bank Exempt
Unconvertible loan stock- listed Co. Exempt
Convertible loan stock-listed Co. 700
700
Total Dividend and Interest 700

ANSWERS  271

Less: Donation: Business (2,000)
Personal; cash (500)
Books Not
allowed
Total Income 98,700
Less: Reliefs:
Self 9,000
Insurance for education and medical 1,200
Child relief: Sabel 1,000 (Max)
(17,200)
Tax Liability
On the next on RM 11,500 @ 24% 2,760
Tax Payable 9,410

272  ANSWERS
2.
Zainal Awang
RM RM
Sec. 13(1)a: Cash

Salary from January to March 2014 15,000
Pension Exempt
Retirement gratuity Exempt
Salary from May to December 2014 48,000
Entertainment allowance (8 months) 4,000
Medical and dental expenses Exempt
67,000
DriverÊs salary (RM600 * 8) 4,800
Fuel expense (RM1500/2) 750
Car (RM5000/2) 2,500
8,050
Total employment income 75,050
Less: Allowable expenses

Entertainment allowance (2,667)

Dividend Income
Pioneer dividend from Pioneer Status Bhd Exempted
Total Dividend and Interest Nil

Less: Donation: Cash (6,368)
Total Income 66,015

ANSWERS  273
Less: Reliefs:
Self 9,000
Medical expenses for his parent 5,000 (Max)
Child relief:
1st. 1,000
4th. 1,000
5th. 1,000
Books 480
(26,980)
Tax Liability
On the next on RM 4,035 @ 11% 443.85
1,643.85
Less: Rebate
Zakat and fitrah (4,780 )
Tax Payable Nil

274  ANSWERS
Zaidah
RM RM
Sec. 13(1)a: Cash

Salary (4,800 * 12 months) 57,600
Travelling allowances (RM400 * 12) 4,800
Entertainment allowance (RM500 * 12
months) 6,000
Total employment income 68,400
Entertainment allowance Max (6,000)
Travelling allowance (3,200)
Dividend Income
From Kerjasama Cooperative Society Exempt
From Renong Bhd (gross) Exempt
Total Dividend Nil
Sec. 4(d): Rental Income
Rental per month (RM3,200 x 12 months) 38,400

Non
Rental deposit: Refundable taxable
38,400
Assessment and quit rent 2,800
Fire and theft insurance 1,500
Renovation cost (Not allowed) -
Repainting 3,500
Replacement of broken window 1,800
(9,600)
Total Rental income 28,800
Less: Donation: Cash (3,000)
Total Income 85,000
Less: Reliefs:
Self 9,000

ANSWERS  275

Supporting equipment for disable parents 5,000 (Max)
Medical expenses for his parent 2,200 (Max)
Child relief:
2nd. 4,000
3th. 4,000
Books 700 (Max)
(33,700)
Tax liability
Next on RM1,300 @ 19% 247
3,097
Less: Rebate
Zakat and fitrah (3,200)
Tax Payable nil
TOPIC 10: TAXATION ON PARTNERSHIPS

Activity 1.1
Cheryl & Daniel Auditing
RM RM
Net profit per partnership account 59,500
Add:
Non allowable expenses - Depreciation 20,000
PartnerÊs salaries 30,000
Interest on Capital 2,500
PartnerÊs Private Expenses 8,000 60,500
PROVISIONAL ADJUSTED INCOME 120,000
Less:
PartnerÊs salaries 30,000
Interest on Capital 2,500
PartnerÊs Private Expenses 8,000 (40,500)
DIVISIBLE INCOME 79,500

276  ANSWERS
Cheryl Daniel
(RM) (RM)
Share of divisible income (50% each) 39,750 39,750
Add: Salary 20,000 10,000
Interest 1,000 1,500
Private expenses 3,000 5,000
ADJUSTED INCOME 63,750 56,250
Less: Capital Allowance (10,000) (10,000)
STATUTORY INCOME 53,750 46,250
Activity 1.2
RM RM
Add: PartnersÊ salary 63,000
PartnersÊ interest on capital 27,500
Depreciation on fixed asset 25,800 116,300
Provisional Adjusted Income (PAI) 446,300
Less: PartnersÊ salary 63,000
PartnersÊ interest 27,500 (90,500)
355,800
Less: Other income (330,000)
Divisible Income 25,800
Divisible Income for 6 months 12,900
Allocation:
For the period 1.1.2014 – 30.6.2014 (6 months)

