CHAPTER 1: BASIS OF MALAYSIAN INCOME

TAX
Learning Objectives
After completing this chapter, student should be able to:
Identify the objectives and contribution of Malaysian income tax to the economy
Describes the types of taxes
Explain the Section 3: Charging sections and scope of charge
Explain Section 4: Classes of Income chargeable to tax

WHAT IS A TAX?
It is an amount collected by government from the public to finance the expenditure on
facilities or benefit which given back to the public. The income that you earned is taxed
by the government. It helps the government to meet some of the expenditure incurred for
example the construction of roads, schools, hospitals etc.
Generally, taxation is to impose a financial charge or other levy upon a taxpayer (an
individual or legal entity) by a state or the functional equivalent of a state such that
failure to pay is punishable by law. Taxation in its various forms has existed since
mankind began organizing itself into civilized communities. From the beginning, many
of these payments were involuntary and had to be forced out of the taxpayer.

MAIN OBJECTIVE OF TAX POLICIES

Raising revenue to finance government expenditure
To finance development activities for society
To reduce gap between different class of society -regulating the distribution of
income and wealth as between different types and classes of citizen
Ensuring that tax are collected effectively and at minimum cost both to the
government and tax payer for example through self assessment system
Regulating specific activities of citizens which are thought to be undesirable for
example smoking, drinking and gambling (control through increase the import
duty
Ensuring fairness and equity where burden of tax is spread fairly and equally
among tax payers which based on scale rates

WHO WILL BE TAXED?

A person resident in Malaysia is assessable to income tax on income accruing
in or derive from Malaysia or received in Malaysia from outside Malaysia
(w.e.f. from YA2004, income remitted into Malaysia from overseas by a
resident individual, a trust body, a corporative and a Hindu Joint family will
be exempted from tax)
A non-resident person is assessable on the income accruing in or derived from
Malaysia but is not taxed on income arising from sources outside Malaysia
which is brought into Malaysia.
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HOW MANY TYPES OF TAX DO WE HAVE?

TYPES OF
TAXES

DIRECT INDIRECT

Tax that imposed directly to
the person who receives an
income and it is paid
directly to tax authority
Inland Revenue Board (IRB)
Individual paid through the third party.
An indirect tax is generally an addition to
the price of a product or services and is
collected by an intermediary who will
then pay it over to the tax authority, IRB

Excise duty
Income Tax
Import/ Export Duty
Stamp duty
Good and Service Tax (GST)
Real Property Gains Tax
Petroleum Income Tax

DIRECT TAXES
Tax which is paid directly by those on whom it is levied.
Example:
i. Income tax chargeable upon the income of any person (including)
individual and companies) accruing in or derived from Malaysia or receive
by a resident person in Malaysia from outside Malaysia.
ii. Real Property Gains Tax Charged under real property Gains Tax Act.
1976. It is a tax on capital gains arising from the disposal of any interest,
option, shares or other right in or over land situated in Malaysia. The tax
rates is subject at flat rate of 5%.
iii. Stamp Duty The Stamp Act, 1949 levies two types of duties namely
fixed duties and ad valorem duties. Fixed duties are those imposed
without any relation to the consideration or amount expressed an
instrument while ad valorem duties are those levied in relation to the value
of the consideration disclosed in an instrument.

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INDIRECT TAXES
Tax which is generally collected via some third party. Generally an addition to the
price of a product /service and is collected by an intermediary who will then pay it
over to the authorities.
Example:
i. Custom duties Levied to any goods imported into Malaysia (import
duty) or exported from Malaysia (exported duty) and are to be paid by the
importer or exporter.
ii. Excise duty this is a form of duty imposed on locally manufactured
goods such cigarettes, alcoholic beverage.
iii. Goods service tax - GST is a consumption tax charged on a wide range of
domestic & international products, goods and services. Its a broad-based
tax imposed on every level of a product, from raw materials all the way to
finished goods.

SOURCES OF REVENUE LAWS:

SCOPE OF CHARGE:
Scope of charge basically explains about where and when the income will be taxed in
Malaysia. Section 3 of the Income Tax Act states that, .a tax to be known as income
tax shall be charged for each YA upon the income of any person accruing in or derived
from Malaysia or received in Malaysia from outside Malaysia.

World scope basis any income wherever derived will be taxed in the country
resided i.e. resident bank, shipping, air transport and insurance company

Derived or territorial basis only income derived from Malaysia will be taxed.
With effect from (W.e.f.) YA 2004, any foreign sources of income received by
any person will be exempted from income tax. The phrase any person includes
individual, trust, executors, unit trust, trading company, manufacturing company
and investment holding company

CONCEPT OF ACCRUING IN OR DERIVED FROM

The word accruing and derived are considered to have the same meaning. Income
accrued in or derived from Malaysia will be taxed at the time of accrual or derived in
Malaysia.

