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Malaysia Tax

Tax Act 1967

Tax Computation

Tax computation begins with your business income statement, which must be prepared according to the Malaysia Accounting Standard. For a company, an audited report is required before proceeding with the tax computation.

To determine chargeable income, Section 5 of the Income Tax Act outlines the scope, starting with the identification of the basis period. The process involves determining the gross income, adjusted income, statutory income, aggregate income, and total income, ultimately leading to the chargeable income.

Gross Income Includes:

• Cash receipts from the sale of goods or services provided.
• All debts incurred from the sale of goods and services provided.
• Receipts in kind.
• Recovery of bad debts.
• Insurance compensation received for business loss.
• Withdrawal of business stock or stock taken for personal use.

Adjusted Income From Business Source is derived from gross income after deduction of business expenses, such as:

• Allowable business expenses
• Allowable specific expenses
• Double deduction expenses allowable under the Income Tax Act 1967

Business Expense Has To Fulfill All The Following Conditions in order to secure a deduction from the gross income of a business source:

• Each business source must be accounted for separately.
• The scope of expenses refers to “outgoings and expenses.”
• Expenses must be “wholly and exclusively” incurred in the production of gross income from the business source.

Based on the table, the total business investment cost is RM60,712. Out of this amount, RM13,520 will be contributed by the owner as personal funding, demonstrating their commitment to the business. The remaining balance of RM47,192 will be sourced through third-party lending, ensuring sufficient capital to cover all necessary expenses and facilitate the startup’s operations.

Example:

*Disclaimer: The allowable and non-allowable expenses may be vary and different over period of times

Make an appointment with Company Secretary or Our Lawyer for advice and consultation

Special Deductions for Specific Expenses under Section 34(6)

Section 34(6) has been specifically legislated to allow certain specific expenses as income deductions, even if these expenses do not meet the criteria for allowable business expenses. These expenses are encouraged by the Government as they contribute to national objectives or bring social benefits to the public.

Some of the specific expenses that qualify for special deductions include:

1. Expenditure incurred in providing equipment for disabled employees (OKU).
2. Expenditure incurred in respect of publication in the National Language.
3. Donations to libraries.
4. Expenditure incurred in providing services, public amenities, or contributing to charity or community projects.
5. Expenditure incurred in providing and maintaining a childcare center for the benefit of employees.
6. Expenditure incurred in establishing and managing a musical or cultural group.
7. Expenditure incurred in sponsoring any art or cultural event.

These expenditures are aimed at promoting the well-being of the community and achieving broader societal goals.

Capital Allowance in Business

Capital allowance is provided as a deduction from business income in place of depreciation expenses incurred when purchasing business assets.

Examples of assets used in a business include motor vehicles, machinery, office equipment, furniture, and computers.

Conditions for Claiming Capital Allowance:

1. Operating a Business – The entity must be engaged in a business operation.
2. Purchase of Business Assets – The business must purchase assets used for business purposes.
3. Assets Used in the Business – The assets must be actively used in the business.
4. Ownership of the Assets – The business must be the legal owner of the assets.
5. Rates Determined by Asset Types – The rates of capital allowance are determined based on the type of asset.

Types and Rates of Capital Allowance:

• The rates for claiming capital allowance depend on the classification of the asset. These rates are outlined by the tax authorities and are applied to different types of assets such as machinery, office equipment, vehicles, etc.

This allows businesses to offset the cost of purchasing assets against their taxable income, reducing their overall tax liability.

Types of Allowance	Type of Assets	Rate
Initial allowance	All types of assets	20 %
Annual allowance	Motor vehicles and heavy machinery	20 %
	Plant and machinery	14 %
	Office equipment, furniture and fittings	10 %
	Computer	40 %

Types of Allowance	Type of Assets	Rate
Initial allowance	All types of assets	20 %
Annual allowance	Motor vehicles and heavy machinery	20 %
	Plant and machinery	14 %
	Office equipment, furniture and fittings	10 %
	Computer	40 %

Example of Tax Computation Format Would Be:

Corporate Tax Rate

Corporate income tax in Malaysia is applicable to both resident and non-resident companies, with a general tax rate of 24% for companies from the Year of Assessment (YA) 2016 onwards. Resident companies are those that are registered in Malaysia and have control or management of business activities within the country. Non-resident companies, on the other hand, are those whose control or management is outside of Malaysia.

