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CHAPTER 4

TAXATION FOR SPECIALISED INDUSTRY

4.0 Topic Outcomes

Upon completion of this chapter, students will be able to:

Compute the income tax liability for the sea and air transport operators.
Explain the scope of charge for banking industry.
Explain the treatment of business income, business losses, bilateral and unilateral
relief
Define the investment holding company.
Identify the criteria for being an investment holding company.
Explain the tax treatment of unlisted and listed Investment holding company.
Compute the income tax liability of investment holding company.

4.1 Source of information

4.1.1 Section 54, ITA 1967


4.1.2 Section 54A, ITA 1967
4.1.3 Public Ruling 10/2012

4.2 Definition of Malaysian Ship

Sea going ship registered


under MSO 1952

Note: Exclude: ferry, barge, tug-boat, supply vessel, crew


boat, lighter, dredger, fishing boat or other similar vessel.

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4.3 Resident operators ships and airplanes

4.3.1 Scope of charge

Income of a resident person from the business of transporting passengers or


cargo by sea from wherever derived or accrued (world income scope) includes

(a) income received and receivable in Malaysia, and


(b) income received and receivable outside Malaysia, irrespective of whether it is
remitted to Malaysia.

Other business income from other sources (example: transport by lorry) is


treated under territorial scope i.e. only income derived or accruing from Malaysia
is taxable in Malaysia and income remitted from outside Malaysia is exempted
from income tax.

4.3.2 Tax treatment for shipping income

(a) Exemption on shipping business income


With effect from YA2012, Section 54A(1) and 54A(2) were amended. The key
amendment is that the income tax exemption for shipping companies be
reduced from 100% to 70% of statutory income; Section 54A(1) - (budget 2012)

(b) Separate business source

Business of transporting passengers or cargo by sea or air is treated as a


separate business source from the business of letting or hire a Malaysian
ship on a voyage or time charter.

(c) Unabsorbed capital allowances


WEF YA2009, the company is deemed to have claimed the capital
allowances.

Any unabsorbed capital allowances of one ship cannot be set off against
another ship.

(d) Unabsorbed business loss from shipping business


Any unabsorbed business loss incurred, are deducted against the exempted
income of the shipping business and cannot be deducted against the income
of other businesses.

(e) Single source

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For the purpose of the exemption of statutory income, all income of the
qualified ships shall be treated as consisting of a single source.

4.4 Non-resident operators ships and airlines


The non-resident operators carrying business of transporting passengers or cargo by
sea would be taxable under the ITA 1967 on his/her gross income derived from
Malaysia. [Section 54(5)]

Derived from Malaysia means the total of all sums first receivable by the operator in the
basis period in respect of transporting by sea or air passenger or cargo embarked or
loaded in Malaysia into the ships or aircraft owned /chartered by the operator, excluding
the following:
Goods or passengers which are merely transferred in Malaysia from one
transport to another (transshipment)
Casual call
Refund

4.5 Determination of chargeable income for non-resident operator

4.5.1 5 Percent Method


The statutory income is deemed to be 5 percent of the gross shipping charges
received from the embarkation of passengers or the gross freight loaded from
Malaysia.

4.5.2 Acceptable Ratio Certificate Method


This method is used if the certificate issued by a foreign tax authority is
submitted to the Inland Revenue Board within 3 years (or such further period
as the Director General may allow) after the commencement of the relevant
year [Section 54(4)].

Example 1

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A resident company owned two ships, A and B which are registered under the Merchant
Shipping Ordinance 1952. The details of both ships are as follows:

Ship A Ship B
Adjusted income /(loss) 800,000 1,000,000
Capital allowances 400,000 200,000

The company earned interest income of RM60,000 for the year of assessment 2015.

Required:

Calculate the chargeable income and the amount credited to the exempt income account for the
year of assessment 2015.

