AN INTRODUCTION

TO MALAYSIAN
TAX SYSTEM

1
Origin Of Accounting
 Under feudal system:
paying the landowner in kind
through goods and labor
– e.g.: energy
 Undertaxation system:
payments to the tax authorities
in monetary rather than
payment in kind.
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Definition of Taxation
 Payment/contribution charged by the Government
as a return for using the country’s income, wealth
and other resources

 “contribution levied on persons, property or business

for the support of Government” (Concise Oxford
Dictionary)

 “income tax is a tax charged for each year of

assessment upon the income of any person
accruing in or derived from M’sia or received in M’sia
from outside M’sia” ( S.3.ITA 1967)
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History of taxation in
Malaysia
 1st introduced in Malaya in 1.1.1948 by
British- Income Tax Ordinance (ITO)1947

 ITO 1947 is then replaced by Income Tax

Act 1967 enforced from 1.1.1968

 ITA 1967 is the law governing income

taxation
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 Sources Of Malaysian
Taxation Law
 There are 3 sources of revenue law in the
Malaysian context :
1. Statute law (referred to as the
legislation
2. Case Law (judge made laws)
3. Practice of the Malaysian Inland
Revenue Board (IRB)
 Implementation of Tax Laws :
IRB is responsible for all policies relating to direct
taxes and administer which are Income Tax,
Petroleum Income Tax, Real Property Gains Tax 5

and Stamp Duty

 RM
contribution - no service is
rendered in return of
No one like to payment
pay voluntarily Law is imposed
• Income Tax Act
1967

A compulsory monetary
contribution
demanded by the Govt. for its
support
and levied on income , property,
goods purchased etc.

No government machinery Not only on income but sale &

can continue to function purchase of properties,
without financial resources goods & services

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Objectives of Taxation

Raising revenue to finance government’s

expenditure

Ensuring that taxes are collected effectively

and at minimal cost (both government and
taxpayers)

Regulate the private sector to maintain desired

level of employment and increase the economic
development/ growth

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Objectives of Taxation… cont

Regulate the distribution of income and

wealth between different types and
classes of citizen

Ensuring fairness and equity,

i.e the burden of tax is spread fairly and
equitably among taxpayers
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 Types of Tax

• Income Tax
• Petroleum Income Tax
DIRECT TAX • Real Property Gains Tax (RPGT)
• Stamp duty

• Sales tax
• Service tax
• Custom Duty (Import and export
INDIRECT duty) – e.g. electronic product
imported.
TAX • Excise duty – e.g. product
manufactured in Malaysia such
as liquor, cigarettes.
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 Types of Tax
1. Direct Taxes:
 The responsibility to administer direct
taxes in Malaysia lies with the Inland
Revenue Board (IRB).
2. Indirect Taxes
 The responsibility to administer indirect
taxes in Malaysia lies with the Royal
Custom Department.

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 Basis of Taxation

 Total income – tax is charged on total income

received by a person in that basis year.
 Total expenditure – tax is charged on the
expenses incurred by a person
 Wealth – tax is charged on total capital
increment or wealth of a person in a basis
year.
 Transactions – tax is charged every time a
transaction incurred.
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 What is Income Tax?

 Tax charged on income

A sum of money taken from a person
income to be used by the Government in
order to provide public facilities in this
country

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 Scope of Income Tax Charge

Section 3 of the Income Tax Act 1967

provides:
“Subject to and in accordance with this
Act, a tax to be known as income tax
shall be charged for each year of
assessment upon the income of any
person accruing in or derived from
Malaysia or received in Malaysia from
outside Malaysia”
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 Scope of Income Tax
Charge
 Sec.3 sets out two circumstances where
income tax liability arises:
a) the transaction must be ‘income’ in
nature and such income is accrued in or
derived from Malaysia; or

b) the transaction must be ‘income’ in

nature and it is received in Malaysia from
outside Malaysia (foreign source income).
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 Income

gains
Income Benefit enjoyed

Profit

Increase in value of Return on capital employed/

Revenue
capital, not anin nature
income Capital in nature
transportation involving
circulation of capital

15
 Taxable Persons
 Section 2 defines ‘person’ to include
a company, a body of persons and a
corporation sole.
 Company means any body
corporate & including any body of
persons established with a separate
legal identity under any law outside
Malaysia.

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 Taxable Persons…
 Body of person’ – unincorporated body of
persons (not being a company), including a
Hindu joint family but including Limited Liability
Partnership (LLP)**,excluding a conventional
partnership.
 e.g: trust, club, trade association, cooperative
etc

 For conventional partnership, individual partner

will be assessed to tax, not the partnership
itself.
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 Taxable Persons…
 Itis crucial to establish the concept
of ‘person’ because:
To determine the chargeable person
on the income derive from taxable
activities
To determine the tax rate applicable
to each category of chargeable
persons

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 Accruing In Or Derived
From
 Income accrued in or derived from Malaysia
will be taxed at the time accrued or derived
notwithstanding the fact that the income
may not have been received in Malaysia.

