Malaysian taxation -lecture 1 PDF

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1 WHAT IS TAX? “ compulsory exaction of money by public authority for public purposes enforceable by law” (An Australian case) “.. of our earnings is contributed to the Government to enable them to meet expenditures for the benefit of the people, such as the construction of roads, schools, hospita...

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1. BASIC TAXATION –SCOPE OF CHARGE – 2012 questallim 1

WHAT IS TAX? 

“ compulsory exaction of money by public authority for public purposes enforceable by law” (An Australian case)



“…part of our earnings is contributed to the Government to enable them to meet expenditures for the benefit of the people, such as the construction of roads, schools, hospitals and undertaking other development projects” (Tax Nasional 2001).

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TYPES OF TAXES Direct Taxes -Income tax -Stamp duty

Indirect Taxes -Sales tax -Service tax

Direct taxes Taxes paid _______________ to the Revenue authorities by the taxpayer. Indirect tax Taxes paid ______________ to the Revenue authorities by the taxpayer. A third party will collect the taxes on their behalf and then forward the tax collected to the Revenue authorities.

3. TAXES AS GOVERNMENT REVENUE  Tax revenue constitutes more than 80% of the total nation revenue;  Direct tax 56% of the revenue and indirect 25% and others non-tax revenue.  Direct taxes: RM44 billion (2002)  Tax laws have been designed to ensure that source of revenue for the nation.  Budget 2010 (RM191.5 billion). Development expenditure (RM53.2 billion). Operating expenditure (RM138.3 billion). SOURCES OF REVENUE LAW 

Statute laws law enacted by Parliament eg Income Tax Act, 1967

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Case laws law created by the decisions of courts eg Pan Century Edible Oil vs IRB

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Informal laws -Inland Revenue Board’s guidelines (Public Rulings). IRB’s website: www.hasil.org.my

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1. BASIC TAXATION –SCOPE OF CHARGE – 2012 questallim

TAX ADMINISTRATION

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Ministry of F________________ : overall control of Malaysian taxation

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________________________ Responsible for the assessment and collection of direct (both personal and corporate taxes) and is headed by the Director General of Inland Revenue.

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Royal Malaysian Customs And Excise Department Responsible for the assessment and collection of indirect taxes SELF-ASSESSMENT SYSTEM 

The burden of computing the taxpayer’s liability is_______________ from the IRB to the taxpayer.

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He is expected to compute his tax liability based on the tax laws, guidelines and regulations (eg public rulings) issued by the IRB.

CHARGING SECTION A person can only be charged to tax if he falls within the scope of the charge under the provisions of the Act. Section 3 of the Income Tax Act, 1967 (the Act) provides:

“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”

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1. BASIC TAXATION –SCOPE OF CHARGE – 2012 questallim 7.1 Year of Assessment (Y/A) 

With effect from 1 January 2000, the basis of taxation in Malaysia is on a current year of assessment. Current year of assessment means income derived in a current year will be assessed to tax in the same year. Eg: a. For Individuals Year of assessment 2010 (Y/A 2010) : 1 January 2010 to 31 December 2010. b. For Companies The year of assessment will follow the financial year-end. Eg If co. year end is 1 July 2009 to 30 June 2010, therefore its YA _________ If co. year end is 1 January 2010 to 31 December 2010: YA _________

7.2 Income  Not defined in the Act but categorized under Section 4 and 4A of the Act Section 4 provides: Subject to this Act, the income upon which tax is chargeable under this Act is income in respect of: (a) (b) (c) (d) (e) (f) 

Gains of profits from a business, for whatever period of time carried on; Gains or profits from employment; Dividends, interest or discounts; Rents, royalties or premiums; Pensions, annuities or other periodical payments not falling under any of the foregoing paragraphs; Gains or profits not falling under any of the foregoing paragraphs.