Answer:
Ship A Ship B
RM RM
Adjusted income 800,000 1,000,000
(-) capital allowances 400,000 200,000
Statutory income 400,000 800,000
(-) 70% exemption 280,000 560,000
Deemed total income 120,000 240,000

Calculation of chargeable income


RM
Interest income 60,000
Aggregate income 60,000
(-) current year loss from non-Malaysian ship/other businesses NIL
(-) approved donation NIL
Total income 60,000
(+) Deemed total income Ship A 120,000
(+) Deemed total income Ship B 240,000
Chargeable income 420,000

Amount credited to exempt income account:


RM
Exempt income from Ship A 280,000
Exempt income from Ship B 560,000
840,000
(-) business loss from Malaysian ships NIL
Amount credited to exempt income account 840,000

Example 2

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Bahtera Sdn Bhd is a resident shipping company. It has two Malaysian ships, Bahtera 1 and
Bahtera 2, both registered under the Merchant Shipping Ordinance 1952. The income,
expenditure and capital allowances in respect of the two ships for YA2015 is as follows:

Bahtera 1 Bahtera 2
RM RM
Gross income 30,000 12,000
Allowable expenses 5,000 7,000
Capital allowances 800 1,800
Capital allowances brought forward from YA2014 1,000 2,000

Required:

Calculate the chargeable income for the year of assessment 2015.

Answers:
Bahtera 1
RM
Gross income 30,000
(-) Allowable expenses 5,000
Adjusted income 25,000
(-) Capital allowances current 800
(-) Capital allowances brought forward from YA2014 1,000
Statutory income 23,200

Bahtera 2
Gross income 12,000
(-) Allowable expenses 7,000
Adjusted income 5,000
(-) Capital allowances current 1,800
(-) Capital allowances brought forward from YA2014 2,000 1,200
Aggregate of statutory income 24,400
(-) 70% of statutory income (17,080)
Chargeable income 7,320

4.6 Financial Institutions (banking industry)

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4.6.1 Scope of Charge (Section 60C of ITA 1967)

According to Section 60C, ITA 1967, the income from the banking business is taxable
based on the world income scope, i.e. income wherever accruing or derived. Other
income from non-banking business such as rental income would be taxed on a territorial
basis.

4.6.2 Banking business loss from overseas

Section 60C does not make any provision for the deduction of the business loss,
therefore the losses are not be deductible against the aggregate income.

4.6.3 Non-application of Paragraph 28, Schedule 6

Para 28, Schedule 6 states that income derived from sources outside Malaysia and
received in Malaysia is exempted from tax. This rule is not applicable to the banking
business if it receives dividend from its subsidiary from foreign country. The dividend
would be taxable in the foreign country and also in Malaysia if the dividend is received in
Malaysia.

4.6.4 Entitlement to the Bilateral and Unilateral relief

Section 132 and Section 33, ITA 1967 and Schedule 7 provide for the relief with regards
to the double taxation suffered by the taxpayer. The income from foreign country would
had suffered `underlying tax and/or `withholding tax. Underlying tax is a tax imposed by
the foreign country on the profits arising from that country while withholding tax would
arise if the income is paid to non-residents and the law of that country provides for the
withholding tax (rate specified by the tax authority).

The taxpayer would be able to claim the bilateral relief (existence of double taxation
agreement) or unilateral relief (non-existence of double taxation agreement).

4.7 Investment Holding Company

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4.7.1 The provisions of the Income Tax Act 1967 (ITA)

Paragraphs 4(a), 4(d), 4(f), 8(1)(b) and 8(1)(c), sections 43, 44, 60F and 60FA as
well as paragraph 75 of Schedule 3 and paragraph 12B of Schedule 6.

4.7.2 Definition of an Investment Holding Company

Generally, the determination of whether a company is an IHC depends on two (2)


criteria:

(a) its main activity is the holding of investments; and

(b) not less than 80% of the companys gross income other than gross income
from a source consisting of a business of holding of an investment (whether
exempt or not) is derived from the holding of those investments.

Example 3

Jelly Investment Sdn Bhd (Jelly) started business in year 2012 and its main
activity is investment in several companies and fixed deposit. For the year 2015,
Jelly only receives dividend income from the investment in those companies and
fixed deposit interest. Jelly closes its account on 31 December every year.

Required:

Is Jelly Investment Sdn Bhd an investment holding company?

Answer:
Jelly Investment Sdn Bhd is an IHC for the year of assessment 2015 since its
main activity is the holding of investments and not less than 80% of its gross
income (only dividend and interest) is derived from the holding of those
investments.

Example 4
Ladang Sdn Bhd started business in year 2012 and its main activity is oil palm
plantation. Apart from that, Ladang Sdn Bhd also invests in several companies
and fixed deposit in several banks. In year 2015, the company receives interest
amounting to RM10,000 from the fixed deposit. The company has not generated

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any income from the plantation activity. The company closes its account on 31
December every year.

Required:

Is Ladang Sdn Bhd an investment holding company?

Even though the income of Ladang Sdn Bhd is 100% derived from the saving in
fixed deposit, Ladang Sdn Bhd is not an IHC for the year of assessment 2015
since its main activity is not the holding of investments but oil palm plantation.

