Taxation 1 (TAX 267)

Chapter 1: Basis of Malaysian income tax

2022

Table of Contents

1. What is tax ...................................................................................................................... 2

2. Scope of charge .............................................................................................................. 3
3. Exemption from income tax ............................................................................................. 6
4. Types of income: Revenue in nature and capital in nature .............................................. 7

Prepared by: Mahfuzah Ahmad, CA(M), FCCA(UK) 1|Page

Taxation 1 (TAX 267)
Chapter 1: Basis of Malaysian income tax
2022

1. What is tax?
 Taxation has existed since humankind began organising itself into civilised communities.
The Oxford Dictionary defines a tax as a:

“contribution levied on persons, property (RPGT) or business for the

support of government”.

 In Malaysia, taxation was formally introduced into Federation of Malaya in 1947 in the
form of the Income Tax Ordinance 1947.

 Subsequently repealed and replaced with Income Tax Act 1967 with effect from 1
January 1968.

There are two types of tax:

Direct tax – are those taxes paid directly to the Malaysia Inland Revenue Board
(MIRB). For example, income tax, real property gain tax, petroleum income tax
(PITA) and stamp duty.

E.g. Kumar’s income tax paid to

MIRB

Indirect tax – are those taxes generally paid to another person (third party) who then
transmits the tax to the MIRB. For example SST, custom duties and excise duties.

E.g. Kumar eats at McD and paid sales tax to McD who then transmits to Custom/
IRB

2. The sources of reference to Revenue law include:

1. Statute law (ITA)
2. Case law
3. Public Ruling
4. Advance Ruling

Prepared by: Mahfuzah Ahmad, CA(M), FCCA(UK) 2|Page

Taxation 1 (TAX 267)
Chapter 1: Basis of Malaysian income tax
2022

2. Scope of charge
In Malaysia, a transaction must fall within the ambit of ‘scope of charge’ in Section 3 of
ITA in order to be liable to income tax.

The scope of charge to income tax refers to the limits within which income would be
taxable in a country (i.e. who the taxpayer and where income is arises):
1) Territorial / derived Scope - All income that arises within a country would be
taxable. In other word, only income derived in that country will be taxable E.g.
Malaysia.
2) World Income Scope – All income, wherever arising is taxable include business
carried on by resident on certain types of business such as banking, insurance and
air or sea transport.
3) Derived and Remittance Basis – Income arising in a particular country and
brought back or remitted into the country would be taxable (income remitted,
foreign source of income exempted).

Section 3 of ITA:

“Subject and in accordance with this Act, a tax to be known as income tax
shall be charged for each year of assessment (YA) upon the income of any
person accruing in or derived from Malaysia or received in Malaysia from
outside Malaysia”

3. From this Section 3, there are several term to be clarified in details as follow:
1. This act – Income Tax Act 1967 (as amended)

2. Tax
 Contribution levied on persons, property or business for the support of
government Based on
 A compulsory exaction of money by a public authority for public purposes Australian
cases
enforceable by law
 Raising money for the purposes of government by means of contributions from
individual persons.

Prepared by: Mahfuzah Ahmad, CA(M), FCCA(UK) 3|Page

Taxation 1 (TAX 267)
Chapter 1: Basis of Malaysian income tax
2022

3. Year of assessment (YA)

 Tax is assessed based on year of assessment (YA).
 A year of assessment refers to calendar year.
 For example, YA 2021 refer to calendar year of 1 January 2021 to 31
December 2021.
 Basis year also refers to the calendar year.
 For example, basis year 2018 refers to the period from 1 January 2018 to
31 December 2018.
 When tax is charged or assessed on a person, it is charged in respect of the
basis year for the year of assessment.
 For example, the basis year for year of assessment 2018 is the 12
months from, 1 January 2018 to 31 December 2018.
 S. 21 (A) -> The basis year for a year of assessment shall constitute the basis
period for that year of assessment.
 Basis period is the accounting period which end in the basis year for a year
of assessment.
 The term of ‘basis period’ is used in respect of income derived from a
business source.

4. Income
Not defined in ITA but categorise the income under Section 4 (resident) and Section
4A (non-resident).

Section 4. Classes of income on which tax is chargeable.

