Lecture 7

Tax Planning: Concept, Planning and Calculation

LEGISLATION
Income Tax Act 1967 Real Property Gains Tax Act 1976 Lembaga Hasil Dalam Negeri (LHDN) Inland Revenue Board (IRB)
Corporatised on March 1, 1995

PERSONAL TAXATION
Employment Sole Proprietorship Partnership

SCOPE OF CHARGE
Territorial concept Income of any person
Accruing in (right to receive) Deriving from (who pays you government and state government, payment from tax resident, charged as outgoing expenses) Received in Malaysia From outside Malaysia

DEFINITION OF PERSON
Individual Company Body of persons Corporation sole Excluding partnership only on personal income

INCOME RECEIVED IN MALAYSIA FROM OUTSIDE MALAYSIA

Taxable Income
Resident individual/body of persons/corporation Resident companies involving 4 specific industries: banking, insurance, shipping and air transport

Tax Exempted
Non-resident (under Schedule 6 para. 28) Resident company - income tax (exemption) Unit Trusts Offshore Companies (LOBATA 1990)

RECENT TAX DEVELOPMENTS

Historically
Preceding year basis (PYB) 1/1/98 to 31/12/98 Year of assessment 1999

CHANGE OF ASSESSMENT SYSTEM

Preceding year basis (PYB) to current year basis (CYB) Effective date
Year ended 31/12/2000 Financial year in 2000

BASIS PERIOD
Current year basis Calendar year 1/1/2000 to 31/12/2000
Year of assessment 2000

Financial year 1/7/1999 to 30/6/2000

Year of assessment 2000

BASIS YEAR 2000

Current year basis (CYB) 1/1/1999 to 31/12/2000
Year of assessment 2000

1/1/2000 to 31/12/2000
Year of assessment 2000

TAX IMPLICATIONS SHIFT TO CYB

Year of assessment 2000
2 basis periods

Basis period in 1999

Tax waiver year Income tax (amendment) Act 1999

TAX WAIVER YEAR

Income earned in 1999
No tax payable

Exceptions
Dividend Payment subject to withholding tax Non-citizen/non-resident individuals who commence or cease employment in 1999

SELF- ASSESSMENT
Effective Date
1 January 2000 Year of assessment (YA) 2001

YA 2001 - Companies (220,000) YA 2004 - Business, partnership and cooperatives (800,000) YA 2004 Employment (1,800,000)

CLASSES OF INCOME SECTION 4 (RESIDENTS OR NON-RESIDENTS)

a) b) c) d) e) Business Employment Dividends, interest or discounts Rents, royalties or premium Pensions, annuities or other periodical payments f) Gains or profit outside of (a) to (e)

SPECIAL CLASSES OF INCOME SECTION 4A

Recipients: Non-residents Withholding tax payment/credit Services
use of property/rights Installation/operation of plant + machinery

Technical advice/services/assistance/management/ administration Rent movable property

PAYMENTS TO NON-RESIDENT WITHHOLDING TAX

% Technical Fee 10

Royalty
Interest Management Fee

10
15 10

Contract Payment
Public Entertainer Rental or movable property

15
15 10

INCOME VS CAPITAL
Income Revenue Tax exempt - Revenue/capital -Taxable

- Tax exempt
- Schedule 6 - Gazette orders

Capital

- Not taxable
- Real property gains tax (RPGT)

Combined Assessment
RM

Separate Assessment Husband RM 8,000 Wife RM 8,000

Personal Relief Wife/ Husband relief Alimony Payment

8,000

3,000

N/A

N/A

N/A

3,000

N/A

Combined Assessment RM

Separate Assessment Husband RM 800 Wife RM

Child Relief

800

Enhanced Relief Alimony Payment

3,200

3,200

5,000

5,000

EPF + Insurance Medical/Edu. Insurance EPF Annuity Scheme

Combined Separate Assessment Assessment RM Husband Wife RM RM 5,000 5,000 5,000 3,000
1,000

3,000
1,000

3,000
1,000

Combined Separate Assessment RM Medical exp. - parents - serious diseases - check-up Disabled Person Supporting Equipment * # Husband Wife

5,000 5,000* 500 5,000 5,000#

5,000 5,000 500 5,000 5,000

5,000 5,000 500 5,000 5,000

self, spouse + child self, spouse, child + parent

COMPUTATION OF TAX PAYABLE

Tax Payable
= Chargeable Income X Relevant Tax Rate

Tax Rates
Resident individual/club/trade association/ co-operative society
Scale rates : 0% to 28 %

Company Trust 28 % Non-resident individual 28 % (total income = chargeable income)

