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Chapter 5; non business income students

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Chapter 5; non business income students

  1. 1. CHAPTER 5 NON BUSINESS INCOME ATXB 213 MALAYSIA TAXATION I 1
  2. 2. LEARNING OBJECTIVE ATXB 213 MALAYSIA TAXATION I 2
  3. 3. Introduction Other Income Sec 4(c): Dividends; Interests; Discounts Sec 4(d): Rent; Royalties; Premiums Sec 4(e): Pension, Annuities; Other Periodical Payments ATXB 213 MALAYSIA TAXATION I Sec 4(f): Other profits. 3
  4. 4. Sec 4(c) Dividends ITA 1967 does not define the meaning of dividend. Malaysia is replacing its imputation system to single tier system commencing from year 2008. The profit will be taxed at the company level. The dividend received by shareholders would be exempted from tax. ATXB 213 MALAYSIA TAXATION I 4
  5. 5. Sec 4(c) Dividends It is an amount distributed to s/holder by a company. Normally in the form of cash or cash equivalent. Can also be in kind. Derived from Malaysia if paid by a Malaysian resident company (Sec 14) Taxed in calendar year or financial year that it was paid depending upon type of taxable person (Sec 26). ATXB213 MALAYSIAN TAXATION I ATXB 213 MALAYSIA TAXATION I 5 5
  6. 6. Gross Income from Dividend  When a person receives dividend, the dividend is net of tax or deemed to be net.  However, the s/holder must declare the gross amount of dividend.  The following is a formula to gross up the dividend: Dividend receives (net) x 100 / 75 – company’s tax rate (25%)  May refer to Example 1  Now, all dividend income are classified as exempted. (Effected YA 2008) ATXB 213 MALAYSIA TAXATION I 6
  7. 7. Attributable Deduction  The implementation of the single tier system from year of assessment 2008, any expenses incurred to produce such income will no longer be deductible. ATXB 213 MALAYSIA TAXATION I 7
  8. 8. Exempt Dividend  Dividend income paid out of tax exempt accounts  Dividends distributed by co-operative societies to members  Dividends income received from unit trust.  Dividends received from an offshore company distributed out of income derived from an off-shore business activity or income exempt from tax  Dividend income received from foreign company and remitted to Malaysia (w.e.f YA 2004). ATXB 213 MALAYSIA TAXATION I 8
  9. 9. Example In the year 2012, Farid (a resident individual) received the following net dividends: (a) Singapore dividend of RM15,000 (b) Malaysian dividend of RM7,200 in year 2011 (which was paid on 28-12-2012) (c) Malaysian dividend of RM10,000 (which was paid in year 2012 from the company’s exempt income account. The account arose from the pioneer status conferred upon the company 2 years ago). Determine whether the all dividend is taxable. ATXB 213 MALAYSIA TAXATION I 9
  10. 10. Example En. Ramli took a RM25,000 loan to purchase shares in XYZ Bhd. Interest on loan is 8% per annum. In the basis year 2012, he received RM2,880 as net dividend from XYZ Bhd. The company tax rate is 25%. Compute the statutory income from dividend. Answer: ATXB 213 MALAYSIA TAXATION I 10
  11. 11. Sec 4(c) Interest  ITA 1967 does not define the meaning of interest.  Interest can be defined as the premium or consideration paid for the use of sum of money or property to the lender or from the settlement of debt.  Therefore interest from financial institutions, dividend from Tabung Haji and Provident Fund or profit from Bank Islam Malaysia Bhd fall under this definition. ATXB 213 MALAYSIA TAXATION I 11
  12. 12. Sec 4(c) Interest  Interest income received by individuals from money deposited in an approved financial institutions will be tax. However, effected year 30 August 2008, it was classified as exempted.  Taxed in calendar year or financial year that it was paid depending upon type of taxable person (Sec 21). ATXB 213 MALAYSIA TAXATION I 12
  13. 13. Sec 4(c) Interest  Section 4B was introduced in the 2013 Budget and it provides that interest income can only be treated as business income under sec 4(a) if the debenture, mortgage or other source to which the interest related forms part of the stock in trade of a business of a person or if the interest is receivable by a person from the business of lending money.  May refer Example 3,4 and 5. ATXB 213 MALAYSIA TAXATION I 13
  14. 14. Derivation of Interest Income (Sec. 15) Responsibility for payment lies with Government or State Government Y Responsibility for payment lies with Resident Person + Malaysian Loan Y Charged As Outgoing or Expense Against Income Accruing In Or Derived From Malaysia Y Y Payment of interest on debts is secured by property or assets situated in M’sia Deemed derived from M’sia ATXB 213 MALAYSIA TAXATION I 14
  15. 15. Withholding Tax  Interest income is subject to withholding but the rate of WHT is depend on the resident status of recipient.  If interest paid by any financial institution in Malaysia to resident person, a 5% WHT will be deducted from the interest income.  This 5% WHT on interest income is treated as final tax. Therefore, net interest income received by resident taxpayer not be included in the computation of his tax liability.  The WHT deducted on interest income received by non-resident taxpayer is 15%. ATXB 213 MALAYSIA TAXATION I 15
