CHAPTER 1

Chapter 1

General Introduction

1.0 General Introduction

Policy makers use taxes and tax systems as powerful fiscal policy tools to carry out their
strategies. The purpose of charging tax is to ensure the efficient functioning of government
machinery in wealth distribution. Taxation is the major source of government revenue and it
is used to finance government expenditure. Different economic doctrines are used to bring
about varying tax policies and influence the way wealth is distributed.

1.1 Introduction to the Malaysian tax System

There are two types of taxes in Malaysia: direct tax and indirect tax. The collection of direct
taxes, which includes individual income tax, corporation tax, petroleum income tax, real
property gains tax and stamp duty, is managed by the Inland Revenue Board. The
responsibility for the administration of direct taxes is with the Director General who is the
Chief Executive Officer of the Inland Revenue Board of Malaysia.

Indirect taxes, which consist of sales tax, service tax, customs duties and excise duty, are
administered by the Royal Malaysian Customs Department. Customs duties comprise of
import duties and export duties. The responsibility for the administration of indirect taxes is
with the Director General of the Royal Malaysian Customs Department.

1.1.1 Maxims of taxation

Adam Smith (1723-1790) is regarded as the ‘Father of Modern Economics’. He established

the four broad maxims or canons of taxation:

▪ Equity;
▪ Efficiency;
▪ Certainty; and
▪ Convenience.

The equity principle implies that taxation must be imposed in accordance with the ability to
pay principle. The distribution of tax burden should be equitable such that everyone should
be made to pay his or her fair share of taxes. There should be an efficient mechanism to
collect the taxes with minimum compliance cost. The taxpayer too should be able to predict
with reasonable certainty the tax payment from his or her economic activity. The payment of
taxes should be convenient to the taxpayer both in the time and in the mode of payment
and in proportion to the revenue which they pay to the government. The cost to manage the
tax administration and taxpayer compliance costs should be kept as low as possible. The
tax system should permit a fair and non-arbitrary administration and the tax law system
should be easily understood by taxpayers.

1.1.2 Scope of Income tax

Under the Income Tax Act 1967 (as amended) (ITA), a tax known as income tax is charged

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upon the income of any person. Hence, in order for a receipt to be subject to tax, it must be
established that the receipt is of an income nature. Otherwise, the receipt is not chargeable
to income tax (Sec 3 ITA). Sec 3 ITA is the charging section and it stipulates that 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.

Para 28 Schedule 6 of the ITA exempts, with exceptions, the income of any person derived
from sources outside Malaysia and received in Malaysia. The exception is for resident
companies carrying on the business of banking, insurance, sea or air transport whose
business income is charged to tax on the world income basis.

The term income itself is not defined in the ITA. One therefore has to rely on the ordinary
meaning of the term. The situation is similar in the UK where the tax legislation does not
provide a definition of income but rather provides a classification of incomes, profits, or gains
which must be subject to the payment of tax.

The scope of charge refers to the limits or parameters within which income would be taxable
in a country. It is generally connected with the question of who is the taxpayer and where
the income arises from. Over the years, Malaysia has narrowed its scope of taxation.

1.1.3 Territorial Basis

Under the ITA, income is assessed on territorial basis. Only income accruing in or derived
from Malaysia is chargeable to tax. Foreign income is not taxable. This rule is applicable to
both resident and non-resident persons, including companies, with the exception of
resident companies involved in banking, insurance, and sea and air transportation. These
companies are assessed on a worldwide basis, which means all income, wherever derived,
is chargeable to tax in Malaysia.

1.1.4 Derived Basis

The words “derived” or “accruing” have been held to be synonymous in meaning. The word
“derived” would suggest an active manner of obtaining income such as business or
employment. Sec 3 stipulates that 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.

Para 28 Schedule 6 exempts, with exceptions, the income of any person derived from
sources outside Malaysia and received in Malaysia.

1.1.5 Remittance Basis

Remittance basis would imply income is accrued or derived from overseas sources.
Remittances made from capital nature are not taxable in Malaysia.

