Malaysian Tax System PDF

Overview of the Malaysian tax system Topic list 1 Introduction 2 Direct and indirect taxes 3 Scope of charge – the Income Tax Act 1967 4 Sources of income 5 Rates of income tax 6 Self-assessment system 1  Study guide...

Overview of the Malaysian tax system Topic list 1 Introduction 2 Direct and indirect taxes 3 Scope of charge – the Income Tax Act 1967 4 Sources of income 5 Rates of income tax 6 Self-assessment system 1  Study guide Intellectual level A(1) The overall function and purpose of taxation in a modern economy (a) Describe the purpose (economic, social etc) of taxation in a modern 2 economy A(2) Different types of taxes (a) Identify the different types of capital and revenue tax 1 (b) Explain the difference between direct and indirect taxation 2 A(3) Principal sources of revenue law and practice (a) Describe the overall structure of the Malaysian tax system 1 (b) State the different sources of revenue law 1 1 Introduction Revenue collection from income tax is one of the ways in which the Malaysian Government could obtain a source of revenue from which the Government could budget its annual expenditure. Tax laws are designed and used in the carrying out fiscal and economic policies of the Malaysian Government. Direct taxes including income tax contribute more than half of the national revenue. Indirect taxes including sales tax, service tax and custom duties also contribute about one-third of the total revenue. The balance is from non-tax revenue collections. It is therefore important to understand the sources of revenue law together with the legal principles that the Director General of the Inland Revenue (DGIR) and the courts apply in resolving tax issues or disputes. (a) Statute law The laws are enacted by parliament and contained in statute, for example the Income Tax Act (ITA) 1967, Real Property Gains Tax Act (RPGTA) 1976, Regulations or Orders made under such Acts. (b) Case law These are unenacted laws created by the decisions of courts. They have persuasive authority though not binding on the Malaysian courts. Those decisions can be used as reference in the interpretation of the provisions of the ITA 1967. If the language used by a statute is ambiguous, the court would adopt the construction of that language which is favourable to the taxpayer – National Land Finance Co-operative Society Ltd v DGIR. In taxation, you have to look simply at what is clearly said. There is no room for intendment; there is no equity about tax; there is no presumption as to a tax; you read nothing in; you imply nothing, but you look fairly at what is said clearly and that is the tax. What was meant is that the words used in the Act are all that you need to consider. You must not try to look behind the words to give them a different meaning that might be more acceptable to the taxpayer or to the tax authorities – CIR v Granite City Steamship Co Ltd. (c) Informal law – concessions These are practices of the DGIR or also known as the Inland Revenue Board (IRB) that they administer and apply the tax laws through specific guidelines and public rulings. These are known as informal law where the taxpayers or tax practitioners may accept or challenge the DGIR practices or rulings. 2 1: Overview of the Malaysian tax system  In cases where the law is clear but the tax authorities considered it unfair to taxpayers or its application involves administrative difficulties, the DGIR may not enforce the strict provisions of the law. These are known as concessions and have no legal effect – that is, the court has to apply the strict law instead of DGIR practices. (d) Informal laws – public rulings These are rulings issued by the DGIR on interpretation of the provisions of tax laws. It is binding on the IRB where tax officers need to follow those tax treatments stated in the public rulings. (e) Advance rulings A taxpayer may request for an advance ruling from the DGIR on the application of any provision of the ITA 1967 to a particular transaction or arrangement. Advance rulings are binding on the applicant and the DGIR. Application (based on actual facts and not on assumptions) is to be made in a prescribed form together with a fee chargeable for each application. 2 Direct and indirect taxes MALAYSIAN TAXATION Direct taxes Indirect taxes For example: For example: Income tax Sales tax Stamp duty Service tax Real property gains Custom duties Direct taxes Taxpayer Tax Collector Pay income tax (Income Tax Collection Office) Indirect taxes Registered Person Pay service tax Collected and remit Customer Royal Malaysian Indirect payment by a customer Custom Figure 1.1: Direct and indirect taxes 1: Overview of the Malaysian tax system 3  3 Scope of charge – the ITA 1967 Derived and remittance basis. A tax 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. Income arising from sources outside Malaysia known as foreign income and received in Malaysia by any person in Malaysia is chargeable to income tax unless exempted under schedule 6 of the ITA 1967 or Income Tax (Exemption) Order. The scope of charge to Malaysian income tax is based on derived and remittance basis. World-scope basis Resident companies that carry on specialised business such as banking, insurance, sea and air transport are charged to income tax on a different basis. Such resident companies are taxed on income wherever derived known as world-scope basis. Remittance of foreign income from 1 January 2022 Effective from 1 January 2022, income arising from sources outside Malaysia known as foreign income and received in Malaysia by any person who is not resident in Malaysia are exempted from income tax under paragraph 28 Schedule 6 ITA 1967. Foreign income received in Malaysia by any persons resident in Malaysia are chargeable to income tax unless eligible for exemption from income tax under the Income Tax (Exemption) Order. Income Tax (Exemption) Order The following Exemption Orders were gazetted on 18 July 2022 and deemed to have effect from 1 January 2022 until 31 December 2026: (a) Income Tax (Exemption) (No. 5) Order 2022- PU (A) 234 A qualifying individual is exempted from the payment of income tax in respect of the gross income from all sources of income, excluding a source of income from a partnership business in Malaysia, which is received in Malaysia from outside Malaysia in the basis period for a year of assessment. The income exempted in the immediate preceding paragraph shall have been subjected to tax of a similar character to income tax under the law of the territory where the income arises and complies with the conditions specified in the Guidelines on tax treatment in relation to income which is received from abroad issued by the IRB. (b) Income Tax (Exemption) (No. 6) Order 2022- PU (A) 235 This Exemption Order shall not apply to a person carrying on the business of banking, insurance or sea or air transport. A qualifying person is exempted from the payment of income tax in respect of the gross income of that qualifying person from dividend income which is received in Malaysia from outside Malaysia in the basis period for a year of assessment. The dividend income exempted in the immediate preceding paragraph shall: (i) have been subjected to tax of a similar character to income tax under the law of the territory which the income arises; and (ii) the highest rate of tax of a similar character to income tax charged under the law of the territory which the income arises at that time is not less than 15%. Dividend income is regarded as having been subjected to tax of a similar character to income tax, whereby the dividend income received in Malaysia by the qualifying person complies with the conditions imposed by the Minister as specified in the guidelines on tax treatment in relation to income which is received from abroad issued by the IRB. The IRB’s Guidelines imposed additional an requirement that a qualifying person must comply with the economic substance requirements to be eligible for exemption. 