The 2014 Malaysian Budget Information

The 2014 Malaysian BudgetInformation

GST Introduction_________________________________________________________________________

GST will be introduced at 6% on 01/04/2015

Sales & Service Tax will be abolished

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Page 2 The 2014 Malaysian Budget

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Entitles Corporate Tax RateCurrent Proposed

(w.e.f YA 2016)

Company ( Including Business Trust) Trust Body. Executor of an estate of an individual who was domiciled

outside Malaysia at the time of his death. Receiver appointed by the court. Limited liability partnership.

25% 24%

Company with ordinary paid-up share capital of up to RM2.5million.( at the beginning of the basis period for a YA) First RM500,000 of chargeable income.(Note)

Remaining chargeable income.

20%

25%

19%

24%

Reduction in Corporate Tax rate ( cont’d)____________________________________________________________

Reduction in Corporate Tax rate(cont’d)_________________________________________________________________________

Note: The preferential tax rate shall not apply to a company if the company has a direct or indirect relationship( in respect of ordinary shares) with another company which has more than RM2.5 million in paid up capital at the beginning of the tax basis period.

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Year of assessment Tax rate

1989-1992 35%

1993 34%

1994 32%

1995-1997 30%

1998-2006 28%

2007 27%

2008 26%

2009-2015 25%

2016 onwards 24%

Comparative Corporate Tax and GST/ VAT rates-ASEAN countries_________________________________________________________________________

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Reduction in Corporate Tax rate_________________________________________________________________________

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Chargeable income

brackets (RM)

Current tax rates (%)

Proposed tax rate (%)

Reduction (%)

1-5,000 0 0 -

5,001-20,000 2 1 1

20,001-35,000 6 5 1

35,001-50,000 11 10 1

50,001-70,000 19 16 3

70,001-100,000 24 21 3

100,001-250,000 26 24 2

250,001-400,000 26 24.5 1.5

Exceeding 400,000

26 25 1


Non-resident rate reduced by 1% from 26% to 25%.

Effective date:From year of assessment 2015.

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Tax savings from tax rate reduction_________________________________________________________________________

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RM RM RM Rm RM RM

Chargeable income

22K 50K 70K 100K 250K 400K

Current tax 20 2,850 6,650 13,850 52,850 91,850

Proposed tax

0 2,400 5,600 11,900 47,900 84,650

Tax Savings 20 450 1,050 1,950 4,950 7,200

Tax reduction, %

100% 15.8% 15.8% 14.1% 9.4% 7.8%

Comparative tax rates- ASEAN competitors_________________________________________________________________________

Highest marginal tax rate comparison

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Comparative tax estimate- ASEAN competitors_________________________________________________________________________

Estimated tax on USD $100,000 chargeable income


Expenses for GST-related training in Accounting and Information and Communication Technology_________________________________________________________________________

Current position • Single deduction under Section 33(1) of the Income Tax Ace 1967

Proposed change•Expenses incurred for GST-related training of employees in Accounting and Information and Communication Technology(“ICT”) will be given further reduction.

Effective date:

•For the years of assessment 2014 and 2015.

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Accelerated Capital Allowance on Information and Communication Technology equipment._________________________________________________________________________

Current position • Pursuant to the Income Tax (Accelerated Capital Allowance) ( Information and Communication Technology Equipment) Rules 2008 [ P.U.(A) 358/2008], ACA is given at the following rate:

Initial allowance : 20% Annual allowance: 80%

•Not Applicable to:

**A company that has been granted any incentive under the Promotion of Investment Ace 1986, or

**A company that has been granted reinvestment allowance under Schedule 7A of the Tax Act1967.

•For the years of assessment 2009 to 2013.

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Accelerated Capital Allowance on Information and Communication Technology equipment. (cont’d)_________________________________________________________________________

Proposed change•ACA (IA= 20%, AA=80%) on ICT equipment to be extended for another 3 years, i.e. the years of assessment 2014 to 2016.

Purpose

•To further encourage the purchase and installation of ICT equipment and software by companies and to encourage companies to replace and upgrade ICT equipment in order to improve operational efficiency and speed of delivery to customers.