1.1.6 World Income Basis

A country that adopts the world income scope of taxation seeks to tax all income regardless
of where the income is derived. The scope of charge is typically based on citizenship,

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residence or domicile. Where the taxpayer is non-resident or non-domiciled in a country

which operates the world income scope of taxation, the scope of charge applicable to that
person is usually the territorial basis.

Countries that have adopted the world income basis of taxation include Australia and the United
States of America.

1.1.7 Objectives of taxation

Taxation is the main source of revenue for the government which finances its expenditure
including the economic infrastructure, welfare, funding of education and healthcare systems.
There are other objectives of taxation and they include the following:

(i) Taxation can also be used to implement its economic initiatives such as
accelerating the rate of economic growth, encouraging involvement in certain
promoted activities, discouraging involvement in activities that are not beneficial
to national interests and strengthening weak industries through various policies.
(ii) Local industries are also protected by imposing customs duties on competing
imports.
(iii) Taxation can also be used to influence social behavior such as smoking and
alcoholic consumption by imposing high taxes on cigarettes and alcoholic drinks
to discourage the use of such products.
(iv) Governments have also imposed carbon taxes on polluters to control carbon
emission which pollutes the environment.
(v) Inequalities in income and wealth can be reduced by higher rates of tax for higher
income earners, capital transfer tax and wealth taxes.

1.1.8 Types of Taxes

There are two types of taxes: direct taxes and indirect taxes. A tax is a direct tax where the
economic burden of the tax is borne by the person who pays the tax. A tax is indirect w h e n
the person who pays the tax is able to pass the burden of the tax to third parties.

[Link] Type of direct taxes

(a) Income Tax

In Malaysia, the law governing income tax is the Income Tax Act, 1967(ITA). The taxable
income of a company is, broadly speaking, computed in the same way as that of an
individual except that no personal reliefs are deductible. Although the company income tax
and personal income tax are governed by the ITA, they are treated as distinct taxes.

Companies pay tax at a single rate tax of 24% [effective from the YA 2019] on the taxable
income determined for an accounting o r financial year. Small and medium enterprises
[SME] are taxed on a two-tier basis i.e. at 17 % on the first RM500,000 of the chargeable
income and the balance or excess at 24%. This two-tier tax rates also applies to a Limited
Liability Partnership (or LLP) [effective from the YA 2019 for the SME and the LLP]. SME
entities would include companies and Limited Liability Partnerships [LLP].

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A company qualifying to be a SME is a resident company incorporated in Malaysia that has

a paid-up ordinary share capital of not exceeding RM2.5 million as at the beginning of the
basis period for a year of assessment.

Students should take note of the following legal aspect in respect of the SME i.e.

(i) not more than 50% of the paid-up capital is directly or indirectly owned by the
first mentioned company; or
(ii) Not more than 50% of the paid-up capital of the ordinary shares in the first
mentioned company and the related company is directly or indirectly owned
by another company.

In this context, ‘related company’ is a company which has a paid capital of ordinary shares
of more than 2.5 million as at the beginning of the basis period for a year of a ssessment.

In the case of an LLP, it must be resident in Malaysia with a total contribution of capital,
whether in cash or in kind, of up to RM2.5 million at the beginning of the basis period for a
year of assessment. For an LLP to be considered an SME entity, it must satisfy the following
conditions:

(i) not more than 50% of the capital contribution of the LLP, whether in cash or
in kind, is directly or indirectly contributed by a company;
(ii) not more than 50% of the capital of the company mentioned in (I) above is
directly or indirectly owned by the LLP; or

Again, in this context, ‘company’ [other than the one mentioned in (iii) above in connection
with an LLP] refers to a company which has a paid-up capital in respect of ordinary shares of
more than RM2.5 million at the beginning of the basis period for a year of assessment.

[ See Schedule 1 Part 1 Paragraph 2A and 2D with effect from the year of assessment 2017
and subsequent years of assessment].