4 1: Overview of the Malaysian tax system  A qualifying person means a person resident in Malaysia who is: (i) an individual who has dividend income received in Malaysia from outside Malaysia in relation to a partnership business in Malaysia; (ii) a limited liability partnership which is registered under the Limited Liability Partnerships Act 2012; or (iii) a company which is incorporated or registered under the Companies Act 2016. Technical Guidelines issued by the IRB Technical Guidelines on tax treatment in relation to income received from abroad issued by the IRB on 29 December 2022 can be viewed at: https://www.hasil.gov.my/en/legislation/guidelines. Labuan entity Income tax shall NOT be charged in respect of a Labuan entity carrying on a Labuan business activity in or from or through Labuan. Derived and remittance charging section The scope of charge under derived and remittance charging section under the ITA 1967 can be analysed as detailed in sections 3.1 to 3.5 of this chapter. 3.1 How is income being taxed? The basis of taxation is based on a year of assessment. It is taxed on a current year basis. 3.1.1 Example Income earned/received in Malaysia in the Chargeable to income tax for the relevant basis relevant year period for a year of assessment 2023 2023 2024 2024 Current year basis of assessment means income derived in a current year will be assessed to tax in the same year. It is chargeable to income tax based on a taxable period known as basis period. 3.2 What is taxed? Receipts or gains, which are income or revenue in nature, would be chargeable to tax under the ITA 1967. Those which are capital in nature are excluded. Capital gains in respect of disposal of real property are charged to tax under the RPGTA 1976. The expression 'income' is not defined under the ITA 1967. In CIT v Shaw Wallace, income was defined as: 'Periodical monetary returns coming in with a sort of regularity, from a definite source...excluding anything in the nature of a mere windfall.' The above definition can be likened to: Fruit (Income) Fruit (Income) Tree (Source Tree of income (Source is capital) of income is capital) Figure 1.2: Source and income 1: Overview of the Malaysian tax system 5  Generally, if the receipt/gains are connected with circulating capital of a trade, it has been held to be income, and if connected with fixed capital, it may be capital in nature. Circulating capital is what the owner makes profit with by parting with it and letting it change masters; for example, trading stock or inventories. Fixed capital is what they turn into profit by keeping it in their possession; for example, machinery. 3.3 Who is taxed? The word 'person' refers to the chargeable person and is defined to include: A company A body of people A corporation sole An individual A limited liability partnership 3.4 Concept of a source or where the source arises To be subject to Malaysian income tax, the source of income must be in Malaysia or must be located in Malaysia. Foreign income not received in Malaysia would not be chargeable to tax. Remittance of foreign income to Malaysia by any resident persons are chargeable to tax. It can be exempted from tax if remittance of foreign income to Malaysia are by person non-residents in Malaysia under paragraph 28 Schedule 6 ITA 1967 or by resident persons under the Income Tax (Exemption) Order. Key term The expression 'Malaysia' is defined as 'the territories of the Federation of Malaysia, the territorial waters of Malaysia and the sea-bed and subsoil of the territorial waters, and the airspace above such area, and includes any area extending beyond the limits of the territorial waters of Malaysia, and the sea-bed and subsoil of any such area, which has been or may hereafter be designated under the law of Malaysia as an area over which Malaysia has sovereign rights or jurisdiction for the purpose of exploring and exploiting the natural resources, whether living or non-living'. (Section 2 of the ITA 1967) A source is generally the geographic location of the originating source of income. In a privy council case of CIR v Hang Seng Bank, the broad guiding principles in determining the source of an income were stated as follows. One looks to see what the taxpayer has done to earn the profit in question. If they have rendered a service or engaged in an activity such as the manufacture of goods, the profit will have arisen or derived from the place where the service was rendered or the profit making activity carried on. But if the profit has been earned by the exploitation of property assets as by letting property, lending money or dealing in commodities or securities, by buying and reselling at a profit, the profit will have arisen in or derived from the place where the property was let, the money was lent or the contracts of purchase and sale were effected. 3.5 Foreign income received in Malaysia (taxable from 1 January 2022 if received by resident persons) Effective from 1 January 2022, income arising from sources outside Malaysia known as foreign income and received in Malaysia by any person who is not resident in Malaysia is exempted from income tax under paragraph 28 Schedule 6 ITA 1967. Remittance of foreign income to Malaysia by qualifying person residents in Malaysia are exempted under the Income Tax (Exemption) Order explained in section 3 of this chapter. Income tax shall be charged on foreign income received in Malaysia by any resident person from 1 January 2022 to 30 June 2022 at a concessionary income tax rate of 3% on the gross amount. Effective from 1 July 2022 it shall be subject to the normal income tax rates of a resident person in section 5 of this chapter. 6 1: Overview of the Malaysian tax system 3.5.1 Expression "received" based on case law The expression 'received' is important in taxing a foreign source of income. (a) Mere book entries in Malaysia do not constitute that the amounts have been received in Malaysia. A literal interpretation of the word 'received' would refer to two persons being involved where one would give and the other would take. In Gresham Life Assurance Society Ltd v Bishop, it was held that mere book entries did not constitute amounts being 'received'. (b) In Scottish Mortgage Company of New Mexico v Mckelvie, cross entries in the accounting records where two persons were involved would constitute amounts being 'received'. For example, where both parties owe each other and agree to contra the amount in their accounting records, such entries would constitute amounts being 'received' even though there is no actual money being remitted. (c) Income received in Malaysia includes anything equivalent to money, or that may be convertible into money. A foreign source of income may not change its character into capital. For example, instead of remitting income in the form of money back to Malaysia, an asset was sent back to Malaysia; the asset remitted back may be chargeable to tax. (d) The doctrine of first receipt may be used as an indicator of whether the income is received. In a privy council case, Pondicherry Railway Co Ltd v CIT, it was held that: 'It cannot be disputed that the words used...relate to the first receipt after the accrual of income. Once it is received by the party entitled to it, in respect of any subsequent dealing with the said amount, it cannot be said to be 'received' as income on that occasion.' 3.5.2 Guidelines on tax treatment in relation to income received from abroad issued by the IRB Received in Malaysia means transferred or brought into Malaysia, which can be in the form of cash, through electronic funds transfer, or both, as explained in the Guidelines issued by the IRB. Cash means notes, coins and cheques. Electronic funds transfer means bank transfer, payment card, e-money, privately-issued digital assets, for example crypto-assets and Central Bank digital currency 3.6 Scope of charge (summary) Basis of taxation Source of income Malaysian Foreign Remitted Parked offshore Derived and remittance Y Y N World-scope Y Y Y Y denotes chargeable to income tax N denotes non-chargeable to income tax 3.6.1 Derived and remittance Chargeable persons other than resident companies carrying on specialised business shall be charged to income tax on derived and remittance basis. Foreign income parked offshore is out of the scope of charge under the ITA 1967. Remittance of foreign income by any persons resident in Malaysia are chargeable to tax unless exempted under the Income Tax (Exemption) Order – PU(A) 234 or PU(A)235 of 2022. Foreign income remitted to Malaysia by any persons non-resident in Malaysia is exempted from tax under paragraph 28 Schedule 6 ITA 1967. 