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T. H. KUAN & CO. (AF: 1216) | Your partner in success

General Tax Guide

Form Tax rate
Resident Individual 0% - 26%
Non-Resident Individual 26%
SB / BHD 18% or 24%

The current system of tax payment is similar to "Pay As You Earned" ("PAYE") basis.

Malaysian taxes generally include:-

Tax incentives (both direct and indirect) for the manufacturing, agriculture, tourism (including hotel) and approved services sectors as well as R&D, training and environmental protection activities are contained in the Promotional of Investments Act 1986, Income Tax Act 1967, Customs Act 1967, Sales Tax Act 1972, Excise Act 1976 and Free Zones Act 1990.

Applicable Tax Implication On SME Arising From 2014 Tax Budget:-

1. LOAN TO DIRECTOR


It is proposed that where a company provides any loans or advances from its internal funds to its directors, the company shall be deemed to derive interest income from such loans or advances. The interest income for the basis period for a year of assessment shall be the aggregate sum of the monthly interest in the basis period. The sum of the monthly interest is determined in accordance with the following formula:

  ( 1/12) x A x B
Where A is the total amount of loans or advances outstanding at the end of the calendar month; and
B is the average lending rate of commercial banks published by the Central Bank at the end of the calendar month, or, where there is no such average lending rate, such other reference lending rate as may be prescribed by the Director General.

Following the above proposal, the following accounts commonly maintained within a company’s ledger at any point of time shall have the above directly implicates the tax position of a company:-

- Amount owing by Directors to a Company
- Advances to Directors by a Company
- Loan to Directors by a Company
- Directors’ account

The tax implication in summary is:-

Our Understanding

Our understanding on the above new proposal, without further detail guidance given within the proposal is that any money given, lend, advanced to Directors and/or taken by Directors or any in kinds given or transacted with directors at any point of time with the money or in kind transaction accounted within any of the abovementioned accounts shall be subjected to interest charges by a Company and the interest shall be taxable under the corporate tax regime of a company.

Our understanding on the new proposal is not guided specifically by the following:-

  1. The definition of loan and/or advances;
  2. The extent of evidentiary documents required for the loans and/or advances for example legal binding agreement, meeting and resolutions in approving the loans and/or advances and etc;
  3. The tax deductibility of the expense incurred in preparing the evidentiary documents against the interest income;
  4. The interpretation and the conjugation of the new proposal with the MoneyLenders Act 1951;
  5. The definition of internal funds.
    Our understanding on the internal funds within a SME at this juncture can only confined to mean the available accumulated profits after payment of corporate tax of 20% and/or 25% earned and save by the SME owner’s;
  6. The commercial consideration of a transaction entered between a director and a third party, for example, interest free credit period normally given to a third party during a sale of assets by a company is applicable if the assets is sold to directors. In another word, a third party purchaser of a company’s assets will normally take some time to have the consideration fully paid without interest charged whereas the sale if made to the directors, may subject to interest charges within the broad interpretation or context of the new proposal;
  7. Whether interest is chargeable for advances normally given to the SME owners in carrying out their duties and responsibilities in overseas.

Our Suggestion

In view of the tax proposal which will take effect from 1st January 2014, the abovementioned accounts maintained within the ledger shall be cleared off or eliminated immediately by the following manner if they shall not rightfully be subjected to interest calculation or interest charges made by the Company:-

  1. A full repayment of the amount owing to the Company by the Director; or
  2. Declaration of dividend from the available profit of the Company and utilised the balance of amount owing by Directors to set off against the Dividend declared.
    This method is only applicable provided that the Company’s Directors are common to Shareholders and there is sufficient retained profit for the declaration of dividend.

Tax treatment on interest income

In a broad view, the loans and/or advances given to directors of a SME company are commonly within the context of non-trade in nature and within such circumstance, the interest or deemed interest earned by a company from the director’s account shall be taxable within a company under the proviso of S 4 (c) of MIT.

On the other hand, the interest incurred by the directors on the same circumstance shall not be allowable as deduction against his/her personal income unless the fund borrowed from the company is utilised otherwise.



Quick Reference

The following exhibit the various interest amounts and tax effect on different tranches of loans and/or advances consistently owing by directors in time within a month, a quarter and on annual and the exhibit incorporates an interest rate of 6.53% per annum.

