Understand the basics of Malaysia’s taxation system. How to calculate tax for businesses and individuals. How to maximise your tax planning efficiently.
Tax is a compulsory payment to a government from individual income, business profit, and charged on sales of goods and services. This money is used to pay for the running of a country including education, public healthcare, and other public services.
In this world nothing can be said to be certain, except death and taxes. ~ Benjamin Franklin
Malaysia Income Tax Act 1967 – Section 7 – 1
(a) An individual is a tax resident in Malaysia if present in Malaysia on basis year for 182 days or more in a calendar year.
(b) Preceding/following period qualifies if linked to period of 182 consecutive days. Temporary absences are ignored:-
- Connected with services in Malaysia attending conferences, seminars or studies.
- Ill health of self or immediate family
- Social visit not exceeding 14 days
(c) In Malaysia 90 days or more days for 3 out of 4 preceding years as a tax resident OR present in Malaysia for more than 90 years.
(d) In last 4 years if individual has been tax resident for preceding 3 years.
Tax Resident vs Non-Resident
- Resident tax scales progressively from 0%-28% VS non-resident tax flat at 28%
- Exemption on royalty income VS no exemption
- Personal tax relief (Self/spouse/children, insurance, lifestyle, etc) VS no relief
Malaysia Tax Computation
Income tax is assessed on a current calendar year basis on income derived in Malaysia (territorial concept).
Taxable Business Sources of Income
+ Non tax deductible expenses (ie depreciation)
– Non taxable income (ie capital gains)
Gross income from business
– Tax deductible expenses
+ Balancing charge
– Balancing allowance
– Capital allowance
– Previous year’s business losses carried forward
Taxable Business/Individual Sources of Income
+ Other Income (employment, rental, investment, royalty, etc)
– Current year business losses (business only)
– Approved donation
– Tax relief (only for resident individual)
Gross Income from Business
- All debts arising in the course of carrying on a business
- Non-refundable advance received
- Market value of stock withdrawn for personal use
- Dividend income from shares
- Interest income (for banks, financial institutions, and money lenders)
- Bad debts recovered (trade related)
- Compensation for loss of income
- Initial allowance: upon first acquiring asset (including used/2nd hand assets). 20% rate of qualifying capital expenditure (QCE) using straight line basis.
- Annual allowance: claimable yearly at following rates until fully claimed (QCE reaches 0).
- Office equipment, furniture and fittings, others: 10%
- General plant and machinery: 14%
- Heavy machinery (construction), motor vehicles: 20%
- Small value assets: value of each asset not exceeding RM1,300. Total claim not exceed RM13,000 (No total claim restrictions for SMEs with share capital below RM2.5m).
- Motor vehicle: up to RM50,000. For new motor vehicle below RM150,000 up to RM100,000. Commercial vehicles fully claimable as purely for business use.
- Balancing charge: withdrawal of capital allowance previously claimed. Occurs on a gain on disposal value higher than residual value.
- Balancing allowance: adjustment on capital allowance. Occurs on loss on residual value higher than disposal value.
- If asset owned less than 2 years, all capital allowance on disposal will be clawed back (even if loss on disposal) unless commercial justification provided.
Straight line: a method of depreciation allocating a fixed percentage of asset cost each year for a fixed period.
Contract of service (Employment income)
- Defined as master and servant relationship.
- Employee works on defined working hours.
- Employee restricted from contracting with other parties.
- Employer provides tools and equipment.
- Contribution to EPF, EIS and SOCSO.
- Employee salary, remuneration, fixed allowances, benefits-in-kind, perquisites, tips, compensation for loss of employment, etc.
- Share option scheme: income calculated based on difference between option price and lower of option granted/option exercise price.
- Asset sold at discounted price/given free: income calculated based on difference between asset market value and amount paid by employee.
- Taxed: Car, household furniture, apparatus, and appliances, gardener, domestic help, driver, houses sold to employee at discount.
- Not taxed: Medical and dental, child care benefit, goods/services benefit given to all employees at a discount with value below RM1,000, 3 local trips/RM3,000 per family for overseas trip, and relocation package.
- Note: retirement gratuity is taxable except exemption for ill-health, or retirement age (ie 55) with minimum 10 years employment.
VS Contract for service (Business income)
- Appointment which remuneration is payable.
- Loss relief deductable.