OFFSHORE BUSINESS:
Section 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. Offshore
business means a business activity which is carry on or from Labuan.

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BASIS YEAR VS. YEAR OF ASSESSMENT (YA)
YEAR OF ASSESSMENT (YA) Is a year where income being calculated and tax
being paid

BASIS YEAR (BY) The basis year is a calendar year consisting of

twelve months running from 1st January to 31st
December (Section 20 ITA, 1967). As such basis
year is also a calendar year.

BASIS PERIOD (BP) A time frame in which a source of income is

related to:
Individual, unit trust and trade association
based on calendar year i.e. 31 December
Company, trust body and co-operative
society based on calendar year or non
calendar i.e. ACCOUNTING PERIOD

PRIOR YEAR BASIS VS. CURRENT YEAR BASIS

PRIOR YEAR BASIS (PYB)
CURRENT YEAR BASIS (CYB)
Before year 2000, income for the year will be
assessed in the next year
For instance, income for year 1996 will be
assessed in YA 1997
With effect from year 2000; CURRENT YEAR
ASSESMENT (CYA) was implemented. CYA
means any income for the year will be assessed in
the same year. For instance, income for year 2002
will be assessed in YA 2002 itself.

WHY IS IT IMPORTANT TO COLLECT TAX?

a) A person will be assessable to tax on income from taxable activities.
b) Tax rates applicable to each person are different.
Types of persons Income tax rate
Company Capital > 2.5 million 24%
Capital 2.5 million Chargeable 500 000 18%
income
>500 000 24%
Individual Resident 0 28% scaled rate
Non-resident 28 % flat rate

SOURCES OF INCOME
Income is defined as periodical monetary returns coming in with a sort of regularity
from a definite sourceexcludes anything in the nature of a mere wind-fall.
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Section 4: Classes of income on which tax is chargeable:

Sec 4(a) Profit from business

Sec 4(b) Income from employment
Sec 4(c) Dividend, interest and discount (DID)
Sec 4(d) Rental, royalty and premium (RRP)
Sec 4(e) Pension, annuities, periodical payment (PAP)
Sec 4(f) Other income not falling under any foregoing paragraphs

Section 4A: Special classes of income:

a) Amount paid in consideration of services rendered by a person or his employee in
connection with the use of property or rights belonging to, or the installation or
operation of any plant, machinery or other apparatus purchased from such person.

b) Amount paid in consideration of technical advice, assistance or services rendered in

connection with technical management or administration of any scientific, industrial
or commercial undertaking, venture, project or scheme.

c) Rent or other payment made under the agreement or arrangement for the use of any
moveable property.

INCOME RECEIPTS AND CAPITAL RECEIPTS

The distinction between capital and income is crucial. The Act imposes income tax on
income. Capital gains are not chargeable to income tax. Below is the summary of
income and capital receipts:

Income receipts: chargeable to Capital receipts: not chargeable to income

income tax tax

provision of services gift

sale of goods gambling
trading in nature of trade sale of capital assets
profit from disposal of long term
investment

WHAT IS A SELF-ASSESSMENT SYSTEM (SAS)?

SAS is a system where taxpayers are required by law to determine their taxable income,
compute the tax liabilities, submit their tax return and pay their tax liabilities within the
specified period.
Tax return would not subject to detail-checking by the Inland Revenue Board (IRB)
instead; a post-assessment tax audit would be conducted to verify the correctness of the
tax returns submitted by the taxpayers. Any non-compliances and/or under statement of
income will be penalized.

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The present Official Assessment System shall be changed to SAS in stages, with effect
from the YA 2001 starting with companies and other than companies (sole-traders,
partnerships, co-operatives and salaried individuals) starting from YA 2004.

ARE THERE ANY ADVANTAGES WHEN THE GOVERNMENT

SWITCHES FROM THE TRADITIONAL ASSESSMENT SYSTEM
TO SELF-ASSESSMENT SYSTEM?
a) To reduce operating cost of the IRB. The IRB do not have to hire more staff in order
to calculate tax when all the taxpayers can assess their own tax.
b) For smoother workflow of the tax assessment.
c) Expose the taxpayers to the knowledge of tax.
d) Save time and to avoid any bias or unpredictability.

*AMENDMENT TO THE SELF ASSESSMENT RETURN

Effective from YA2009, a new provision had been introduced in the ITA, 1967 to allow
the tax payers to make self amendments for additional assessment under the following
conditions:
Amendments allowed are in respect of errors resulting in increase assessments
such as errors committed in reporting income or claims on deductions or expenses
Self amendment be allowed only once for each YA
Self amendment be allowed within a period of six months from the due date of
furnishing the tax return
Taxpayer makes self amendment in specified forms.

THE END OF CHAPTER 1

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