Salary Interest Divisible Total
on cap. Income
Puteri (1/3) 9,000 5,000 4,300 18,300
Anita (2/3) 18,000 7,500 8,600 34,100
27,000 12,500 12,900 52,400

ANSWERS  277
For the period 1/7/2014-31/12/2014 (6 months)

Anita (1/2) 18,000 7,500 6,450 31,950
Johan (1/2) 18,000 7,500 6,450 31,950
36,000 15,000 12,900 63,900
PartnersÊ statutory Income – Year of assessment 2014
Puteri (Basis period 1/1/ 2014 -30/6/

2014)
Statutory income 18,300
Anita (basis period 1/1/2014 – 31/12/

2014)
Adjusted income (34,100 + 31,950) 66,050
Less: Capital allowance (1/2) 45,850
Johan (basis period 1/7/ 2014-31/12/

2014)
Less: Capital allowance (1/2) (20,200)
Note: Where there is a change of partnership, capital allowances are only given to the
partners at the end of the relevant basis period.
Self-test 1
1. According to Section 2 Income Tax Act 1967, a partnership is defined as an

association of any kind between parties who have agreed to combine any of
their rights, powers, property, labour or skill, for the purpose of carrying
on a business and sharing the profits there from.
In general terms, a partnership is defined as a legal relationship which

subsists between two or more persons who carry on a business in common
with the objective of making a profit.

278  ANSWERS
2. Types of partners and how it is assessed:
(a) Full Partner

A full partner participates in the conduct of the partnership business
and shares in its profits and losses.
The income of a full partner from a partnership business is taxed as a

business source under Section 4(a) ITA 1967.
(b) Salaried Partner

A salaried partner is merely an employee within the partnership as
he does not share the losses of the partnership although he may share
the profits or may receive a commission. He/she does not have any
right to direct the partnership business or any title to the goodwill of
the partnership.
The income of a salaried partner from a partnership business is taxed

as an employment source under Section 4(b) ITA 1967.
(c) Sleeping Partner

A sleeping partner is not involved in the conduct of the partnership
business. He/she receives a share of the profits by virtue of his
capital contribution to the partnership.
The income of a sleeping partner is taxed as a business source under

Section 4(a) ITA 1967.
3. The definition in the Income Tax Act 1967 indicates that in order for a
partnership to exist, there must be:
(a) An association of some kind;
(b) An agreement (not necessarily in writing) between the persons to

combine their rights, powers, property, labour or skill; and
(c) A view to share the profits from the business.
4. Assessment of partnership is as follows:
(a) A partnership is not a legal entity (i.e. a person) and is thus not a
chargeable person under the ITA 1967.
(b) The partners of the partnership are each chargeable for tax on their
share of the partnership profits as computed under the ITA 1967.
ANSWERS  279
(c) The precedent partner is responsible for filing the partnership return.
(d) In the absence of the precedent partner, any attorney, agent, manager
or factor of the partnership is required to file the partnership return.
5. The treatment of partnership losses are as follows:
(a) Divisible loss will be allocated to respective partners based on profit

sharing ratio;
(b) Current year business loss can be set off/utilised against other
business and non-business income; and
(c) Unabsorbed losses can be carried forward and utilised against future
business income.
Self-test 2
1. Ahmad and Abdul:
RM RM
Net profit per accounts 50,000
Add:
PartnersÊ salaries 10,000
PartnersÊ interest on capital 3,500
Depreciation 3,000 16,500
Provisional Adjusted Income 66,500
Less:
PartnersÊ salaries & interest on capital (13,500)
Divisible Income 53,000

280  ANSWERS
The partnersÊ statutory income from the partnership are as follows:
Ahmad Abdul Total

(RM) (RM) (RM)
Salary 5,000 5,000 10,000
Interest on capital 2,500 1,000 3,500
Divisible income 26,500 26,500 28,000
Adjusted Income 34,000 32,500 41,500
Less: capital allowances (1,500) (1,500) (3,000)
Statutory income 32,500 31,000 38,500
The donations would be apportioned equally among the partners, i.e.

