There are different ways a country obtains their income to run public services, like hospitals, public transport etc. Malaysia is no exception. There are two important agencies that collect taxes in this country, namely: The Inland Revenue Board and The Royal Custom and Excise Department. The Inland Revenue Board is responsible to collect income tax, and the Royal Custom and excise department collect indirect taxes like import duty, Sales Tax, Service Tax and Excise Duty.
THE MALAYSIAN TAX ENVIRONMENT
Malaysian tax environment is determined by Section 3 of Act, which states:
"Subject to and in accordance with this Act, a tax to be known as income tax shall be charged for each Year Assessment upon the income of any person accruing in derived from Malaysia or received in Malaysia from outside Malaysia."
Since 2004, all foreign source income received in Malaysia from outside Malaysia is exempted from Malaysian tax.
Whether income tax liability arises is decided by Section 3 of ITA. The act sets out two circumstances where income tax liability arises, namely:
The transaction must be 'income' in nature and such income is accrued in or derived from Malaysia; or
The transaction must be 'income' in nature and its received in Malaysia from outside Malaysia (foreign source income).
Income tax would be imposed by reference to a Year Assessment upon a person's income. Such person is known as a chargeable person.
In Malaysia, the law did not mention the exactly meaning of 'income' but the law gives classify the income under s 4 and s 4A as follows:
Section 4 is subject towards the tax chargeable under this Act is income in respect of:
Gains or profits from business, for whatever period of time carried on;
Gains or profits from an employment;
As in the scenario 1, Encik Daniel has a salary from his jobs.
In under this section, there are S13 (1) (a), S13 (1) (b), S13 (1) (c), S13 (1) (d), and S13 (1) (e) included.
Dividends, interest or discount;
Rents, royalties, 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.
Section 4A is totally different from section 4. The section 4 is for the people are not resident in Malaysia for the year of assessment in respect of:
amount paid in consideration of services rendered by the person or his 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;
amounts paid in consideration of technical advice, assistance or services rendered in
connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; or
Rent or other payments, not being payments of film's rentals, made under any agreement for the use of any moveable property,
Which is derived from Malaysia is chargeable to tax under this Act. The Act is all about the earning from nonresident earn in Malaysia must be tax. (Choong, 2008).Meaning resident by the law in Malaysia government is you are in Malaysia in 182 days in a year. The act under 4 and 4A is not mutually exclusive. Meanings, even the act number is same, 4 but the features in act are not same.
The above are the tax computation for Encik Daniel, Puan Sara and tax computation for joint assessment.
TAX COMPUTATION ON EN DANIEL YEAR ASSESMENT 2009
First company (1Jan2009 -30 June 2009)
RM
RM
RM
S4 (b) Employment Income
S13 (1) (a)
W1 Gross Salary
60,000
Gratuity (exempted)
Nil
60,000
S13 (1) (b)
Watch
exempted
W2 Furnishing
560
Medical Expenses
exempted
W3 Air Fares
10,000
Hotel Accommodation
exempted
10,560
S13 (1) (c)
W4 Living Accommodation
Defined Value (RM1200 x 4 months)
4,800
(30% x RM60,000) x 4/6
12,000
whichever is the lower
4,800
S13 (1) (d)
W5 Withdrawal from unapproved retirement fund
Employer's Potion
40,000
Interest Income Earned
10,000
50,000
125,360
Second company (1August09 -31 Dec 2009)
RM
RM
RM
S13 (1) (a)
W6 Director Fees
50,000
W7 Entertainment Allowance
5,000
55,000
S13 (1) (b)
Mobile Phone
exempted
W8 Motor Car
