TA X & A C C O U N T I N G

From a Dividend Imputation System

to a Single Tier Dividend System
Dr. Choong Kwai Fatt
Malaysias dividend system has gone for a complete overhaul in 2008, with the objective
to provide companies, shareholders and the government a simple, transparent, efficient
and equitable system. With effect from YA 2008, a single tier dividend system will replace
the tax imputation system on dividend payments to shareholders.

Transitional Period (1.1. 2008 to 31.12.2013)

New companies commencing business in YA 2008 will be placed
on the single tier dividend system immediately. Existing companies with Section 108 credit balance (dividend imputation system)
have to apply the following transitional provisions stipulated in
Sections 38 to 57 of the Finance Act 2007 (Act 683/2007) to slowly
phase out the imputation system and move in completely to the
single tier dividend system on 1 January 2014.
Any unutilised credit balance on 31 December 2013 is deemed
at nil. During this transitional period, so long as the company has
its Section 108 account, the imputation system will apply and tax
credit on dividend income is available to shareholders.

New Company
New companies commencing their first business operations in
YA 2008 will be placed on the single tier dividend system. Income
tax paid monthly by the company is final tax. The Section 108
account is not required.
Where dividend is paid or credited by such companies to any
shareholders in YA 2008 and subsequent YAs, the company is not
required to deduct tax from such dividend paid or credited to
shareholders. However, companies have to provide a statement
to the tax authorities on dividends paid during the YA within seven
months after the closing of the account.
Failure to provide the statement of dividends to the tax authorities is an offence. Upon conviction, it will be liable to
(a) Fine between RM200 to RM2000;
(b) Imprisonment of not more than six months;

tation or tax return forms. Documentation and records however

need to be maintained for tax audit inspection.

Existing Companies
Existing companies with business operations in YA 2007 will
continue to credit the December 2007 monthly installment to the
Section 108 account. The balance of the Section 108 account is
then frozen on 31 December 2007. This credit balance cannot be
increased further and it is only to be used to pay cash dividends
on ordinary shares to shareholders until nil balance or at 31 December 2013, whichever is the earlier. Thereafter the Section 108
account is deemed to be in nil balance. On 1 January 2014, the
company moves in to the single tier dividend system.
The Section 108 account is cut off on 31 December 2007. This
would mean that a company with a year end other than 31 December would be able to continue to allow its monthly income tax paid
for the YA 2008 to 31 December 2007 to be credited to the Section
108 account. A company with a 31 December year end will have its
January 2008 monthly installment (payable for December 2007) to
be credited to the Section 108 account. Thereafter credit balance
in the Section 108 account is frozen. It cannot be increased further.
Section 108 Account credit balance:
Companies Year End 31 December
Non 31 December
YA 2007 (31.12.2007)
YA 2008

30

Jan 2008

N/A

N/A

monthly installment
till 31.12.2007

31.12.2007

Credit balance frozen

Credit balance frozen

1.1.2008 - 31.12.2013

To pay cash dividend

on ordinary shares
till nil balance

To pay cash dividend

on ordinary shares
till nil balance

Deemed nil

Deemed nil

(c) Both (a) and (b)

Shareholders receiving these dividends are tax exempt and
these dividends are not required to be included in the tax compu-

Last installment in

1.1.2014 Unutilized
S 108 balance

ACCOUNTANTS TODAY March 2008

From a Dividend Imputation System to a Single Tier Dividend System

The Section 108 account will be further reduced by any tax discharged, remitted or refunded in relation to the tax assessment
prior to YA 2008. Composite assessment arising from tax investigation, issued after 31 December 2007 shall not be added to the
Section 108 account balance.

The company has to readjust the Section 108 account to

RM25,648 instead of RM27,000. The tax credit on dividend income available to the shareholders will be RM25,648. This is deductible from the income tax payable by the shareholders.

Cash dividend on ordinary shares

A company paying or distributing dividends to shareholders has

to furnish the shareholders with the dividend warrant stating:

Statement of dividend
The existing frozen Section 108 account balance will be used to
pay out cash dividends on ordinary shares. The company will deduct the following amount from the Section 108 account and pay
the net amount of dividends to shareholders:
YA

(a) gross dividend;

(b) tax deducted/deemed deducted from the Section 108 account;
(c) the net amount paid or market value of asset distributed.

