Question 1

KOLEJ UNIVERSITI TUNKU ABDUL RAHMAN

FACULTY OF ACCOUNTANCY, FINANCE & BUSINESS

ACADEMIC YEAR 2013/2014

BACHELOR OF ACCOUNTING (HONOURS)

BBFT2013 TaxationTutorial 1 : Introduction to Malaysian Taxation & Tax Residence of Individuals Suggested answer to Q1

Income is not defined under the Income Tax Act 1967. Therefore, based on case law and judicial precedent is relevant in determining whether receipts or gains are income or capital in nature.

In CIT V Shaw Wallace, income was defined to be periodical monetary returns coming in with a sort of regularity, from a definite source excluding anything in the nature of a mere windfall.

Generally, if the receipts or gains are connected with the working capital of a trade, it has been held to be income and if they are connected with fixed assets, may be capital in nature.Suggested answer to Q2Direct taxes

Income tax

Real property gains tax

Petroleum income tax

Labuan offshore business activity tax

Stamp duty

Indirect Taxes

Sales tax

Service tax

Entertainment tax

Gaming tax

Customs duties

Import duties

Export duties

Excise duties

Suggested answer to Q3(a)Classes of income on which tax are chargeable under the Income Tax Act (ITA) 1967 are:Section of ITA 1967Sources of income

4(a)Gains or profits from a business

4(b)Gains or profits from an employment

-general

-public servant

4(c)Dividends

Interest

Discount

4(d)Rent

Royalties

Premiums

4(e)Pension

Annuities or other periodical payments not falling under any of the foregoing paragraphs;

4(f)Gains or profits not falling under any of the foregoing paragraph

Section 4A of the Income Tax Act 1967

Notwithstanding the provisions of Section 4 and subject to this Act, the income of a person not resident in Malaysia for the basis year for a Year of Assessment in respect of-

(i)Amount 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;

(ii) Amount 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;

or (iii) Rent or other payments, made under any agreement or arrangement for the use

of any moveable property which is derived from Malaysia is chargeable to tax under the Income Tax Act 1967.

Suggested answer to Q3(b)

Based on Section 3 of the Income Tax Act 1967, income tax is charged for a year of assessment upon the income of any person accruing in or derived from Malaysia or receiving in Malaysia from outside Malaysia. Suggested answer to Q4A resident person is charged to tax on income accrued in or derived from Malaysia

and income received into Malaysia from outside Malaysia under Section 3 of the

Income Tax Act (ITA) 1967.

However, income received / remitted into Malaysia from outside Malaysia, i.e. foreign income (or overseas income) for resident person will be exempted from tax by virtue of Paragraph 28 of Schedule of the ITA 1967. While a Malaysian tax resident company carrying on business of banking, insurance, sea and air transport will be charged to tax on income arising from Malaysia and outside Malaysia, i.e. tax on world scope basis.Suggested answer to Q5Chargeable personsMalaysian source of income (RM)Foreign source of income (RM)

Encik Ali (Resident)RM10,000 is accrued in Malaysia and taxable based on territorial basis.RM28,000 received in Malaysia is tax exempted under Para 28 of Sch 6 of the ITA 1967.

Ms. Janet (Non-resident)RM30,000 is accrued in Malaysia and tax based on territorial basis.RM56,000 received in Malaysia is not taxable as the income is not derived or accrued from Malaysia.

Satu Sdn Bhd (Resident co. but Not in specialised business)RM120,000 is accrued in Malaysia and taxable based on territorial basis.RM200,000 received in Malaysia is tax exempted under Para 28 of Sch 6 of the ITA 1967.

Gold Berhad (Resident co. in specialised business)RM730,000 is accrued in Malaysia and taxable based on world scope basis.RM800,000 not accrued and not received in Malaysia but taxable based on world scope basis.

Suggested answer to Q6

(a)The inherited amount of RM8 million received by Mr. Tan from his late fathers estate is not subjected to income tax as it does not fall within the meaning of income under Section 4(a) to 4(f) of ITA 1967. It is considered as a gift from his late father to Mr. Tan.

(b)The gain / profit of RM1 million made by AC Berhad from the disposal of land is to be considered as a capital gain from its investment. It is NOT a revenue gain from carrying out its business. Therefore, it will not be subject to income tax but real property gains tax (RPGT). [RPGT was exempted from 1 April 2007 to 31 December 2009].

However, if AC Berhad is a property developer company whose business is selling properties or lands (trading stock) then the gains it made will be considered as revenue gains and it will be subjected to income tax instead of RPGT.

(c) The contest prize of RM100,000 won by Amy is considered a windfall (i.e. capital gain). It does not fall within the meaning of income under Sections 4(a) to 4(f) of the ITA1967.