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Accelerated Capital Allowance on Information and Communication Technology equipment.(cont’d) _________________________________________________________________________

ICT equipment as specified in the gazette order [ P.U.(A) 358/2008] are as follows:

Access control system Banking systemsBar code equipmentBusters/decollatorsCables and connectorsComputer assisted designComputer assisted manufacturingComputer assisted engineeringCard readersComputer and componentsCentral processing unitStorageScreenPrintersScanners/ readerAccessories Communication and networkSoftware system and software package

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Secretarial fee and Tax filing fee_________________________________________________________________________

Current position • Not deductible since it is not incurred directly in the production of business income.

Proposed change•Secretarial fee is allowed a tax deduction up to RM5,000.•Tax filing fee is allowed a tax deduction up to RM10,000.

Effective date•From the year of assessment 2015.

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Deductibility of interest expense on money borrowed_________________________________________________________________________

Current position

•Section 33(1) of the Income Tax Ace 1967 reads as follows:“ Subject to this Act, the adjusted income of a person from a source for the basis period for a year of assessment shall be an amount ascertained by deducting from the gross income of that person from that source for that period all outgoings and expenses wholly and exclusively incurred during that period by that person in the production of gross income from that source, including –

(a) subject to subsection(2), any sum payable for that period( or for any part of that period) by way of interest upon any money borrowed by that person and –

(i) employed in that period in the production of gross income from that source; or (ii) laid out on assets used or held in that period for the production of gross income from that source; “

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Deductibility of interest expense on money borrowed(cont’d)_________________________________________________________________________

Proposed changeIt is proposed that a person now only be eligible to claim a tax deduction on interest expenses in the period that the interest is due to be paid. However, the deduction would be given in the year the interest in payable.

Reference New subsection 33(4) of the Income Tax Act 1967.

Effective dateFrom the year of assessment 2014.


Interest income obtainable on demand_________________________________________________________________________

Current position•Under Section 29 of the Income Tax Act 1967, where circumstances are such that a person is able to obtain income on demand, that income shall be treated as gross income at the time those circumstances arise.

Proposed change•In a controlled loan transaction, it is proposed that interest income is deemed to be obtainable on demand in the basis period for a year of assessment in which such interest is due to be paid. •The above would apply to a loan between persons, one of whom has control over the other, or between persons, both of whom are controlled by some other person.


Interest income obtainable on demand(cont’d)_________________________________________________________________________

Reference •New subsection 29(3) of the Income Tax Act 1967.



Deemed interest for loans/ advances to directors_________________________________________________________________________

Current position•No Specific provisions to deem interest income on loans to directors.

Proposed change•Where a company provided a loan/ advance to a director from its internal funds, the company will be deemed to have received interest income and would be taxed accordingly under Section 4(c) of the Income Tax Act 1967•Minimum interest rate deemed to be based on average monthly lending rate of commercial banks published by Bank Negara(or, where such rate is not available, such other reference rate as may be prescribed by the Director General)•The interest income for the basis period will be based on the sum of interest for all calendar months in the basis period.


Definition of directors_________________________________________________________________________

Current position•He/she occupies the position of director by whatever name called, or is concerned in the management of the company’s business; and•He/she, either on his/her own or with one or more associates, the owner of, or able to directly or through the medium of other companies by any other indirect means to control, more than 50% of the ordinary share capital of the company.

Proposed change•It is proposed that the percentage of the ordinary share capital that is to be owned or controlled by a person who is regarded as a director be reduced from more than 50% to not less than 20%.


Deemed interest for loans/ advances to directors(cont’d)_________________________________________________________________________

Proposed change•The formula to compute the monthly interest income is as follows:

1/12 x A x BwhereA: Total amount of loan/ advance outstanding at the end of the calendar month.B: Average lending rate of commercial banks published by Bank Negara(or such other rate as may be prescribed by the DG)

Reference•New Section 140B of the Income Tax Act 1967.



