Why I have to PAY TAX even though not yet received my money???

Mr X (Director): Aiya..I haven’t received my director fee which accrued in YR2019 account because of this Covid-19.

Mr K (Tax Agent): Oh.. So sad to hear about this.. But, did you pay your PCB for the accrued director fee?

Mr X (Director): Why I need to pay??? I haven’t received my director fee!!!

Mr K (Tax Agent): You are required to do so if you are the person who has the right to control the company.

Mr X (Director): …… Yes, I am.

Mr K (Tax Agent): So, your director fee which accrued in Year 2019 is required to

• pay PCB before 15.01.2021 and
• reported in Year 2020 Form EA before 28.02.2021.

Deemed income provision under Income Tax Act

If you met the conditions under S29(4) of ITA:-

b) Individual who are relatives of each other

c) Person both of whom are controlled by some other persons

So, the “income” is required to declare in the Income Tax Return Form even though it is not yet received.

Director Fee (Past vs Now)

In the past, the directors receive the directors fees are not taxed on them until they are actually received,

But...

With effect from 2016, irrespective of whether the directors’ fees/bonus are actually paid in cash from the company bank account, or credited to the directors’ loan account...

... 𝐃𝐄𝐄𝐌𝐄𝐃 𝐑𝐄𝐂𝐄𝐈𝐏𝐓 is applicable.

It mean the directors must declare his/her director fee in personal tax in the following year.

Real Story of Deemed Income Provision under S29 (4) of the Income Tax Act

Given #1 Kena Tax Sdn Bhd Balance Sheet show :

• Accrual of director fee since 2018 RM100,000

• Accrual of director fee since 2019 RM150,000

• Accrual of director fee since 2020 RM200,000

Given #2 Director of Kena Tax Sdn Bhd never pay the personal tax on the director fee (assuming not yet receipt).

Given #3 Kena Tax Sdn Bhd never pay PCB on the accrued director fee.

Question to taxpayer;

• How to appeal to tax officer during tax audit on such accrual director's fee?

• Does IRB officer has the right to add back those accrued director fee in Kena Tax Sdn Bhd?

Trivial of Deemed Income Provision

PS #1 : Why our tax people always ask directors on the reporting of director fee?

PS #2 : Why our account people always review accrual account in the balance sheet for Form E compliance work?

𝐒𝐨𝐮𝐫𝐜𝐞𝐬 of Deemed Income Provision

Income Tax Act 1967 – Section 29(4) Basis period to which income obtainable on demand is related

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The accountant helps the boss to deduct interest expense on new warehouse for own business. Boss wants to buy new warehouse. But worry about the tax deduction on new borrowing on the proposed warehouse.

Interest definition as per IRBM

The return or compensation for the use or retention by a person of a sum of money belonging to or owed to another.

Tax treatment of interest expense

Deductibility of interest expense under paragraph 33(1)(a), in ascertaining the adjusted income of a person from a source for the basis period for a year of assessment, interest incurred and payable on 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

Example on interest expenses is an allowable expense

ABC Sdn Bhd which closes its account on 31 December every year borrowed RM10 million from Maybank in March 2008 to build a new factory for its own use.

The building is expected to be completed in January 2010.

Although the building has not yet been completed in the years 2008 and 2009, the interest expense incurred by the company in those years are allowed a deduction from its gross business income for the years of assessment 2008 and 2009 respectively.

The loan was laid out on asset held for the production of income.

Borrowing not used in business

Borrowed money not wholly and exclusively used in business like investment in property, shares, securities, interest free loan..

Interest is not deductible expenses

Pre-commencement of business

A person would not be given any deduction on the interest expense which he has incurred on borrowed money to construct a building or plant prior to commencement of his business.

Source : IRBM Public Ruling 2/2011 Interest Expense and Interest Restriction

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IRB的最新裁定 - 过帐支票来纳税

请观看此视频1分钟视频更新@ KTP Youtube
 

New rules are coming to town!! Changes in tax treatment of secretarial and tax filing fees.
 

Overview

On 18.09.2020, the IRB had issued a technical guideline on tax deductions for secretary and tax agent fees effective from YA2020.

Key takeaway

• What is the current practice (YA 2019 and before)?
• Changes in year 2020 onwards
• What is the secretarial fee?
  • Deductible
  • NOT deductible
• What is tax filing fees?

Summary of learning

What is current practice (YA 2019 and before)?

Expenses incurred on secretarial and tax filing fees give a tax deduction of up to RM5,000 and RM10,000 respectively for each year of assessment (YA).

Changes in year 2020 onwards

Secretarial and tax filing fees being combined, such that a total deduction of up to RM15,000 per YA be allowed for both expenses from YA 2020 onwards.

Scenario:

ABC Sdn. Bhd. has received following invoices for financial year end is 31 December 2020 and made payment as follows:

What is the secretarial fee?  