  16. 16. Exempt Interest  Interest paid or credited in respect of: any savings certificate issued by the government, investment in premium savings certificate under the scheme of Bank Simpanan Nasional, bonds and securities issued by Pengurusan Danaharta Nasional Berhad within and outside Malaysia, securities or bonds issued or guaranteed by the government; debentures other than convertible loan stock approved by the Securities Commission; ATXB 213 MALAYSIA TAXATION I 16
  17. 17. Exempt Interest Bon Simpanan Malaysia issued by the Central Bank of Malaysia; non-convertible loan stocks paid or credited by any listed company in Malaysian Exchange of Securities Dealings and Automated Quotation Berhad, Merdeka Bonds issued by Bank Negara Malaysia, interest or bonus from Bank Simpanan Nasional or Lembaga Tabung Haji, interest upon saving deposits up to RM100,000 with banks or finance companies registered under the Banking and Financial Institutions Act 1989 or Islamic Banking Act 1983, ATXB 213 MALAYSIA TAXATION I 17
  18. 18. Exempt Interest interest upon saving deposits up to RM100,000 with Bank Pertanian, Malaysia Building Society Bhd, Borneo Housing Mortgage Finance Bhd, a registered co-operative and other institutions approved by the Minister, interest upon fixed deposits or money deposits in any investment account up to RM100,000 and not exceeding twelve months with the banks and financial institutions in (i) and (j) above, interest upon fixed deposits with tenures more than 12 months with banks and financial institutions in (i) and (j) above. ATXB 213 MALAYSIA TAXATION I 18
  19. 19. Sec 4 (d) Rental  Sec 2, ITA 1967 defined rent as sum received for the occupation of premises or hiring of assets.  Rental income could be classed under Sec 4(d) or Sec 4(a) income. It is classified as Sec 4(d) if is arises from an investment activity or it will be treated as Section 4(a) if it arises from a business activity. ATXB 213 MALAYSIA TAXATION I 19
  20. 20. Sec 4 (d) Rental  Derivation of rental income: For immovable property – if property located in M’sia, the rental income deemed derived in M’sia. For moveable property – if lessor carries on business in Malaysia, the rental income deemed derived from M’sia. ATXB 213 MALAYSIA TAXATION I 20
  21. 21. Example Jefri received rental income from 5 units in a shopping complex measuring 100 square metes and 1 unit residential house. Issue: Determine whether the rental can be assessed under section 4(a) of the Income Tax Act 1967. Discussion: ATXB 213 MALAYSIA TAXATION I 21
  22. 22. Basis for Assessing  Rent from each property is treated as a separate source of income. As a concession, properties are grouped into categories (residential, commercial & vacant land).  Each category is a separate source.  Rental as a rental source will be assessed on a net basis – gross income less allowable deductions.  Rental income is assessed based on calendar year basis (except for companies which is on a financial/accounting basis) ATXB 213 MALAYSIA TAXATION I 22
  23. 23. Continue  Rental income is treated as income when it is received or receivable.  It implies that if the rental is accrued on the date on which it is due and payable, it is still treated as gross income received.  In addition if the rent is paid in advance, it is also treated as rental income for the particular year when it is received. ATXB 213 MALAYSIA TAXATION I 23
  24. 24. Example Mr. Jason received rental income from Mr. Lim amounting to RM8,500 for the period July, 2012 to December 2012. In addition, he also received an advance rental for the month of Jan to Feb, 2013 amounting to RM3500. Compute Mr. Jason’s gross income from rental for YA 2012. Answer: ATXB 213 MALAYSIA TAXATION I 24
  25. 25. Allowable Expenses  Expenses that can be deducted from gross rental income are expenses that wholly and exclusively incurred in production of rental income:  Repairs and maintenance of property – renovation, alteration are not allowed.  Fire insurance premium on the rented property  Interest on loan borrowed for purchase of property.  Assessment and quit rent of property  Cost of advertising to obtain tenant (not applicable for the first tenant as it is initial cost).  Sewage charge  As stated in page 136 ATXB 213 MALAYSIA TAXATION I 25
  26. 26. Example Maria let out her apartment in Bukit Titiwangsa to Wawa from 1-5-2012. Both parties agreed to a rental of RM2,800 per month. On 28-4-2012, Wawa paid a two month rental deposit of RM5,600 as well as a utility deposit of RM2,200. In order to secure the tenancy, Maria incurred in year 2012, repainting costs of RM3,300 and RM5,800 to install built in cupboards in all three rooms of the apartment. She also incurred legal costs of RM1,800 to prepare the tenancy agreement and one-month’s rental as commission to Steven, the real property agent involved. ATXB 213 MALAYSIA TAXATION I 26
  27. 27. Example Note: Wawa is the third person to occupy the apartment since Maria purchased it from the developer. The annual quit rent for the property is RM540. Issue: Compute the statutory rental income for the year of assessment 2012. ATXB 213 MALAYSIA TAXATION I 27
  28. 28. Discussion ATXB 213 MALAYSIA TAXATION I 28