Deemed interest for loans/ advances to directors(cont’d)________________________________________________________________________

Example A loan of RM120,000 payable over a period of 12 months has been provided to a director from internal funds in January 2013.The average lending rate of commercial banks published by Bank Negara is assumed to be 3% for every month in the year.


Deemed interest for loans/ advances to directors(cont’d)________________________________________________________________________


Month Ending Computation Interest Income(RM)

January 1/12 x 120,000 x 3% 300February 1/12 x 120,000 x 3% 300March 1/12 x 120,000 x 3% 300April 1/12 x 120,000 x 3% 300May 1/12 x 120,000 x 3% 300June 1/12 x 120,000 x 3% 300July 1/12 x 120,000 x 3% 300August 1/12 x 120,000 x 3% 300September 1/12 x 120,000 x 3% 300October 1/12 x 120,000 x 3% 300November 1/12 x 120,000 x 3% 300December 1/12 x 120,000 x 3% 300Minimum total interest income

1/12 x 120,000 x 3% 3600

Taxation of amount receivable from disposal of stock in trade by any element of compulsion________________________________________________________________________

Current position Court cases suggest that based on certain circumstances such amounts should not be taxable. This issue was considered in the cases of ‘Ketua Pengarah Hasil Dalam Negeri v Penang Realty Sdn Bhd(2006) 2 CLJ 835’ and ‘Metacorp Development v Ketua Pengarah Hasil Dalam Negeri (2011) MSTC 30-024’.

Proposed changesAny amount receivable by a person from the disposal of its stock in trade by” any element of compulsion”, such as compulsory acquisition, is deemed to form part of business gains or profits.


Taxation of amount receivable from disposal of stock in trade by any element of compulsion (cont’d)________________________________________________________________________

ReferenceNew section 4C of the Income Tax Act 1967.New paragraph 24(1)(aa) of the Income Tax Act 1967.

Effective dateFrom the year of assessment 2014.


Definition of “entertainment”________________________________________________________________________

Current position Under Section 18 of the Income Tax Act 1967, “entertainment includes:a) The provision of food, drink, recreation or hospitality of any kind, or

b) The provision of accommodation or travel in connection with or for the purpose of facilitating or any employee of his, in connection with a trade or business carried on by that person.

Proposed changesIt is proposed that the definition of “entertainment” be amended by inserting after the words “an employee of his”, the words “with or without any consideration paid whether in cash or in kind, in promoting or…”

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Definition of “entertainment” (cont’d)________________________________________________________________________

Effective dateFrom the year of assessment 2014

ImplicationAs such, the costs of promoting the company’s business in connection with the provision of food, drink, recreation, hospitality of any kind and any related accommodation or travel will be treated as entertainment expenses irrespective of whether any consideration is received. The wider definition of entertainment may result in additional non-deductible expenses.


Tax relief for middle-income tax payers________________________________________________________________________

Proposed A special tax relief of RM2,000 will be given to resident tax payers with a monthly income of up to RM8,000( aggregate income up to RM96,000 per year) Note: Aggregate income= Employment income + business income + other sources of income

ImpactTax savings of up to RM480( RM2,000 @ 24%)

Effective dateFor the year of assessment 2013 only.


Private Retirement Scheme( PRS) and deferred Annuity________________________________________________________________________

Currently, the PRS provided is required to deduct the tax of 8% on the pre-retirement withdrawal.

Withdrawal may be made in part or in full under the following circumstances:Upon retirement age.Following the death of the member.Permanent departure of a member from Malaysia.Permanent total disablement, serious disease, mental disability, orPre-retirement withdrawals.

It is proposed that the tax of 8% will also apply to pre-retirement withdrawal from deferred annuity contracted on or after 1 January 2014. Hence, pre-retirement withdrawal from deferred annuity is subject to income tax.