RM250 each and would be deducted against each partnerÊs aggregate
income in arriving at the total income.
2. ABC Enterprise
Tax computation for YA 2014:
RMÊ000 RMÊ000
Net profit before tax 730
Add Depreciation 52
Interest on partnersÊ capital 25
PartnersÊ salaries 120
197
Provisional adjusted income 927
Less Interest on capital 25
PartnersÊ salaries 120
(145)
Divisible income 782
A B C
RMÊ000 RMÊ000 RMÊ000
Share of divisible income 391 234.6 156.4
Interest on capital 20 5 -
PartnerÊs salary 24 36 60
Adjusted income 435 275.6 216.4

ANSWERS  281
3. Rafidah, Yuen and Kamala:
RM RM
Net profit per account 134,000
Add:
Depreciation 6,000
Renovation costs 2,000
General provision for bad debts 7,000
Donations 2,000
Interest on capital 6,000
PartnersÊ salaries 60,000 83,000
Less:
PartnersÊ salaries 60,000 (66,000)
Divisible income 151,000
Allocated to partners as follows:
Rafidah Yuen Kamala Total

RM RM RM RM
Interest 1,200 1,800 3,000 6,000
Salaries 20,000 22,000 18,000 60,000
Divisible income 60,400 60,400 30,200 151,000
Adjusted income 81,600 84,200 51,200 217,000
Capital allowances 1,000 1,000 500 2,500
Approved donations 800 800 400 2,000

282  ANSWERS
4. Khairy, Sammy & Leong:
(a) Computation of provisional adjusted business income

RMÊ000
Net profit 255
Add: Non-allowable expenses
Depreciation 30
Approved donation 15 45
Partnership expenses
Salaries 168
Interest on capital 255 423
723
Less: Investment income
Rental (120)
Provisional Adjusted Income 603
(b) Divisible income of business

RMÊ000
Provisional adjusted business income 603
Less: Partnership expenses (423)
Divisible Income 180
(c) Khairy Sammy Leong

RM RM RM
Allocation of business
Divisible income 30,000 60,000 90,000
Salaries 45,600 50,400 72,000
Interest on capital 60,000 140,000 55,000
Adjusted Income 135,600 250,400 217,000
Less: Capital allowance (15,000) (30,000) (45,000)
Statutory income for business 120,000 220,400 172,000
Less: Unabsorbed loss (90,600) (60,400) (62,000)
30,000 160,000 110,000
Add: Rental income 20,000 40,000 60,000
Aggregate income 50,000 200,000 170,000
Less: Approved donation (2,500) (5,000) (7,500)
Total income 47,500 195,000 162,500

ANSWERS  283
5. Raja & Suki:
2 (a) Partnership (1/1/2014 to 31/12/ 2014) YA 2014
RM RM
Net Profit per account 347,500
Less:
Dividend income (separately assessed) 3,800
343,700
Add:
Depreciation 31,100
Approved donations 2,900
PartnersÊ private and domestic expenses 97,000
(RM44,400 + RM52,600)
403,500
Provisional adjusted income 747,200
Less:
PartnersÊ private and domestic expenses 97,000
369,500
Divisible income 377,700
6 months = RM377,700/2 188,850

284  ANSWERS
(b) Computation of each partnerÊs income from the partnership for the
year ended 31 December 2014:
Raja Suki Total

1/1/2014 to 30/6/ 2014 (6 months)
Profit sharing ratio 50% 50%
RM RM RM
Private expenses (44,400 x 6/12) 22,200 - 22,200
Domestic expenses (52,600 x 6/12) - 26,300 26,300
Salary (150,000/2; 120,000/2) 75,000 60,000 135,000
Interest on capital (1,000/2; 1,500/2) 500 750 1,250
Divisible income (188,850 x 0.5) 94,425 94,425 188,850
Adjusted income (6 months) 192,125 181,475 373,600
Approved donations (May 2014) (2,900/2) 1,450 1,450 2,900
1/7/2014 to 31/12/ 2014 (6 months)