  29. 29. Losses on Rented Property  Loss from rented property (gross income less allowable expenses) is not allowed to be carried forward for following years. It is cannot be off-set against other income.  It is considered as a permanent loss unless the rental income fall under section 4(a) as business where loss is allowable to be claimed for following year. ATXB 213 MALAYSIA TAXATION I 29
  30. 30. Sec 4 (d) Royalties  Sec 2, ITA 1967 defines royalty to include any sum paid as consideration for publications, or for the use of or the right to use the following: Copyright, artistic or scientific works, patents, designs or models, plan, secret processes, trademarks or tapes for radio or TV broadcasting or other like property or rights. Know-how or information concerning technical, industrial, commercial or scientific knowledge, experience and skill. ATXB 213 MALAYSIA TAXATION I 30
  31. 31. Derivation of Royalty Income Responsibility for payment lies with Government or State Government Y N Responsibility for payment lies with Resident Person Y N Charged As Outgoing or Expense Against Income Accruing In Or Derived From Malaysia Y N Not Deemed Derived From Malaysia ATXB 213 MALAYSIA TAXATION I Deemed Derived From Malaysia 31
  32. 32. Continue The basis period for royalty is calendar year. For non-resident individual, a withholding tax of 10% will have to be withheld on royalty income before make a payment (sec 109). ATXB 213 MALAYSIA TAXATION I 32
  33. 33. Exempt Royalty Income  A resident individual who receives royalty income will be exempted on the following amount:  Para 32, Sch 6 - Royalty from publication, use or the right to use any artistic work (other than original painting) and from recording discs or tapes – The exemption limit is RM10,000 (wef YA 2006).  Para 32A, Sch 6 - Royalty from translation of books or literary work at the specific request of the Ministry of Education or the Attorney General’s Chambers – the exemption limit is RM12,000  Para 32B - Royalty respect of publication of, or the use of, or the right to use any literary work, any original painting or musical compositions – the exemption limit is RM20,000 ATXB 213 MALAYSIA TAXATION I 33
  34. 34. Exempt Royalty Income Para 32C - Income in respect of cultural performances approved by the Minister – full exemption. Para 32D – income in respect of any musical composition – the exemption is limit to RM20,000. Refer to Example 7 & 8 ATXB 213 MALAYSIA TAXATION I 34
  35. 35. Sec 4(d) Premium  Premium is defined as a receipt for a consideration of giving away the right under the tenancy in connection with the granting of lease or immovable properties.  The landlord or lessor would be assessed on the amount received together with any rental income.  The basis period of assessment is calendar year. ATXB 213 MALAYSIA TAXATION I 35
  36. 36. Sec 4 (e) Pension Periodical payment made in respect to an individual who has permanently ceased to exercise an employment. The pension is from employer to the employee, his wife, children or dependent. Malaysian derived pension is taxable. Pension will be assessed on a calendar year basis (1/1 until 31/12). ATXB 213 MALAYSIA TAXATION I 36
  37. 37. Derivation of Pension (Sec 17) Payable by the government or state government Y N Administration of fund is in Malaysia Y N Person paying the pension is a Malaysian resident Y N Not Deemed Derived From Malaysia ATXB 213 MALAYSIA TAXATION I Deemed Derived From Malaysia 37
  38. 38. Exempt Pension Income (Sch 6)  Pension paid to a resident person reaching 55 or compulsory retirement age or retirement is due to illhealth and satisfied by DG.  Pension paid to any person under written law relating to widows’ and orphans’ pension.  Wound and disability pension paid to a person in respect of service in the arm force of Malaysia or a Commonwealth countries.  Bounty payment provided by parliament to members of the following reserve force: Royal Malaysian Naval or Air Force Volunteer Reserve Malaysian Territorial Army  Refer pages 144 ATXB 213 MALAYSIA TAXATION I 38
  39. 39. Sec 4(e) Annuities  An annuity is defined as an amount received on a regular basis.  It can be payable annually or by way of installment in perpetuity or for some lesser period.  The annuity will be assessed based on calendar year. ATXB 213 MALAYSIA TAXATION I 39
  40. 40. Sec 4(e) Annuities  Sums received by way of annuities granted under annuity contracts issued by Malaysian life insurers are exempted from income tax. Malaysian life insurers means life insurers and takaful operators where Malaysian citizens hold the majority ownership or membership.  Assessable on a receivable basis. ATXB 213 MALAYSIA TAXATION I 40
  41. 41. Example Hamid, domiciled and resident in Malaysia for tax purposes, died on 30-9-2012. The terms of his will provide that Ahmad should pay an annuity of RM3,000 to Hamid’s wife. In the year 2012, Ahmad paid RM2,800 to Hamid’s wife. Issue: Determine whether the annuity is taxable. Discussion: The annuity is taxable under section 4(e) of the Income Tax Act 1967. ATXB 213 MALAYSIA TAXATION I 41
  42. 42. Section 4(f): Other gains or Profits  Section 4(f) ITA any income or profit from any gains of business activity is subjected to taxed. ATXB 213 MALAYSIA TAXATION I 42
  43. 43. THANK YOU Q&A ATXB213 MALAYSIAN TAXATION I 43

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