2,083
W9 Driver
3,000
W10 Servant
1,600
W11 Gardener
1,200
7,883
S13 (1) (c)
W12 Hotel Accommodation
7,750
W13 Unfurnished House
8,000
15,750
78,633
Aggregate Income
203,993
Less: Approved Donation
2000
Total Income
201,993
CHARGEABLE INCOME OF EN DANIEL YEAR ASSESMENT 2009
Total Income
201,993
Less: Personal Reliefs
Self
8,000
Medical Expenses for his parents
4,500
Wheel Chair
1,100
Medical Examination
500
Books
900
Wife
3,000
Children Relief
Second Child
4,000
Third Child
9,000
Fourth Child
1,000
Life Insurance & EPF
6,000
38,000
Chargeable income
163,993
Chargeable Income: 1st tax RM 150000 = RM 27825
Balance RM13993@ 27% = RM 3778
Total Income Tax = RM 31603
TAX COMPUTATION ON PUAN SARA YEAR ASSESMENT 2009
S4 (d) Rental Income
RM
RM
Monthly Rental
10,800
Less: Expenses
Installation of Kitchen Cabinet
Nil
Repairs and Maintenance
1,200
Interest of Loan
5,000
Fire Insurance
900
Quit Rent
700
7,800
Aggregate Income
3,000
Less: Approved Donation
500
Total Income
2500
Less: Reliefs
Computer
3000
Total Income
(500)
EN DANIEL & PUAN SARA TAX COMPUTATION OF JOINT ASSESSMENT YEAR ASSESMENT 2009
Total Income
RM
RM
Encik Daniel
201,993
Puan Sara
500
201,493
Less: Personal Reliefs
Self
8,000
Wife
3,000
Medical Examination
500
Medical Expenses for his parents
4,500
Wheel Chair
1,100
Books
900
Life Insurance & EPF
300
Computer
3,000
Children Relief:
Second Child
4,000
Third Child
9,000
Fourth Child
1,000
35,300
Chargeable Income
166,193
Chargeable Income
RM
Tax 1st RM150,000
27,825
Balance RM19,193 @ 27%
5,182
33,007
Refer to the income computations for the year assessment 2009; Encik Daniel should submit his tax return for the year assessment 2009 on 30th April 2010 to Lembaga Hasil Dalam Negeri. Then, to respect Encik Daniel employment income his tax payments will be made by PCB (Potongan Cukai Bulanan). If there any balance of any tax due, Encik Daniel should pay before 30th April 2010 and his timeframe for a valid appeal against an assessment are 23th April 2010 until 30th April 2010. That's mean the taxpayers have 8 days to make a valid appeal against an assessment. Special commission income tax will become to an agreement with Encik Daniel in the case of an appeal if Inland Revenue Board cannot come for the determination.
THE NATURE AND PURPOSE OF TAXATION
The Nature of Taxation
Taxation in Malaysia is one of the percentage of resident and nonresident earnings income in Malaysia even though all of them not paying the tax. Taxes are divided into two types, direct tax and indirect tax. Whereby direct tax is when the taxpayers pay tax directly to our government, Inland Revenue Board of Malaysia such as income tax and road tax are chargeable to people who have car The indirect tax is when the taxpayers will pay the tax through third person or organization and being charged on a service based on earnings or spending not income. For example, consumers have to pay the service tax to have their food from fast food restaurant.
The Purpose of Taxation
The purpose of taxation is all about the government spending to develop the country. Every year government needs to improve their infrastructure such as public road and airport to give benefit to peoples. The fund of taxation is to give a subsidy to resident. Malaysia government gives a subsidy in fuel and diesel to resident that give a convenience to people in Malaysia. Malaysian people especially the kids will get a free education from 6 years old until 17 years old and that why Government needs a lot of funds even though parents still to pay education fees. The other purpose is in healthcare area that needs by the lower level income people. The price of service and buy the medicine is lower and also free. Government need to build many hospital and clinic for all those people. To make sure they get the benefits from government.