1: Overview of the Malaysian tax system 7  3.6.2 World-scope basis Resident persons are chargeable to tax on income wherever it is derived from, where that person carries on specialised business such as banking, insurance, or sea and air transport. 3.7 Scope of charge-an overview Scope of charge – an overview Revenue receipts/gains Yes Exempted or excluded from the Income Tax Act 1967 Labuan entity Yes Labuan business Yes activity No Received in Malaysia Malaysian source of No from outside Malaysia income No Yes Resident company No carrying on specialised business Yes Yes Chargeable to tax under the Income Tax Act 1967 Figure 1.4: Scope of charge to income tax Notes 1 Capital gains are not taxable under the ITA 1967. Capital gains in respect of disposal of a property shall be chargeable to tax under the RPGTA 1976. 2 Labuan entities including a Labuan company carrying on Labuan business activity are excluded from the ITA 1967. 3 Resident companies carrying on business of banking, insurance, shipping and air transport are assessed on a world-scope basis, that is, wherever the income is derived. 4 Resident persons other than those mentioned in note 3 above are chargeable to income tax on derived and remittance basis. 8 1: Overview of the Malaysian tax system  Remittance of foreign income by any persons not resident in Malaysia are exempted from income tax under Schedule 6 or by qualifying resident persons exempted under the Income Tax (Exemption) Order – PU(A) 234 or PU(A) 235 of 2022. Refer to section 3 of this chapter. 4 Sources of income The sources or classes of income on which tax is chargeable on a person (resident or non-resident) under Section 4 of the ITA 1967 are: (a) Gains or profits from a business (b) Gains or profits from an employment (c) Dividends, interest or discount (d) Rent, royalties or premiums (e) Pension, annuities or other periodical payments (f) Gains or profits not falling under any of the foregoing paragraphs In addition to the above, the following special classes of income (Section 4A of the ITA 1967) of a non-resident which are deemed derived from Malaysia shall be chargeable to tax: (i) Amount paid in consideration of services rendered by the person or their 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 any advice given or assistance or services rendered in connection with management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme (iii) Rent or other payments, made under any agreement or arrangement for the use of any moveable property 5 Rates of income tax Tax rates can be accessed at any time during the live exam by selecting (a) Income tax for a year of assessment shall be charged at a flat rate of 24% on the chargeable income of a company. (b) Subject to additional requirements mentioned in section 4 of Chapter 12 in this Study Text, a resident company incorporated in Malaysia with a paid up ordinary share capital of not more than RM2.5 million at the first day of the basis period and having gross business income not exceeding RM50 million shall be charged to tax at the following rates. Chargeable income First RM600,000 17% Balance 24% Tutorial note Since the 2023 Finance Bill was not passed by 31 March 2023, the new three-tier tax rates is not applicable for exam. The above tax rates and in point (d) for resident individual would be given in exam paper. (c) An individual not resident for the basis year for the year of assessment shall be charged to tax at 30%. (d) The following tax rates apply to a resident individual to be used for examination sessions from December 2023 to September 2024 Chargeable income Tax rates Tax payable (RM) (RM) (RM) 1 – 5,000 0% on the first 5,000 0 5,001 – 20,000 1% on the next 15,000 150 1: Overview of the Malaysian tax system 9  Chargeable income Tax rates Tax payable (RM) (RM) (RM) On the first 20,000 150 20,001 – 35,000 3% on the next 15,000 450 On the first 35,000 600 35,001 – 50,000 8% on the next 15,000 1,200 On the first 50,000 1,800 50,001 – 70,000 13% on the next 20,000 2,600 On the first 70,000 4,400 70,001 – 100,000 21% on the next 30,000 6,300 On the first 100,000 10,700 100,001 – 250,000 24% on the next 150,000 36,000 On the first 250,000 46,700 250,001 – 400,000 24.5% on the next 150,000 36,750 On the first 400,000 83,450 400,001 – 600,000 25% on the next 200,000 50,000 On the first 600,000 133,450 600,001 – 1,000,000 26% on the next 400,000 104,000 On the first 1,000,000 237,450 1,000,001 – 2,000,000 28% on the next 1,000,000 280,000 2,000,000 517,450 Exceeding 2,000,000 @ 30% 5.1 Concessionary income tax rates (a) A person who carries on business in respect of a qualifying activity under an approved incentive scheme at the rate of not more than 20% on every ringgit of that chargeable income. (b) An individual who is a knowledge worker and residing in a specified region in respect of having or exercising employment with a person who is carrying on a qualified activity in a specified region at the rate of 15% on every ringgit of that chargeable income. (c) An approved individual under the Returning Expert Programme in respect of having or exercising employment with a person in Malaysia at the rate of 15% on every ringgit of that chargeable income. (d) An individual resident who is not a citizen having and exercising employment in a company which carries on business in respect of a qualifying activity under an approved incentive scheme at the rate of not more than 20% on every ringgit of that chargeable income. 6 Self-assessment system for income tax submission Under the self-assessment system (SAS), taxpayers are required by law to determine their taxable income, compute their income tax liabilities, submit their annual income tax returns and pay their income tax liabilities, based on income tax laws. Income tax returns would not be subjected to detailed checking by the DGIR. Instead a post–assessment tax audit would be conducted to verify the correctness of the income tax returns submitted by taxpayers. Penalties would be imposed for non-compliance and/or understatement of income. 10 1: Overview of the Malaysian tax system Quick Quiz 1 List the six sources or classes of income on which income tax is chargeable on a resident person. 2 The following scenario relates to one requirement. Many public rulings have been issued by the Director General of Inland Revenue Board (DGIR) over the last 20 years. Required State the purpose and status of public rulings issued by the DGIR. 3 The following scenario relates to one requirement. Tax laws are designed and used in carrying out the fiscal and economic policies by the Malaysian Government. Required List any three types of taxes that contributed to the national revenue. 4 The following scenario relates to one requirement. Where the meaning of a provision in a tax act is unclear, and the Director General of Inland Revenue Board has given its view on the meaning in a public ruling, the taxpayer must accept that meaning even if it means paying more tax. Required State, with reasons, whether the above statement is true or not. 5 The following scenario relates to one requirement Malaysia Foreign Foreign income source of source of remitted to Chargeable person income income Malaysia in 2023 RM RM (a) Alice (non-resident) 30,000 20,000 Remitted (b) Adrian a tax resident deriving Remitted Malaysian rental income 40,000 10,000 (c) ABT Sdn Bhd (Resident) 60,000 5,000 Remitted (d) Alpha Pte Ltd (Non-resident) 40,000 40,000 Remitted (e) Alex (Resident) 30,000 10,000 Not Remitted (f) Insurance Bhd (Resident) 900,000 100,000 Not Remitted (Branch profit) Required State whether income (both Malaysia and Foreign income) of the above persons are chargeable to income tax for year of assessment 2023. 