CHAPTER 7

DIVIDEND,

INTEREST,RENTAL,ROYALTY

AND

OTHER SOURCES OF INCOME

SECTION 4 (c)

• Dividend Income • Interest Income

• Discount

DIVIDEND INCOME

ITA 1967 does not define the meaning of dividend.

it is an amount distributed to shareholders by company.

normally in the form of cash,in also be in kind.

derived from Malaysia if paid by a Malaysian resident company (sec 14).

taxed in the financial year that it was paid depending upon type of taxable person (sec 26).

Malaysia is replacing its imputation system to single tier syatem commencing from year 2008.

the profit will be taxed at the company level.

the dividend received by shareholders would be exempted from tax.

the basis period of assessment is calendar year (1/1-31/12).

DIFFERENCES BETWEEN

IMPUTATION SYSTEM SINGLE TIER SYSTEM

•tax paid by company is not a final tax.

•tax paid is final tax.

•tax is deducted from dividend paid,credited / distributed to

shareholders.

•no tax is being deducted from dividend paid,credited / distributed

to shareholder.

•shareholders are taxed on gross dividends received & entitled to claim

section 110 set off.

•dividends are exempt in hands of shareholders.

•tracking mechanism through section 108 account.

•no tracking mechanism is required.

-meaning company & shareholders pay tax.

-meaning only company covers and pays tax.

deduction of expenses: when shareholder are assesed on the dividend income,he can only deduct

expenses that are "wholly & exclusively" incurred in the production of the dividend income.

eg. interest expenses,management charges.

agent commission,brokerage fees,custodial fees are non-deductible expenses.

**stated under section 33 & 39**

dividends received by a person that are exempted from income tax:

dividend income paid out of tax exempt accounts.

dividend distributed by co-operative societies to members.

dividend income received from unit trust.

dividend received from offshore company distributed out of income derived from an offshore business activity /income exempt from tax.

dividend income received from foreign company and remitted to Malaysia.

INTEREST INCOME

ITA 1967 does not define the meaning of interest. can be defined as the premium / consideration paid for the use of

sum of money / property to the lender / from the settlement of debt.

eg. interest from financial institution,dividend from Tabung Haji,Provident Fund & profit from Bank Islam Malaysia.

interest income received by individuals from money deposited in any financial institution has been exempted from tax effective from year 30 August 2008.

if non resident choose to charge the interest expense against the Malaysia business income,the interest is deemed to be derived from Malaysia (sec 15 (c)).

the basis period of assessment is calendar year.

it is chargeable to tax under section 4(c) of the act as investment income.

it would be assessed under section 4(a) of the act as business income if:

it is received from trading debts.

it is received in the ordinary course of business (includes adventure in the nature of trade).

it is earned by specialised industries like bank / insurance company.

any person receiving interest income will be subjected to tax in Malaysia if :

it is derived from Malaysia.

it is received in Malaysia from outside Malaysia (applied only to resident,trust,co-operative / specialised industries companies).

can only deduct expenses that are "wholly & exclusively" incurred in the production of the dividend income. (section 33 & 39)

interests paid by a person that are exempted from income tax:

interest of any savings certificate issued by the government. interest of Bon Simpanan Malaysia and Merdeka Bonds issued

by Central Bank of Malaysia.

interest from bond & securities issued by Pengurusan Danaharta Nasional Berhad within and outside Malaysia.

interest of debentures other than convertible loan stock approved by the Securities Commission.

interest of non-convertible loan stock paid by any listed company in Malaysian Exchange of Securities Dealings.

interest of investment in premium savings certificate under the scheme of Bank Simpanan Nasional.

interest / bonus from Bank Simpanan Nasional / Lembaga Tabung Haji.

interest upon saving deposits up to RM100,000 with Bank Pertanian,Malaysia Building Society Bhd,Borneo Housing Mortgage Finance Bhd & other approved by the minister.

interest upon saving deposits up to RM100,000 with banks / finance companies registered under the Banking and Financial Institution Act 1989.

interest upon fixed deposits / money deposits in any investment account up to RM100,000 and not exceeding 12 months with banks and financial institutions.

interest upon fixed deposits with tenures(have the right to maintain) more than 12 months with banks and financial institutions.