Secretarial fee charged in respect of secretarial services to comply with the statutory requirements under the Companies Act 2016 is deductible as follows:

• Lodgement of annual return and Financial statements.
• Change of name
• Add or delete business activities
• Retainer fees
• Issuance or transfer of shares
• Update register of members and directors
• Appointment of director or auditor

*Condition to be made: Must be incurred and paid

General secretary charges NOT deductible:

• Incorporation fee for new company (include professional fees)
• Fee for acquisition of shelf company (include professional fees)
• Name search fee to SSM (include professional fees)
• Preparation of registration documents
• Company profile printout from SSM
• Professional fee for preparation of ordinary/ special resolution
• Professional fee for preparation of other resolution, confirmation letter to bank or solicitor
• Professional fees for preparation of trust deed
• Preparation fees for CTC documents
• Attestation fees for commissioner for Oaths

 What is tax filing fee?

A tax agent approved under the Income Tax Act 1967 (ITA) in respect of services provided for the:

• Preparation and submission of income tax returns
• Estimate of tax payables

A person in respect of services provided for the preparation and submission of returns in the prescribed form for the purposes of:

• Section 26 of the Sales Tax Act 2018
• Section 26 of the Service Tax Act 2018
• Section 19 of the Departure Levy Act 2019; or
• Section 19 of the Tourism Tax Act 2017

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Special tax treatment for SME

1. Lower income tax rate

   - 17% on the first RM600,000 of chargeable income.

2. 100% capital allowance on small value assets

   - Assets costs not exceeding RM2,000.00.
   - No maximum limit of RM20,000 per year.

Criteria for SME

1. Share capital / capital contribution

   At the beginning of the basis period for a year of assessment:
   - A resident company: paid-up capital of RM2.5 million and less;
   - LLP: Total contribution of capital of RM2.5 million and less.
   
   AND

2. ​Gross business income

   - Gross business income not exceeding RM50 million.
   - The Gross income shall be determined as follows:
   
   a) If engaged in manufacturing, trading or services activities

• Section 22 of the Income Tax Act (ITA) 1967 – Gross income generally
• Section 24 of the ITA 1967 – Basis period to which gross income from a business is related
• Section 30 of the ITA 1967 – Special provisions applicable to cross income from a business

• Specific provisions under the ITA or specific regulations for certain industries

1. Investment holding company (Not listed on Bursa Malaysia) - Section 60F of ITA 1967
   The entity is deemed to have no gross income from business source.
    
2. Investment holding company (Listed on Bursa Malaysia) - Section 60FA of ITA 1967
   The entity is deemed to have gross income from business source.
    
3. Rent or interest as other source of income
   The rent or interest Is not under paragraph 4(a) of the ITA 1967, the entity is deemed to have no gross income from a business source.
    
4. Income from foreign business sources
   Gross income from foreign business sources shall be taken into account in determining gross business income.
    
5. Company/LLP enjoying tax incentives - such as pioneer status or investment tax allowance
   Exempted gross income from business source shall be taken into account in determining gross business income.
    
6. * Company/ LLP carries out a business activity.- No gross income from business sources due to current year business losses
   The company/ LLP is deemed to have gross income from a business source equivalent to NIL.
    
7. * Company/ LLP is temporary closure of business operation - No gross income from business sources due to current year business losses.

Taxpayer can claim 𝐒𝐩𝐞𝐜𝐢𝐚𝐥 𝐃𝐞𝐝𝐮𝐜𝐭𝐢𝐨𝐧 𝐟𝐨𝐫 𝐑𝐞𝐧𝐨𝐯𝐚𝐭𝐢𝐨𝐧 & 𝐑𝐞𝐟𝐮𝐫𝐛𝐢𝐬𝐡𝐦𝐞𝐧𝐭 𝐨𝐟 𝐁𝐮𝐬𝐢𝐧𝐞𝐬𝐬 𝐏𝐫𝐞𝐦𝐢𝐬𝐞 as it was finally gazetted on 28/12/20.

Keynote on the PU order:

• Gazetted on 28th December 2020
• Effective from Year Assessment 2020
• Incurred from 1st March 2020 to 31st December 2021
• Maximum amount of RM300K
• Certified by external auditor

Background story in our social media dated 30/11/20 as we voiced our concern on this special deduction.

''We, as approved tax agent, can not claim these two tax incentives namely

𝟏. 𝐒𝐩𝐞𝐜𝐢𝐚𝐥 𝐝𝐞𝐝𝐮𝐜𝐭𝐢𝐨𝐧 𝐟𝐨𝐫 𝐫𝐞𝐧𝐭𝐚𝐥 𝐝𝐢𝐬𝐜𝐨𝐮𝐧𝐭 𝐭𝐨 𝐒𝐌𝐄 𝐭𝐞𝐧𝐚𝐧𝐭𝐬

𝟐. 𝐃𝐞𝐝𝐮𝐜𝐭𝐢𝐨𝐧 𝐟𝐨𝐫 𝐫𝐞𝐧𝐨𝐯𝐚𝐭𝐢𝐨𝐧 𝐚𝐧𝐝 𝐫𝐞𝐟𝐮𝐫𝐛𝐢𝐬𝐡𝐦𝐞𝐧𝐭

The above-said special tax deduction has not yet been gazetted. Claims on such incentive/deduction can only be allowed after legislation is gazetted....''

Click the gazette order PU (A) 381

INCOME TAX (COST OF RENOVATION AND REFURBISHMENT OF BUSINESS PREMISE) RULES 2020

PS #1 We still need to seek further clarification of IRB guideline especially on the involvement of external auditor on certification.

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