For small and medium enterprises (SMEs), there is a special tax incentive. Small-scale companies with a paid-up capital not exceeding RM2.5 million are entitled to a more favorable tax rate. These companies are taxed at:

1. 17% on the first RM600,000 of chargeable income
2. 24% on chargeable income exceeding RM600,000

This tiered tax structure is designed to provide relief for smaller businesses and encourage entrepreneurship and growth within the country.

It is important to note that the tax rate for non-resident companies is typically higher, and additional provisions apply to special business activities such as petroleum exploration, banking, and insurance companies.

The Malaysian government also provides other incentives for certain industries or sectors, including research and development (R&D) companies, green technology, and those involved in the export of goods or services.

Notes: A Limited Liability Partnership (LLP) in Malaysia has a similar tax treatment to that of a private limited company (Sdn. Bhd.). However, it is important to note that specific incentives that are provided to a company do not apply to an LLP. These special incentives are exclusively available to companies. For example, under the Promotion of Investment Act 1986, only a company is eligible to enjoy the incentives offered under the Act. Therefore, while an LLP may benefit from the general tax treatment applicable to businesses, it is not eligible for certain incentives that are reserved specifically for companies.

Tax Rate for Sole Proprietorship or Partnerships

The total relief available are then set off against the total income / chargeable income from the business to arrive at chargeable income which is taxable according to the tax rates:

Tax Rebate

Tax rebate is deducted from the actual taxed amount. There are two types of tax rebate applicable.

Types of Taxes in Malaysia

There are two main categories of taxes in Malaysia: direct tax and indirect tax.

Direct Tax

Direct tax is imposed on an individual or company’s income and wealth, and it is paid directly to the government. Examples of direct taxes include income tax and real property gains tax. The authority responsible for managing direct taxes is the Inland Revenue Board of Malaysia (LHDN).

Indirect Tax

Indirect tax is levied on goods and services consumed by individuals, with the tax amount being indirectly paid to the government through intermediaries. Examples of indirect taxes include the Goods and Services Tax (GST), Service Tax, and Sales Tax. The body responsible for administering indirect taxes is the Royal Malaysian Customs Department (RMCD).

Sales & Service Tax (SST)

The Sales and Services Tax (SST) was introduced in Malaysia on 1 September 2018, replacing the Goods and Services Tax (GST) Act 2014. SST is a single-stage consumption tax aimed at simplifying the taxation system while maintaining revenue generation for the government.

Key Features of SST:

1. Sales Tax:
   • Applied to taxable goods that are manufactured and sold locally in Malaysia.
   • Also imposed on imported taxable goods brought into Malaysia.
   • The sales tax rate varies depending on the type of goods, with common rates being 5%, 10%, or a specific rate per unit for certain items.
2. Service Tax:
   • Levied on taxable services provided within Malaysia, such as professional services, food and beverages, and telecommunications.
   • Additionally, service tax applies to imported taxable services, ensuring fairness and consistency in taxation.

Differences Between SST and GST:

• Single-Stage Taxation: SST is collected only at the point of sale (for sales tax) or upon provision of services (for service tax), unlike GST, which was a multi-stage tax system involving input and output tax at every stage of the supply chain.
• Scope: SST covers fewer goods and services compared to GST, which helps reduce the compliance burden on businesses.

Objectives of SST:

• Simplify the tax structure for businesses and consumers.
• Focus taxation on specific goods and services to better align with the country’s economic goals.
• Maintain a fair and transparent tax system.

SST is governed by the Sales Tax Act 2018 and the Service Tax Act 2018, with the Royal Malaysian Customs Department (RMCD) overseeing its implementation and enforcement.

Make an appointment with Company Secretary or Our Lawyer for advice and consultation