Lecture 7

Tax Planning:Concept, Planning and Calculation

LEGISLATION

• Income Tax Act 1967• Real Property Gains Tax Act 1976• Lembaga Hasil Dalam Negeri (LHDN)• Inland Revenue Board (IRB)

– Corporatised on March 1, 1995

PERSONAL TAXATION

• Employment• Sole Proprietorship• Partnership

SCOPE OF CHARGE

• Territorial concept• Income of any person

– Accruing in (right to receive)– Deriving from (who pays you – government

and state government, payment from tax resident, charged as outgoing expenses)

– Received in Malaysia – From outside Malaysia

DEFINITION OF PERSON

• Individual• Company• Body of persons• Corporation sole• Excluding partnership – only on personal

income

INCOME RECEIVED IN MALAYSIA FROM OUTSIDE MALAYSIA

• Taxable Income– Resident individual/body of persons/corporation– Resident companies involving 4 specific industries:

banking, insurance, shipping and air transport• Tax Exempted

– Non-resident (under Schedule 6 para. 28)– Resident company - income tax (exemption)– Unit Trusts – Offshore Companies (LOBATA 1990)

RECENT TAX DEVELOPMENTS

• Historically – Preceding year basis (PYB)– 1/1/98 to 31/12/98 – Year of assessment 1999

CHANGE OF ASSESSMENT SYSTEM

• Preceding year basis (PYB) to current year basis (CYB)

• Effective date– Year ended 31/12/2000– Financial year in 2000

BASIS PERIOD

• Current year basis• Calendar year 1/1/2000 to 31/12/2000

– Year of assessment 2000• Financial year 1/7/1999 to 30/6/2000

– Year of assessment 2000

BASIS YEAR 2000

• Current year basis (CYB)• 1/1/1999 to 31/12/2000

– Year of assessment 2000• 1/1/2000 to 31/12/2000

– Year of assessment 2000

TAX IMPLICATIONS – SHIFT TO CYB

• Year of assessment 2000– 2 basis periods

• Basis period in 1999– Tax waiver year– Income tax (amendment) Act 1999

TAX WAIVER YEAR

• Income earned in 1999– No tax payable

• Exceptions– Dividend– Payment subject to withholding tax– Non-citizen/non-resident individuals who

commence or cease employment in 1999

SELF- ASSESSMENT

• Effective Date– 1 January 2000– Year of assessment (YA) 2001

• YA 2001 - Companies (220,000)• YA 2004 - Business, partnership and

cooperatives (800,000)• YA 2004 – Employment (1,800,000)

CLASSES OF INCOME – SECTION 4 (RESIDENTS OR NON-RESIDENTS)

a) Businessb) Employmentc) Dividends, interest or discountsd) Rents, royalties or premiume) Pensions, annuities or other periodical

paymentsf) Gains or profit outside of (a) to (e)

SPECIAL CLASSES OF INCOME – SECTION 4A

• Recipients: Non-residents• Withholding tax – payment/credit• Services

– use of property/rights– Installation/operation of plant + machinery

• Technical advice/services/assistance/management/ administration

• Rent – movable property

PAYMENTS TO NON-RESIDENT – WITHHOLDING TAX

%Technical Fee 10Royalty 10Interest 15Management Fee 10Contract Payment 15Public Entertainer 15Rental or movable property 10

INCOME VS CAPITAL

Income - Revenue/capitalRevenue -Taxable

- Tax exemptTax exempt - Schedule 6

- Gazette ordersCapital - Not taxable

- Real property gains tax (RPGT)

Combined Assessment Separate Assessment

RM HusbandRM

WifeRM

Personal Relief

8,000 8,000 8,000

Wife/Husband relief

3,000 N/A N/A

Alimony Payment

N/A 3,000 N/A

Combined Assessment Separate Assessment

RM HusbandRM

WifeRM

Child Relief 800 800

EnhancedRelief

3,200 3,200

Alimony Payment

5,000 5,000

Combined Assessment

Separate Assessment

RM HusbandRM

WifeRM

EPF + Insurance

5,000 5,000 5,000

Medical/Edu. Insurance

3,000 3,000 3,000

EPF AnnuityScheme

1,000 1,000 1,000

Combined Separate Assessment

RM Husband Wife

Medical exp. - parents - serious diseases - check-upDisabled Person Supporting Equipment

5,000 5,000*

5005,000

5,000#

5,0005,000

5005,000

5,000

5,0005,000

5005,000

5,000

* self, spouse + child# self, spouse, child + parent

COMPUTATION OF TAX PAYABLE

• Tax Payable = Chargeable Income X Relevant Tax Rate

• Tax Rates– Resident individual/club/trade association/ co-operative society

• Scale rates : 0% to 28 %– Company Trust – 28 %– Non-resident individual – 28 %

(total income = chargeable income)

