Accounting Wonderland

S113 (2) Income Tax Penalty

2010-10-04T21:51:00.000+08:00

(1) Introduction

S113 (2) of Income Tax 1967 has been under the limelight of SME Malaysia with the introduction of tax audit with effect from 2001. Inland Revenue Malaysia (IRB) has been imposing penalty under S113 (2) on taxpayers whom under declaring their tax liabilities.

S113 (2) reads as follow:

Where a person:

(a) makes an incorrect return by omitting or understating any income of which he is required by this Act to make a return on behalf of himself or another person; or

(b) gives any incorrect information in relation to any matter affecting his own chargeability to tax or the chargeability to tax of any other person.

then, if no prosecution under subsection (1) has been instituted in respect of the incorrect return or incorrect information, the Director General may require that person to pay a penalty equal to the amount of tax which has been undercharged in consequence of the incorrect return or incorrect information or which would have been undercharged if the return or information had been accepted as correct; and, if that person pays that penalty (or, where the penalty is abated or remitted under subsection 124(3), so much, if any, of the penalty as has not been abated or remitted), he shall not be liable to be charged on the same facts with an offence under subsection (1).

We noted that S113 (2) has been used on routine and mechanical basis by IRB officers for all cases of under declaring of income tax without exercising the judgement in considering the merit of tax audit cases.

However, the jurisdiction given under S113 (2) to the IRB to impose penalty has been under scrutinisation after the case law of OPD Sdn. Bhd. vs Ketua Pengarah Hasil Dalam Negeri.

(2) Salient features of the OPD Sdn. Bhd. vs Ketua Pengarah Hasil Dalam Negeri

(a) Discretionary provision

In Ketua Pengarah Hasil Dalam Negeri vs Kim Thye & Co case, the learned judge mentioned that S 113 (2) is a discretionary provision. His Lordship said that the IRB is given a discretion, a discretion which to his mind the IRB cannot exercise at whim or fancy but after due consideration of all relevant facts and circumstances.

(b) Good faith is a factor

The learned judge mentioned that the IRB shall exercise judgement in assessing whether the taxpayers have acted in good faith when submitting the tax returns. Thus, good faith should be the factor to be considered before imposing the tax penalty.

If the taxpayers have engaged a qualified tax agent in submitting the tax return, this is an essential factor indicating whether the taxpayers are acting in good faith. In addition, if the taxpayers are acting in according to the professional advice of the tax agent, it should be clearly indicating that the taxpayers are acting in good faith.

However, taxpayers and tax agents are advised to maintain the written documentation i.e. correspondence or minutes of meeting to substantiate the tax submission is conducted in a professional manner.

(d) Taxpayers and tax agent are transparent

Taxpayers and tax agent must be transparent and open in the preparation and submission of tax return. Acting in good faith must be acting with transparency and openness.

(e) Taxpayers must be co-operatives

Taxpayers must be providing full co-operations to IRB officers during the tax audits exercise. This is important as the full co-operations are concrete evidence in proving the taxpayers’ confidence in the tax return prepared and submitted. It also proves that the tax returns are prepared in good faith.

(3) Conclusion

If the taxpayers encounter a forty five (45) per cent of tax penalty under S113 (2) of ITA during the tax audit cases, the taxpayers should consider whether the element of them acting in good faith has been considered by the IRB before imposing the penalty.

If the tax return has been submitted with GOOD FAITH and the penalty is believed to be imposed at whim or fancy, the taxpayers should liaise with the tax agent immediately in appealing the penalty.

Real Property Gains Tax Exemption

2009-12-31T23:24:00.000+08:00

The Honourable Prime Minister had announced that with effect from 1 January 2010, chargeable gains from the disposal of real properties which are held more than 5 years will be exempted from the Real Property Gains Tax (RPGT) of 5%. Therefore, any gains from the disposal of real properties in which the holding period is within 5 years from the date of acquisition of the real properties will be subject to RPGT at the rate of 5%.