The two-tier tax rates for SME and LLP had gone through a downward revision over the years
2009 to 2019 and the changes are indicated in the table below:

Table 1.1
Two tier tax rate changes for SME and LLP

2019
YA 2009-2015 2016 2017-2018
Tax rates (%)
Tax rates (%) Tax rates (%) Tax rates (%)
Chargeable
income:
20 19 18 17
RM500,000
and less
Chargeable
income:
25 24 20-24* 24
RM500,001
and above

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* For the years of assessment in respect of companies, an income tax rate reduction was
given whereby the income tax rate applicable for incremental portions of chargeable income
was reduced in tandem with the percentage of the increase in chargeable income compared
to the immediately preceding year of assessment. This change that applied only for the years
of assessment 2017-2018 and only in respect of the incremental chargeable business
income, is indicated in the table below:

Table 1.2
Incremental income tax rates based on increase in chargeable income

Percentage of the Percentage point The reduced corporate

increase in chargeable reduction income tax rate applicable
income compared to the to the increase in the
immediately preceding chargeable income (%)
year of assessment

Less than 5.00 NIL 24

5.00-9.99 1 23
10.00-14.99 2 22
15.00-19.99 3 21
20.00 and above 4 20

Example 1

Ravi Manufacturing Sdn Bhd (‘the company’) is a Malaysian resident company carrying on the
business of manufacturing rubber boots. It closes the accounts to 31 December each year. The
company’s chargeable income for the years ended 31 December 2016 and 2017 is as follows:

Ravi Manufacturing Sdn Bhd

Year ended 31 December 2016 2017
RM RM
Statutory income from business 529,600 926,800
Statutory income from rent 12,320 105,920
Aggregate/Chargeable income 541,920 1,032,720

Required:

Compute the tax payable for the year of assessment 2017 for Ravi Manufacturing Sdn Bhd in
the following circumstances:
(i) the company is not a SME
(ii) the company is a SME

Answer:

Tax charged for the year of assessment 2017

Increase in chargeable income

(Business) 926,800 less 529,600 397,200
Percentage increase [(926,800-529,600)/529,600] x 100 75

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Eligible rate on the increased chargeable income 20%

Assuming Ravi Manufacturing is NOT a SME

Tax charged RM
On 397,200 x 20% 79,440
On balance 635,520 x 24% 152,525
Total 1,032,720 231,965

Assuming Ravi Manufacturing is a SME

Tax charged
On 500,000 at 18% 90,000
On 397,200 at 20% 79,440
On 135,520 at 24% 32,525
Total 1,032,720 201,965

[Link] Resident and non-resident individuals

Resident and non-resident individuals are subject to income tax at graduated rates
(ranging from 0 % to 28%) while non-resident individuals are taxed at 28% for
the YA 2019.

(b) Real Property Gains tax

Real Property Gains Tax (RPGT) is charged under the Real Property Gains Tax Act 1976,
which came into effect on 7 November 1975. It is a tax on capital gains arising from the
disposal of any interest, option or other right in or over land situated in Malaysia. There is
no other capital gains tax legislation in Malaysia.

‘Real property’ means ‘any land situated in Malaysia and any interest, option or other right
in or over such land’. According to sec 6 RPGTA, every person, whether resident or non-
resident in Malaysia, is chargeable to RPGT in respect of any chargeable gain on the
disposal of a chargeable asset.

(c) Stamp duty

Stamp duty is imposed by the Stamp Act 1949. Stamp duty is a transaction tax where the
tax is imposed on the instrument of transfer. According to sec 2 of the Stamp Act,
‘instrument’ includes every written document. The legislation was essentially based on the
structure and principles embodied in the UK Stamp Act 1891. The rates of stamp duty can
be specific or ‘ad valorem’ as provided in the First Schedule of the Stamp Act.

[Link] Indirect Taxes

The responsibility to administer indirect taxation in Malaysia lies with the Director General
of the Royal Customs Department. The various types of indirect taxes in Malaysia include
custom duties, excise duty, sales tax and service tax. The legislations involving these taxes

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are:
• Customs Act 1967;
• Excise Act 1976;
• Sales Tax Act 2018; and
• Service Tax Act 2018.