Budget 2014 proposal- increase in RPGT rates Effective 1 January 2014________________________________________________________________________


Prohibiting Developer Interest Bearing Schemes (DIBS)________________________________________________________________________

oDIBS is a scheme, where the interest on loans during the construction period of a property is borne by the property developer.oThe following were announced in Budget 2014:> The prohibition of development projects with DIBS.>The prohibition of financial institutions from providing funding to projects with DIBS.

oSingapore banned similar scheme, known as the “Interest Absorption Scheme” and “Interest Only Housing Loan” in 2009 to curb property speculation. Such schemes resulted in property prices being up to 5% higher.( The Business Times, 15 September 2009)


Increase in minimum price of property that can be purchased by foreigners from RM500k to RM 1million________________________________________________________________________Residential property transactions by state: 2010-2012


2010 2011(Transaction date until June 2011)

2012

Kuala Lumpur

Foreign 10.3% 11.1% 17.6%

Local 98.7& 88.9% 82.4%

Johor Foreign 12.1% 18.5% 15.7%

Local 87.9% 81.5% 84.3%

Selangor Foreign 2.9% 1.4% 2.0%

Local 97.1% 98.6% 98.0%

Penang Foreign 9.9% 8.0% 8.2%

Local 90.1% 92.0% 91.8%

Amount of additional payment and penalty________________________________________________________________________

Current position

•If the disposer provides an incorrect notification to the acquirer ( Form CKHT 3) and as a result, the acquirer fails to retain and remit the sum pursuant to section 21B of the RPGT Act, an additional sum equal to ten percent of the tax payable will be imposed on the disposer.

Proposed change

•Tax payable means the amount of tax charged on the chargeable gain excluding any allowable loss referred to under subsection 7(4).

Reference

•New subsection 14(6) and 15(5) of the Real Property Gain Tax Act 1967.

Effective date

•Upon coming into operation of the Finance(No. 2) Act 2013


Amount of additional payment and penalty(cont’d)________________________________________________________________________

Current position

•If a person fails to furnish a RPGT return( Form CKHT1A or 1B), a penalty equal to treble the amount of tax payable will be imposed on the disposer.

Proposed

•“Tax payable” is proposed to mean the amount of tax charged on the chargeable gain excluding any allowable loss referred to under subsection 7(4).

Reference

•New subsection 29(4) of the Real Property gain Tax Act 1976.

Effective date

•Upon coming into operation of the Finance(No. 2) Act 2013


Implementation of minimum wage policy________________________________________________________________________Current and proposed


Implementation of minimum wage policy Illustrative example________________________________________________________________________

Original wage: RM8,400( RM700 * 12months) in Peninsular Malaysia

Minimum wage: RM10,800 (RM900 * 12 months)

Difference: RM2,400 Further deduction


Other tax incentives- Green technology________________________________________________________________________

Green technologyInvestment Tax Allowance for purchase of green technology equipment and income tax exemption for use of green technology services and systems.


Other incentives - SME________________________________________________________________________


SME

Subsidy on interest rate of 2% or maximum of RM200,000 per year

Tax deduction on expenses incurred to obtain 1-InnoCERT certification

Government procurement

incentives

Priority incentives

Incentives available until 31

December 2017

Compulsory submission of annual tax returns by e-filing for companies________________________________________________________________________

Current position A company can either submit its annual tax return to the IRB by manual filing or e-filing.

Proposed changeA company must now submit its annual tax return to the IRB by e-filing only.

Effective dateYear of assessment 2014


Monthly Tax Deduction(MTD) as final tax________________________________________________________________________

Current:Employers are required to make Monthly Tax Deductions(MTDs) on cash remuneration and perquisites paid to the employees in the current year.

Benefits-in-kind and living accommodation provided are not subject to MTD.

MTDs are made after deducting personal relief, relief for spouse with no income, child relief, EPF contributions and zakat payment through salary deductions.

Employees may request their employers to deduct other reliefs so that the MTD payments are equal to the total final tax payable by completing the Form TP1- subject to the employer’s approval.

Employees are still required to submit tax returns to the IRB on or before 30 April of the following year.



ProposedEmployees whose total income tax is equivalent to the amount of MTD no longer need to submit tax returns. Amount of MTD is the final tax paid.Introduction of new section 77c.

Effective dateFrom year of assessment 2014.