INCOME TAX COMPUTATION FOR ENCIK DANIEL
W1
Gross Salary
= [(Net monthly salary + tax)/89%] x 6months
= [(RM8600 + RM300) / 89%] x 6 = RM60000
W2
Semi-furnished house, Prescribed Value Method (1 Jan 09 - 30 April 09)
RM140 per month x 4 months
= RM 560
W3
Air Fares = RM13000 - RM3000
= RM1000
W4
Value of Living Accommodation (whichever is the lower)
Defined Value (RM1200 x 4) = RM4800
(30% x RM 60000) x 4/6 = RM 12000
W5
Withdrawal from unapproved retirement fund
Encik Daniel (employer's potion) = RM40000
Interest income earned = RM10000
W6
Directors fees RM10000 per month
RM10000 x 5 months (1 August 2009 - 31 Dec 2009) = RM50000
W7
Entertainment allowance RM1000 a month
RM1000 x 5 months (1 August 2009 - 31 Dec 2009) = RM5000
W8
Annual value of private usage of the car = RM5000
The value should be adjusted proportionately 5/12 x RM5000 = RM2083
W9
Driver from 1 August 2009
Provision of driver RM600 per month x 5 = RM 3000
W10
Servant RM4800 per annum
(RM4800/12) x 4 month = RM1600
W11
Gardener RM3600 per annum
(RM3600/12) x 4 month = RM1200
W12
Hotel accommodation August 2009
RM250 x 31 days = RM7750
W13
Unfurnished house on 1 Sept 2009
RM2000 X 4 month = RM8000
RECOMMENDATION TO EN. DANIEL
As a tax payer, Encik Daniel can use more reliefs to minimize tax payable legally so that in the return forms of Encik Daniel (Form BE), Part D. This reliefs may be useful so that there will be a big amount of deductions of the tax payment, excluding the reliefs that have been used by Encik Daniel. For this recommendation, assume that Encik Daniel's parents is still alive, for sure he and his wife must look after them to get restricted until RM5, 000. Since Encik Daniel is an educated person, he can continue his studies and get education fees restricted to RM5, 000 by taking other than degree and degree by referring to Form BE. For this 55 years old man, it is good for him to complete his medical examination not even for himself but also spouse or child in case anything happen, doctor can detect any disease early and get RM4500. To add up more reliefs, as a student, Encik Daniel can purchase a computer that allowed once in 3 years for RM3, 000. As Encik Daniel's fourth child is 16 years old, he can apply to deposit in Skim Simpanan Pendidikan Nasional additional for his/her future. To have healthy body, Encik Daniel should do any sports activity capable and purchase any sports equipment that help him minimize the tax payable RM300.Lastly, since Encik Daniel do not have any education or medical insurance he suppose to apply for medical insurance that is more cheaper that education insurance if he may get any disease.
2.0 PARTNERSHIP
A partnership can be defined as a formal agreement between two or more parties in the company that have agreed to work together in the pursuit of common goals. This parties who have agreed to combine any of their right, powers, property, labour or skill between them. They must respect the organization mission of each partner.
2.1 TAXATION OF PARTNERSHIP
The Inland Revenue Board of Malaysia (IRBM) is one of the main revenue collecting agencies of the Ministry of Finance. Their objective is participating in or outside Malaysia in respect of matters relating to taxation. This act also as agent of the Government and provide services in administering, assessing, collecting and enforcing payment of income tax.
The law governing the taxation of the partnership can be classes under Section 2 (a) of act and he case law precedence. This type of business gains profits and have to share between their agreements from the business for whatever period of time carried on.
Obtain the favorable tax treatment from the partnership that can be a reason because this type of business will be taxed based on the shared by partnership profits or loss. In the taxation of partnership they will be taxed by the separately individual although it's required to file annual tax return. Ng and Siow must pay their taxed that presumed for the purpose of computing partnership adjustment income to ascertain the gross income and deductions.
In the assessments of the taxed exists by partnership they must identify and make an agreement to know their right and related responsibility. When they have a joint ventures between them they must shared and liquidation business income related to the agreement. Their division incomes are stipulated in the partnership agreement will be taxed by interest or remuneration of each partner.
The computation of non business income is not included in the taxation of partnership but it computed in separately of the partners. This income will be apportioned among the partner according to the ratio between them. Example of non business income is dividend, rental, divisible income and irrespective from the distribution to partner or not.
2.2 TOTAL INCOME FOR NS EDUCATIONAL
2.2.1 Income Tax Computation
Income Tax Computation
NS Educational Partnership
Year Assesment 2006
Net profit per account
125700
Add:
Non-allowable expenses
Private use of car by Siow [W1]
2400