This revised study text will only cover sales tax and service tax.

(a) Sales Tax

Sales tax was first introduced in Malaysia by way of the Sales Tax Act 1972 with effect from
29 February 1972. This single stage ad valorem tax is imposed on taxable goods
manufactured by any person or company in Malaysia (except Labuan, Tioman, Langkawi
and the ‘Joint Development Area’). Taxable goods are those goods, which are not exempt
from sales tax under the Sales Tax Exemption Order. Sales tax is also applicable to goods of
a similar class, if imported. Sales tax is due and payable by the importer at the time the goods
are cleared from the customs control.

Sales tax is called a single stage tax because the tax is charged only once, either at the
input or output stage. Goods, which are currently liable for sales tax, belong to the
manufactured and semi-manufactured category. Basic raw materials and essential food
stuffs are exempted from sales tax.

Sales tax was abolished and was replaced by the Goods and Services Tax Act on 1 April
2015. This later was abolished, and Sales Tax was brought back. Sales tax is now
implemented with effect from 1 September 2018 under the Sales Tax Act 2018. This is a
single-stage tax imposed on taxable goods manufactured locally by a manufacturer for the
purposes of the Sales Tax Act. The tax is also imposed on taxable goods imported into
Malaysia by any person. Sales tax is generally a value-based tax or ad valorem tax.
Specific rates of sales tax are currently only imposed on certain classes of petroleum
(generally, refined petroleum). The ad valorem rates are 5% or 10% depending on the
class of goods which are sought to be taxed.

(b) Service Tax

Service tax too was first introduced in Malaysia on 1 March 1975 by way of the Service Tax
Act (STA) 1975. In addition to the STA, the Service Tax Regulation 1975 and the Service Tax
(Rate of Tax) Order 1975 are also applicable. The STA applied throughout Malaysia
excluding Langkawi, Labuan, Tioman and the Joint Development Area. Service tax was
charged and levied in respect of any taxable service provided by any taxable person (sec 3
STA). The Service Tax was replaced by the Goods and Services Tax.

When the goods and services tax was abolished, Service Tax Act 2018 was implemented
with effect from 1 September 2018 to replace the Goods and Services Tax. Service tax is
a consumption tax and is levied and charged on any taxable services provided in Malaysia
by a registered person carrying on his business in Malaysia including any imported
services i.e. any taxable services acquired by any person in Malaysia from any person who
is outside Malaysia. The rate of service tax is presently 6%.

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1.1.9 Basis of assessment

In Malaysia, for the purposes of taxation, the time when the income is received and the time
it is taxed are connected by the concept of the basis year or basis period, and the
assessment year. Generally, the basis year in respect of a year of assessment is the
calendar year.

[Link] Basis year

Under section 20, the calendar year coinciding with the year of assessment constitutes the
basis year for that year of assessment.

Under section 21 the basis year for a year of assessment shall constitute in relation to a
source of a person other than a company, limited liability partnership, trust body or co -
operative society, the basis period for that year of assessment.

And under section 21A, the basis year for a year of assessment shall constitute in relation
to a source of a company, limited liability partnership, trust body or co-operative society,
the basis period for that year of assessment.

Example 2

The basis year for the year of assessment 2019 shall be the calendar year from 1 January
2019 to 31 December 2019.

[Link] Basis period

Basis period means the period relative to a year of assessment. A basis period (a period of
12 months) should be distinguished from a basis year (a period of 12 months from January
to December - also known as the calendar year).

Under section 21A(2) where a company, limited liability partnership, trust body or co -
operative society had made up accounts of its operations for a period of 12 months ending
on a day other than 31 December in the basis year, that period shall constitute the basis
period for that year of assessment for any of its sources of income.