(d)Dividend income of RM70,000 received by XY Sdn Bhd is subjected to income tax under S4(c) of the ITA 1967 as it is recurrence and repetitive. The capital gain of RM600,000 from the disposal of shares is not taxable as it does not fall within the meaning of income under any of Sections 4(a) to 4(f) of ITA1967. Suggested answer to Q7(a)

Mr. Lee will be subjected or assessed to Malaysian tax as follows:Section of the ITA 1967 Type of incomeYear of AssessmentBasis period

4(a)Business20131.3.2013 to 31.12.2013

4(b)Employment20131.1.2013 to 31.12.2013

4(c)Dividend20131.1.2013 to 31.12.2013

4(d)Rental20131.1.2013 to 31.12.2013

The transmission or remission of the foreign interest income into Malaysia is tax exempt under Paragraph 28 of Schedule 6 of the Income Tax Act (ITA) 1967. Suggested answer to Q7(b) Satu Berhad will be subjected to Malaysian tax as follows:Section of the ITA 1967 Type of incomeYear of AssessmentBasis period

4(a)Business20131.7.2012 to 30.6.2013

4(c)Interest20131.7.2012 to 30.6.2013

4(c)Dividend20131.7.2012 to 30.6.2013

As for the remittance of the foreign rental income of RM30,000 from Singapore, it will be exempted from Malaysian tax under Paragraph 28 of Schedule 6 of the ITA 1967.

Suggested answer to Q8

The differences that influenced the tax liability between a resident and a non-resident individual are as follows:-

No.ResidentNon-Resident

1Business income under S4(a)Taxable if deemed derived from Malaysia under S12Only taxable if carrying on business in Malaysia or through a Permanent Establishment. Applicable where Double Taxation Agreements between Malaysia and treaty countries exist

2Employment income derived from MalaysiaTaxable, irrespective of the number of days.Tax exempt if the individual satisfies 60 days test under Paragraph 21 of Schedule 6, ITA 1967.

3Individual tax relief under S46 to S50, ITA 1967Entitled to the personal relief deduction.Not entitled, except in cases where non resident relief is entitled to claim the double taxation relief.

4Income tax rateScale rate from 0% to 26%Flat rate of 26%

5Rebates under S6A & S6C, ITA 1967Entitled to the rebate claims.Rebates not granted.

6Royalties from literary or artistic workTax exempted under Para 32, 32A & 32B of Sch 6, ITA 1967. No tax exemption.

7Income from cultural performance approved by MinisterTax exempted under Para 32C of Sch 6, ITA 1967.No tax exemption.

8Income from musical compositionTax exempted under Para 32D of Sch 6, ITA 1967.No tax exemption.

9Withholding tax on interest, royalty, technical fees, other S4A payment and contract paymentNot applicable.Subject to withholding tax, rate ranging from 10% to 15% or 10% + 3%.

10Interest income received from licensed financial institution in MalaysiaPrior to 30.8.2008, interest income is subject to 5% withholding tax under S109C. Effective from 30.8.2008, interest income is exempted from tax under Income Tax (Exemption) (No. 7) Order 2008.Tax exempted under Para 33 of Schedule 6.

Suggested answer to Q9(a)

YAPeriod of stay in MalaysiaNo. of daysResidence StatusReasons

200923.09.2009 to 31.12.2009100Non-ResidentIt does not fulfilled any conditions under S7(1)(a) to (d).

20101.11.2010to 31.12.201062Resident under S7(1)(b)Stay less than 182 days in 2010and the period linked to a period of 182 days or more consecutive days in 2011The temporary absence (social visit of 13 days in Korea) will form part of the consecutive days.

201101.01.2011 to 31.03.201114.04.2011to 31.07.201190

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199

Resident under S7(1)(a)Stay for a period of at least 182 days or more.

201201.05.2012to 31.07.201292Resident under S7(1)(c)In Malaysia at least 90 days and three out of the four immediate preceding years.

Either resident in 2010and 2011 or in Malaysia for 90 days or more in 2009

2013Not in Malaysia0Resident under S7(1)(d)Resident in Malaysia for three years of assessment immediately preceding year (i.e. 2010 to 2012) and resident in the following year (i.e. 2014).

Suggested answer to Q9(b)

Temporary absence under Section 7(1)(b) constitutes:

(i) in connection with his / her service in Malaysia and owing to service matters or

attending conferences or seminar or study abroad;

(ii) owing to ill health involving himself / herself or a member of immediate family;

and

(iii) social visits not exceeding 14 days in the aggregate.

Suggested answer to Q9(c)

The tax residence status can affect an individuals tax liability in the following ways:-

(i)Resident individual is eligible for personal reliefs (i.e. self, wife, children, contribution to approved schemes & life insurance premiums, books, computer and etc.). Non-resident will not be granted tax relief deductions.

(ii)Tax at gradual / scale rates ranging from 0% to 26% where a non-resident is taxed at a flat rate of 26% .

(iii)Resident individual is entitled tax rebate of RM400 on chargeable income less than RM35,000, zakat, fitrah or any other Islamic religious due payment of which is obligatory and employment / visit / work pass.

(iv)Employment of a non resident will be exempted (Paragraph 21 of Schedule 6) from tax if the individual is employed for 60 days or less.

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