DISCOUNT

ITA 1967 does not define the meaning of discount.

it is the deduction made from the amount of a bill of exchange / promissory notes by one who gave value for it before it was due.

it would be assessed under section 4(c) of the act as profits arising from discounts received from discounting transaction.

it would not include:

discounts allowed by the traders on the purchase of goods. discounts received from the creditors for earlier payment.

**(because it is known as cash discounts / bulk discounts)**

the basis period of assessment is calendar year.

it is said to be derived from Malaysia if the bill of exchange is transacted in Malaysia and gives rise to profit.

the profits from discounts are taxed only when it is on the maturity date of the bills / the date of sale,whichever is the earlier.

SECTION 4 (d)

• Rental Income

• Royalties Income

• Premiums

RENTAL INCOME ITA 1967 (sec 2) defined rent as sum received for the letting out of

premises / hiring of assets.

it is chargeable to tax under section 4(d) of the act as investment income.

it would be assessed under section 4(a) of the act as business income.

derivation of rental income:

immovable property

-if the property located in Malaysia,the rental income is deemed to derived from Malaysia although the owner is outside Malaysia & the tenancy agreement is concluded outside Malaysia.

movable property

-if the lessor(people who give rent) carries on business in Malaysia,the rental income is deemed to derived from Malaysia.

basis for assessing: rent from each property is treated as a separate source of income.

properties are grouped into categories like residential,commercial & vacant land.

each category is a separate source. it is assessed based on calendar year basis (except for companies

which are on accounting basis)

rental income = gross income - allowable deductions

it is treated as income when it is received. if the rental is accrued on the date payable,it is still treated as gross

income received. if the rental paid in advance,it is also treated as rental income for the

particular year when it is received.

Mr Jason received rental income from Mr Lim amounting to RM8500 for the period of July to December 2012. In addition,he also received an advance rental for the month of Jan to Feb 2013,amounting to RM3500. Compute his gross rental income for YA2012.

RM8500+RM3500=RM12000

expenses that can be deducted from gross rental income (allowable expenses):

repairs and maintenance of property (renovation & alteration are not allowed).

fire insurance premium on rented property.

interest on loan borrowed for purchase of property.

assessment and quit rent of property.

cost of advertsing to obtain the following tenant (not applicable for first tenant as it is initial cost).

sewage charge.

cost of renewing rental agreement and other miscellaneous expenses.

cost of supervision and rental collection.

expenses that cannot be deducted from gross rental income (disallowed expenses):

initial expenses like advertising,commission & legal expenses on first rental agreement to get first tenant.-because these are to create source of income.

losses on rented property:

loss from rented property is not allowed to be carried forward to the following years.

it cannot be off-set against other income.

is considered as a permanent loss unless the rental income fall under section 4 (a) as loss is allowed to be claimed for the following year.

ROYALTIES INCOME

ITA 1967 (sec 2) defines royalty to include any sum paid as consideration for publications / for the use of / the right to use the following:

copyright,artistic / scientific works,patents,designs / models,plan,secret processes,trademark / tapes for radio / TV broadcasting / other like property /rights.

know-how / information concerning technical,industrial,commercial / scientific knowledge,experience & skill.

any person receiving royalty income will be subjected to tax in Malaysia if:

the royalty income is derived from Malaysia.

received in Malaysia from outside Malaysia (applied to resident,specialised industries like banking,shipping,insurance & air transport companies,trusts & cooperative societies).

deduction of expenses stated under section 33 & 39.

it is assessed on a calendar year basis.

Double Taxation Agreement (DTA) In malay - Perjanjian Pengelakan Pencukaian Dua Kali.

is an agreement regarding avoidance of double taxation.

when a foreign company derives royalty income from Malaysia and if there is a treaty between Malaysia and the treaty country,the definition of royalty would refer to the definition in the DTA.

meaning the foreign company will be charged tax twice in both Malaysia and its own country.

hence,the tax rates will be referred to DTA table made between both countries.

