Chapter 5; non business income students

ATXB 213 MALAYSIA TAXATION I 1

CHAPTER 5

NON BUSINESS INCOME


LEARNING OBJECTIVEIdentify the derivation of non-business income

Types of non-business income

To calculate the adjusted income

To determine the exemption of non-business income


Sec 4(c): Dividends; Interests; Discounts

Sec 4(d): Rent; Royalties; Premiums

Sec 4(e): Pension, Annuities; Other Periodical Payments

Sec 4(f): Other profits.

Other Income

Introduction


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 5ATXB213 MALAYSIAN TAXATION I 5

Sec 4(c) DividendsIt 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).


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 1Now, all dividend income are classified as

exempted. (Effected YA 2008)


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.


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).


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.


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:


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.


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).


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.


Derivation of Interest Income

(Sec. 15)Responsibility for payment lies with

Government or State Government

Responsibility for payment lies with Resident Person +

Malaysian Loan

Charged As Outgoing or Expense Against Income Accruing In Or

Derived From Malaysia

Y

Y

Y

Payment of interest on debts is secured

by property or assets situated in M’sia

Y

Deemed derived from M’sia


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%.


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;


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,


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.


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.


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.


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:


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)


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.


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:


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 propertyCost of advertising to obtain tenant (not

applicable for the first tenant as it is initial cost).Sewage charge As stated in page 136


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.


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.


Discussion


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.


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.


Responsibility for payment lies with

Government or State Government

Charged As Outgoing or Expense Against Income Accruing In Or

Derived From Malaysia

Y

Y

Deemed Derived From

Malaysia

N

N

Y

Responsibility for payment lies with Resident Person

Not Deemed Derived From

Malaysia

N

Derivation of Royalty Income


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).


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


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


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.


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).


Payable by the government or state

government

Person paying the pension is a Malaysian resident

Y

Y

Deemed Derived From

Malaysia

N

N

Y

Administration of fund is in Malaysia

Not Deemed Derived From

Malaysia

N

Derivation of Pension (Sec 17)


Exempt Pension Income (Sch 6)

Pension paid to a resident person reaching 55 or compulsory retirement age or retirement is due to ill-health 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

ReserveMalaysian Territorial Army

Refer pages 144


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.

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.

Sec 4(e) Annuities


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.


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.

ATXB213 MALAYSIAN TAXATION I 43

THANK YOU

Q & A

Economy & Finance

Chapter 5; non business income students