Income Tax Law

BUSINESS LAW FOM, MMU.

what is tax?
In simple words tax is a sum of money paid by the citizens to the government on the income or value of purchases. Tax is imposed on the income or value of purchase of certain specific goods and services. The purpose of imposition of tax by the government is to bear government expenditure and to undertake development projects. Therefore, it is very important to pay tax regularly to the government for the defence and development of the country.

what is income tax?

When tax is levied on the income of a person it is called income tax. If there is no income, there is no income tax. There are different types of income upon which tax is imposed, such as business income, employment income, rental income, dividends, interest, royalties etc.

What are the different types of taxes?

There are different types of taxes. Primarily they are classified into two types, such as direct tax and indirect tax. Direct tax is imposed and paid by the taxpayers directly to the tax department, e.g. income tax. However, indirect tax is imposed on the prescribed goods and services rather on the individuals. Indirect taxes are sales tax and service tax. Other types of taxes are customs duty, stamp duty, real property gains tax (RPGT) etc.

Under what statute income tax is imposed in Malaysia?

In Malaysia, income tax is imposed, assessed and collected under the Income Tax Act 1967. Income tax is only charged on the income and not on capital. No tax is levied on capital gains under the Income Tax Act.

 Income tax is charged on the persons who are chargeable to income tax for every year of assessment. Section 3 of the Income Tax Act provides that:
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."

what is income?
Income has not been defined in the Income Tax Act 1967. In the absence of statutory definition we can adopt ordinary dictionary meaning. In the Oxford Advanced Learners Dictionary, income means money which comes in as the periodical produce of ones work, business, land or investments. In the Webster Dictionary, income has been defined as a gain or recurrent benefit that is measured in money and for a given period of time derived from capital, labour, or combination of both.

basis period and year of assessment

Basis period means the period of time upon which tax is assessed. Usually income tax is assessed upon one-year period. Year of assessment means calendar year in which tax is assessed. Calendar year begins in January and ends in December. However, business companies usually do not follow this calendar year for their financial year. For example, MEASAT Broadcast Network Systems Sdn. Bhd. determines its financial year from July to June. The company wants to pay tax on its income from July 2000 to June 2001. Here July 2000 to June 2001 is the basis year or basis period and year 2002 is the year of assessment.

Who is chargeable to income tax?

Income tax is chargeable upon the income of any person accruing in or derived from Malaysia or received in Malaysian from outside Malaysia. (Sec. 3, Income Tax Act 1967). It means any person is liable to pay income tax if he has income under sec. 3 of the Act. However, a non-resident person will not be taxable in Malaysia if he receives income from sources outside Malaysia.

Income received in Malaysia from outside Malaysia

Under section 3 of the Income Tax Act it is stated that income tax shall be charged on the income received in Malaysia from outside Malaysia. The term received is not defined in the Act. In the ordinary meaning, it means come into possession. It is not very clear whether the income must be physically received or not. According to some scholars, if the income is not physically received in Malaysia may not be taxable under the Income Tax Act 1967.

Different classes of income

Under section 4 of the Income Tax Act, tax is chargeable on different classes of income. Those classes of income are as follows:
( ( ( ( ( a) gains or profits from a business; b) gains or profits from an employment; c) dividends; interest or discounts; d) rents, royalties or premium; e) pensions, annuities or other periodical payments not falling under any of the foregoing paragraphs; ( f) gains or profits not falling under any of the foregoing paragraphs.

How to compute chargeable income?

Income tax is charged on the chargeable income of a person. So, it is crucial to determine the chargeable income of a person. To determine chargeable income of a person we have to go step by step. First we have to ascertain the basis period, then gross income, then adjusted income, then statutory income, then aggregate income, then total income and then chargeable income. Gross Income: Gross income of a person is the income from a source without deducting allowable expenses. Gross income of a person from a source includes any sums receivable or deemed to have been received.

 Adjusted Income: Adjusted income from a source is calculated by deducting all outgoings and expenses wholly and exclusively incurred in the production of gross income of that source. Statutory Income: Statutory income from a source is determined by adding balancing charge with the adjusted income and by deducting capital allowance. Aggregate Income: Aggregate income is the statutory income from a business less business losses brought forward from previous years plus statutory income from other sources of income.

 Example: Mr. Nazris income in a basis year is as follows. Determine his aggregate income. Adjusted income Adjusted loss (b/f) Dividend Rent RM 80,000 RM 10,000 RM 5,000 RM 20,000

 His aggregate income is: Adjusted income RM 80,000 Less: Business loss (b/f) RM 10,000 ----------------------------------------------------------------------------RM 70,000 Plus: Dividend income RM 5,000 Plus: Rental income RM 20,000 -----------------------------------------------------------------------------Aggregate income RM 95,000

 Total Income: Total income is aggregate income, less current year adjusted business loss, less donations paid to approved institutions. Chargeable Income: The chargeable income is total income less personal reliefs (such as deductions for individual relief, wife relief, children relief and insurance relief). Exercise: Mr. David has earned RM 100,000 gross income from his business and RM 10,000 from dividend for the basis year 2001. In that basis year he made the following expenses. Salary paid to the employees RM 24,000 Interest paid RM 5,000 Rent paid RM 15,000 Other expenses RM 20,000

 Mr. David has two children, first child studying at eh university in Malaysia and second child studying at a school in Malaysian. Compute his chargeable income. Computation of Mr. Davids chargeable income: Gross income from business source RM 100,000 Less: salary paid to the employees RM 24,000 Less: interest paid RM 5,000 Less: rent paid RM 15,000 Less: other expenses RM 20,000 Adjusted income RM 36,000 Add: Dividend income RM 10,000

Adjusted income Add: Dividend income Aggregate income Less: Individual relief Less: wife relief Less: child relief (first child) Less: child relief (second child)

RM RM RM RM RM Chargeable income of Mr. David

RM 36,000 RM 10,000 RM 46,000 8,000 3,000 3,200 800 15,000 RM 31,000

How is the income tax assessed?

Income tax is assessed based on the return made by the respective taxpayers. Return forms are generally issued to tax payers in early March of each year. By virtue of S. 77(1) the return forms must be duly completed and returned to the Department of Inland Revenue within 30 days or such further period given by the Director-General of Inland Revenue. Where a taxpayer has not received a return form within 3 months of a given year, he must within 14 days of April inform the Director General that he is subject to tax [S.77(2)].

 Where a person has delivered a return under section 77 to the Director General for a year of assessment, the Director General may accept the return and make an assessment accordingly; or refuse to accept the return and, according to the best of his judgment, determine the amount of the chargeable income of that person for that year and make an assessment accordingly. The Director General, where he is of the opinion that a person who has not delivered a return under section 77 for a year of assessment is chargeable to tax for that year, may according to the best of his judgment determine the amount of the chargeable income of that person for that year and make an assessment accordingly.

 If the taxpayers are unhappy with the tax assessment made by the tax officers they may appeal to the Special Commissioners of Income Tax against the assessment. The Special Commissioners then will decide the case by giving a oral hearing to the parties. The taxpayers might be satisfied or dissatisfied with the decision given by the Special Commissioners. If the taxpayer is dissatisfied with the decision, he may further appeal to the High Court by stating a case for the consideration of the High Court on question of law arising from the decision of the Special Commissioners.

Rules and procedure of appeal to the Special Commissioners and the court