The Concise Oxford Dictionary defined a tax as a "contribution levied on persons, property, or business for the support of government". It means a right body is appointed to collect the tax for public purpose. Inland Revenue Board of Malaysia (IRBM) is the one who is responsible as a legislature in Malaysia.
Taxation is a source of revenue for the government. The main aims of implementing tax policies are to ensure the government has enough money to fund government spending on projects, which are beneficial to the country. For instance repairing roads, raises funds for healthcare and education sectors, providing superior infrastructure, providing work opportunities to the society as well as providing better public transport such as KTMB, Bus and Taxi .
THE NATURE AND PURPOSE OF TAXATION
Taxes are the most important source of governmental income. Taxes differ from other sources of income in that they are compulsory tax and are unreturned, they are not paid in exchange for some specific thing, such as the sale of public property or the issue of public debt. While taxes are apparently collected for the sake of the welfare of taxpayers as a whole, the liability of the individual taxpayer is free of any benefit received.
According to www.uv.es, taxpayers are commonly charged on employee income in order to fund retirement benefits, medical payments, other social security programs and other tax relief.
In Malaysia taxes are divided into two which is direct and indirect taxation. Direct taxation consists of income tax, real property gains tax, stamp duty, petroleum income tax and as well as film hire duty. While indirect taxation is services tax, sales tax, custom duty, excise duty, entertainment tax and also gaming tax. These are administered by different entities. Direct taxation by the Inland Revenue Board, while indirect taxation by the Royal Customs Department.
The major tax purpose is to fund government spending on development. Throughout taxation, the government raises money to fund activities such as repairing roads, raises funds for hospitals and schools, providing better infrastructure as well as providing comfortable public transport such as KTMB, Bus and Taxi for the society convenience. In the same way, the tax that collected indirectly will be finances by government for the purpose such as regulation of market or the justice systems.
MALAYSIAN TAX ENVIRONMENT
The Malaysian tax environment is governed by Section 3 of the Income Tax Act.
"Subject to and in accordance with this Act, a tax to be known as income tax shall be charged for each YA upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia."
The tax is a source of income for the government to discharges its appropriate functions for the protection and general welfare of the citizens. For example, the funds used to develop infrastructure, provide most excellent public facility, pay salary for the army, public servants, and so on.
Malaysian Income Tax Act does not define income. It classified income under section 4 of the Act according to classes, as follows:
Gains and profits from trade, profession and business
Salaries, remunerations, gains and profits from an employment
Dividends, interests or discounts
Rents, royalties or premiums
Pensions, annuities or other periodic payments
Other gains or profits of an income nature not mentioned above.
Encik Daniel, a resident in Malaysia is subject to Malaysian taxation. He will bE taxed according to Income Tax Act 1967 (Act 53/1967) (ITA 1967). In accordance to Section 13 (a) of the Act, salaries, remunerations, gains and profits from an employment will be taxed. As an employee, Encik Daniel will have Section 4(b) employment income. He will be taxed under Section 4(b). Below explain the details about the En Daniel Taxation Principles:
Due date for submitting Tax Return for the Year Of Assessment Of 2009.
According to Inland Revenue Board of Malaysia, for individuals without business source which is BE Form, the due date is submitted on or before 30th April 2010 for YA 2009. This had been legislated by the government of Malaysia. If Encik Daniel did not submit the BE Form by 30th April 2010, he will has to pay penalty. In the scenario, Encik Daniel works as a manager earning monthly salary of RM10, 000. This is income. The income earned by Encik Daniel is a form of direct tax.
How the tax payment will be made to his employment income?
Encik Daniel is an employee for a private company which he had work from the year of 1992. His tax payment will be made by his employer by using the Scheduler Tax Deductions. Based on Inland Revenue Board, Scheduler Tax Deductions is an income tax deduction mechanism from employee's current monthly remuneration in accordance with the schedule of monthly tax deductions. This requirement for employers is under Section 107 of ITA 1967. Encik Daniel's employer will make a monthly deduction to reduce the employee's burden to pay the tax. As shown in the calculations parts, Encik Daniel needs to pay in total of RM 31,603.00. It is a burden for his to pay all the tax in a lump sum. So by practicing the STD method, it will help Encik Daniel to reduce his burden to pay the tax charge towards him.
Due Date for paying the tax in balance of any tax due.
If there any tax balance need to pay off, Encik Daniel must made the payment by 30th April 2010. Under the section 103 Income Tax Act 1967, any tax due and payable but has not been paid by the taxpayer by the due date shall be increased by 10% under subsection 103(3) ITA 1967 and any balance remaining unpaid upon the expiration of 60 days from the due date shall be further increased by 5% under subsection 103(4) ITA 1967 of the balance unpaid.
The Timeframe for a valid appeal against an assessment
A taxpayer must lodge an appeal to the IRB within 30 days of the deemed assessment on submission of tax return.
If the Inland cannot come to an agreement with Encik Daniel in the case of an appeal, to whom the appeal will be forwarded for determination?