TAX COMPUTATION FORMAT

Business Employment Investment Income Other Sources Aggregate Income Less: Basis Year Loss Approved Donation/ Subscription TOTAL INCOME X X X X XX (XX) (X) XX TOTAL INCOME Less: Personal Reliefs Chargeable Income TAX PAYABLE Less: Rebates Less: DTA Reliefs Sec 110 Set-off TAX PAYABLE/REPAYABLE XX (X) XX XX (X) XX (X) (X) XX

Approved Study Books + Periodicals

Combined Separate Assessment Assessment RM Husband Wife RM RM 5,000 5,000 5,000 500 500 500

PERSONAL REBATES
Set-off against tax payable Chargeable income < RM35,000 Single (RM350) Separate Assessment
Husband (RM350) Wife (RM350)

PERSONAL REBATES
Combined assessment
Husband (RM350) Wife (RM350)

Personal Computer
RM400 (every 5 years)

Employment Levy Religious Payments

Zakat/Fitrah

DERIVATION SECTION 13(2)

Exercised in Malaysia Leave attributable to employment in Malaysia Overseas duties incidental to employment in Malaysia Director of resident company Employment aboard ship/aircraft

TYPES OF EMPLOYMENT INCOME

Salary, wages, fee, bonus, remuneration, leave pay, commission, gratuity, perquisite, allowance Benefits-in-kind Living accommodation Non-approved pension scheme/provident fund Compensation payment

GRATUITY
Tax exempt
ill health 55 years + 10 years of service

Taxable
Period of employment 6 years of assessment Whichever is shorter

ASSESSMENT - GRATUITY
Gratuity RM60,000 Employment period
5 years RM12,000/ for each YA

Employment period
7 years RM10,000 for each YA

SHARE OPTIONS
Not-Taxable
Option not exercised

Taxable
Option exercised Option date Difference between market value and option market

BENEFITS-IN-KIND
Motor vehicle
Private usage - RM1,200 to RM25,000 Fuel RM600 to RM3,000

Driver RM3,600 Accommodation (30% of actual) Household furnishings

Barely-furnished, semi-furnished, fullyfurnished, service charges, utilities payment etc.

LIVING ACCOMMODATION
Job requirement
Tax exempt

Hotel/hostel
3% X Sec 13 (1) (a)

Apartment/house
Lower of
30% Sec 13(1)(a) or Actual rental (unfurnished accommodation)

Mobile phone, gardener, servants, school/tuition fees, club membership, staff loan

LIVING ACCOMMODATION
Salary RM100K Defined value unfurnished : RM36K/24K Assessability of Benefits Salary RM100K Lower of
30% X RM100K or

RM36K/24K

Gross Income

RM30K/24K RM130K/124K

TAX EXEMPT - BIK

Discounted goods and services Subsidised food and drinks Free transport Child care benefits Medical/dental Leave passage Group insurance policy

APPROVED FUND/SCHEME
EPF Contributions
11% (Employee) 12% (Employer) Tax deductibility 19%

Reduction in Cash Remuneration

Lower tax liability Cash flow Time value of money

RESIDENT STATUS INDIVIDUAL :SECTION 7

> 182 days <182 days but linked to another period of 182 days or more
Temporary absence
Incidental to employment, conference/study/seminar, ill health, social visits (<14 days)

90 days immediately preceding 3 years < 90 days

immediately following year resident Immediately preceding 3 years - resident

SECTION 7(1)(B)
Aug.1999 A Aug. 2000 B

Period A - < 182 days Period B - > 182 days Period A link to Period B Link - 31 Dec. to 1 Jan. in Malaysia Period A qualifies as resident

SECTION 7(1)(B)
April 1999 A March 2000 B

Period A - > 182 days Period B - < 182 days Period A link to Period B Link - 31 Dec. to 1 Jan. in Malaysia

Period B qualifies as resident

SECTION 7(1)(C)
YA 1999 1998 1997 1996 1995 Qualifies as resident

150 days 92 days RESIDENT 15 days 138 days

SECTION 7(1)(D)
YA 1999 1998 1997 1996 1995 Qualifies as resident

Resident 63 days Resident Resident Resident

CAPITAL GAINS
Real Property Gains Tax (RPGT) Act, 1976 Effective date 7/11/1975 Disposal of real property or shares in a real property company Replaced Land Speculation Tax Act 1974

ACQUISITION/DISPOSAL DATE
Acquisition date = disposal date Written agreement (S & P) Completion date
Asset transferred Full consideration paid or received

Conditional contract

CHARGEABLE GAIN OR ALLOWABLE LOSS

Disposal Price > Acquisition Price = Chargeable Gain

Disposal Price < Acquisition Price = Allowable Loss

TAX RATES
C/I/NCo NC/NPR % %

Year of Disposal (within years) 2

3 4 5 6th year and thereafter Company/Non-citizen/Non-PR Malaysian

30 20 15 5

30 30 30 30

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