This exemption is applicable on gains from all types of real property including shares in real property companies disposed by all categories of property owners who are individuals (citizens, permanent residents, noncitizens and non-permanent residents of Malaysia), companies as well as other property owners.

Budget 2010 - Personal Relief

2009-10-24T11:01:00.004+08:00

The Budget 2010 announced on 23 October 2009 proposes for increment of personal relief from RM8,000 to RM9,000 is a welcome measure as the Malaysian are facing a difficult time following the economic downturn in 2008.

However, I would think that the increment is insufficient as compare with the increase of the cost of living. An increment of RM1,000 per annum is only approximate to RM80 per month. Is this sufficient for us to cope with the rising cost of our daily spending (excludes luxury spending)?

I think the personal relief should be higher ranging from RM10,000 to RM12,000 per annum. Besides that, government should also increase the child relief for taxpayers in order to relieve the burden of taxpayers having children. Is the child relief of RM1,000 per annum still sufficient in nowadays?

Besides that, the government also propose for a reduction of maximum personal income tax rate from 27% to 26%. The reduction benefits those middle and upper income group taxpayers because the maximum personal income tax rate of 27% only taxed for taxpayers with yearly income of RM100,000 and above. As one of the taxpayer mentioned in an interview, it is good to have some saving but it is nothing to shout about. The move is generally not appreciated by those group of taxpayers as the saving is insignificant to them.

On the contrary, if the personal income tax rate would remain at 27% but the personal relief could be higher, it will help larger group of taxpayers.

In conclusion, the increment in personal relief is a welcome measure but it is also nothing to shout about.

Closure, Strike Off or Winding Up of a Sdn. Bhd.

2009-10-16T13:41:00.007+08:00

Businessman are keen to know the procedures, time required and costs involved in setting up a Sdn. Bhd. in Malaysia. However, as a well organised businessman, we should aware or familiar the procedures, time required and costs involved in closing or winding up of a Sdn. Bhd. I would think that closure of company is important too when the business does not develop as per our initial business plan, we need to close the company in a proper manner to ensure our name are not being blacklisted by Suruhanjaya Syarikat Malaysia (SSM).

If we would like to close a Sdn. Bhd., we need to segregate the company into two (2) categories, solvent and insolvent companies.

Solvent companies are those company having positive shareholders' fund (Share capital + retained profits) or in layman terms, company make money before and have enough money/reserve to refund to the shareholders.

Insolvent companies are those company having negative shareholders' fund (Share capital - accumulated losses) or in layman terms, company make losses previously and have no money/reserve to refund to the shareholders. Besides that, shareholders are expected to advance to the company in order to close the company.

Under S308 of the Companies Act 1965, the company may make application to the Registrar of Company to strike off the company. The strike off is the power given to the Registrar of Company to close the company.

We refer to the guidelines issued by SSM, insolvent companies which are dormant or ceased operations in prior years are allowed to apply to Registrar to strike off the company. There are other criteria stated in the guidelines i.e. the shareholders must not be corporate shareholders, all penalty due to government bodies fully settled and etc must be complied before the Registrar would consider the strike off application.

I would strongly encourage the businessman to make the application to strike off the company if the basic conditions are fulfill. As per our experience, it is unlikely that the strike off will be rejected if the conditions are fulfill. In addition, SSM has recently announce that the moratorium period to strike off the company has been extended to 31 December 2009. It is easier for SSM and the applicant to strike off the company during this moratorium period.

The most important thing that need to be noted is the cost involved to strike off a company is very nominal, application fee is only RM120 and accounting firm is charging normally around RM700 for the strike off exercise. Thus, the total cost involved is less than RM1,000.

The application process normally takes 3 - 6 months and it is faster as compare to closure of company under the winding up process.

Step up to apply to strike off the company if the company had ceased business operations and no intention to commence business in the near future. It is a cost saving measure rather than maintaining the company and expose to the penalty risk if any non compliance arises.

