Malaysian Taxation 1

ACC 2108

Lecture 1
 History of Tax
EGYPT
During the various reins of the Egyptian Pharaohs
tax collectors were known as scribes. During one
period the scribes imposed a tax on cooking
oil. To insure that citizens were not avoiding the
cooking oil tax scribes would audit households to
insure that appropriate amounts of cooking oil
were consumed and that citizens were not using
leavings generated by other cooking processes as
a substitute for the taxed oil.

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GREAT BRITAIN

The first tax assessed in England was during

occupation by the Roman Empire.

Under the earliest taxing schemes an income tax

was imposed on the wealthy, office holders, and
the clergy. A tax on movable property was
imposed on merchants. The poor paid little or no
taxes.

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The organization which is responsible for the
administration of the UK tax system is Her
Majesty’s Revenue and Customs (HMRC)

Taxation system is composed of number of

different taxes, some if which are direct tax
(charge on income, profits or other gains) and
indirect tax(taxes on spending: custom duty,
stamp duty).

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 Malaysia
Early History of Tax Administration

Before any Western powers ever set foot in this land, a tax administration
system had actually existed, that is during the heyday of the Melaka and
Johor-Riau Sultanate.

In the era of the Melaka Sultanate, maritime and harbour laws existed along
with matters pertaining to a tax structure involving the foreign and local
merchants. During that period tax collector and all tax-related matters were
the responsibility of the Chief of the Exchequer.
“…the Chief of the Exchequer. (He) controlled all the revenue and Customs
Officers and looked after the palace building and equipment”. (R.J.W.
Wilkinson “The Melaka Sultanate”. JMBRAS VOL. XIII-Pt.2, 1935, p.31).

The portfolio in charge of tax collection was the Harbour Master. He was
entrusted by the king with the power to enforce rules and Harbour Laws.

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Introduction

In Malaysia, the law governing income taxation is the

Income Tax Act 1967 (Act 53/1967).

A transaction must fall within the ambit of “scope of

charge” as provided in S3 of the Act in order to be liable
to income tax.

If it is not within the ambit of S3, no income tax is due in

respect of such transaction. In short, it is tax free.

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 Scope of Charge (s3)

Section 3 (a) the transaction must be ‘income’ in

nature and such income is accrued in or derived
from Malaysia; or

Section 3(b) ‘Income’ in nature and it is received

in Malaysia from outside Malaysia.

Income tax would be imposed by reference to a YA upon a person’s

income. Such person is known as a chargeable person.

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 Scope of income (s4)
Section 4 – Subject to this Act, the income upon which tax is chargeable under
this Act is income in respect of:

 Gains or Profit from a Business, for whatever period

of time carried on;
 Gains or profits from an employment;
 Dividends, interests or discounts;
 Rents, royalties or 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.
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INCOME

The distinction between capital and income is crucial. The Act imposes income tax on
“income”. Capital gains are not chargeable to income tax. The Act does not define
“income” nor “capital”, thus one needs to research through the case laws for guidance.

Lord Macmillan observed in Van den Berghs Ltd v Clark (19 TC 390) at p. 428:

“…The income Tax Acts nowhere define “income” any more than they define “capital”;
they describe sources of income and prescribe methods of computing income, but what
constitutes income they discreetly refrain from saying….Consequently it is to the decided
cases that one must go in search of light…” .

In practice, the distinction between “capital” and “income” is never an easy task. Greene
MR commented in CIR v British Salmson Aero Engine Ltd [1938 ] 2 KB 482 at p.498:

“…in many cases it is almost true to say that the spin of a coin would decide the matter
almost as satisfactorily as an attempt to find reasons.”

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 Different between Income and Capital
Gain

Income (chargeable ) Capital Gain (not chargeable)

•Repetitive •Long term Investment
• From a source •Personal Asset /Personal Use
•Provision of services •Profit from disposal of long term
investment
•Trading in nature •Speculation
•Sale of short term investment • Gambling
•Sale of capital assets

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 Example 1
Lulu is a music composer with various business interests.
While on a business trip to Italy, she acquired a piece of
jewellery at the exhibition for her personal use. She
expects the value of the jewellery to appreciate over the
years.

The purchase through a broker and was financed from

borrowings. 3 years later, she sold at a substantial profit.
Lulu had not previously disposed of any jewellery.

Explain, with reasons, whether the profit is liable to

income tax.

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 Answer to Example 1
Lulu, although having various business interests, does not
necessarily implies that all transactions carried out by her would
be considered as trading transactions.

The Intention at the time of acquisition of the jewellery is crucial.

Since nature of the asset purchased is more for personal use, the
profit realized would constitute capital accretion and not liable to
income tax.

The Use of a broker and financing from borrowings is irrelevant

as the intention for profit seeking is not presented. In addition, an
isolated transaction would further strengthen the argument for
Personal enjoyment than trading.
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 Example 2
Xiao Lin is a lawyer by profession in Kuala
Lumpur. In 2016, she developed a special interest in
the stock market where she spent most of her time.
During the period, she was actively involved in
purchase and sale of shares in BURSA Malaysia
and made a total gain of RM150,000, out of the 28
transactions she entered into.

Explain, with reasons whether the gain of

RM150,000 is liable to income tax.

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 Answer to Example 2
The gain of RM150,000 would constitute capital gains arising
from a speculative activity and hence would not be liable to
income tax. Xiao Lin is a lawyer by profession and is not
connected with the securities industry, unlike a stockbroker or
remisier who possesses specialized knowledge and source of
information.