If Mr. Daniel disagrees with the high tax charged on him, he may appeal to the Special Commissioner of income tax for the first determination. If Mr. Daniel is still dissatisfied with the decision, he may forward to the High Court. If Mr. Daniel agreed with the decision by High Court, the case will be closed. However, if the result is not behalf on his side, he may further to Appeal Court for the determination. Finally, Mr. Daniel may bring the case to the Federal Court to clarify in depth to get final decision. For example, we assume that Mr. Daniel won the case, he able to reduce the amount of tax charged.
Tax payable by Encik Daniel for year assessment of 2009:
Total Income = RM 163,993
1st RM 150,000 = RM27, 825
Next 13,993@ 27 % = RM 3,778
Tax payable = RM 31,603
Tax Planning Opportunities
From the computation that has been done we found out that Encik Daniel tax payable is RM31, 603 while Puan Sara is NIL. Consequently the total tax payable for Encik. Daniel is high. In order to reduce the amount of tax payable or to save additional money from the taxes Encik. Daniel have to do some tax plans and arrangement for his planning affairs. As a result we can come out with few suggestions in order to reduce the amount of tax chargeable.
Table below shows about the Mr. Daniel reliefs for the year assessment of 2009. There is also the suggestion column which is recommendation for him in order to reduce the total tax charged by increasing the total reliefs.
Based on the table above we can conclude that the actual chargeable income is RM 193,593 while based on our suggestion is RM 182,793. The difference between these two chargeable incomes is RM 10,800. Consequently he is able to reduce the total tax charged worth RM 2,916.
Benefits In Kind
According to the Section 13(1) (b) of the Act, the benefits are not convertible into money. These benefits are provided by the employer for their employees. There are two conditions of leave passage which is applicable for Encik Daniel.
First his employer will give fully support for meals and accommodation if Encik Daniel and family travel in Malaysia for three times. If exceeding more than three times, Encik Daniel has to choose the three most expensive bills to get an exemption.
While second condition is applicable for one leave passage. This travel is between Malaysia and overseas. His employer will support him at maximum of RM3000 for his one leave passage. Both benefits in kind are provided direct for En Daniel, Puan Sara and their children.
Refer to the Section 13(1)(a) of the Act, it's about cover all the sources of employment income in the form of cash. Government also intended in encouraging the employer to provide more benefits to employees. (vinconsultancy2u, 2009)
Encik. Daniel salary is RM50, 000 which is he gains from the position as Director. It is means that he may request to get more benefits in terms of perquisites. With starting from year assessment 2008, Encik Daniel is applicable to get exemption if his employer provides several perquisites for him.
First, company allocates up to RM2, 400 per annum for Encik .Daniel to enjoy the petrol card or petrol allowance or travel allowance within the home and work place. Other than that, the company allocates up to RM3, 000 per annum for petrol card, petrol allowance or travel allowance and toll card only for official duties.
As a result, Encik Daniel acquires exemption for perquisites given by his employer by getting full deduction. So, he is able to reduce the amount of chargeable income. The perquisites provided can be as a motivation for Encik Daniel to improve his competence and productivity performance while working.
En. Daniel Should Go For Joint Assessment
Since the tax chargeable for Encik Daniel is high they can elect to go for joint assessment since his wife Puan Sara only having a small portion income. Here the solution showed the comparison between elect for joint assessment and otherwise.
Based on the tax planning above if En Daniel elects to go for joint assessment he can absolutely reduce their tax worth to RM151 which is a little less than the original tax chargeable towards him in the earlier computation.
Encik Daniel can come out with a plan by making up some savings in the approved financial institutions. From his savings, Encik Daniel is able to earn dividends. This dividend income is fully exempted from been taxed. On top of that En Daniel also can invest in or outside Malaysia that will allowed him to get fully exemption as well.
Therefore, Encik Daniel is able to reduce the total chargeable income and also pay less for tax payable. Once the dividends income is exempted from been taxed, it encourages resident to make savings in the future.
Prescribed Value Method
Prescribed value method is an alternative method in order to determine the value of benefits in kind that are usually provided by the employer to their employees. Based on the Encik Daniel cases, he's provided by the car with the driver for him to travel for official duties.
In order to reduce the amount of the tax chargeable Encik Daniel can choose between the method of Prescribed and Formula in order to get the smaller amount to pay on the benefits that he received from his employers.
Based on the table above we can conclude that, Encik Daniel should choose the Prescribed Value method because it given a smaller amount compared to the formula Method. Consequently it would help Encik Daniel in reducing the amount of tax chargeable towards him.
Partnership can be defined as a legal relationship which subsists between two or more persons who carry on a business in common with the object of making a profit (Veerinderjeet Singh, 2008). The partnerships consist of two to twenty persons. It can be more if they are among professional.
The main objective of partnerships is to carry out on business and make profits. Based on the scenario, both Ng and Siow are considered as "Partners". The organization names Ng Educational must register with registrar of business unless an exemption is given. The partnership between Ng and Siow is considered as a general partnership which is a written agreement has been formed.
The Law Governing The Taxation Of Partnership And How The Partnership Is Taxed?