 Accruedmeans ‘right to receive’ whereas

derived has been defined according to the
sources of income as follows:

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Section Sources of Income Derivation
Section
4(a) Business 12
4(b) Employment – general 13(2)
- public services 13(3)
4(c) Dividends 14(1) –(3)
Interest 15
Discounts -
4(d) Rents -
Royalties 15
Premiums -
4(e) Pensions 17(1) –(3)
Annuities / other periodical payments -
4(f) Others 15B
4A Special classes of income 15A

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Received And Remitted
• Received – means come into possession.
• Income not physically received in Malaysia
would not be liable to Malaysian income
tax.
• Eg: receipt of a cheque in Malaysia would
not constitute ‘received’ unless it is
credited into a bank account in Malaysia.
• Remitted = receipt

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CHARGEABLE INCOME
Sec 5 of ITA 1967

Gross Income
Adjusted Income
Statutory Income
Aggregate Income
Chargeable
Total Income
Income

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Scope of taxation
 Income tax in Malaysia is imposed
on income accruing in or derived
from Malaysia except for income of
a resident company carrying on a
business of air/sea transport,
banking or insurance, which is
assessable on a world income
scope.

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Scope of taxation
 Income attributable to a Labuan
business activity of Labuan entities
including the branch or subsidiary of a
Malaysian bank in Labuan is subject to
tax under the Labuan Business Activity
Tax Act 1990 instead of the Income Tax
Act 1967.
 A Labuan entity can make an irrevocable
election to be taxed under the Income Tax
Act 1967 in respect of its Labuan
business activity.
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Basis of assessment

 Income is assessed on a current

year basis.
 The YA is the year coinciding with
the calendar year, for example, the
YA 2019 is the year ending 31
December 2019.

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Basis of assessment

 The basis period for a company, co-

operative or trust body is normally the
financial year ending in that particular
YA.
 For example the basis period for the YA
2020 for a company which closes its
accounts on 30 June 2020 is the
financial year ending 30 June 2020.
 Allincome of persons other than a
company, co-operative or trust body,
are assessed on a calendar year
basis. 26
 Scope Of Charges
Categories

 3 categories:-
1. The territorial/derived
basis/scope
2. The world income scope
3. Derived/remittance basis

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 1. The territorial/derived
basis/scope
 Allincome arising within particular territory/
country would be taxable –
 eg: Japan – income arises from
outside Japan is not subject to tax.
Income arising from overseas brought to
Japan are not taxable (free of tax)
 Resident / non resident irrelevant
 Important aspect is to establish that
income arises/derived from the particular
location / country 28
 2. The world income scope
 income wherever arises is taxable
 question of remitting income is irrelevant
 emphasis on tax payer – based on
citizenship, residence, or domicile (place
one lives/home) of a taxpayer.
 Domicile
 where you reside.
 Normal meaning – the place where one person usually
stay.
 differ from resident status.
 Eg: seek medical treatment overseas and then die
=> still domicile in Malaysia 29
The world income scope…cont

 eg: if individual is a citizen of country A,

all income (irrespective of where it is
derived from) is taxable in country A. For
company – refer to resident status of
company.
 if taxpayer not citizen,
resident/domiciled, then the territorial
basis would be applied.
 it is very wide; requires more resources
of manpower for tax authorities to verify
taxpayers have actually reported their
worldwide income. 30
3. Derived/remittance basis

 improvement over the derived/territorial

basis, but not as wide as the world income
scope.
 income arising from one country world:-
 a) be taxable as in (i) – derived basis and;
 b) income brought into the country from overseas
would also be chargeable to tax
 this basis of taxation - applied to residents
/ citizens:
 resident – income taxable under a & b.
 If non resident = territorial/derived basis.
 Applied in Malaysia and Singapore. Avoid 31

double taxations – relief given

Scope Of Charge To Income
Tax Applicable In Malaysia

Derived & remittance basis World income Territorial basis

basis
Resident chargeable on Resident Non-resident
i) Income accrued / chargeable on chargeable on
derived from M’sia income income derive
ii) Income received in wherever from Malaysia
M’sia from overseas arising

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Classes of Income on which
tax is chargeable
 Section 4 Subject to this Act, the income upon
which tax is chargeable under this Act is income
in respect of:-
4(a) Gains/profit from a business;
4(b) gains/profit from employment;
4(c) dividend, interest/discount;
4(d) rent, royalties/premium;
4(e) pensions, annuities or other periodical
payments not falling under any of the
foregoing paragraphs;
4(f) gains/profits not falling under any of the
foregoing paragraphs. 33
Special Classes of Income
on which tax is chargeable
 S4A ITA 1967
 Income of a person not resident in Malaysia
for a year of assessment:

