LECTURE 1-Scope and Basic For Accounting

SCOPE AND BASIC FOR TAXATIONS LEARNING

1. UKAT2023 TAXATION I TOPIC 1: SCOPE & BASIS OF MALAYSIAN TAXATION

2. 1.1 Types of taxes in Malaysia 1.2 Scope of charge of Malaysian tax 1.3 Chargeable persons 1.4 Classes of income chargeable to tax 1.5 Basis year and year of assessment 1.6 Gross, adjusted, statutory, aggregate, total and chargeable income 1.7 Income tax rates Outline

3. Learning Objectives After studying this topic, you should be able to: List the types of taxes (direct and indirect) in Malaysia Explain the scope of charge of Malaysian tax Give examples of chargeable person Identify classes of income chargeable to tax under different sections of the Income Tax Act 1967 Determine the basis period for a year of assessment (individuals and companies)

4. After studying this topic, you should be able to: Compute adjusted, statutory, aggregate, total and chargeable income Apply rates of tax on chargeable income Learning Objectives

5. Importance of Tax Policy Granting fiscal incentive to encourage economic growth . Regulating the distribution of income and wealth . To provide funds for numerous projects Improving the disadvantaged sectors of society. Regulating specific undesirable activities e.g. smoking, gambling, drinking, etc.

6. Types of Taxes in Malaysia Goods and Service Tax Customs Duty Excise Duty Gaming Tax Entertainment Tax

7. Direct Tax vs Indirect Tax Direct Tax Tax paid, by those on whom it is levied, directly to the tax authorities Indirect Tax Tax added to the price of a product or service and collected by an intermediary on behalf of the tax authorities

8. Administration of the Tax Authorities The Ministry of Finance (Treasury) / Kementerian Kewangan The Inland Revenue Board (IRB) / Lembaga Hasil Dalam Negeri The Malaysian Royal Customs and Excise Department / Kastam Diraja Malaysia

9. Development in the Tax Industry Unclear tax law and disputes Specific legal terms are being used in the Act Certain provision in the Act is too general and did not provide the detail guideline or treatment; Certain provision in the Act is outdated. Issuance of guidelines & rulings Technical guideline Public Ruling Advance Ruling (effective from YA 2007)

10. Development in the Tax Industry Professional bodies Chartered Tax Institute of Malaysia (CTIM) Malaysian Institute of Accountants (MIA) Malaysian Institute of Certified Public Accountants (MICPA)

11. Development in the Tax Industry Tax Agents Auditor licensed by the Ministry of Finance Other professional accountants recognised by the Government and obtained 5 years practical tax experience. Any other persons recognized by the Director General of Inland Revenue Board with relevant qualification and obtained 5 years practical tax experience.

12. SCOPE OF CHARGE In Malaysia the law governing income taxation is the Income Tax Act 1967 A transaction must fall within the ambit of ‘Scope Of Charge’ as provided in S3 of the Act in order to be liable to income tax, if not it will be tax free

13. Scope of Charge: Malaysian Tax Income tax shall be charged for each year of assessment upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia . [Section 3, Income Tax Act 1967]

14. Scope of Charge Scope of charge Limits within which income would be taxable in a country Basis Derived and remittance basis Territorial basis World scope basis A transaction must fall under the ambit of ‘scope of charge’ to be liable to income tax

15. Territorial Basis (from Y/A 2004) Chargeable to tax only on income accruing in or derived from Malaysia (Malaysian source of income) Example: When you employed by a Singapore company and you work at there, will your salary be taxable in Malaysia? No

16. Foreign Source Income Foreign source income received in Malaysia by any person* is exempted from income tax with effect from Y/A 2004. [Paragraph 28, Schedule 6, ITA 1967] * Exception : Resident company carrying on the business of banking, insurance, sea or air transport

17. World Scope Basis Resident companies carrying on the specialized businesses (banking, insurance, sea and air transport) are assessed on world scope basis , that is, income wherever derived , even though the income is not received in Malaysia.