1: Overview of the Malaysian tax system 11  Answers to Quick Quiz 1 The sources or classes of income on which income tax is chargeable on a person (resident or non-resident) are: (a) Gains or profits from a business (b) Gains or profits from an employment (c) Dividends, interest or discount (d) Rent, royalties or premiums (e) Pension, annuities or other periodical payments (f) Gains or profits not falling under any of the foregoing paragraphs 2 A public ruling is issued by the Director General of Inland Revenue (DGIR) for the purpose of providing guidance for the public and officers of the Inland Revenue Board. It sets out the interpretation of the DGIR in respect of the particular tax law, and the policy and procedures that are to be applied. Public rulings are not law but merely interpretation of law. DGIR interpretations are binding on tax officers but not on the taxpayer. It can be challenged by the courts. 3 Any three of the following: Income tax Real property gains tax Sales tax Service tax Custom duties 4 This statement is not true. A public ruling is an interpretation of the provision of the Income Tax Act 1967 (ITA 1967) by the Director General of the Inland Revenue. It does not make law. If the language used by the ITA 1967 is ambiguous and capable of two reasonable meanings or constructions, the courts would adopt the one that is favourable to the taxpayer. 5 Chargeable persons Tax treatment (a) Alice Only Malaysian source is chargeable to income tax. Foreign income of RM20,000 remitted is tax exempt under Schedule 6 ITA 1967 as Alice is a non-resident (b) Adrian Malaysian source is chargeable to income tax. Foreign income of RM10,000 received in Malaysia is exempted from income tax under the Income Tax (Exemption) (No. 5) Order 2022- PU (A) 234. Tutorial note The Exemption Order exclude a source of income from a partnership business in Malaysia, which is received in Malaysia from outside Malaysia. An individual who has dividend income received in Malaysia from outside Malaysia in relation to a partnership business in Malaysia is eligible for exemption under Exemption Order PU (A) 235. (c) ABT Sdn Bhd Malaysian source of income is chargeable to income tax. Foreign income of RM5,000 remitted is chargeable to income tax as the company is tax resident in Malaysia. Tutorial note Only foreign dividend income that complied with the conditions imposed by the Income Tax (Exemption) (No. 6) Order 2022- PU (A) 235 and Guidelines issued by the IRB qualifies for exemption. (d) Alpha Pte Ltd Only Malaysian source is chargeable to income tax. Foreign income remitted is tax exempt under Schedule 6 ITA 1967 as the company is non-resident in Malaysia. 12 1: Overview of the Malaysian tax system (e) Alex Only Malaysian source is chargeable to income tax. Foreign source of income is not taxable as it is not remitted to Malaysia (f) Insurance Bhd Resident company carrying on specialised business is chargeable to income tax on income wherever derived known as world-scope basis. Foreign branch profit is also chargeable to income tax even it is not remitted to Malaysia. Tutorial note The Income Tax (Exemption) (No. 6) Order 2022- PU (A) 235 on exemption of foreign dividend income shall not apply to a person carrying on the specialised business of banking, insurance or sea or air transport. 1: Overview of the Malaysian tax system 13 14 1: Overview of the Malaysian tax system Residence status Topic list 1 Test of residence status of a person 2 Tax residence of individuals 3 Tax residence of companies 4 Pre-planning on foreign income 15  Study guide Intellectual level B(1) The scope of income tax (a) Explain how the residence of an individual is determined 1 C(1) The scope of income tax (c) Explain how the residence of a company is determined 2 1 Test of residence status of a person The Malaysian Income Tax Act 1967 (the Act) uses a quantitative test to determine the residence status of individuals. For companies, the deciding factor is where control and management are exercised. An individual must satisfy the various tests (four rules) under the Act, which uses the number of days the individual (other than a Malaysian citizen employed in the public service or service of a statutory authority) is present in Malaysia, to determine their residence status. Details are in sections 2.1 to 2.4 of this chapter. 1.1 Government servants For government servants, the four rules in sections 2.1 to 2.4 of this chapter do not apply to them. Details of tax treatment are in section 2.7 of this chapter. 1.2 Part of a day deemed to be one day Section 7(1A) of the Act provides that an individual shall be deemed to be in Malaysia for a day if they are present in Malaysia for part or parts of that day. 2 Tax residence of individuals 2.1 182 days or more (Section 7(1)(a) of the Act) An individual is considered to be a tax resident if they are in Malaysia in a basis year for a total of 182 days or more in a calendar year. 2.1.1 Example Bernard is in Malaysia for the following periods: 01.01.2023 to 31.07.2023 – 212 days 01.01.2024 to 30.04.2024 – 121 days Bernard qualifies as a tax resident for year of assessment (Y/A) 2023, as the number of days he spent in Malaysia amounted to 182 days or more in a basis year. He is a non-resident for Y/A 2024. 2.2 Fewer than 182 days (Section 7(1)(b) of the Act) An individual may qualify to be a tax resident if they are in Malaysia for a period of fewer than 182 days and that period is linked by or linked to another period of 182 consecutive days or more (hereinafter referred to as such period) either immediately preceding or immediately following that particular year of assessment. Certain temporary absence shall be taken to form part of such period: (a) Connected with their service in Malaysia and owing to service matters or attending conferences or seminars or study abroad (b) Owing to ill-health involving themselves or a member of their immediate family 16 2: Residence status (c) In respect of social visits not exceeding 14 days in aggregate Member of immediate family was clarified by the Director General of the Inland Revenue (DGIR) in their public rulings to cover a spouse, children and parents. In addition, they also clarified that social visits include any form of vacation outside Malaysia besides a vacation to a home country. 2.2.1 Example Billy is in Malaysia for the following periods: 01.12.2022 to 31.12.2022 – 31 days 01.01.2023 to 31.07.2023 – 212 days 01.01.2024 to 31.01.2024 – 31 days Year of assessment Number of days Resident status 2022 31 Section 7(1)(b) 2023 212 Section 7(1)(a) 2024 31 NR Y/A 2022 – qualifies to be a tax resident under Section 7(1)(b), as it is linked to period of at least 182 consecutive days in Y/A 2023 Y/A 2023 – qualifies to be a tax resident under Section 7(1)(a) Y/A 2024 – fails to qualify, as the period of less than 182 days is not linked to or linked by a period of 182 consecutive days 2.2.2 Example Ben was in Malaysia for the following periods: 01.06.2023 to 19.12.2023 – 202 days 06.01.2024 to 31.03.2024 – 85 days Ben went to Hong Kong on 19 December 2023 and returned to Malaysia on 6 January 2024, due to his sister's health condition. Year of assessment Number of days Resident status 2023 202 Section 7(1)(a) 2024 86 NR Ben is regarded to be a non-resident for Y/A 2024 and his absence of 17 days is not regarded as permitted temporary absence. The term 'member of immediate family' clarified by the DGIR in their public ruling refers to a spouse, children and parents. 2.2.3 Example Brian was in Malaysia for the following periods: 01.06.2023 to 22.12.2023 – 205 days 03.01.2024 to 31.01.2024 – 29 days He was sent by his employer to attend an annual conference in Australia from 23 December 2023 to 2 January 2024. Year of assessment Number of days Resident status 2023 205 Section 7(1)(a) 2024 29 Section 7(1)(b) 2: Residence status 17  The period of temporary absence shall be ignored for the purposes of Section 7(1)(b). Brian qualifies as a tax resident for Y/A 2024, as he was in Malaysia for 29 days and that period was linked by a continuous period in Y/A 2023. Tutorial Note Temporary absences are only used for the purpose of determining residence status of an individual under Section 7(1)(b). It does not apply to the other subsections of Section 7(1). 