In the case of a company, limited liability partnership, trust body or co-operative society the
basis period will depend on the financial year which may not necessarily be the calendar
year if the accounts are not closed to 31 December. Thus for a company, which closes the
accounts to a date other than 31 December of the relevant year, the basis period for the year
of assessment 2020 for example would follow the accounting period of the company which
ends in the year 2020 i.e. if the accounting period say, for a limited company is 1 July 2019
– 30 June 2020, then the basis period for the year of assessment 2020 for the company is
the period 1 July 2019 – 30 June 2020.

[Link] Year of assessment and basis year

There are therefore two concepts of time, that is, a year of assessment and a basis year.
They are always referred in relation to each other. The calendar year used for tax purposes

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is the Gregorian calendar.

With the change to the current year basis of assessment, section 20 was amended with
effect from 1 January 2000 whereby the calendar year coinciding with the year of
assessment s h a l l constitute the basis year for the year of assessment. For example, the
basis year for the year of assessment 2020 is the period 1 January 2020 to 31 December
2020 (previously under the ‘official assessment system’, the basis period for the year of
assessment 2020 would have been 1 January 2019 – 31 December 2019).

Diagrammatically it can be represented thus:

Basis year:
Assessment year 2020

Basis year 2020 (1 January 2020 –31 December 2020)

Basis period
[Applies only to company, limited liability partnership, trust body or co-operative society]

Assessment year 2020

Basis period 2020 (say accounting period is 1 Oct 2019 – 30 Sept 2020)

1.1.10 Tax Rates

Income tax is charged on the chargeable income of a person. Basically, there are two types
of rates: (a) scale rates; and ( b ) flat rates.

[Link] Scale rates

Resident individuals are taxed at scaled rates on their income that ranges between 0% and
28% [effective for YA 2018-2019]. The rates of income tax on individual taxpayers are to be
found in Schedule 1, ITA (see Table 1.3).

Table 1.3: Resident Individual tax rates

Chargeable Rate Cumulative

Income Tax Payable
RM % RM
On the first 5,000 0 0
On the next 15,000 1 150
On the first 20,000 150
On the next 15,000 3 450
On the first 35,000 600
On the next 15,000 8 1,200
On the first 50,000 1,800
On the next 20,000 14 2,800
On the first 70,000 4,600
On the next 30,000 21 6,300

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On the first 100,000 10,900

On the next 50,000 24 12,000
On the first 150,000 22,900
On the next 100,000 24 24,000
On the first 250,000 46,900
On the next 150,000 24.5 36,760
On the first 400,000 83,650
On the next 200,000 25 50,000
On the first 600,000 133,650
On the next 400,000 26 104,000

On the first 1,000,000 237,650

Exceeding
28
1,000,000

Non-resident individuals and company tax rates are as follows (for YA 2019):

Non-resident company 24%

Non-resident individual 28%

Example 3

A resident individual with chargeable income of RM90,000 in year of assessment 2019 is

liable to the following income tax:

Chargeable income RM

On the first RM70,000 @ scale rates 4,600.00

On the next RM20,000 @ 21% 4,200.00

Income tax payable 8,800.00

[Link] Flat rate and tiered rates

Income tax is charged at the flat rate of 24% [for the year of assessment 2019 onwards]
on the chargeable income of the following entities:

(i) a company (including a non-resident company);

(ii) trust a nd b us i nes s t r u st ;
(iii) an executor of an estate of a deceased individual who was domiciled outside
Malaysia at the time of his death; and
(iv) a receiver appointed by a court.

Resident companies with paid up capital of not exceeding RM2.5 million enjoy lower tax rate
of 17% for the first RM500,000 of taxable income and the excess would be taxed at 24%.

In the case of limited liability partnership resident in Malaysia that has a paid-up capital of
RM2.5 million and less as at the beginning of the year of assessment also enjoy a lower

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tax rate of 17% for the first RM500,000 of taxable income and the excess would be taxed
at 24%.