TAX COMPUTATION FORMATBusiness X TOTAL INCOME XXEmployment X Less: Personal Reliefs (X)Investment IncomeX Chargeable Income XX Other Sources X TAX PAYABLE XXAggregate Income XX Less: Rebates (X)Less: XXBasis Year Loss (XX)Less: DTA Reliefs (X) Approved Donation/ Sec 110 Set-off (X)Subscription (X) TAX PAYABLE/REPAYABLE XX TOTAL INCOME XX

Combined Assessment

Separate Assessment

RM HusbandRM

WifeRM

Approved Study

5,000 5,000 5,000

Books + Periodicals

500 500 500

PERSONAL REBATES

• Set-off against tax payable• Chargeable income < RM35,000• Single (RM350)• Separate Assessment

– Husband (RM350)– Wife (RM350)

PERSONAL REBATES

• Combined assessment– Husband (RM350)– Wife (RM350)

• Personal Computer– RM400 (every 5 years)

• Employment Levy• Religious Payments

– Zakat/Fitrah

DERIVATION – SECTION 13(2)

• Exercised in Malaysia• Leave attributable to employment in

Malaysia• Overseas duties incidental to employment

in Malaysia• Director of resident company• Employment aboard ship/aircraft

TYPES OF EMPLOYMENT INCOME

• Salary, wages, fee, bonus, remuneration, leave pay, commission, gratuity, perquisite, allowance

• Benefits-in-kind• Living accommodation• Non-approved pension scheme/provident

fund• Compensation payment

GRATUITY

• Tax exempt – ill health– 55 years + 10 years of service

• Taxable– Period of employment – 6 years of assessment– Whichever is shorter

ASSESSMENT - GRATUITY

• Gratuity – RM60,000• Employment period

– 5 years– RM12,000/ for each YA

• Employment period– 7 years– RM10,000 for each YA

SHARE OPTIONS

• Not-Taxable– Option not exercised

• Taxable – Option exercised– Option date– Difference between market value and option

market

BENEFITS-IN-KIND

• Motor vehicle– Private usage - RM1,200 to RM25,000– Fuel – RM600 to RM3,000

• Driver – RM3,600• Accommodation (30% of actual)• Household furnishings

– Barely-furnished, semi-furnished, fully-furnished, service charges, utilities payment etc.

LIVING ACCOMMODATION• Job requirement

– Tax exempt• Hotel/hostel

– 3% X Sec 13 (1) (a)• Apartment/house

– Lower of • 30% Sec 13(1)(a) or• Actual rental (unfurnished accommodation)

• Mobile phone, gardener, servants, school/tuition fees, club membership, staff loan

LIVING ACCOMMODATION

• Salary RM100K• Defined value – unfurnished : RM36K/24KAssessability of Benefits• Salary RM100KLower of

• 30% X RM100K or

• RM36K/24K RM30K/24KGross Income RM130K/124K

TAX EXEMPT - BIK

• Discounted goods and services• Subsidised food and drinks• Free transport• Child care benefits• Medical/dental• Leave passage• Group insurance policy

APPROVED FUND/SCHEME

• EPF Contributions– 11% (Employee)– 12% (Employer)– Tax deductibility – 19%

• Reduction in Cash Remuneration– Lower tax liability– Cash flow– Time value of money

RESIDENT STATUS – INDIVIDUAL :SECTION 7

• > 182 days• <182 days but linked to another period of 182

days or more– Temporary absence

• Incidental to employment, conference/study/seminar, ill health, social visits (<14 days)

• 90 days – immediately preceding 3 years• < 90 days

– immediately following year – resident– Immediately preceding 3 years - resident

SECTION 7(1)(B)

Aug.1999 Aug. 2000

A BPeriod A - < 182 daysPeriod B - > 182 daysPeriod A link to Period BLink - 31 Dec. to 1 Jan. in Malaysia

Period A qualifies as resident

SECTION 7(1)(B)• April 1999 March

2000

• A B• Period A - > 182 days• Period B - < 182 days• Period A link to Period B• Link - 31 Dec. to 1 Jan. in Malaysia

• Period B qualifies as resident

SECTION 7(1)(C)

YA1999 150 days1998 92 days1997 RESIDENT1996 15 days1995 138 daysQualifies as resident

SECTION 7(1)(D)

YA1999 Resident1998 63 days1997 Resident1996 Resident1995 ResidentQualifies as resident

CAPITAL GAINS

• Real Property Gains Tax (RPGT) Act, 1976

• Effective date – 7/11/1975• Disposal of real property or shares in a

real property company• Replaced Land Speculation Tax Act 1974

ACQUISITION/DISPOSAL DATE

• Acquisition date = disposal date• Written agreement (S & P)• Completion date

– Asset transferred– Full consideration paid or received

• Conditional contract

CHARGEABLE GAIN OR ALLOWABLE LOSS

• Disposal Price > Acquisition Price = Chargeable Gain

• Disposal Price < Acquisition Price = Allowable Loss

TAX RATESC/I/NCo

%NC/NPR

%Year of Disposal (within years)2 30 303 20 304 15 30

5 5 30

6th year and thereafterCompany/Non-citizen/Non-PRMalaysian 0

5