- Capital allowance relief for capital expenditure.
- Concession given on certain expenses deductible.
- Financial year may not be following calendar year (for companies and LLP).
- Rental derived in Malaysia subject to tax based on receipt basis (calculated at point of time received).
- Dividends not taxed as paid out after tax under a single tier dividend system. Bank interest exempted for individuals but taxed for businesses.
- Allowing others to use intellectual property like copyright, patents, trademarks or other property rights. Exemption RM10,000 for artistic work, or RM20,000 for literary/painting original work.
- Pensions including civil servants pension and overseas pension exempted.
- Annuity from insurance exempted. Annuity from trust companies subject to tax.
Tax Planning Objectives
- Reduce tax payment to minimum legally
- What are your tax deductions available?
- What kind of exemption is available for the income you earn?
- Defer tax payment legallY
- Claim expenditures first and pay back later (ie capital allowance)
Commencement of Business
For a business, commencement of business refers to the date company has started carrying out of essential activity and generating income (manufacturing, sales, services). Pre-commencement expenses are treated as capital expenditure, and are not tax deductible. The selection of business commencement date affects selection year end, and income tax first year of assessment.
- Non tax deductible
- Non-recurring, fixed assets for use 1 year or more in the business
- Owner of the asset at end of basis period
- Note: Qualifying capital expenditures are eligible for capital allowance
- Tax deductible
- Recurring expenses to maintain business operations
- Full: salary, rental, utilities
- Partial: entertainment (1/2), petrol (~2/3)
- Excluded: depreciation
Taxpayer needs to justify expenses incurred is wholly and exclusively for the production of the business. Specific expenses are deductible to bring social benefits.
How to Calculate Capital Allowances
- Record Qualifying Capital Expenditure (QCE) with appropriate documentation.
- Record 1st year of claim for calculating claims for 1st and subsequent years.
- Record type of asset as different assets will have different allowance rates.
- Approved donations to institutions, government, state government, local authorities.
- Approved cash donations to institutions max 10% aggregate income for companies / 7% for individuals.
- Donation artefact, manuscript or painting to government.
- Donation for approved library (max RM20,000).
- Donation for public facilities.
- Contribution for approved sports activity.
- Contribution to project of national interest.
- Individual resident: RM9,000
- Disabled taxpayer: RM6,000
- Disabled spouse: RM3,500
- Spouse relief: RM4,000
- Child relief
- Each child age below 18: RM2,000
- Studying tertiary: RM8,000 (min diploma overseas, min degree overseas)
- Disabled child: RM8,000
- Basic supporting equipment: RM6,000
- Parents’ medical expenses: RM6,000
- Life insurance/EPF: RM6,000
- Annuity/PRS: RM3,000
- Medical/Education insurance: RM3,000
- Serious diseases: RM6,000 (including RM500 for medical exam)
- Course fees for self improvement: RM7,000
- Breastfeeding equipment: RM1,000 (female only)
- Childcare/kindergarten: RM1,000 (either parent)
- Lifestyle relief: RM2,500
- Books, magazines, newspapers
- Computer, smartphone or tablet
- Sports equipment
- Broadband internet
- Gym membership
- SSPN deposit: RM6,000
- PERKESO contributor: RM250 (actual max possible contribution RM237)
- Parental care: RM1,500 per parent (taxpayer not claiming parents medical expenses, parents age 60 above, shared among children)
- Individual/spouse rebate: RM400 each
- Resident with Business: Form B
- Resident without Business: Form BE
- Partnership: Form P
- Limited Liability Partnership: Form PT
- Company: Form C
- Failure to furnish a return: 3x tax penalty (without prosecution) | Fine RM200-2,000 and/or 6 months imprisonment
- Incorrect return: penalty equal to tax undercharge (without prosecution) | Fine RM1,000- RM10,000 and penalty 2x tax undercharge
- Wilful evasion: Fine RM1,000-RM20,000 and/or 3 years imprionsment and penalty 3x tax undercharge
- Leaving Malaysia without tax payment: Fine RM200-2,000 and/or 6 months imprisonment
- Obstruction officers in duty: Fine RM1,000- RM10,000 and/or 1 year imprisonment
- Breach of confidence: Fine not exceeding RM4,000 or 1 year imprisonment
- Failure to keep records: Fine RM300- RM10,000 and/or 1 year imprisonment