Donation
19000
Depreciation
24000
Partner salaries
150000
Interest on capital
10800
Trade Exhibition
(8700)
197500
Provision Adjustment Income
323200
Less:
Partner salaries
150000
Interest on capital
10800
Private use of car by Siow [W1]
2400
(163200)
160000
Divisible Income
W1 = Private use of car by Siow
= RM12000 x 20%
= RM2400
Divisible Income
1.1.2006 - 31.3.2006
= RM 160000 x 3/12
(3 months)
= RM 40000
1.4.2006 - 31.12.2006
= RM 160000 x 9/12
(9 months)
= RM 120000
2.2.2 Computation of each partner's income from the partnership for the year ended 31.13.2006
01.01.06 - 31.03.06 (3 months)
Ng
Siow
Total
Profit Sharing Ratio
50%
50%
100%
RM
RM
RM
Private expenses [w1]
0
600
600
Salary [w2]
22500
15000
37500
Interest on capital [w3]
1500
1200
2700
Divisible Income [w4]
20000
20000
40000
01.04.06 - 31.12.06 ( 9 months)
Profit Sharing Ratio
60%
40%
100%
Private expenses [w5]
0
1800
1800
Salary [w6]
67500
45000
112500
Interest on capital [w7]
4500
3600
8100
Divisible Income [w8]
72000
48000
120000
Less:
Approve Donation [w9]
(7800)
(5200)
(13000)
Annual Allowance [w10]
(5400)
(3600)
(9000)
Statutory Income
174800
126400
301200
Working
Ng
Siow
01.01.2006 - 31.03.2006 ( 3 months)
w1
Private expenses
-
=RM2400 x 3/12
=RM600
w2
Salary
=RM90000 x 3/12
=RM22500
=RM60000 x 3/12
=RM15000
w3
Interest on capital
=RM6000 x 3/12
=RM1500
=RM4800 x 3/12
=RM1200
w4
Divisible income
=RM40000 x 50%
=RM20000
=RM40000 x 50%
=RM20000
Working
Ng
Siow
01.04.2006 - 31.12.2006 ( 9 months)
w5
Private expenses
-
=RM2400 x 9/12
=RM1800
w6
Salary
=RM90000 x 9/12
=RM67500
=RM60000 x 9/12
=RM45000
w7
Interest on capital
=RM6000 x 9/12
=RM4500
=RM4800 x 9/12
=RM3600
w8
Divisible income
=RM120000 x 60%
=RM72000
=RM120000 x 60%
=RM48000
w9
Approve donation
=RM13000 x 60%
=RM7800
=RM13000 x 40%
=RM5200
w10
Annual Allowance
=RM9000 x 60%
=RM5400
=RM9000 x 40%
=RM3600
2.3 TAX PLANNING OPPORTUNITIES FOR INDIVIDUAL WITH BUSINESS INCOME.
Tax planning giving chances for the tax payer to planed the tax that need to pay by them for the recent year. Purposes of income tax planning are to eliminate, minimize or defer income tax within the ambit of the law. This tax is to deny the tax avoidance scheme by invoking anti avoidance provision under s 140. Under s 4 (a), gains or profit from business for whatever period of time carried on will be chargeable for the income tax. Business in Malaysia can be defined into three that are trading, manufacturing and services.
In order to planning the tax, the tax payer need to look at the date that been chosen for the company. It is because; the tax will be deductable according to the date recorded. For example, when the business wanted to purchase new assets as a capital expenditure for their business, they need to choose an appropriate time to record when they purchased the asset. Company can purchase on 31December or 1January on the next year. It may give an impact on the tax that need to be paid. Proper planning on the timing of the acquisition of the asset is good for the tax.
Besides that, tax planning also concern on the pre-commencement business expenses. Under s 33, this type of expenses is not deductable on the income tax. On other hand, there are several pre-commencement expenses are deductable that are, training expenses, incorporation expenses, and number of business sources. The tax payer may have more than one business sources, the separation of sources will be a question on law. For example, when the assets are used by both businesses, the capital allowance of the assets will be divided among the business. It is based on the usage, gross income that been accepted by tax authorities.
When the company doing an import and export in the business their product will delivered by several method such as sea, road and air to the others place or country. In order to make sure that if any damages to the product when it been delivered, the company may purchased an insurance to recover the damages. They can choose either to bought Malaysia or overseas insurance. However, if the company bought the insurance from Malaysia, they will get RM 200000 deductable on their tax but on other hand when the company bought the insurance from other country, they only able to deduct maximum RM 100000 from their tax. It shows that, the tax payer have to choose the right thing in order to reduce the tax paying by them.
REFFERENCES
ACCA, Paper F6, Taxation (UK), 2007, BPP learning media LED London
Business.gov, Partnership, 2010, [Online] Available at http://www.business.gov.sg/EN/StartingUp/RegisterYourBusiness/ChooseABusinessStructure/regbiz_type_partnership.htm
Fatt C. K, Malaysian Taxation: Principle and Practice Fifteentth Edition, 2009,
Fatt C. K., Lee I. & Chia R., Advance Malaysian Taxation, 1994, U-text, Selangor Darul Ehsan
Lowyerment.com, Tax Law- Income Tax Law, 2001, [Online] Available at http://www.lawyerment.my/tax/income.shtml /asiatradehub.com/malaysia/tax1.asp
Irs.gov, topic 407 Business Income, March 4 2010, [Online] Available at: http:// www.irs.gov/taxtopics/tc407.html