4.7.3 Tax Treatment of IHC

The tax treatment for an IHC depends on whether the IHC is or is not listed on
the Bursa Malaysia. The special tax treatment for an IHC is provided under:

(a) section 60F of the ITA for an IHC not listed on the Bursa Malaysia; and

(b) section 60FA of the ITA for an IHC listed on the Bursa Malaysia

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The income tax treatments of a non-listed and listed IHC are listed below:

Non-listed IHC Listed IHC


Classification Rental income Section 4d Rental
of income Interest Section 4c Interest Separate
Dividend - Section 4c Dividend deemed
business income
Investment S.4a
income

Non-investment income = Section 4f.


Management fees treated as
Management fees treated as `other business source.
income rather than business income.
Direct Expenses are deductible against each Expenses are deductible against
expenses source under Section 33(1), but each source under Section 33(1), but
incurred in restricted to the gross income from the restricted to the gross income of the
the investment source. deemed business source.
production of
income Expenses related to single tier dividend Expenses related to single tier
are specifically not deductible. dividend are specifically not
deductible.
Common Deduction is given at the level of The expenses are deductible in
expenses aggregate in arriving at total income. arriving at the adjusted income of the
These are subjected to a restrictive various deemed business source.
formula of permitted expenses:
A x B/4C. Common expenses are fully
apportioned to the separate deemed
[A is the total permitted expenses, B is business source and deductible but
the gross investment income restricted to the available gross
chargeable to tax and C is the income.
aggregate of gross investment income
(taxable and exempt) and gains from The restrictive formula A x B/4C is not
the realization of investments. applicable.

The amount allowable is further Common expenses relating to


restricted to 5% of gross taxable deemed business single tier dividend
income. are specifically not deductible.

Any unabsorbed permitted expenses


cannot be carried forward
Only proportion of permitted expenses
relating to the management fees is tax

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deductible
The amount related to single tier
dividend is not deductible.
Availability of Capital allowances cannot be claimed. For a deemed business, CA are
capital allowed but any unabsorbed CA
allowances cannot be carried forward.
Example 5

The Statement of Profit or Loss for the year ended 31 December 2015 of a non-listed IHC,
whose sole activity is in the making of investment is as follows:

RM
Gross income
Interest from fixed deposits 60,000
Rental from shop (note 1) 50,000
Dividend -Co. A (single tier) note 1 150,000
Dividend from Co. B (single tier) note 1 75,000
Rental from sublet of office 20,000
Gain from realization of investments 86,000
441,000
Expenses
Directors remuneration 50,000
Employees salaries 30,000
Accounting and secretarial fees 10,000
Audit fee 20,000
Interest (note 2) 40,000
Printing and stationery 2,000
Management expenses 28,000
Rent for office 50,000
Quit rent and assessment 2,000
Entertainment 3,000
Depreciation 5,000 240,000
Net profit 201,000

Notes:

1. Investment:
Cost Rental Dividend
RM RM RM
Shop 500,000 50,000 -
Co.A 2,000,000 - 150,000
Co B 1,000,000 - 75,000

2. Interest expenses of RM40,000 was incurred on loans for the investments in shop house
and shares.

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Required:
Calculate chargeable income of the company for the year of assessment 2015.

Answer:
RM
Section 4c: Dividend Exempt
Section 4c: Interest 60,000
Rent (shop) 50,000
(-) interest 40,000 x 500,000/ 3,500,000 (5,714)
(-) quit rent (2,000)
Adjusted income from rent 42,286
Aggregate income 102,286
(-) fraction of Permitted Expenses (5,500)
[note1]
Chargeable income 96,786

Note 1:

Permitted Expenses RM
Directors remuneration 50,000
Employees salaries 30,000
Accounting and secretarial fees 10,000
Audit fee 20,000
Printing and stationery 2,000
Management expenses 28,000
Rent for office 50,000 sublet 20,000 30,000
A 170,000

Gross income chargeable to tax RM


Interest 60,000
Rent 50,000
B 110,000

Aggregate of gross income (exempt or taxable) RM


Interest 60,000
Rent 50,000
Dividend (exempt) 225,000
Gain from realization of investments 86,000
C 421,000

A x B /4C = 170,000 x 110,000


4 x 496,000

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= 9,425 or

5% of B (5% x 110,000 = 5,500),whichever is lower, therefore the lower amount


is RM5,500.

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