Subject to this Act, the income upon which tax is chargeable under this Act is income
in respect of-

4(a) gains or profits from a business, for whatever period of time carried on;

4(b) gains or profits from an employment (i.e. individual);

4(c) dividends; interest or discounts;

4(d) rents, royalties or premium;

4(e) pensions, annuities or other periodical payments not falling under any of the
foregoing paragraphs;

4(f) gains or profits not falling under any of the foregoing paragraphs.

Prepared by: Mahfuzah Ahmad, CA(M), FCCA(UK) 4|Page

Taxation 1 (TAX 267)
Chapter 1: Basis of Malaysian income tax
2022

Section 4A. Special classes of income on which tax is chargeable (applicable to non-
resident) – Withholding Tax

i. amounts received by a non-resident in consideration of services rendered by a non-

resident or his employee in connection with the use of property or rights belonging
to, or the installation or operation of any plant (i.e. services paid to non-
resident on the installation of the machine), machinery or other apparatus
purchased from, that non-resident;

ii. amounts received by a non-resident in consideration of non-technical/ technical

advice (technical or non-technical), assistance or services rendered in
connection with technical management or administration of any scientific, industrial or
commercial undertaking, venture, project or scheme; or

iii. rent or other payments made under any agreement or arrangement for the use of
any moveable property.

5. Person includes:
1) Company
2) Body of persons - an unincorporated body of persons (not being a company),
including a Hindu joint family but excluding a partnership.
3) Corporations sole
4) Individuals by virtue of its definition as a natural person
5) Excludes partnership

6. Source: Accruing in or derived or Accrued/derived, from Malaysia, received in

Malaysia from outside Malaysia (foreign source of income)
 Income accrued in or derived from Malaysia will be taxed at the time of accrual or
derived notwithstanding the fact that the income may not have been received in
Malaysia.
 Derived also mean:
 To obtain, receive, come from something,
 Active involvement e.g. employment; and
 Deemed derivation provision (Sections 12 to 17 – income deemed to
be derived from Malaysia although generated outside Malaysia).

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Taxation 1 (TAX 267)
Chapter 1: Basis of Malaysian income tax
2022

 Source of an income:
 Manufacture/service – place where service is rendered or production
is carried on
 Employment – location where service is rendered
 Dividend – where the payer company is resident (exempt)
 Pension/annuities – location of funds (i.e. it must be in Malaysia)
 Rental – location of property (i.e. it must be in Malaysia).

Dividend income and interest income – EXEMPT income for individual

Interest income – TAXABLE for company (TAX317 – Company tax)

Interest income – EXEMPT for individual (TAX267 – Individual tax)

Dividend income – EXEMPT for both individual and company

3. Exemption from income tax

Exemption from Income tax – with effect from the year of assessment (YA) 2004, Para
28, Sch. 6 of ITA was amended to provide from income tax exemption on income
remitted into Malaysia from overseas (foreign source of income).

Paragraph 28, Schedule 6.

Income of any person, except (a resident company carrying on the business of banking,
insurance or sea & air transport) derived from sources outside Malaysia and received in
Malaysia is exempt.

For a resident company, the exempted foreign income will be credited to an exempt
account from which exempt dividends can be paid. If the initial recipient of the dividends is
a corporate entity, then it can also pay out tax exempt dividends to its own shareholders
i.e. a two-tier tax exemption.

Prepared by: Mahfuzah Ahmad, CA(M), FCCA(UK) 6|Page

Taxation 1 (TAX 267)
Chapter 1: Basis of Malaysian income tax
2022

4. Types of income: Revenue in nature and capital in nature

1. Revenue in nature -> taxable for income tax purposes (or subjected to income tax)

1) Income arising from daily sale or revenue from business activity (business source).
2) Sundry income (miscellaneous income) arising from non-business sources.

2. Capital in nature -> not taxable for income tax purposes (or not subjected to income
tax)

1) Income arising from sale or disposal of non-current assets.

2) Revenue arising from capital structure acquisition or disposition. In other words,
affect the business structure.

3. Both Revenue and capital in nature

 Money received in advanced -> revenue receipts or capital receipts.

 Revenue receipts if taxpayer has the unconditional right to the advance.
 If the taxpayer will have to be refunded, it becomes capital receipts.

Prepared by: Mahfuzah Ahmad, CA(M), FCCA(UK) 7|Page