2.3 90 days or more (Section 7(1)(c) of the Act) An individual was in Malaysia for a total of 90 days or more in a calendar year and for any three out of the four immediately preceding years: (a) He had been a tax resident (b) He was present in Malaysia for a total period of 90 days or more 2.3.1 Example Bong was in Malaysia for the following period. Year of assessment Period of stay Number of Resident status days 2021 01.04.2021 – 30.09.2021 183 Section 7(1)(a) 2022 01.01.2022 – 03.04.2022 94 NR 2023 01.01.2023 – 20.11.2023 324 Section 7(1)(a) 2024 01.03.2024 – 21.10.2024 235 Section 7(1)(a) 2025 02.04.2025 – 03.07.2025 93 Section 7(1)(c) Bong was a non-resident for Y/A 2022, as the period of stay does not qualify under Sections 7(1)(a) to (c). For Y/A 2025, Bong qualifies to be a tax resident under Section 7(1)(c), even though the period of stay is not linked to a period of 182 consecutive days. This is because the period of stay in Malaysia for the basis year 2025 is not less than 90 days, and because he had been in Malaysia for at least 90 days or tax resident for three out of the four preceding years of assessment. 2.3.2 Example Bakri has the following period of stay in Malaysia. Year of assessment Period of stay Number of Resident status days 2021 01.06.2021 – 31.12.2021 214 Section 7(1)(a)* 2022 01.01.2022 – 31.01.2022 31 Section 7(1)(b)* 2023 01.01.2023 – 31.05.2023 151* NR 2024 03.03.2024 – 31.03.2024 29 NR 2025 01.02.2025 – 15.05.2025 105 Section 7(1)(c) Bakri qualifies to be a tax resident for Y/A 2025, as he has either been tax resident (Y/A 2021 and Y/A 2022) or was in Malaysia for 90 days or more (Y/A 2023) for any three out of the four years of assessment (indicated by * mark) immediately preceding Y/A 2025. 2.4 Unusual rule (Section 7(1)(d) of the Act) An individual can still be regarded as a tax resident even if they are in Malaysia for fewer than 90 days or entirely absent from Malaysia for the whole of the calendar year in question. This arises when the 18 2: Residence status individual had been a tax resident in Malaysia for three immediate preceding years and is also a tax resident in the following year. 2.4.1 Example Bulvir has the following period of stays in Malaysia. Year of assessment Number of days Resident status 2021 198 Section 7(1)(a) 2022 192 Section 7(1)(a) 2023 213 Section 7(1)(a) 2024 – Section 7(1)(d) 2025 188 Section 7(1)(a) Bulvir is a tax resident for Y/A 2024 by virtue of Section 7(1)(d), as he had been a tax resident from Y/A 2021 to Y/A 2023 and is also a tax resident for Y/A 2025. 2.5 Tax resident and Malaysian citizen From the above examples, you will note that the tax residence and citizenship of an individual are two different concepts. A Malaysian can be regarded to be either a tax resident or non-resident, depending on the number of days they stay in Malaysia. An expatriate who is neither a Malaysian citizen nor permanent resident (those allowed to stay in Malaysia permanently) may qualify to be a tax resident on their period of stay in Malaysia. 2.6 Practical purpose With the introduction of electronic scanning of passports at major entry/exit points in Malaysia, the evidence to substantiate the period of stay of an individual in Malaysia gives rise to problems. The Inland Revenue Board (IRB) normally verify non-Malaysian arrival/departure 'dates' or 'stamps' on the passport as evidence to determine the period of stay of an individual in Malaysia. Where the 'date' or 'stamp' in the passport is not made due to the immigration policy of the country visited, the IRB would accept any other written confirmation or evidence, for example, written confirmation from an employer, a used airline tickets or confirmation from a travel agency. 2.7 Section 7(1B) of the Act - for government servants The above four rules from sections 2.1 to 2.4 of this chapter do not apply to an individual who is a citizen of Malaysia and employed in the public service or service of a statutory authority in Malaysia. An individual who is a citizen of Malaysia is deemed to be tax resident for the basis year for a particular year, and for any subsequent basis years when they are not in Malaysia, at any day in the basis year for a particular year of assessment by reason of either: (a) Having or exercising their employment outside Malaysia (b) Attending any course of study in any institution or professional body outside Malaysia that is fully-sponsored by the employer 2.7.1 Example Balan, a Malaysian citizen was sent to work in India by the Malaysian Government from November 2022 to October 2026. Year of assessment In Malaysia Resident 2022 Yes Section 7(1)(a) 2023 No Section 7(1B) 2024 No Section 7(1B) 2025 No Section 7(1B) 2: Residence status 19  Year of assessment In Malaysia Resident 2026 Yes Section 7(1B)* Balan is deemed to be tax resident from Y/A 2023 to Y/A 2026. * If it is not linked to Y/A 2027, Section 7(1B) shall apply. The DGIR clarified in their public ruling that the above only applies to a Malaysian citizen employed in Malaysia and sent by the Government or its agencies to work outside Malaysia. For Malaysian citizens who have migrated abroad and apply for employment with a Malaysian government agency abroad, Section 7(1B) does not apply. This is because such individuals are not considered to be employed in the public service or statutory authority in Malaysia. Tax residence of individuals – the four rules Rule Stayed in Malaysia for Yes one 182 days or more No Yes* Rule If less than 182 days but is linked by or to a period of two 182 consecutive days No Stayed in Malaysia for 90 days or more but less than 182 days Tax resident Rule three Yes Tax resident or 90 days or Yes more for three out of four preceding year assessment No Tax resident in three immediately Rule preceding years of assessment Yes four and resident in the following year of assessment No Non resident** *Certain temporary absences are included to form part of a period of 182 consecutive days. **Excluding individual deemed to be tax resident under Section 7(1B). Figure 2.1: Tax residence of individuals 20 2: Residence status 2.8 Tax resident vs non-resident of individuals (comparison) RESIDENT NON-RESIDENT (a) Income tax rates Scale rate from 0 % to 30% Flat rate of 30%*, or 15%# or 10%# (b) Personal reliefs Entitled to claim Not entitled to claim (Section 46 to 50) (c) Income tax rebates for Entitled Not entitled chargeable income ≤RM35,000 (d) Business income (Taxable if deemed derived from Taxable if through a permanent Malaysia) establishment (for example a branch) (e) Employment income of Taxable Exempted under paragraph 21 ≤ 60 days of Schedule 6 of the Act (f) Remittance of foreign Qualifying individual eligible for Exempted under paragraph 28 income exemption under the Income Tax of Schedule 6 of the Act. (Exemption) Order – PU (A) 234 of 2022. * Non-resident tax rate # Withholding tax rates 3 Tax residence of companies A company or a body of persons carrying on a business or businesses is resident in Malaysia for the basis year for a year of assessment if at any time during that basis year the management and control of its business or of any one of its businesses are exercised in Malaysia. A company or a body of persons is resident in Malaysia for the basis year for a year of assessment if at any time during that basis year the management and control of its affairs are exercised in Malaysia by its directors or other controlling authority. Students should be careful not to mix up the terms basis period and basis year. When we compute the taxable income of a person, we need to refer to a taxable period, known as a basis period. For the purpose of ascertaining whether a company is resident or non-resident for a year of assessment, we need to refer to the basis year, which is the calendar year. The correct term should be used in answering your exam paper. The above can be simplified as follows. 01.01.2023 31.12.2023 RS Anytime 01.07.2022 30.06.2023 30.06.2024 Basis period for a business source of income for Y/A 2023 shall be from 01.07.2022 to 30.06.2023 Basis period for a business source of income for Y/A 2024 Residence status of a company does not follow the financial year-end of the company. It follows basis year for a year of assessment, that is, for Y/A 2023, it is from 01.01.2023 to 31.12.2023 Figure 2.2: Basis year for a year of assessment 2: Residence status 21  3.1 What actually constitutes 'management and control'? 