Criteria for qualification:Employees with only employment income( excluding benefits-in-king and living accommodation)Employees whose MTDs are made under the Income Tax( Deduction from Remuneration) Rules 1994, andEmployees employed by same employer for a period of 12 months in that year of assessment.Employees’ MTDs are not borne by their employers for that year of assessmentEmployees who have not elected for a combined assessment



Where no return has been furnished by the individual for a year of assessment under Section 77, ITA 1967:Individual is deemed to have made an election not to file a tax returnTotal MTD deducted shall be deemed to be the amount of tax payable for that year of assessmentNo assessment will be made by the IRB for that year of assessment

The Director General still has the power to make an assessment under Section 90(3) and Section 91 if there appears to be insufficient assessment made, and the MTD paid during the year shall be disregarded as final tax.


Who still needs to file a tax return?________________________________________________________________________

Individuals working with more than one employer during the year(i.e. those who changed jobs as well as those having more than 1 job at the same time)Individuals who have worked for less than 12 months during the calendar year, including leaver casesIndividuals who have other sources of income besides employment income

e.g. business income, rental incomeIndividuals who have opted for joint/combined assessment with their spouse – where the individual’s MTD and the spouse’s MTD are not deducted based on the combined incomeIndividuals with tax refunds or reduced tax liabilities due to over deduction of MTDIndividuals with additional reliefs or deductions to claim which have not been accounted for by the employer through MTD


Who still needs to file a tax return?________________________________________________________________________

Non-residents whose MTDs have been deducted at resident rates

First year inbound assignee whose MTD is deducted at a non-resident rate of 26% until his tax residence status has been established

Employees who are eligible for the time of appointment exemption claim under OHQ, RO, TMC, TDC, IPC.


Implications to employees________________________________________________________________________

Knows and understands whether he qualifies to treat MTD as final tax, and does not need to file a personal income tax return

Needs to complete Form TP1 to claim additional reliefs and rebates as the expenses are incurred to ensure that MTDs are deducted correctly ( which is subject to the employer’s approval)

Keeps records of the receipts and supporting documents together with a copy of the Form TP1 submitted to the employer for a period of 7 years

Ultimate responsibilities lies with the employee to ensure that accurate and complete information is provided to the employer


Implications to employees________________________________________________________________________

Compute MTD accurately based on the MTD table issued by the IRB

May need to take into account additional reliefs/ rebates to be claimed by the employees in Form TP1, which is not mandatory currently.

May need to make adjustments to their payroll and accounting systems to cater for the above changes plus taking on additional payroll administration burden


Issues to be clarified with the Inland Revenue Board________________________________________________________________________

Will the IRB make it compulsory for the employer to process Form TP1 that is submitted by the employee instead of it being optional as currently?

If the employees provide correct information to the employer but the employer makes an error in keying in the data which resulted in insufficient MTD being deducted, which party would be responsible for penalties?


Annual tax returns must be based on audited accounts________________________________________________________________________

Current position•There is no specific provision that requires a tax return to be prepared by a company based on accounts audited by a professional accountant.

Proposed change•It is proposed that a company’s tax return submitted under Section 77A has to be based on accounts audited by a professional accountant together with a report by that accountant which shall contain, in so far as they are relevant, the matters set out in subsections 174(1) and (2) of the Companies Act 1965.

Effective date•Year of assessment 2014


Basis period for commencement of operations________________________________________________________________________

Current positionA taxpayer who commences operations in a basis year and makes up accounts for a period of 12 months ending on a date other than 31 December shall have no basis period in the first year.

Proposed changeTo simplify the determination of basis periods, it is proposed that where a company commences operations, the accounting period is the basis period for the year of assessment in which the accounts are closed.

ReferenceSection 21A(4) of the Income Tax Act 1967

Effective dateFrom the year of assessment 2014


Thank you

“PAM does not take responsibility on the accuracy of the above information. The information aforementioned is based on PAM’s internal research made

available from accounting books to the best of PAM’s knowledge only for your easy reference. Members are encourage to seek further advice from a qualified

auditor/accountant.

Members who wish to rely on the above information have been informed of the risks associated with relying on such information.”

Documents

The 2014 Malaysian Budget Information