Tax Planning on Family Members

We notice there are a lot of businessman who are wrongly advised on the concept of tax planning on family members.

There are a lot of cases in which businessman tend to include the family members i.e. wife, children, parents or relative members in the company payroll as a method to reduce the company tax.

S33 of the Income Tax Act 1967 clearly mentioned that only those expenses wholly and exclusively incurred in the production of business income are tax deductible. Thus, if the family members are working or servicing the company, the payroll costs are tax deductible. However, if the family members are not servicing or not working in the company but just included in the payroll with the intention of reducing the company tax. Income Tax Department may applies S33 of ITA 1967 to disallow the deduction of payroll costs. Consequently, a tax penalty will be imposed for under declaration of company profit.

Besides that, we noted there are company paying above market rate salary to family members. For example, a company may be paying RM4,000 for a general administrative clerk. All this trigger Income Tax Department attention and they may disallowed those salary in excess of normal market rate. Consequently, a tax penalty will be imposed for under declaration of company profit.

In conclusion, businessman must be vigilant and seek professional advice from tax consultants or tax agents in order to ensure that all the particulars reported are in compliance with the rules and regulations.

Cash Basis Accounting in Malaysia

Frequently, i have been consulted by my friends or businessman on the application of cash basis accounting. There are a lot of businesses in Malaysia still using cash basis in preparing the management report.

Cash Basis Accounting

Cash basis accounting requests the company to record a business transaction when payments are made or cash are received by the company. For example, sales are recognised when customers make payments and purchases are recognised when payments made to suppliers.

I need to reiterate that cash basis accounting is not acceptable in Malaysia. In Malaysia, under the MASB 1 issued by the MASB (Malaysian Accounting Standards Board), the accounts shall be prepared under Accruals Basis.

Accruals Basis Accounting

Accruals basis accounting requires the company to recognise a transaction when it incurs. For example, sales are recognised when goods are delivered and accepted by the customers. The non payment of debt has nothing to do with the sales recognition. The non payment from the customers will be reflected as trade debtors under the company's assets category.

Besides that, purchases are recognised when goods are accepted by the company. The non payment of suppliers' goods will be reflected as trade creditors under the company's liabilities category.

Hope this article helps to clear the misunderstanding of Cash Basis Accounting.

Disadvantages of Sdn. Bhd.

What are the disadvantages of Sdn. Bhd.?

(a) Costly

It is much more costly to maintain a Sdn. Bhd. as compared with Enterprise. Under the Sdn. Bhd., the company has to engage a company secretary and an approved auditor to maintain the register books and audit the accounts of the company respectively. The engagement of these professions may cost the company paying approximately RM2,000 to RM5,000 per annum.

(b) Proper records for bookkeeping

As the accounts will be audited by an approved auditor, the accounts must be well maintained and in compliance with approved accounting standards in Malaysia. Therefore, it is more tedious and complicated in maintaining and engaging a well trained bookkeeper to perform the duty.

Advantages of Incorporating Sdn. Bhd.

Businessman are always encouraged either by the business associates, bankers or accountants to incorporate Sdn. Bhd. for their businesses. What are the advantages of Sdn. Bhd. which attracts small and medium enterprises. Currently, majority of businesses are operating under Enterprise, which is in the form of Partnership or Sole-Proprietor.

(a) Separate legal entity

Sdn. Bhd. is a separate legal entity which can sue or being sued by others. Business owners, in the form of shareholders have legal standing from Sdn. Bhd. For example, if the company has huge amount of liabilities and unable to repay the loans, the bankers may sue the company for bankruptcy. If the directors or shareholders do not provide personal guarantee in obtaining the loans, the directors or shareholders will not be sued for repayment of the loans. It also applies on unsecured creditors i.e. supplier of raw materials, if the suppliers are unable to collect the debts from the company, they are unable to sue the directors or shareholders for the outstandings debts.

However, under Enterprise, the owners or partners will be sued for any debts or borrowings owed by the Enterprise and consequently, the owners or partners may be sued for bankruptcy.

(b) Tax planning or savings

The Enterprise is tax under individual scale rate i.e. the owners who bear maximum tax rate of 27%. However, Sdn. Bhd. (With share capital less than RM2.5 million) will enjoy tax rate of 20% for the first RM500,000 of the chargeable income and chargeable income starting from RM501,000 onwards will be taxed at 25%. So there is a tax saving of approximately 7% for income below RM500,000 and 2% tax saving for income above RM500,000.

(c) Financing from bankers

It is easier to obtain financing from bankers under Sdn. Bhd. as compared with Enterprise as the accounts of Sdn. Bhd. will be audited by an approved auditor and compliance with approved accounting standards by the Sdn. Bhd. is more representative.

(d) Branding

It is easier to secure the sales under Sdn. Bhd. as compared with Enterprise because generally, the businessman have the perception that Sdn. Bhd. are more established and more reliable to secure raw materials from established businesses as compared with those small players.

Third Addendum Public Ruling Benefits In Kind

On 17 April 2009, The Inland Revenue Board (IRB) has released the 3rd Addendum Public Ruling on Benefits In Kind.

In relation to that, the taxpayers are entitled for tax exemption for the following:

(a) Discounted price for products or services purchased from employer
(b) Monthly telephone or broadband services provided by employer
(c) Traditional medical treatment paid by employer
(d) Exemption on petrol value

As the Public Ruling was issued closing to the tax filing deadline of 30 April 2009, IRB has requested the taxpayers to inform the IRB Branch and submit the revised tax return form which incorporated the tax exemption mentioned above.

Tax exemption is always welcome but amendment of rules and legislation should be timely. In this incident, the IRB has created unnecessary hassle for the taxpayers in completing the revised tax return form.

We need to be competitive and the tax administration should not be expected to cause hassle to the taxpayers or businesses. It should be friendly and hassle free.

We appeal to the government to speed up the effort in improving the delivery system so that we are more competitive as compare to other Asean countries.