3.1.1 The place where the directors meet The management and control of a company are normally exercised by its directors. Therefore, the place where the board of directors meet for decision making would determine whether the management and control are exercised in Malaysia – De Beers Consolidated Mines Ltd v Howe. 3.1.2 Directors' or shareholders' action? The following was established by courts: (1) It is the directors' actions and not the shareholders' actions that usually indicate the resident status of the company. (2) The place where a company's central management and control are usually situated will be the place where the directors meet (that is, where they hold their board meetings) for business decision making of the company. Case law reference for (1) is American Thread Co v Joyce and for (2) is Koitaki Para Rubber Estates Ltd v FC of T. 3.1.3 Can a foreign company be tax resident in Malaysia? Where a foreign company carries on trading activities in Malaysia, the company may wish to be a non-resident by ensuring that all its board meetings are held outside Malaysia. Where one of the board meetings of the company for decision making is held in Malaysia and the rest are held outside Malaysia, the foreign company can be treated to be a tax resident company. Place of incorporation or registered office? The place of registration and the registered office of a company would not determine its residence status. In a decided tax case, it was held that a company incorporated in Singapore has been held to be tax resident in Australia for income tax purposes because the company was completely managed and controlled by its directors in Australia. Case law reference: Malayan Shipping Co Ltd v FC of T. Place where AGM and accounting records are kept In a decided tax case it was held that a company incorporated in South Africa, which held its general meetings and kept its book of accounts there, was held to be tax resident in the United Kingdom, as the company was controlled by a majority of directors resident in London. Case law reference: Egyptian Delta Land & Investment Co Ltd v Todd. 3.2 Branch and subsidiary Foreign corporations extending their business activities to Malaysia can be by way of: (a) Incorporating a local subsidiary (b) Registering a branch A local subsidiary is normally treated to be tax resident unless facts of the case indicate otherwise. For a local branch, it is generally treated to be non-resident in Malaysia unless it can be established that management and control of its affairs or any of its business is exercised in Malaysia. 3.3 Dual tax residence A company may have dual tax residence, that is, it may be considered to be tax resident in both countries. In a decided tax case the court held that 'a company incorporated in London to construct and operate a railway in Sweden was found to be tax resident in both the United Kingdom and Sweden for that purpose. Case law reference: Swedish Central Railway Co Ltd v Thompson. 22 2: Residence status 3.4 Change of tax residence status 3.4.1 Case law In a decided tax case it was held that a company may change its tax residence status, that is, a company may be tax resident in one year and non-resident in another year. Case law reference: Bullock v Unit Construction Co Ltd. 3.4.2 Statute law In Malaysia, once a company is established to be tax resident for a basis year for a year of assessment, it shall be deemed to be tax resident for the subsequent basis years unless the company could prove otherwise to the satisfaction of the DGIR. 3.5 Importance of tax residence status of companies 3.5.1 Scope of charge A non-resident company is taxed at a flat rate of 24% in respect of any profits or gains accrued in or derived from Malaysia. A resident company incorporated in Malaysia is charged to tax at either a flat tax rate of 24% or two-tier tax rates of 17% and 24%, depending on its paid up ordinary capital on the first day of the basis period and gross business income for a year of assessment. Foreign income remitted to Malaysia by non-resident companies are exempted from tax under paragraph 28 Schedule 6 of the Act. For resident companies, foreign income remitted to Malaysia are chargeable to tax. Only foreign dividend income received by a qualifying resident company is eligible for exemption under the Income Tax (Exemption) Order – PU (A) 235 of 2022. 3.5.2 Distribution of dividends Where a company is resident for a particular basis year but was not resident for the immediately preceding basis year, any dividends paid, credited or distributed by the company on or after the day on which the control and management of its business was first exercised in Malaysia are deemed to be derived from Malaysia. For example, if a company is not resident for the basis year 2022 but the business of the company is managed and controlled in Malaysia from 1 September 2023, then dividends paid or credited from 1 September 2023 are deemed to be derived from Malaysia. 3.5.3 Specialised business A resident person carrying on specialised business such as banking, insurance, or sea and air transport is assessed on world scope basis. The Income Tax (Exemption) Order – PU (A) 235 of 2022 shall not apply to resident companies carrying on specialised business. 3.5.4 Investment incentives Tax incentives either under the Promotion of Investments Act 1986 or the Act are normally given to a resident company incorporated in Malaysia. 3.5.5 Withholding taxes Withholding taxes are applicable in respect of interest, royalty, public entertainers, contract payments, technical fees and Section 4(f) income paid or credited to non-resident persons (including companies). Payments made to resident persons in Malaysia would not be subject to withholding tax. 2: Residence status 23  4 Pre-planning on foreign income 4.1 Tax resident Taxpayers need to comply with the criteria stated in the Technical Guidelines on tax treatment in relation to income received from abroad issued by the IRB on 29 December 2022. Taxpayers resident in Malaysia who are unable to meet the IRB’s criteria should pre-plan their residence status to be a non-resident in the year of remittance. 4.2 Remittance of foreign income Foreign income can be timed so as to be taxed in Malaysia at the best point in time, for example, when taxes are low or when exemption is granted for a specific period by Exemption Order. Both Exemption Order on foreign income and foreign dividend are applicable until 31 December 2026. 24 2: Residence status Quick Quiz 1 (a) Tabulate the differences between a resident and a non-resident individual for income tax purposes. (b) What are the four rules (quantitative tests) used to determine the residence status of an individual other than a Malaysian citizen employed in the public service or service of a statutory authority? 2 The following scenario relates to one requirement. Beatrice first arrived in Malaysia on 1 November 2021 and left Malaysia permanently on 1 August 2025. Her pattern of stay was as follows. 01.11.2021 – 31.12.2021 61 days in Malaysia 01.01.2022 – 10.07.2022 192 days in Malaysia 02.09.2022 – 11.10.2022 40 days in Malaysia 03.04.2023 – 05.10.2023 186 days in Malaysia 03.04.2024 – 15.07.2024 104 days in Malaysia 18.01.2025 – 31.01.2025 14 days in Malaysia 01.02.2025 – 07.02.2025 7 days' social visit to Thailand 08.02.2025 – 30.06.2025 143 days in Malaysia 01.07.2025 – 14.07.2025 14 days' business trip to Taiwan 15.07.2025 – 01.08.2025 18 days in Malaysia Required Determine her tax residence status for the years of assessment 2021 to 2025. 3 The following scenario relates to one requirement. The deciding factor for residence status of a company is where the management and control are exercised. Required Explain what constitutes 'management and control'. 