According to the section 2 of the Act, partnership exist when they want to carry on a business, willing to share rights and responsibility, profit and risk. In Malaysia partnerships are governed by the partnerships Act 1961 (Act 135). Partnership does not pay any tax but sharing of profits from partnership will be taxed. It's mean that since a partnership is not a taxable person each partner of the partnership is individually assessed to tax on his share of the partnerships profit.
Tax Planning Opportunities
Malaysian Government will charge a tax to a resident of Malaysia who is an employee or operating their own business. A resident is describing to a person who is staying in Malaysia for more than 182 days. Towards the individuals who have their own business, there are a few tax planning opportunities for them. The objective of income tax planning is to abolish, reduce or defer income tax without the action of law.
Tax Planning Opportunities has been regulated by the government of Malaysia to encourage individuals or companies to make a business in Malaysia. This method will help the individuals or a company to get an incentive or tax reliefs during the tax computations.
Double deductions are given by the government towards the expenses incurred on certain activities that can be set off double beside taxable income. There are many factors for earning the double deductions.
The first double deductions that individuals with business income can claim are by making a promotion for export. It is the expenses that are aimed at promoting an export and the supplying goods overseas. These expenses can be deducted twice from taxable income. According to IRBM, double deduction on promotion of export of services for companies eligibleÂ for tax incentives under Section 127 or Schedule 7B of the Income Tax Act 1967, is allowed to be accumulate and offset against their post exemption income. In Malaysia, the participation in aÂ trade or industrial trade fair approved by MATRADE in Malaysia or overseas will get a double deduction. The allowable expenses are including overseas promotion, abroad travel and accommodation, preparation of companies tender for the supply goods in global market, export market research, approved industrial exhibitions, and cost of maintaining overseas offices.
Next double deductions that can be claimed by the individuals of business are research and development. All the expenses incurred on government approved research study, payments made for services of an approved research institute and charitable cash contributions made to approved research institutes that can be deducted twice from taxable profits.
Other than that, employee training programs also can be deducted twice from the taxable income. Expenditure that earn by government based programs in manufacturing companies to upgrade and develop the skills towards an employees which will having a double deductions from the tax chargeable on the taxpayers.
The allowance is also available to the tourist industry in respect of costs incurred in the overseas promoting Malaysia as a tourist destination. Double deduction incentive for training in a tourism industries is given to companies in the hotel or tour operating business which carry out training for the purpose of upgrading the skill level of the tourism industry and get an approval by the Minister of Culture, Arts and Tourism.
To encourage the employees to hired disabled persons, all payment to be paid to physically or mentally disabled employees can get a double deduction from taxable income. This incentive is obtainable for manufacturing sectors
Incentives for Investment
Government of Malaysia encourages and welcomes the individuals with business income to make an investment in the main sectors of the Labuan economy systems. Businesses that are encourage by the government for the individuals to involve are the manufacturing industries, shipping sectors, oil and gas, trading industries, tourism sectors as well as education sectors. Plenty of incentives and other facilities are available for these sectors. These incentives are included investment tax allowance or pioneer status that is including tax deduction and exemption for certain period of years.
A company that is given a Pioneer Status, they will have a partial exemption from the payment of income tax. The company required to pay tax on 30% of its constitutional income. The time of year's period for tax exemption is five years. The five years exemption is beginning as of the production date as set by the Minister of International Trade and Industry.
Investment Tax Allowance
As a substitute towards the Pioneer Status an organizations might be able to apply for investment of Tax Allowance. According to IRBM, an organization is granted with an Investment Tax Allowance that are given allowance of 60% in respect of qualifying capital expenditure incurred within five years from the date on which the first qualifying capital expenditure is incurred. The allowance can be making use of to offset against 70% of the statutory income in the year of evaluation.
Capital allowance is the deductions that are given for tax purposes in respect of capital expenditure. Capital allowances are then computed on certain types of asset, and are deducted from profits to arrive at taxable profits. Under the capital allowances they are certain items that can be deducted and get the benefits straightforwardly
For instance the purchase of non current assets which can be consist of vehicles, premises, machinery, and furniture, land and so forth. For the taxpayers the opportunities those gains by them while purchased the capital allowance on the 31st of December will get a year deduction compared on the 1st January following years of the year's assessment
Based on the Scenario 2 which is the partnership between NG and SIOW that are running the NS Education will be having some deduction towards the non current assets that they purchased into their business purposes. One of the main non current assets that deductable is vehicle that used by one of the partners SIOW where SIOW will get a deduction when she purchase on 31st December of 2006, she can claim for the capital allowance that are incurred for the years assessment 2006, while if she purchase the car on 1st January of 2007 she cant even claim the capital allowance that are incurred for the year assessments of 2006.
As a result in any partnership business the partner are advised to make the correct decision where can provide them any chances to claim for the deduction on their tax planning opportunities. It's simply means that individual with the business income also will having a reduce on the tax chargeable towards them by analyzing the step on how they can make a proper arrangement for the tax planning opportunities in the future of any years assessments.