(i)Amounts 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;
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Special Classes of Income on
which tax is chargeable….
(ii) Amounts paid in consideration of technical
advice, assistance or services rendered in
connection with technical management or
administration of any scientific, industrial or
commercial undertaking, venture, project or
scheme;
(iii) Rent or other payments not being payments
of film rentals made under any agreement
or arrangement for the use of any movable
property,

Which is derived from Malaysia

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 Year of Assessment
Year of assessment means a
calendar year,
e.g.:
YA 2020 running from 1/1/2020
till 31/12/2020

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 Basis year
 The basis year for year of assessment is
the calendar year coinciding with that
year of assessment.
 Thismeans the basis year is always the
12 months to 31 Dec.
 Eg: the basis year for the YA 2018 is the
calendar year from 1.1.2018-31.12.2018

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Basis period
 Inthe case of a person (other than a
company, trust body or cooperative
society), the basis year for a YA shall
constitute the basis period for that YA
 Inthe case of a company, trust body or
cooperative society, the calendar year for
a YA shall constitute the basis period for
that YA

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 Basis period
 Eg:XYZ Sdn Bhd closes its account on
30 June each year. The accounting
period 1.7.2019 - 30.6.2020 shall form
the basis period for the YA 2020.

 Eg.ABC Sdn Bhd closes its account on

31.12 each year. The accounting
period 1.1.2020 - 31.12.2020 shall form
the basis period for the YA 2020

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 CURRENT YEAR OF
ASSESSMENT
 Witheffect from 1 January 2000,
preceding year basis will be replaced
with current year of assessment (CYA).
 CYB- assessment on income received in
current year. Eg. Income received in
2020 will be taxed in 2020 as well.
 Advantage of CYB- tax collection is
based on the tax payers’ ability to pay
and his cash flow
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 Official Assessment System (OAS)
vs.
Self Assessment System (SAS)
 Self Assessment System (SAS)
 SAS is a method whereby the taxpayers
are given the responsibility to calculate
their own tax liability and pay the amount
of tax liable as calculated by them.
 Therefore the burden of assessing the tax
liability has shifted to the taxpayer.
 SAS is implemented in stages start with
companies in 2001, followed by business,
partnership and co-operative in 2003, and
individual income in 2004.

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 Official Assessment System (OAS)
 Under the OAS the taxpayers have to
report their income to LHDN by filling
the ‘Borang Nyata Pendapatan’ and
then the LHDN will access their income
tax and post the assessment notice to
the taxpayer to show the tax amount
that they have to pay to LHDN.
 The taxpayer has the responsibility to
report and to pay the tax as assessed
by the tax authority only.

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 Tax Rate
 S6 ITA: Resident Individual
 progressive rate
 YA2002- YA2008: 0%-28%
 YA 2009: 0% - 27%
 YA 2010-YA2012: 0%- 26%
 YA 2013-YA2014: 0%- 26%
 YA 2015: 0% -25%
 YA 2016- YA 2019: 0% - 28%
 YA 2020- YA2021: 0% - 30%
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 TAX RATE FOR
RESIDENT INDIVIDUAL
YA 2018- 2021

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Chargeable Income YA 2018-2019 YA 2020
(RM) Rate % Tax(RM) Rate % Tax(RM)
On the First 5,000 0 0
Next 15,000 1 150 1 150
On the First 20,000 150 150
Next 15,000 3 450 3 450
On the First 35,000 600 600
Next 15,000 8 1,200 8 1,200
On the First 50,000 1,800 1,800
Next 20,000 14 2,800 14 2,800
On the First 70,000 4,600 4,600
Next 30,000 21 6,300 21 6,300
On the First 100,000 10,900 10,900
Next 150,000 24 36,000 24 36,000
On the First 250,000 46,900 46,900
Next 150,000 24.5 36,750 24.5 36,750
On the First 400,000 83,650 83,650
Next 200,000 25 50,000 25 50,000
Cont….
Chargeable Income YA 2018-2019 YA 2020
(RM) Rate % Tax(RM) Rate % Tax(RM)
On the First 600,000 133,650 133,650
Next 400,000 26 104,000 26 104,000

On the First 1,000,000 237,650 237,650

Next 1,000,000 28 280,000 28 280,000
On the First 2,000,000 517,650 517,650
Above 2,000,000 28 ………. 30 ……….
 Tax Rate
Non-Resident individual
YA 2016-2021

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 YA 2016- YA 2020-
Types Of Income
2019 2021
Rate (%) Rate (%)

Business, trade or profession

28 30
Employment

Interest 15 15
Royalty
Technical / management fees
10 10
Lease of moveable properties
Section 4(f) income
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This Photo by Unknown Author is licensed under CC BY-NC-ND

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