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.