Tax Planning in Malaysia

Understand the basics of Malaysia’s taxation system. How to calculate tax for businesses and individuals. How to maximise your tax planning efficiently.

 

Tax

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

 

Tax Residency

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

Net profit

+ Non tax deductible expenses (ie depreciation)

– Non taxable income (ie capital gains)

Adjusted Income

OR

Gross income from business

– Tax deductible expenses

Adjusted Income

 

+ Balancing charge

– Balancing allowance

– Capital allowance 

Statutuory Income

– Previous year’s business losses carried forward

 

Taxable Business/Individual Sources of Income

+ Other Income (employment, rental, investment, royalty, etc)

Aggregate Income

– Current year business losses (business only)

– Approved donation

Total income

– Tax relief (only for resident individual)

Chargeable income

 

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  • Market value of stock withdrawn for personal use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

Capital Allowance

  • 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.

Employment Income

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.
  • Benefits-in-kind:
    • 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 Income

  • Rental derived in Malaysia subject to tax based on receipt basis (calculated at point of time received).

Investment Income

  • Dividends not taxed as paid out after tax under a single tier dividend system. Bank interest exempted for individuals but taxed for businesses.

Royalty Income

  • 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.

Pension

  • Pensions including civil servants pension and overseas pension exempted.

Annuities

  • Annuity from insurance exempted. Annuity from trust companies subject to tax.

 

Tax Planning

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.

 

Business Expenses

Capital expenditures

  • 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

Revenue expenditures

  • 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

  1. Record Qualifying Capital Expenditure (QCE) with appropriate documentation.
  2. Record 1st year of claim for calculating claims for 1st and subsequent years.
  3. Record type of asset as different assets will have different allowance rates.

 

Donations

  • 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.

 

Tax Relief

  • 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
  • Zakat

 

Tax Filing

Forms

  • Resident with Business: Form B
  • Resident without Business: Form BE
  • Partnership: Form P
  • Limited Liability Partnership: Form PT
  • Company: Form C

Penalties

  • 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

 

Calculators

MyPF.my