4 The following scenario relates to one requirement. Bok and Boon, both Malaysian citizens, left Malaysia to work in Japan on 1 February 2022. Bok works as an administrative assistant with the Malaysian Embassy in Japan for a period of five years. Boon works as an engineer with Japan Automobile Pte Ltd from February 2022 to 2025. Required Explain their tax residence status for year of assessment 2023, assuming that they would only return to Malaysia after their employment contracts expire. 2: Residence status 25  Answers to Quick Quiz 1 (a) The differences between a resident and a non-resident individual for tax purposes are as follows. Resident Non-resident (a) Income tax rates Scale rate from 0 % to 30% Flat rate at 30% or withholding tax rates of 15% or 10% (b) Personal reliefs Entitled to claim Not entitled to claim (Section 46 to 50) (c) Income tax rebates for Entitled Not entitled chargeable income ≤RM35,000 (d) Business income Taxable if deemed derived Taxable if through a from Malaysia permanent establishment (example a branch) (e) Employment income of ≤ Taxable Exempted under paragraph 21 60 days of Schedule 6 Income Tax Act (ITA) 1967 (f) Foreign income remitted Qualifying individual eligible Exempted under paragraph 28 to Malaysia for exemption under the of Schedule 6 ITA 1967 Income Tax (Exemption) Order – PU (A) 234 of 2022 (b) (i) They are in Malaysia for a total of 182 days (not necessarily consecutive) or more in a basis year. (ii) They are in Malaysia for a period of less than 182 days and that period is linked by or linked to a period of 182 consecutive days or more (certain temporary absences are ignored) either immediately preceding or immediately following that particular year of assessment. (iii) They were in Malaysia for a total of 90 days or more in the calendar year, and for any three out of the four immediately preceding years were either: (1) A tax resident (2) Present in Malaysia for a total period of 90 days or more (iv) They had been a tax resident for three immediate preceding years and are also a tax resident for the following year. Tutorial notes: (1) Candidates need to explain the laws correctly. The word ‘consecutive’ only applicable to section 7(1)(b) and should not be used when explaining Sections 7(1)(a) or (c). (2) 182 days or more is different from more than 182 days. The latter refers to 183 days which is incorrect in explaining income tax laws. 2 Year of Period of stay Number of days Resident status assessment 2021 01.11.2021 – 31.12.2021 61 S 7(1)(b) 2022 01.01.2022– 10.07.2022 192 23 S 7(1)(a) 02.09.2022 – 11.10.2022 40 2023 03.04.2023 – 05.10.2023 186 S 7(1)(a) 2024 03.04.2024 – 15.07.2024 104 S 7(1)(c) 26 2: Residence status  Year of Period of stay Number of days Resident status assessment 2025 18.01.2025 – 31.01.2025 14 S 7(1)(c) 175 08.02.2025 – 30.06.2025 143 15.07.2025 – 01.08.2025 18 S in the last column denotes section of the Act. 3 The management and control of a company are normally exercised by its directors. Therefore, the place where the board of directors meet for decision making would determine whether the management and control are exercised in Malaysia – De Beers Consolidated Mines Ltd v Howe. Based on laws established by courts the following do not constitute management and control. It is the directors' actions and not the shareholders' actions that usually indicate the resident status of the company. (1) The place of registration and the registered office of the company would not determine its residence status. It was held that a company incorporated in Singapore has been held to be tax resident in Australia for tax purposes because the company was completely managed and controlled by its directors in Australia. (2) It was held that a company incorporated in South Africa that held its general meetings and kept its book of accounts there was held to be tax resident in the United Kingdom, as the company was controlled by a majority of directors resident in London. Reference of tax case for (1) is Malayan Shipping Co Ltd v FC of T and Egyptian Delta Land & Investment Co Ltd v Todd for (2). 4 Bok is deemed to be a resident for Y/A 2023 under Section 7(1B) ITA 1967, as he is a citizen and is employed in the public service or service of a statutory authority in Malaysia. Boon is a non-resident for Y/A 2023, as he failed to satisfy any of the four tests under Sections 7(1)(a) to (d) ITA 1967. Section 7(1B) does not apply to him. 2: Residence status 27 28 2: Residence status Ascertainment of chargeable income Topic list 1 Introduction 2 Basis period 3 Gross income 4 Adjusted income 5 Statutory income 6 Aggregate income 7 Total income 8 Timeframe for business loss carried forward 9 Chargeable income 10 Tax treatment of adjusted loss from a business 11 Schedule 4B – qualifying pre-operational business expenditure 29  Study guide Intellectual level B(3) Income from self-employment (f) Compute the statutory income from a business source 2 (g) Capital allowances 2 (h) Relief for business losses (i) Understand how relief for current year adjusted losses can be claimed 2 against aggregate income (ii) Explain how unabsorbed adjusted losses can be carried forward 2 (iii) Understand how unabsorbed adjusted losses brought forward can be 2 claimed against the total amount of statutory income of all businesses C(2) Income chargeable to income tax (f) Explain the treatment of approved donations and other deductions that can 2 be set off against the aggregate income (g) Understand how adjusted losses can be carried forward 2 (h) Understand how current year adjusted losses can be claimed against the 2 aggregate income of the current basis period C(3) The comprehensive computation of income tax liability (c) Explain the treatment of unabsorbed losses and unabsorbed capital 2 allowances brought forward from the previous year of assessment (d) Compute the amount of unabsorbed losses and unabsorbed capital 2 allowances from the previous year of assessment that can be set off against the income of the current year of assessment 1 Introduction Income tax is charged for a year of assessment on the chargeable income of a person (company or individual). It is ascertained as follows. (a) Taxable period known as basis period for each source of income for a year of assessment (b) Gross income for each source of income for the basis period for a year of assessment (c) Adjusted income which is gross income less tax deductible expenditure from each source of income for the basis period for a year of assessment (d) Statutory income for each source of income for a year of assessment (e) Aggregate income for a year of assessment (f) Total income for a year of assessment (g) Chargeable income for a year of assessment. Notes: In ascertaining the chargeable income of a person any amount or income received by that person which is subject to following deduction of income tax shall be excluded: 30 3: Ascertainment of chargeable income  Section Income subject to deduction of tax 1. 109C Interest paid to a resident individual 2. 109D Distribution of income by a listed Real Estate Investment Trust (REIT) 3. 109DA Income of a unit holder other than an individual which consists of interest distributed or credited by a unit trust that is a retail money market fund 4. 109E Distribution of income from an Islamic Insurance Fund 5. 109G Income derived from withdrawal of a deferred annuity or a private retirement scheme by an individual. Item (1) applies to non-exempt interest paid by financial institutions. It is no longer applicable as interest income is exempted from tax under the Income tax (exemption) (No 7) Order 2008 – PU(A) 351/2008, explained in section 3.2 of chapter 5 in this Study Text. Items (2), (3) and (4) are excluded from TX-MYS syllabus. 2 Basis period 2.1 Individuals The basis year (or calendar year) for a year of assessment shall constitute the basis period for that year of assessment of a person other than a company, limited liability partnership, trust body or co-operative society. 2.1.1 Example Charlie received rental income from his residential property from 1 July 2023 to 30 June 2024 of RM3,000 per month. The taxable period or basis period of his rental source of income for years of assessment 2023 and 2024 shall be: Year of assessment Basis period 2023 01.07.2023 to 31.12.2023 RM18,000 2024 01.01.2024 to 30.06.2024 RM18,000 01.07.2024 to 31.12.2024 ? 