Regrossing dividend

The company is obliged to provide the tax authorities a statement of dividends paid out during the YA and its Section 108 balance within seven months of the closing of the accounting period.
This will continue to apply for YA 2008 to 2013 or until the Section
108 account is fully utilised, whichever is earlier.

The amount received by shareholders will be deemed net

amount should the company:

Section 108 account

2007

2008

2009

Amount debited to S 108 A/C

27%

26%

25%

Net dividend to shareholders

73%

74%

75%

The Section 108 account will be reduced by dividends paid for:

(a) fail to deduct tax from the Section 108 account; or

(b) distribute asset in specie
A regross of the dividend will apply and the appropriate tax will then
be computed and debited to the Section 108 account accordingly.
The amount debited to the Section 108 account is computed:

Amount received by shareholders (deemed net) (B)

B
1 tax rate of company
Example 1
Joe Chen (Holding) Bhd closes its accounts on 31 December every
year. On 14 February 2008, the company pays cash to its shareholders,
RM 10,000. No tax has been deducted from the Section 108 account.
The income tax rate applied to companies in YA 2008 is 26 per
cent. Therefore the amount received by shareholders is deemed at
net amount, after tax of 26 per cent. The tax credit on dividend
income debited to the Section 108 account of the company will be:

RM10,000
1 26 %

RM10,000 = RM3,514

Changes in tax rate

Where there is a revision in the tax rate of companies due to
budget and the interim dividend paid is based on the old tax rate,
the amount received by the shareholders has to be regrossed
using the new rate and the Section 108 account of the company
will have to be adjusted.
Example 2
Siang Loong (M) Sdn Bhd closes its account on 31 March annually. On 1 May 2007, the company pays net dividends of
RM73,000 to its shareholders and debits RM27,000 (27 per cent
of the gross dividend) to the Section 108 account.
As the tax rate for the company [legislated by Finance Act 2007
(Act 683/2007), gazetted on 28 December 2007] applicable for
YA 2008 is 26 per cent, the shareholders are deemed to have received net of tax 26 per cent and the amount assessable to tax is:

RM73,000
1 26 %

March 2008 ACCOUNTANTS TODAY

= RM98,648

(a) YA 2008 to 31 December 2007 (for companies with year ends

other than 31 December)
(b) 1.1.2008 to 31.12.2013
until nil balance.
Where the amount debited to the Section 108 account exceeds
the credit balance, the excess is a debt due from the company to
the Government and needs to be accounted to the IRB [Section
108(6) charge] within seven months from the date of closing the
account (due date).
The amount of the Section 108 charge which is not paid within
the due date shall be without notice increased by 10 per cent of
the Section 108 charge. Both the Section 108 charge and the increased sum of 10 per cent shall be debt due to the Government
and payable to the tax authorities.
The DG, however, at his discretion may waive the 10 per cent
penalty or part of the penalty.

Moving to single tier dividend system

Where the existing company has the following circumstances:
(a) The Section 108 balance is nil as at 31.12.2007;
(b) The Section 108 balance is nil as at any date from 1.1.2008 to
31.12.2013;
(c) The Section 108 balance is nil due to tax discharge, remittance or refund for tax assessment prior to YA 2008;
(d) The Company exercised irrecoverable option between 1.1.2008
and 31.12.2013 to self zerorise the Section 108 balance to nil;
the company then must move to the single tier dividend system.
Any dividends paid after the event of (a) to (d), need not be
accounted for tax and shareholders receiving such dividends will
be tax exempt. In the event the shareholder is a company, the
subsequent payment of dividends from these exempt incomes is
also exempt dividends to shareholders.
On 1 January 2014, all companies are on the single tier dividend system. Any Section 108 balance as at 31 December 2013 is

31

From a Dividend Imputation System to a Single Tier Dividend System

deemed at nil balance.