Amount of Loan/Advances to director <-----------------------------Interest------------------------------->
Monthly (RM) Quarterly (RM) Annually (RM)
RM100,000 544.17 1,632.50 6,530.00
RM500,000 2,720.83 8,162.50 32,650.00
RM800,000 4,353.33 13,060.00 52,240.00
RM1,000,000 5,441.67 16,325.00 65,300.00

*The above information is subject to change upon the variation of interest rate and the inconsistency within the amount reflected in the above table.
Amount of Loan/Advances to director <---------------------- Tax @ 20% ------------------------------->
Monthly (RM) Quarterly (RM) Annually (RM)
RM100,000 108.80 326.60 1,306.00
RM500,000 544.20 1,632.60 6,530.00
RM800,000 870.60 2,612.00 10,448.00
RM1,000,000 1,088.40 3,265.00 13,060.00

*The tax calculated is without deduction of any expense.

Anti-Avoidance

We understand that most of the SME companies are having the directors common to shareholders where in many circumstances, a dual position of shareholders cum directors is being assumed by an individual within a SME company.

The dual position in this respect may raised doubt whether a reclassification or redefinition of amount owing by directors to amount owing by shareholders is possible for avoiding the tax implication from the new proposal.

Based on our understanding together with our basic interpretation and direct reference to Section 75A(2)(b) of the MIT, the reclassification or redefinition shall be avoided as the said Section stated hereunder on the liabilities of a director for payment of tax specifically provides the definition of a director within the Act as:-

    A person is regarded as a director if:-
  1. He/she occupies the position of a director by whatever name called, or is concerned in the management of the company’s business; and
  2. He/she is, either on his/her own or with one or more associates, the owner of, or able to directly or through the medium of other companies by any other indirect means to control, more than 20% of the ordinary share capital of the Company.

Moving Forward

Moving forward from 1st January 2014, all advances to directors shall be duly considered on its tax implication within our interpretation mentioned above and advances shall have the following meaning:-



2. BASIS PERIOD

    It is proposed that where a company, limited liability partnership, trust body or co-operative society commences operation on a day in a basis year for a year of assessment (hereinafter referred to as “first year of assessment”) and makes up its account:-
  1. for a period of less than 12 months ending on a day in that basis year, that period shall constitute the basis period for the first year of assessment.
  2. for any period of months ending on a day in the immediately following basis year, that period (hereinafter referred to as “second year of assessment”) shall constitute the basis period for the year of assessment immediately following the first year of assessment; or
  3. for a period of more than 12 months ending on a day in the basis year immediately following the second basis year, that period shall constitute the basis period for the year of assessment immediately following the second year of assessment. There shall be no basis period in relation to any of its sources of income for the first year of assessment and the second year of assessment.

Following the above proposal, a newly incorporated company is no longer subject to the assessment of overlapping period and is regardless of:-

The tax implication is illustrated within the following different scenario of a SME defined under the Proviso of the MIT:-

In such scenario, the taxable profit will be the sum of profit and losses made within the financial period.

In such scenario, the continued profit made after the first 12 months within the same financial period will be subject to a corporate tax rate of 25%. Likewise, under the overlapping assessment, the continued profit may be subjected to 20%.

3.Revision of Real Property Gain Tax Rates

It is proposed that Real Property Gain Tax rates on the gains from disposal of real properties and shares in real property companies be reviewed as follows:
Date of disposal Real Property Gains Tax Rates
Companies Individual (Citizen & Permanent Resident) Individual (Non-Citizen)
Within 3 years from date of acquisition 30% 30% 30%
In the 4th year 20% 20% 30%
In the 5th year 15% 15% 30%
In the 6th year and subsequent years 5% 0% 5%

The above revised rate shall take effects on any gain arising from disposal of real properties and shares in real property companies from 1 January 2014.

Variation and Disclaimer

The tax proposal contained herein may defer in or vary from the final form when passed by Parliament and our views, our understanding and our suggestions stated herein are provided gratuitously and without liability. Neither T. H. Kuan & Co. or its employee shall be responsible or liable for any claims, loss, damages, costs or expenses arising in any manner and/or howsoever upon the reliance of the above.