EXEMPTION OF ROYALTY EXEMPTION OF ROYALTY INCOME FROM TAX RECEIVED BY INCOME FROM TAX RECEIVED BY

RESIDENT INDIVIDUALRESIDENT INDIVIDUAL

PARAGRAPH 32

Royalty from publication,use / right to use any artistic work.from recording discs / tapes.

exemption limit: RM10,000

PARAGRAPH 32A

Royalty from translation of books / literary work at the request of Minister of Education.

exemption limit: RM12,000

PARAGRAPH 32B

Royalty from publication,use / right to use any literary work / original painting.

exemption limit: RM20,000

PARAGRAPH 32C

Royalty income in respect of cultural performances approved by the Minister.

exemption limit: full exemption

PARAGRAPH 32D

Royalty income in respect of any musical composition.

exemption limit: RM20,000

PREMIUMS

is an one off payment.

is defined as the consideration (price) connecting with the granting of a lease on immovable properties such as land,building / shophouses.

the landlord / lessor would be assessed under section 4 (d) on the premium received,together with any rental income.

the basis period of assessment is calendar year.

SECTION 4 (e)

• Pension

• Annuities

• Other Periodical Payments

PENSION

is a periodical payment made in respect to an individual who has permanently ceased to exercise an employment.

the payment may be contractual / voluntary.

is made from employer to the employee,his wife,children / dependent.

Malaysia derived pension as taxable.

will be assessed on a calendar year basis.

EXEMPTION OF PENSION INCOME EXEMPTION OF PENSION INCOME FROM TAXFROM TAX

PARAGRAPH 30

pension is derived from Malaysia.

the recipient has reached the age of 55 / the compulsory age of retirement / retired due to ill health.

the pension is paid out from an approved fund,scheme / society.

pension paid in respect of services rendered as former employee in Malaysia.

PARAGRAPH 30A (for member of parliament)

pension is derived from Malaysia.

the recipient is a resident for the calendar year.

the person reached 55 years old / DG is satisfied that the retirement due to ill health.

the excemption is restricted to only 1 highest pension.

SCHEDULE 6

wounds & disability pensions granted for person in respect of service in the arm force of Malaysia / Commonwealth countries on,before / after Merdeka Day.

disability pensions granted in respect of war service injuries.

pension paid to any person under written law relating to widows' & orphans' pension.

ANNUITIES

is a definite sum of money payable on a regular basis (annually / by installments) either in perpetuity for life / a fixed term under a contract,will / settlement.

assessable on a receivable basis.

it would be exempted from income tax if the sums received by the way of annuities granted under annuity contracts issued by Malaysia life insurers & takaful operators.

meaning a contract by which a life insurer / takaful operator agrees to make a series of income payments (annuity) to an annuitant is exempted from tax,but a contract by which an annuitant agrees to make a series of payments in exchange of the annuity income to a life insurer / takaful operator is not exempted from tax.

OTHER PERIODICAL PAYMENTS

is other payments received from time to time which does not fall in any of the above categories (dividend / interest / discount / rental / royalty / premium / pension / annuity income).

alimony is one of the periodical payment. it is money that a man / woman has been ordered to pay regularly to

his / her former partner after they have been legally separated / divorced.

it is usually the man who is ordered to pay alimony to the woman to help her support their children until they are old enough to leave home.

deductible alimony payments that are subject to specific contingency & the specific period stated under the law is 10 years / less:

the death of spouse.

the remarriage of the spouse.

a change in the economic status of spouse.

**meaning if the spouse dies,the payment can be deducted.**

if the alimony payments are subject to specific contingency & the specific period stated under the law is more than 10 years,it can be deducted in full.

if the alimony payments are not subject to specific contingency & the specific period stated under the law is more than 10 years,it is also can be deducted.

SECTION 4 (f)

• Other Profits

OTHER PROFITS is gains / profits that derived from Malaysia & paid to a non resident

persons.

criterias that can be considered as other profits which may be chargeable to tax regardless it is in the form of cash / in kind:

the payment is revenue and not capital in nature.

the payment is not income that falls under section 4(a) to section 4(e).

the payments received by non resident person is in nature of a miscellaneous income / casual in nature (means an occasional income,received outside the business trade).

the payment is for an isolated (separated) trasaction.

there is an absence of repetition of transaction.

it is derived from Malaysia.