2.2 Companies Where a company commenced its operation and make up its accounts to an accounting date, that accounting period shall constitute the basis period for that year of assessment for any of its sources of income. Details of basis period for a company are explained in chapter 12 of this Study Text. 2.2.1 Example Crescent Corporation Sdn Bhd commenced its rental source of income on 1 July 2022 and made up its accounts to 30 June 2023 and to 30 June for subsequent years. The basis period of its rental source of income for years of assessment 2023 and 2024 shall be: Year of assessment Basis period 2023 01.07.2022 to 30.06.2023 2024 01.07.2023 to 30.06.2024 3: Ascertainment of chargeable income 31  3 Gross income Gross income from any sources of income refers to the full amount of income arising from any source before deductions of any allowable expenditure. It is computed by reference to the basis period for that source for a year of assessment. Gross income from a business source of income is normally assessed on a receivable basis. An advance received may be included as gross income from business source, depending on the circumstances and the nature of the receipt, as explained in section 3.1 of chapter 9 in this Study Text. That from a non-business source of income, for example rental income is assessed when such income is received but is related back to the period when it was first receivable. Income derived from letting of properties can either be assessed as a business source or rental source of income, depending on the facts of the case. Details how to determine whether it is a business or rental source are in section 6.1 of chapter 9 in this Study Text. 3.1 Example A houseowner received part of the 12 months rental income accrued during 2023, for example, only 9 months' rental of RM3,000 each, the income tax treatment shall be: Source of income 2023 Remarks Rental assessed as business income RM36,000 Receivable* Or Rental income RM27,000 Receipt * The balance of RM9,000 shall be allowed in the subsequent years as bad debts where the houseowner needs to satisfy the Director General of Inland Revenue Board (DGIR) that they could not recover it from their tenant. 4 Adjusted income Key term The adjusted income from a source of income for the basis period for a year of assessment is the gross income from each source reduced by expenditure wholly and exclusively incurred in the production of that gross income. Expenditure that qualifies for tax deductions must be revenue in nature. Adjusted income of a source is computed as follows: Gross income AA Less: Tax deductible expenditure (Revenue in nature) (AB) Adjusted income AC Or Net income (accounting profits) AD* Add non-deductible expenditure (for example capital expenditure) AE Adjusted income AF * Recommended approach for practical and examination purpose. 32 3: Ascertainment of chargeable income 4.1 Example CAT Sdn Bhd provides you with the following for the year ended 31 December 2023: RM Gross income 200,000 Less: Expenditure Revenue (tax deductible) (130,000) Capital in nature (15,000) Net profits 55,000 The adjusted income for Y/A 2023 shall be: RM Net profit 55,000 Add: Non-deductible expenditure 15,000 Adjusted income 70,000 4.2 Relief for adjusted loss Where the amount of tax deductible expenditure exceeds the gross income, the excess shall constitute an adjusted loss. Where the adjusted loss is from a business source, relief shall be given to reduce the aggregate income of a person. No loss relief is to be given if the adjusted loss is from a non-business source, for example rental source of income. 4.2.1 Example Business source Rental source of income of income RM RM Gross income 80,000 80,000 Less: Tax deductible expenditure (90,000) (90,000) Adjusted loss (10,000) (10,000) Adjusted income 0 0 Loss relief to be given to reduce aggregate income of a person in section 7 of this chapter. (10,000) 0 5 Statutory income The statutory income (if any) of a person from a source of income for a year of assessment shall consist of: Business Non-business source source Adjusted income (if any) BB BB Add balancing charge BC – BD BB Less: Capital allowances (BE) – Statutory income (if any) BF BB The adjustments of 'BC' and 'BE' do not apply to a non-business source of income. The adjusted income of BB will be the statutory income for a non-business source. Where there is an adjusted loss from a business source of income, the adjusted income of 'BB' shall be 'Nil' or '0' instead of a negative amount. 3: Ascertainment of chargeable income 33  Should the amount of 'BE' exceed 'BD', the difference of unabsorbed capital allowances shall be carried forward to set-off against adjusted income of the same business source of income for the subsequent years of assessment. The Statutory Income for that year of assessment shall be 'Nil' or '0'. 5.1 Example Y/A 2023 Y/A 2024 RM RM Adjusted income 40,000 48,000 Balancing charge 15,000 Capital allowances 45,000 15,000 The statutory income shall be: Y/A 2023 Y/A 2024 RM RM Adjusted income 40,000 48,000 Add balancing charge _ – 15,000 40,000 63,000 Less: Capital allowances Current year allowances 45,000 15,000 Amount brought forward – 5,000 Amount utilised (40,000) (20,000) Statutory income 0 43,000 5.2 Example Catherine provides you with details of her business source of income for Y/A 2023: RM Adjusted loss from her boutique business (20,000) Balancing charge 15,000 Capital allowances (6,000) Her statutory income for Y/A 2023 shall be: RM Adjusted income, if any (note) 0 Add: Balancing charge 15,000 15,000 Less: Capital allowances (6,000) Statutory business income 9,000 Loss relief to be given to reduce her aggregate income for Y/A 2023 (20,000) Note. In the live exam this should be shown as "0" instead of Nil in a spreadsheet response area. 6 Aggregate income The aggregate income of a person for a year of assessment shall consist of: (a) The aggregate of their statutory business income, reduced by an amount of brought forward business loss (b) The aggregate of their other source of income (non-business income) (c)* Any additions falling to be made under Schedule 4 (Mining Industry) or 4A (Agriculture Industry) * Excluded from the syllabus of Paper TX-MYS. 34 3: Ascertainment of chargeable income 6.1 Pro-forma Business I CA Business II CB Partnership CC Aggregate statutory business income (ASBI) CD Less: Business loss brought forward – Section 43(2) loss (CE) Net aggregate statutory business income (NASBI) CF Employment CG Rental CH CI Aggregate income CJ Less: Adjusted loss from business (AL) Less: Approved cash donation (AD) Total income TI Tutorial notes: Based on the above pro-forma, the approach to a tax computation is to arrive at ASBI by aggregating all statutory business income. If there are two types of business losses for a year of assessment, the approach is to deduct the brought forward business losses to arrive at NASBI, and the current year business loss known as adjusted loss from business is deducted after Aggregate Income. Non-business income would only be included after NASBI to arrive at Aggregate Income. 6.1.1 Business loss brought forward The amount of business loss (say from Business I) brought forward of 'CE' is used to reduce the aggregate amount of business income of 'CD' instead of 'CA'. Any excess shall be carried forward to reduce 'Aggregate Statutory Business Income' of subsequent years of assessment. 6.2 Example Business I Business II (Sole proprietor) (Partnership) RM RM Adjusted income 40,000 20,000 Balancing charge 10,000 – Capital allowances 20,000 35,000 Business loss brought forward – 18,000 Statutory income Business I RM Adjusted income 40,000 Add: Balancing charge 10,000 50,000 Less: Capital allowances (20,000) 30,000 Business II Adjusted income 20,000 Less Capital allowances (35,000) Capital allowances carried forward 15,000 0 Aggregate statutory business income (ASBI) 30,000 Less Business loss brought forward – Section 43(2) loss (18,000) Net aggregate statutory business income 12,000 3: Ascertainment of chargeable income 35  The amount of business loss brought forward (from partnership) is used to reduce ASBI of RM30,000. It is not restricted to the sa