Profit sharing ratio 30% 70%
RM RM RM
Private expenses 22,200 - 22,200
Domestic expenses - 26,300 26,300
Salary 75,000 60,000 135,000
Interest on capital 500 750 1,250
Divisible income (188,850 x 0.3; 188,850 x 0.7) 56,655 132,195 188,850
Adjusted income (6 months) 154,355 219,245 373,600
Adjusted income year ended 31/12/2014 346,480 400,720 747,200

Less: Capital allowance (9,750) (22,750) (32,500)
Statutory income 336,730 377,970 714,700
Add: Non-business income
Dividend income (July 2014) 1,140 2,660 3,800
Rental Income - 8,800 8,800
Aggregate income 337,870 389,430 734770

MODULE FEEDBACK
MAKLUM BALAS MODUL
If you have any comment or feedback, you are welcome to:
1. E-mail your comment or feedback to modulefeedback@oum.edu.my
OR
2. Fill in the Print Module online evaluation form available on myINSPIRE.
Thank you.
Centre for Instructional Design and Technology

(Pusat Reka Bentuk Pengajaran dan Teknologi )
Tel No.: 03-27732578
Fax No.: 03-26978702


BBTX4103 Taxation I

Загружено:

Сведения о документе

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

BBTX4103 Taxation I

Загружено:

Авторское право:

Доступные форматы

OUM Business School

Copyright © Open University Malaysia (OUM)

Copyright © Open University Malaysia (OUM)

Module Writers: Yusniyati Yusri

Noor Sharoja Sapiei

Moderators: Noor Sharoja Sapiei

Mohamad Afzhan Khan Mohamad Khalil

Developed by: Centre for Instructional Design and Technology

First Edition, August 2007

Copyright © Open University Malaysia (OUM)

Topic 1 Introduction to Malaysian Taxation 1

Topic 2 Malaysian Tax Administration 22

Copyright © Open University Malaysia (OUM)

Topic 3 Scope of Charge 48

Topic 4 Employment: Acquisition 65

Topic 5 Employment: Basis Period 81

Copyright © Open University Malaysia (OUM)

Topic 6 Non-Business Income 101

Topic 7 Business Income 134

Copyright © Open University Malaysia (OUM)

7.6 Adjusted Income and Statutory Income of Business 142

Topic 8 Capital Allowance ă Plant and Machinery 159

Topic 9 Calculation of Individual Income Tax Payable 179

Copyright © Open University Malaysia (OUM)

9.6 Dividend Credit 193

Topic 10 Taxation on Partnerships 208

Copyright © Open University Malaysia (OUM)

Copyright © Open University Malaysia (OUM)

Copyright © Open University Malaysia (OUM)

COURSE GUIDE DESCRIPTION

As an open and distance learner, you should be acquainted with learning

Copyright © Open University Malaysia (OUM)

Table 1: Estimation of Time Accumulation of Study Hours

1. Explain the tax system in Malaysia;

3. State the types of business and non-business income;

4. Identify the types of deductible expenses, reliefs and rebates; and

5. Calculate the income tax payable for individual taxpayers.

Copyright © Open University Malaysia (OUM)

Topic 5 describes employment income, but at this point, further discussion is

Copyright © Open University Malaysia (OUM)

TEXT ARRANGEMENT GUIDE

Self-Check: This component of the module is inserted at strategic locations

Activity: Like Self-Check, the Activity component is also placed at various

References: The References section is where a list of relevant and useful

Copyright © Open University Malaysia (OUM)

Income Tax Act 1967.

Jeyapalan Kasipillai. (2010). A guide to Malaysian taxation (1st ed.).

Public Rulings of Inland Revenue Board.

Veerinderjeet Singh. (2005). Malaysian taxation: Administrative and technical

Copyright © Open University Malaysia (OUM)

TAN SRI DR ABDULLAH SANUSI (TSDAS) DIGITAL

Copyright © Open University Malaysia (OUM)

Figure 1.1: Taxes

Copyright © Open University Malaysia (OUM)

In this topic, we will discuss the definition of tax in general, historical

1.1 WHAT IS TAX?

Definition of Tax by Oxford Dictionary:

Copyright © Open University Malaysia (OUM)

Besides that definition, you could also define tax as:

„A compulsory exaction of money by a public authority for public purposes

The better way to understand the meaning of taxation is by examining the

Figure 1.2: Six characteristics of taxation

Below are the explanations of the tax characteristics:

(a) A Compulsory Payment