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INCOME TAX

INCOME TAX. 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

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INCOME TAX

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  1. INCOME TAX

  2. Taxes • For the Government to carry out their role: • Infrastructure • Hospital • Education • etc

  3. What makes a good tax system • Fair • Simple • Certainty • Efficient

  4. 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.

  5. 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

  6. Tax Law • Excise Act, 1976 • Sales Tax Act, 1972 • Customs Act, 1967 • Service Act, 1975 Tax is a creature by statute

  7. 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

  8. Tax Administration

  9. 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

  10. IRB Assessment Collections Desk audits ,field audits, Investigation Payments: IT,RPGT,WT, Pre-judgement Post –judgement ETP Tax Administration

  11. ASSESSMENT Sent Tax Return to IBR Taxpayer’s duty Assessment Collections

  12. Tax Appeals DGIR of IRB 30 days SPECIAL COMMISSIONERS OF INCOME TAX HIGH COURT COURT OF APPEAL

  13. Learning Objective Understanding the Concept of income

  14. 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…….

  15. business, employment; dividends, interest or discounts; rents, royalties or premium; pensions, annuities or other periodical payments…. other income INCOME Section 4 – Various sources

  16. Income • Income Concepts • Income must have a “source”. • What flows out from the source is ‘income’. - ‘capital’ is not included as taxable income.

  17. Income vs Capital • Is this capital or income? • Profit from selling of: • House: • Shares: • Cars • No source: • Source: Trade

  18. 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

  19. Income vs Capital Tree and Fruit Analogy eg. - Interest from debts - Rents from Lease of Property - Dividends from shares - Royalties from Intellectual property

  20. Sale of Business Assets • Profits and gains from sale of: • Trading stock – taxable • Other/ fixed assets – not taxable

  21. 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?

  22. Learning Objective Appreciate Section 3 – Scope of Taxation

  23. Section 3 - Scope of Tax • Income tax is imposed on incomeaccruing in or derived from Malaysia or received in Malaysia from outside Malaysia.

  24. 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.

  25. 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.

  26. Source of income • What is domestic source income? • What is foreign source income? • for employment income • for rental income

  27. 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.

  28. 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.

  29. 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

  30. Source • Eg Employment income • Place where employment is exercised • Rental income • Place where the property is situated • Business income • Permanent Establishment • / ‘operations”

  31. Taxation of Foreign Source Income

  32. Taxation of Income • Source • Residence • Exemption

  33. 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.

  34. Foreigner working in Malaysia I am a French working [employed] in Malaysia for the past 4 years. Should I report my income in Malaysia?

  35. TAX YEAR ,BASIS PERIOD & TAX RATES

  36. 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.

  37. 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

  38. Corporate Tax Rate Resident Company All income 28%

  39. 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%

  40. 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%

  41. Individual Tax RateYA 2003

  42. Income Tax Computation

  43. 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.

  44. 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

  45. 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

  46. TAX COMPUTATION Net/loss Profit Adjustments Adjusted Income

  47. 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

  48. WHAT ARE CAPITAL ALLOWANCES? Tax Depreciation • Cost of plant & machinery • Not deductible - Tax laws allows a deduction - CA

  49. Question? Why can’t we accept accounting profits as taxable income?

  50. Net Profit vs Taxable Income • Specific tax laws overrides accounting practices • Stock • Depreciation • Losses • Case law

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