18. Chargeable Person Income tax shall be charged for each year of assessment upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia . [Section 3, ITA 1967] Individual Company Body of persons Corporation sole X Partnership Hindu joint families Trusts Estates Clubs Trade associations Co-operative societies Public trustee

19. Income Taxable Income Exempt Income Non Taxable Income M/Foreign Source Q: Taxable event: Received, paid, Taxable value: MV Q:

20. Classes of Income Chargeable to Tax Section 4, ITA 1967 S 4 (a) – Business S 4 (b) – Employment S 4 (c) – Dividends, Interest or Discounts S 4 (d) – Rents, Royalties or Premium S 4 (e) – Pensions, Annuities or Other Periodical Payments S 4 (f) – Others

21. Special Classes of Income Chargeable to Tax Income of non-resident Derived from Malaysia Under Section 4A, ITA 1967

22. Special Classes of Income Section 4A(i), ITA 1967 Amounts paid in consideration of services rendered by the 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.

23. Special Classes of Income Section 4A(ii), ITA 1967 Amounts paid in consideration of technical advice, assistance or service rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme.

24. Special Classes of Income Section 4A(iii), ITA 1967 Rent or other payments made under any agreement or arrangement for the use of any moveable property .

25. Basis Year & Year of Assessment Basis Year The year in which income is derived or received. Year of Assessment (Y/A) The year in which income is assessed for tax purposes.

26. Current Year Basis (CYB) Assessment of income for tax purposes is concurrent with the derivation of income. Example 1: 1.1.2020 – 31.12.2020 Y/A 2020 Basis of Assessment

27. The basis year for a year of assessment is the basis period for that year of assessment. [Section 21, ITA 1967] Example 2: 1.1.2020 – 31.12.2020 Y/A 2020 Basis period: individuals Calendar year

28. Basis Period – Companies The accounting period is the basis period for the year of assessment. [Section 21A(2), ITA 1967] Example 4: 1.7.2019 – 30.6.2020 Y/A 2020 Accounting period

29. Steps to Ascertain Chargeable Income Ascertain basis period for each source Ascertain gross income from each source for the basis period Compute adjusted income from each source &/or adjusted loss from business source Compute statutory income from each source Compute aggregate income Compute total income Compute chargeable income

30. e.g. Deductible Expenses e.g. Capital allowances Relief + Business & non business Y e.g. CYLoss, Approved donation Basis period Gross income Adjusted income/(loss) Statutory income Total income Aggregate income Chargeable income Tax Rate Steps to Ascertain Chargeable Income

31. Gross Income The full amount of income arising from any source before deduction of any deductible expenses

32. Adjusted Income/(Loss) Gross income Adjusted income/(loss) - Deductible expenses

33. Adjusted Loss Deductible expenses > gross income adjusted loss adjusted income: Nil Adjusted loss from non-business source no loss relief permanent loss

34. Adjusted Loss from Business Adjusted loss from business (current year business loss) can be utilized to reduce the aggregate income from all sources in the same Y/A Unabsorbed loss – c/f to subsequent Y/A to reduce the aggregate statutory income from all business sources until it is fully utilized

35. Statutory Income - Non-business Source Adjusted income Statutory income =

36. Statutory Income - Business Source Adjusted income + Balancing charge - Capital allowances Statutory income

37. Capital allowances Unabsorbed capital allowance b/f Current year capital allowance Balancing allowance

38. Unabsorbed Capital Allowances C/f unabsorbed capital allowance to subsequent Y/A to reduce the adjusted income of the same business source , until it is fully utilized or the business ceases permanently, whichever is earlier. Statutory income is ‘ Nil ’

39. Utilization of Business Losses & Capital Allowances: Summary Utilization of Set off against Current year business loss Aggregate income from all sources b/f business loss Aggregate statutory income from all business sources Capital allowance (current year & b/f) Adjusted income from the same business source

40. Computation of Statutory Income from a Business Source RM RM Gross income XX Less: Deductible expenses (XX) Adjusted income XX Add: Balancing charge XX XX Less: Capital allowances Unabsorbed allowance b/f XX Current year allowance XX Balancing allowance (XX) Statutory income XX

41. Computation of Income from Business Source RM Statutory income Business 1 XX Business 2 XX Business 3 XX Aggregate statutory income from businesses XX Less: Unabsorbed business losses b/f (XX) Income from business sources XX

42. Computation of Income from Business Sources - Example Results of Tony’s businesses for the Y/E 31.12.20: Manufacturing business RM Adjusted loss (14,000) Capital allowances 1,700 Balancing allowance 300 Balancing charge 5,000 Unabsorbed capital allowances b/f 1,200 Unabsorbed losses b/f 1,000