S308 SSM Strike Off Guidelines

http://www.ssm.com.my/berita/media/New308_070112.pdf

Professional Indemnity Insurance

2009-09-04T22:38:00.001+08:00

PR3.2009

Perquisites from Employment

2009-09-04T22:36:00.002+08:00

PR1.2006 (A3) Perquisites From Employment

Tax Treatment of Directors' Fee and Bonus

2009-07-18T16:45:00.003+08:00

Referring to Section 25 (2A) of the Income Tax Act 1967, bonus and directors' fee paid to employees or directors respectively are taxed in the year of assessment the bonus and directors' fee are received.

For example, Employee A received 2008 performance bonus in February 2009, this bonus shall be deemed to be income for the year of 2009 and declared in the EA Form 2009.

Prior to 2009, the bonus and directors' fee received was taxed in the period when the income was earned. For examples, 2008 bonus received in 2009 but the bonus must be reported and declared in 2008. As a results, it involves additional administrative work to revise the Form BE and payment of additional income tax as per latest computation.

Financial Year End Stocktaking

2009-07-10T12:59:00.007+08:00

For those Malaysian companies involve in trading or manufacturing businesses, the inventories or stock are quite common that we can see from the financial report. The inventories or stock are categorised into three, raw materials, work in progress and finished goods.

When come to financial year end, no matter whether it is an enterprise or Sdn. Bhd. they are required to perform a financial year end stocktake to quantify the quantity and also the value of closing stock as at year end.

As per Income Tax Public Ruling 5/2000 (Revised), it is compulsory for a business to perform the stocktake to qualify the closing stock value. For the management, it should be a complete or 100% inventories count. After the counting, the physical quantity counted should be compare with the stock record (either in computer system or manual book), any difference noted should be adjusted to the income statement immediately.

Enterprise as there are no auditors involved, the stocktake will be performed by the management of the enterprise only. However, for Sdn. Bhd., the auditors have to attend the financial year end stocktake as per approved auditing standards in Malaysia. The auditors should observe and select samples on test checked basis to verify the quantity of the stock.

Please ensure the financial year end stocktaking is performed with proper documentation in order to avoid any tax audit risk.

Company Expenses Without Invoices or Official Receipts

2009-06-30T13:04:00.002+08:00

It is common for a company in Malaysia to pay expenses without having the suppliers' invoices or official receipts i.e. commission, sub contractor wages (they do not own a company), part timers as sales promoter or book keepers and etc.

In view of the self assessment regime implemented in Malaysia, is there any potential tax audit risk and penalty in relation to those payments without suppliers' invoices or official receipts?

Under the self assessment system, the Inland Revenue Board (IRB) would require the taxpayers to provide supporting documents to support the expenses incurred by the company. Thus, for those payments without suppliers' invoices or official receipts, the taxpayers need to prepare its own documents and documentation to ensure that those expenses are tax deductible under S33 of the Income Tax Act 1967.

Taxpayers are requested to prepare a payment voucher which details the payee name, IC no, address, nature of payments and also in relation to which business project if it is sub contractors. In addition, the original payment vouchers must be signed by the payee and it is advisable to photocopy the payee IC for reference.

If the company pay the payee using cheque, it is highly recommended that they photocopy the cheque (Account Payee Only) as the supporting documents. We have encounter cases in which IRB requested for a copy of the cheque to substantiate an expenses. As a results, the taxpayers need to liaise with bankers in order to obtain a copy of the cheque which was archive for many years. In conclusion, it is a time wasting and irritating process.

I understand that the administrative work recommended maybe time consuming but considering the tax penalty the IRB may impose, it is worthwhile to maintain proper documentation and documents in order to be tax audit savvy.

