Taxes • For the Government to carry out their role: • Infrastructure • Hospital • Education • etc
What makes a good tax system • Fair • Simple • Certainty • Efficient
Questions What is taxable? What expenses can reduce the taxable income? Depends upon whether or not is falls under the Taxing Act (law) or other laws.
Tax Law • Income Tax Act, 1967 • Promotion of Investments Act, 1986 • Real Property Gains Tax Act, 1976 • Petroleum (Income Tax) Act, 1967 • Stamp Duty Act,1949
Tax Law • Excise Act, 1976 • Sales Tax Act, 1972 • Customs Act, 1967 • Service Act, 1975 Tax is a creature by statute
Subsidiary Law • Double Taxation Agreements: • Limit the taxing powers • Income Tax Regulations / Orders • Legal regulations by the Ministry of Finance • Case Laws: • Law created by the courts
GY_Ong: Income Tax Administration • Inland Revenue Board (IRB) • Director - General (DG) or CEO • Role - responsible for assessment and collection of IT under the IT Act. • Public Ruling System
IRB Assessment Collections Desk audits ,field audits, Investigation Payments: IT,RPGT,WT, Pre-judgement Post –judgement ETP Tax Administration
ASSESSMENT Sent Tax Return to IBR Taxpayer’s duty Assessment Collections
Tax Appeals DGIR of IRB 30 days SPECIAL COMMISSIONERS OF INCOME TAX HIGH COURT COURT OF APPEAL
Learning Objective Understanding the Concept of income
Income • Income tax is tax on “income” • Not defined in the IncomeTax Act Income from: • Providing personal services • Property • Trade A flow from…. a specific source…….
business, employment; dividends, interest or discounts; rents, royalties or premium; pensions, annuities or other periodical payments…. other income INCOME Section 4 – Various sources
Income • Income Concepts • Income must have a “source”. • What flows out from the source is ‘income’. - ‘capital’ is not included as taxable income.
Income vs Capital • Is this capital or income? • Profit from selling of: • House: • Shares: • Cars • No source: • Source: Trade
Income vs Capital • Is this capital or income? • Profit from selling of: • Cats • Source: Business • No source: Hobby • Tips • Source : from employment • No source: from uncle
Income vs Capital Tree and Fruit Analogy eg. - Interest from debts - Rents from Lease of Property - Dividends from shares - Royalties from Intellectual property
Sale of Business Assets • Profits and gains from sale of: • Trading stock – taxable • Other/ fixed assets – not taxable
Case Study 1 A machinery manufacturer uses a special machine (SM) to produce their machinery( Mac) for sale. They sold both of the machines in the year 2004. Will the profits from the sale of those machine subject to income tax? Why?
Learning Objective Appreciate Section 3 – Scope of Taxation
Section 3 - Scope of Tax • Income tax is imposed on incomeaccruing in or derived from Malaysia or received in Malaysia from outside Malaysia.
Section 3 - Scope of Tax Two parts: • Income tax is imposed on incomeaccruing in or derived from Malaysia. • Income tax is imposed on incomeor received in Malaysia from outside Malaysia.
SCOPE TO TAX – S 3 A person is taxed on his income which has its ‘source’ in Malaysia. A person is taxed on his foreign source income if the income is received into Malaysia.
Source of income • What is domestic source income? • What is foreign source income? • for employment income • for rental income
Foreign Source Income- prior to 1.1.2004 Paragraph 28 Schedule 6 A resident person is taxed on his foreign source income (FSI) if the income is received into Malaysia. A non-resident person is not taxed on his foreign source income if the income is received into Malaysia Exception Resident companies other than air/sea transport, banking, insurance co are taxed on a world wide scope I.e. the FSI even though the income is not received into Malaysia.
Foreign Source Income- on or after 1.1.2004 Paragraph 28 Schedule 6 A resident or non-resident person is not taxed on his foreign source income (FSI) if the income is received into Malaysia. Exception Resident companies other than air/sea transport, banking, insurance co are taxed on a world wide scope I.e. the FSI even though the income is not received into Malaysia.
Foreign Source Income – on or after 1.1.2004 INCOME IN MALAYSIA OUTSIDE MALAYSIA PERSONS Taxable Non Taxable Worldwide scope for: Banking, Insurance, Air and Sea transport
Source • Eg Employment income • Place where employment is exercised • Rental income • Place where the property is situated • Business income • Permanent Establishment • / ‘operations”
Taxation of Income • Source • Residence • Exemption
Malaysian working overseas I am a Malaysian working employed in China for the past 4 years. Should I report my China’s income in Malaysia? I am a Malaysian working employed in Singapore for the past 4 years but staying in JB. Should I report my Singapore’s income in Malaysia.
Foreigner working in Malaysia I am a French working [employed] in Malaysia for the past 4 years. Should I report my income in Malaysia?
Tax Year • Income tax is assessed annually • Tax year is the Year of Assessment (YA) Eg. • YA 2002 refers to the tax year 2002 • Income tax for each YA will be computed on the profits of the basis period for the YA.
Basis Periodwef YA 2004 Basis period for a YA Others:Sole proprietor, partnership, employee: 1.1 to 31.12 Calendar year Co, Cooperatives, Trust Generally: financial year
Corporate Tax Rate Resident Company All income 28%
Two-Tier Corporate Tax Rate – YA 2003 • With effect from YA 2003,a resident company with paid-up capital of RM2.5 million ord. shares or less at beginning of basis period is taxed at the following rates: • Chargeable Income • First RM 100,000 20% • In excess of 100,000 28%
Two-Tier Corporate Tax Rate – YA 2004 • Resident company • Paid-up capital of RM2.5 million ord. shares or less at beginning of basis period • Chargeable Income • First RM 500,000 20% • Balance 28%
Income Tax Computation • How they reduce gross income to taxable income? • Gross income is reduced by: • deductions • exemptions • and adjustments • to arrived at taxable income.
Tax Computation Salary 16,900 Total Income 16,900 Less: Relief 8000 Chargeable Income8900 Tax on first RM 5,000 0.00 Tax on next RM 3,900 @1% 39.00 Tax Charged 39.00 Less: Tax rebate 350.00 Tax Payable NIL
Tax Computation • Tax is imposed on chargeable (taxable) income • Tax charged is applying tax rate to the taxable income • Tax payable is tax charged less tax rebates or tax credits
TAX COMPUTATION Net/loss Profit Adjustments Adjusted Income
TAX COMPUTATION • Adjustments: • Deduct not taxable income • Deduct investment income • Add disallowable expenses • Deduct expenses eligible for double deductions • Add investment income as separate source • Deduct donations
WHAT ARE CAPITAL ALLOWANCES? Tax Depreciation • Cost of plant & machinery • Not deductible - Tax laws allows a deduction - CA
Question? Why can’t we accept accounting profits as taxable income?
Net Profit vs Taxable Income • Specific tax laws overrides accounting practices • Stock • Depreciation • Losses • Case law