ACCA 2.3 Malaysian Taxation

"The hardest thing in the world to understand is income tax." - Albert Einstein

Sunday, July 30, 2006

Permanent Migration

This blog will not be updated anymore. Instead, it has migrated to

Thursday, July 27, 2006

Classes of income on which tax is chargeable

The Act does not give the definition of "income" but merely categorises the income under sections 4 and 4A as follows:

Section 4
Subject to this Act, the income upon which tax is chargeable under this act is income in respect of:
  1. gains or profits from a business, for whatever period of time carried on;
  2. gains or profits from employment;
  3. dividends, interest or discounts;
  4. rents, royalties or premiums;
  5. pensions, annuities or other periodical payments not falling under any of the foregoing paragraphs.
  6. gains or profits not falling under any of the foregoing paragraphs.

Section 4A
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:
  1. 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;
  2. 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; or
  3. 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 this Act.

Definition of terms used in the Sections 3, 4 and 4A:

"Person" includes:
  • company
  • body of persons
  • corporation sole
  • individuals by the virtue of its definition as a natural person
  • exludes partnership [except for shipping]
  • Accrue
    • to fall, arise, result, a right to receive
    • passive e.g. interest
  • Derive
    • to obtain, receive, come from something
    • active involvement e.g. employment
    • deemed derivation provisions - from Sections 12 to 17 whereby income is deemed to be derived from Malaysia although generated outside Malaysia. We will look at these in future articles as we cover each of the different types of income.
  • Source of an income
    • manufacture service - place where service is rendered or production is carried on
    • employment - location where service is rendered
    • dividend - where the payer company is resident
    • pension/annuities - location of fund
  • the land of Malaysia
  • continental shelf - 200 nautical miles

Wednesday, July 26, 2006

Section 3

"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."

This is the Income Tax Act 1967 (as amended up to June 2006). The following are the definition for the terms used in section 3:

  • Contribution levied on persons, property or business for the support of government.
  • Compulsory exaction of money by a public authority for public purposes enforceable by law.
  • Raising money for the purpose of government by means of contributions from individual persons.
Year of Assessment
  • A year of assessment is the calender year. (e.g. 1st January 2006 to 31st December 2006)
  • Not defined in the Act
  • Fruit and tree analogy
  • Fixed and Circulating Capital
  • Generally periodical and recurring periodical

Gains comprises of Income Gains and Capital Gains. Income Gains are taxable while Capital Gains are not taxable.

Some examples of Income Gains are:
  • Dividend
  • Interest
  • Rental
  • Royalties
Some examples of Capital Gains are:
  • Sale of shares
  • Sale of properties
Generally, income gains are periodical, regular and recurring while capital gains are lump-sum and one-off payments. Please bear in mind that these are persuasive factors and not conclusive.

Basis & Scope of Charge

Taxation was formally introduced into the Federation of Malaya in 1947 in the form of the Income Tax Ordinance 1947. This was subsequently repealed and replaced with the Income Tax Act 1967 with effect from 1 January 1968.

What are the sources of reference to the Revenue Law?
  • Statute Law (Acts, Gazette orders)
  • Case Law
  • IRB Practice (Public Ruling)
In any situation, the Statute Law is referred to first. Only when the Act is silent or ambiguous, then Case Laws are to be referred. Public Ruling as itself is not law. It is merely the interpretation of the Revenue Law.

What is the difference between direct and indirect taxes?

Direct taxes are those taxes paid directly to the revenue authorities. The revenue authority in Malaysia is the Inland Revenue Board (IRB). Income tax and Real Property Gains Tax are paid directly to the IRB. Stamp duty is paid directly to the Collector of Stamp Duty.

Indirect taxes are generally paid to another person who then transmits the tax to the revenue authorities, for instance, sales tax, service tax, customs duties and excise duties will be collected by a collector, who will then pay to the Malaysian Royal Customs and Excise Department.

Why have taxes?
  • To raise revenue for the government
  • Stimulating economic growth and maintaining stability
  • Regulating the distribution of income and wealth

Scope of charge
  • Territorial / Derived Scope. All income that arises within a particular country would be taxable. e.g. Hong Kong
  • World Income Scope. All income, wherever arising, is taxable. Problems include double taxation and need of an administrative machinery to handle wider scope. e.g. USA, Japan and Australia
  • Derived and Remittance Basis. Income arising in a particular country and foreign income brought into the country would be taxable.

Tuesday, July 25, 2006

Malaysian Tax & Law Resources

IRB M'sia Income Tax Act, Public Rulings, etc
Lawyerment Malaysia Online Law and Legal Resources

General Resources

ACCA Association of Chartered Certified Accountants
ACCA Communities E.g. ACCA Exam Tips
FTC4Success Register for free to access free study resources
BPP Learn Online Register as guest to access some resources for free
Pass Magazine
PQ Magazine
ACCA Malaysia
MIA Malaysia Institute of Accountants
Treasury Malaysia

Monday, July 24, 2006

Examination Resources

IASB International Accounting Standards Board
IASPlus News about International Financial Reporting. Detailed summaries for IAS and IFRS are available.
IFAC International Federation of Accountants. Free International Standards of Auditing (ISAs) is available in PDF format.
MASB Malaysian Accounting Standards Board