43. Computation of Income from Business Sources - Example Required: Compute the income from business sources of Tony for the year of assessment 2020. Trading business RM Gross income 38,000 Expenses Deductible Non-deductible 31,500 1,900 Net profit 4,600 Capital allowances 7,000

44. Computation of Income from Business Sources – Example Tony Computation of Statutory Income from Manufacturing Business for Y/A 2020 Manufacturing business RM RM Adjusted income NIL Add: Balancing charge 5,000 5,000 Less: Capital allowances Unabsorbed allowance b/f 1,200 Current year allowance 1,700 Balancing allowance 300 (3,200) Statutory income 1,800

45. Computation of Income from Business Sources – Example Tony Computation of Statutory Income from Trading Business for Y/A 2020 Trading business RM RM Gross income 38,000 Less: Deductible expenses (31,500) Adjusted income 6,500 Less: Current year capital allowances 7,000 Utilized (6,500) (6,500) Unabsorbed allowances c/f 500 Statutory income NIL

46. Computation of Income from Business Sources – Example Tony Computation of Income from Business Sources Y/A 2020 RM Statutory income Manufacturing business 1,800 Trading business NIL Aggregate statutory income from businesses 1,800 Less: Unabsorbed business losses b/f (1,000) Income from business sources 800

47. Computation of Income from Business Sources – Example Note: The adjusted loss from manufacturing business of RM14,000 can be utilized to set off against the aggregate income (from business and non-business source) of Tony for the Y/A 2020.

48. Aggregate Income - Unabsorbed business losses b/f Statutory income – business(es) Aggregate income Statutory income – non-business

49. Computation of Aggregate Income RM Statutory income: Business 1 X Business 2 X Aggregate statutory income from businesses XX Less: Unabsorbed business losses b/f (X) Income from business sources XX Add: Income from non-business source(s) XX Aggregate income XX

50. Total Income - Adjusted loss (current year business loss) - Approved donations Aggregate income Total income

51. Approved Donations Includes cash donated to - Approved institutions/organisations * Government State government Local authority * Company: Restricted to 10% of aggregate income * Individuals: Restricted to 10% of aggregate income

52. Chargeable Income: Resident Individual Total income Chargeable income - Reliefs

53. Chargeable Income: Others Total income Chargeable income =

54. Computation of Total Income & Chargeable Income RM Aggregate income XX Less: Current year business loss (X) XX Less: Approved donations * (X) Total income XX Less: Reliefs (X) Chargeable income XX *Unabsorbed donation will be forfeited

55. Income Tax Rates Scale rate/ graduated rate Income is taxed at progressively higher rates of tax (higher income at higher rates) Resident individuals (0 – 28%) Fixed rate/ flat rate Non-resident individuals (28%) Companies (in general) Specific types of income (10% & 15%)

56. Income Tax Rates: SUMMARY Individual Resident 0% - 30% Non-resident 30%

57. Income Tax Rates: SUMMARY Companies Resident Paid-up capital ≤ RM2.5m First RM600,000 Subsequent chargeable income Paid-up capital > RM2.5m 17% 24% 24% Non-resident 24%

58. Income Tax Rates: SUMMARY Specific types of income Interest 15% Royalty 10% Special classes of income 10% Public entertainers 15% Other income 10%

59. Scale Rates: Resident Individuals (Y/A 2020) Range (RM) Rate (%) Cumulative Tax Payable (RM) 0 – 5,000 5,001 – 20,000 1 150 20,001 – 35,000 3 600 35,001 – 50,000 8 1,800 50,001 – 70,000 14 4,600 70,001 – 100,000 21 10,900 100,001 – 250,000 24 46,900 250,001 – 400,000 24.5 83,650 400,001 – 600,000 25 133,650 600,001 – 1,000,000 26 237,650 1,000,001 – 2,000,000 28 517,650 EXCEEDING 2,000,000  30  

60. Tax Rates: Resident Companies (Y/A 2019) SME: First RM600,000 chargeable income - 17% Subsequent chargeable income - 24% Paid up capital b/f > RM2.5m 24% of chargeable income Flat rate

61. Self-check on Learning Outcomes After studying this topic, are you able to: List the types of taxes (direct and indirect) in Malaysia Explain the scope of charge of Malaysian tax Give examples of chargeable person Identify classes of income chargeable to tax under different sections of the Income Tax Act 1967 Determine the basis period for a year of assessment (individuals and companies) Compute adjusted, statutory, aggregate, total and chargeable income Apply rates of tax on chargeable income