Election to disregard Section 108 credit balance

Section 50 of the Finance Act 2007 allows a company to elect to
disregard the credit balance of the Section 108 account and opt in
to the single tier system. The form to fill is Form R50 and it should
be submitted to the processing centre located in Pandan Indah,
Kuala Lumpur. This election is an irrevocable option and can be
exercised any time from 1 January 2008 to 31 December 2013.
Every company within a group of companies is treated as a separate legal entity. A holding company that elects to disregard the
balance of the Section 108 account will not affect the subsidiaries. Subsidiaries maintaining the Section 108 account will continue under the imputation system. Any dividends to the holding
company will have to be debited to the Section 108 account and
the holding company will have its Section 110 set off when receiving dividends.
It is felt that listed companies should not elect to disregard the
Section 108 balance as there may be lower income groups depending on the tax credit on dividend income. As to unquoted
companies where the shareholders pay the marginal tax rate of
27/28 per cent, such companies should opt to disregard the Section 108 balance for tax efficiency purposes.

Anti tax evasion

The tax authorities would issue a written requisition calling the
company to account for
(a) tax deducted on gross dividends; and

less than 90 days. This however applies to holding of unquoted

shares only. Disposal of listed shares shall continue to be allowed tax credit on dividend income.

Anti avoidance where shareholder is a company

Companies within a group can enjoy group loss relief whereby
a loss making company may surrender 50 per cent of its current
year business losses to the holding company. This will result in a
cash refund on dividend income in the event the holding company also derives dividend income from other subsidiaries.
Section 53 of the Finance Act 2007 serves as an anti avoidance
legislation. A company receiving dividend income from a company paying dividends using the Section 108 account (in the imputation system), where the statutory income of the dividend income is deemed as total income or part of the total income of that
company for that YA.
The objective of deeming statutory income of dividend income
as total income is to ensure no tax refund is made by tax authorities due to current year business loss.
Statutory income

RM

S4 (a) Business

S4 (c) Interest

S4 (d) Rental

Aggregate income

xx

- Current year business loss

(x)

excess unabsorbed business loss c/f

(b) penalty not exceeding 100 per cent of tax deducted on gross
dividends

Total Income

nil

S4 (C) Dividend income

xx

should the company in any event fail to pay dividends (without

Section 108 balance) but nonetheless issue a dividend warrant to
its shareholders showing the tax deducted on dividend. This will
allow the shareholders to claim the tax credit on dividend income
and result in a loss of revenue to the Government.
Both these amounts are debt due from the company to the Government and shall be payable to the tax authorities upon the service of the written requisition. The DG however at his discretion
may waive the penalty or part of the penalty if the company can
adduce evidence that it is a genuine error or mistake.

Chargeable income

xx

Income tax payable

26 per cent

Shareholders
Where the existing company pays dividends to the shareholders using the Section 108 balance, the tax credit on dividends (YA
2008, 26 per cent of gross dividends) is available as a set off against
the income tax payable by the shareholders (S110 set off). Excess tax credit over income tax payable will be a cash refund to
the shareholders.
Section 110 set off is however not available in the following circumstances:
(a) Shareholder is a Labuan Offshore Company paying income
tax under Labuan Offshore Business Activity Tax Act 1990,
(b) Shareholder acquires unquoted shares whereby the holding
period between the dividend receipt and disposal of shares is

32

- S110 set off

(26 per cent)

Net income tax payable

nil

Without the deeming provision, dividend income would be part

of aggregate income, able to set off the current years business
loss and chargeable income would then be nil. Tax credit on dividend income will result in a cash refund to the company.

Non application of Section 108 account

The Section 108 account is not applicable to the payment of
exempt dividends utilising the tax incentives exempt income account such as reinvestment allowance, investment tax allowance,
increased export allowance etc.

Conclusion
The single tier dividend system is business friendly, economical and tax efficient for the business environment as a company
is no longer required to maintain a tax credit balance for dividend
payment. A portion of tax administration duties is now abolished
so that human assets are able to focus on tax efficiency. AT
Dr. Choong Kwai Fatt is an Associate Professor at the Faculty of Business and Accountancy, University of Malaya.

ACCOUNTANTS TODAY March 2008