In the case of CIT v Shaw Wallace, income is referred to as “periodical monetary return coming in with some sort of _____________from a definite source….. __________________anything in the nature of a mere windfall” The judge has likened it to a tree (capital) that produces fruits (the income)

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Capital gains / receipts are NOT subject to income tax under the Income Tax Act 1967. Q Gains from disposal of cars: Capital or Income?? A distributor of cars: It is sales to the company. Since it is income to the company and therefore it is taxable under Income Tax Act. (ITA) 3

1. BASIC TAXATION –SCOPE OF CHARGE – 2012 questallim A manufacturing of canned food: It is a disposal of capital and therefore it is NOT taxable under ITA Q (underlined the correct answer) Money inherited from your father: Income/Capital Donation received: Income/Capital Gain from lottery winnings: Income/Capital 7.3 Person  Section 2 of the Act defines ‘person’ to include a company, a body of persons (eg trust, club trade association, co-operative societies, etc excluding partnership) Different tax rates apply to different category of chargeable persons. Rates of Income Tax (a)

(b) (c) (d)

i. Resident company (paid-up capital not exceeding RM2.5 million) Chargeable Income: First RM500,000 Remainder ii. Resident company (paid-up capital exceeding RM2.5 million) Non-resident company Non-resident individual Resident individual Chargeable income RM (0 - 2,500) (2,501 - 5,000) (5,001 – 10,000) (10,001 – 20,000) (20,001 – 35,000) (35,001 – 50,000) (50,001 – 70,000) (70,001 – 100,000) (70,001 – 150,000) (150,001 – 250,000) (Above 250,000)

Rates (%) First RM 2,500 Next RM 2,500 First RM 5,000 Next RM 5,000 First RM 10,000 Next RM 10,000 First RM 20,000 Next RM 15,000 First RM 35,000 Next RM 15,000 First RM 50,000 Next RM 20,000 First RM 70,000 Next RM 30,000 First RM 100,000 Next RM 50,000 First RM 150,000 Next RM 100,000 First RM 250,000 Next each RM

7.4 Accruing in or derived from 4

0 1 3 3 7 12 19 24 26 26 26

20% 25% 25% 25% 26%

Cumulative Tax RM 0 25 25 150 175 300 475 1,050 1,525 1,800 3,325 3,800 7,125 7,200 14,325 13,000 27,325 26,000 53,325 ……..

1. BASIC TAXATION –SCOPE OF CHARGE – 2012 questallim 

“accruing in” suggests the coming of income in a passive manner eg interest, rental, dividend

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“derived from” suggests active involvement in obtaining the income eg employment income Q: Assuming a person has an employment income derived from Malaysia and the salary related to the income is paid to him in eg in Japan. Will the income be subject to Malaysian tax?___________________

7.5 …received in Malaysia from outside Malaysia BUT: Sch. 6 Para 28 of ITA, (tax exemption provision) ……income arising from sources outside Malaysia and received in Malaysia (foreign income received in Malaysia) by any person except resident company which carries on specialised business* will be exempted from tax. *Resident companies in the business of:   

Banking Insurance Sea & air transport

}specialised industries }taxed on a world }scope basis

So, now: all resident/non resident (individuals and companies) except the resident company that carries on specialized business are taxed on income derived from Malaysia ONLY. Q 1. Foreign income not received in Malaysia is NOT taxable because _______________ 2. Foreign income received in Malaysia is exempted because __________________ SCOPE OF CHARGE (GENERALLY) a) Derived and Remittance Basis Income derived in that country and overseas income received in that country will be taxable. b) World Scope Basis Any income derived from that country or overseas will be taxable. c) Territorial Basis Only income derived in that country will be taxable.

REVIEW 5

1. BASIC TAXATION –SCOPE OF CHARGE – 2012 questallim 1.

Your friend, Mr James knew that you have just learned Malaysian Taxation. He approached you regarding the following tax matter. “I am earning salary from my work in Japan and I am bringing back some money to Malaysia. Will my income from Japan subject to Malaysian tax? How about my income I earn from my work in Malaysia?” Explain with reasons to your friend, Mr James whether his income from Japan and Malaysia are subject to Malaysian tax.

2. Explain the scope of Malaysian tax charge for an individual and a company. 3. Explain what is an income.

Be CONSISTENT in your study 1. Read ahead of your lecturer. 2. Be attentive and ask questions in tutorials. 3. Do your first revision within ________ hours 2nd revisions within _______ week 3th revisions within ________ month and 4th ________ examination.

You forget_______ % within ______ hours 4. Always complete your tutorials before tutorial class 5. Always clarify your mistakes in your tutorials. (Adapted from Adam Khoo, I am gifted, so are you)

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