Income Tax Filing Deadline 30 June 2009

2009-06-28T13:23:00.003+08:00

This coming Tuesday, 30 June 2009 is the tax filing deadline for Malaysian taxpayers. Taxpayers with business source or having businesses are required to submit the income tax form i.e. Borang P (Partnership) or Borang B (Sole-proprietor or partner of a partnership) to the Inland Revenue Board by 30 June 2009.

In addition, under the self assessment system, taxpayers are required to pay the taxes before the deadline. Payments can be made at Public Bank Berhad or CIMB Bank Berhad by filling in the bank in slip.

Petty Cash Management in Malaysia

2009-06-27T15:26:00.005+08:00

I noted that it is common for Malaysian businessman to have misconcept on the petty cash management. Normally, the company does not maintain a petty cash float for the company, instead the money collected from cash sales are used to pay for daily office or factory expenses. If the cash sales collection is in excess of the daily cash payment, the company will deposit to the company's current accounts. I would comment that this is not a good practice to manage the petty cash in this manner.

The petty cash is used for payment of daily minor office or factory expenses and the fund or petty cash money should not be collected from cash sales, it should be withdraw from the company's current accounts (Cash out). Upon the full utilisation of petty cash money, the shortfall should be withdraw from the current accounts and top up to the petty cash float decided by the management.

For example, if the petty cash float is RM1,000 and existing petty cash balance is RM400 then the accounts staff should cash out RM600 as reimbursement of petty cash so that the petty cash float is maintained at RM1,000.

The company should fix a petty cash float or in layman term, the float is the maximum amount of cash the company should keep to pay for daily minor expenses. The float depends on the payment pattern and also the quantum of payment. Please take note that fixing a float for the company petty cash would enable the company to insure the cash loss risk from the insurance company, as this is the maximum exposure for cash loss.

The frequency of reimbursement of petty cash normally should be around 2 -3 weeks so that it reduces the administrative work of cash out from the current accounts.

All the cash sales money should be deposit to the company's current accounts intact so that it is easier for tracing and tracking and also minimise the tax audit risk.

With this petty cash management practice, it is clear and easier for the taxpayers to proof to the Inland Revenue Board on the cash sales collection which is fully recognised by the company.

MEDICAL EXPENSES FOR PARENTS INCOME TAX RELIEF

2009-06-27T14:08:00.001+08:00

Medical Expenses for Parents [Section 46(1)(c) of Income Tax Act, 1967]

Malaysian taxpayers must aware that medical fee paid for parents' medical treatment is tax deductible. With this tax deduction, the taxpayers will enjoy lower taxable income and consequently lower income tax payments.

However, the medical fee paid must be incurred for the parents and in the official receipts it is advisable stating the patient's name and also payee's name. In this case, the patient will be the parents and payee must be the taxpayers.

The maximum tax relief for parent's medical fee is RM5,000 per annum and the official receipts must be issued by a medical practitioner or doctor registered with the Malaysia Medical Council. Besides that, the official receipts must be retained for proofing if requested by the Inland Revenue Board (IRB).

Taxpayers may refer to the Public Ruling 2/2005 Computation of Income Tax Payable By A Resident Individual under Paragraph 6.1.2 for further information.

With this clarification, it is clear that the costs of health products/health supplements incurred on parents does not fall within the ambit of medical expenses within the meaning of Section 46(1)(c) of the Income Tax Act 1967 and therefore are not eligible for personal relief to the individual.

Tax Audit Framework

2009-06-26T16:46:00.002+08:00

Tax Audit Framework (Ammendment 2009)[1]

Public Ruling 2/2009 Construction Contracts

2009-06-22T16:47:00.002+08:00

PR0209

Public Ruling 1/2009 Property Development

2009-06-22T16:39:00.001+08:00

PR0109

Tax Planning on Family Members

2009-05-17T13:48:00.008+08:00

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

2009-05-13T11:55:00.006+08:00

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.

2009-05-11T15:49:00.005+08:00

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.

2009-05-11T15:03:00.013+08:00

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.

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

2009-05-10T01:12:00.002+08:00

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.