Although the transaction carried out by Xiao Lin were habitual

and repetitious, they were mere bets akin to gambling bets and
thus were capital receipts.

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Summary of income and capital receipts
Income receipts: Capital receipts:
Chargeable to income tax Not chargeable to income tax
(a) Provision of services (a) Personal gift
(b) Sale of goods/trading stock (b)From profit disposal of long term
investment (properties, shares)
(c) Trading or adventure in the nature of (c) speculation, windfall gains
trade
(d) Sales of short-term investment (d) Gambling
(e) Sale of capital assets (motor vehicles,
factory, plant & machinery)

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 Example 3
Greenfield Sdn Bhd (GSB) cleared a portion of its oil palm plantation
for replanting purposes. However, before replanting work could
commence, the Government issued a notice of acquisition to GSB to
acquire that portion of land for road expansion purposes. GSB
received a compensation of RM750,000 based on estimated income
receivable over a period of 20 years from that portion of land.

The road expansion took 12 months to complete. During this period,

the Government utilized another portion of plantation to keep the
machinery used in the road expansion project and GSB received
RM100,000 as consideration.

State, with reasons, whether the sums received are subject to income
tax.
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 Answer to Example 3
The compensation of RM750,000 is not subject to income tax as it represents a
receipt on the disposal of a capital asset i.e. land. This would be a capital receipt.
Although the compensation is calculated based on estimated income that would
have been receivable, this does not change the nature or character of the
receipt. This is just a commercial method to determine a reasonable value for the
land. In this case, the company is unable to utilize that portion of the land
permanently i.e. the compensation is for the permanent sterilization of the asset. It
concerns a disposal of an enduring benefit asset.

Receipt from permanent sterilization of asset is capital receipt as it constitutes a

disposal of a long term investment while receipt from temporary destruction of
asset is income receipt.

As for the consideration of RM100,000, this represents a taxable receipt as it is a

payment for the use of the land for a specified period. It thus represents a
payment for temporary disturbance to the owner of the asset and is “income” in
nature.

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 Offshore business-is not chargeable to
income tax
• Section 3 sets the scope of income tax, that is, income accrued
in or derived from Malaysia would be tax. However, s 3B of
the Act specifically provides that income derived by an
offshore company in respect of offshore business activity is
not chargeable to income tax. The law governing the tax for
such Labuan business activity is the Labuan Business Activity
Tax Act, 1990 (LBATA, 1990) and not the Income Tax Act,
1967.
• With effect from YA 2009, Labuan entities can make an
irrevocable election to have its Labuan business income to be
assessed to income tax, instead of the 3% preferential rate on
net accounting profit under LBATA, 1990.

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Person

Section 2 of the Act defines “Person” to include a company, a

body of persons, a limited partnership and a corporation sole.

Example:

Nik Muhamed wrote a will to leave all his wealth to his favourite
cat, Emmey, upon his death. The income from the wealth
accruing to the cat would be subject to income tax.

In this case, the tax authorities are empowered under the Act to
appoint agent for the collection of income tax on income derived
from the wealth.

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 The following are some categories of person and their
respective income tax rates for the YA 2017:
Rate
Paid up capital > RM2.5 Million shares 24%
(a) Company
Paid up capital ≤ RM2.5 Million shares at Chargeable income
the beginning YA ≤ RM500,000 18%
> RM500,000 24%

(b) Individual
- Tax resident 0% - 28% scale rate
- Non-tax resident 28% flat rate

(c ) Trust 24% flat rate

(d) Club, trade association 0% - 28% scale rate (same

as individual's scale rate)

(e ) Co-operative society 0% - 24% scale rate ( a new

scale differenct from individual's

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 Assessability of income
• i) the accrued/ derived test.
- means right to receive while derived has been
defined in the Act.
• ii) the geographical boundaries of Malaysia.

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 Accrued/ Derived Test
Accrued means “right to receive” while derived has been defined in the Act according to
the sources of income as follows:

Sec. Sources of Income Derivation Section

S4(a) Business Income S12
S4(b) Employment – general S13(2)
– public service,
statutory authority S13(2)
S4(c) Dividends S14(1) - (3)
Interest S15
Discounts -
S4(d) Rent -
Royalties S15
premium -
S4(e) Pensions S17(1) – (3)
Annuities and other periodical payments -
S4(f) others S15B
4A Special classes of income S15A
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 Year of assessment
• With affect from 1 January 2000, Malaysia
moves towards the implementation of current
year assessment. This resulted in the
assessment of income tax to be concurrent
with the derivation of the income.

• The calendar year coinciding with a YA shall

constitute the basis year for that YA

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 Example 4
• YA 2016 refers to calendar year:
1.1.2016 to 31.12.2016

• The basic year of YA 2016 is the calendar year

from:
1.1.2016 to 31.12.2016

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 Basis period for individual
Self was fully implemented in YA2004. With
effect from YA 2004, the income source of a
person other than a company, trust body or co-
operative society will be on calendar year basis.

This is to facilitate the taxpayer on estimation of

income tax, payment of tax and submission of
return not later than 30 April or 30 June of the
following year.

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 Example 5
SL Low operates a restaurant in Tanjung Raya since
2009. She derives business income, dividend income
and rental income. Section 21 of the Act requires the
basis period for all the sources of income to be on a
calendar year basis.

Answer to Example 5
YA 2016
4 (a) Manufacturing business 1.1.2016 – 31.12.2016
4 (c) Dividend 1.1.2016 – 31.12.2016
4 (d) Rental Income 1.1.2016 – 31.12.2016

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Prepared By: Kelvin Tang 27
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Thank You

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