1.1.11 Self-assessment system of taxation

The self-assessment system (SAS) is essentially an approach whereby taxpayers are

required by law to determine their taxable income, compute their tax liability and submit
their tax returns based on existing tax laws and policy statements issued by the tax
authorities. The self-assessment basis of taxation would involve a substantial shift of
responsibility on to the taxpayers in terms of their compliance obligations. The onus would
then be placed firmly on them to understand the law, interpret the law and apply it to their
own situation. It will be up to the taxpayers to compute the tax that they owe, based upon
the information they have provided on their taxable income and allowable expenditure. A
notice of assessment would not be issued under SAS. The tax return furnished by the
taxpayer is deemed to be a notice of assessment. Tax returns would, therefore, not be
subject to a detailed technical scrutiny by the Inland Revenue Board (IRB) like it was under
the Formal System.

Under SAS, the Inland Revenue authorities would be involved in an expanded programme
of checking and verifying tax returns on a post-assessment basis, particularly by way of tax
audits and the implementation of penalty system to enforce compliance with tax law. These
will allow revenue officials to ‘inquire into returns’ in that year or within five years after its
expiration [section 91(1)]. They will also be able to demand a taxpayer to provide records
that they may ‘reasonably require’ to verify the returns submitted to IRB.

The Government implemented the self-assessment system (SAS) in two stages:

▪ Companies i n 2001
▪ Businesses, liability partnership, partnerships and salaried individuals in 2004.

1.2 Tax administration- assessment and collection

The responsibility for the administration of direct taxes is with the Director General who
is the Chief Executive Officer of the IRB. The operations of the IRB are highly
decentralized. The Director General of Inland Revenue (DGIR) exercises his advisory and
supervisory function from the Head Office located in the Federal Territory. Currently, there
are over 60 branches in Malaysia. The branch offices are responsible for enforcing the ITA
by tracing new taxpayers, administering tax returns, carrying out tax audits and as well as
tax investigations. Under the ITA, every person who is liable to income tax is required to
file a return of his income with the IRB. It is this filing requirement that sets the
administrative machinery into motion.

1.2.1 Power and authority of the director General of Inland revenue

The Director General of Inland Revenue (DGIR) is appointed by the Minister of Finance
(MOF). A summary of the administrative powers conferred on the DGIR include:
(i) Power to call for submission of specific returns and all information relevant thereto
(sec 77)
(ii) Power to require taxpayers to attend personally before the DGIR and to produce
books, accounts etc. (sec 78).

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(iii) Power to call for statements of bank accounts, sources and the gross income from
those sources, statement of all assets in the name of taxpayer, spouses, or
dependent child or nominees (sec 79).
(iv) Power of full and free access to lands, buildings and places and all books and
other documents of the taxpayer (sec 80).
(v) Power to obtain from occupiers of land or buildings and places reasonable
facilities and assistance for the exercise of his powers [sec 80 (1A)].
(vi) Power to call for information from any person other than those who are statutorily
obliged to observe secrecy (sec 81).
(vii) Power to require the keeping of records and books of account (sec 82)
(viii) Power to obtain information concerning other person’s income, assets or liabilities
(sec 84).
(ix) Power to raise a “best judgement” assessment if a business does not maintain
sufficient records [sec 90(2A)].
(x) Power to review the assessments in that year, or within five years after the
expiration, if it appears to the Director General that no sufficient assessment has
been made on a person liable to tax in respect of those years of assessment [sec
91(1)]. In the case of fraud, willful default or negligence committed by or on behalf
of any person, there is no time limit on the power to raise additional assessment
[sec 91(3)].
(xi) Power to make advance or additional assessments (sec 92)
(xii) Power to recover unpaid tax from persons about or likely to leave Malaysia (sec
1 0 4 ).
(xiii) Power to arrest without warrant a person who attempts to leave the country
without paying all the taxes specified in the Certificate issued under sec 104
(sec 115).
(xii) Power to approve or withdraw approval of any pension or provident funds (sec
150)

The IRB has wide powers under which they can demand information from taxpayers, their
advisers or third parties. Accordingly, documents, information and communication, in the
possession of taxpayer’s accountant, advocates and solicitors are not privileged from
disclosure to the Director General [sec142(5)(b)]. The Director General may delegate to his
subordinates all or any of the powers vested in him.

1.2.2 Types of return Forms

A taxpayer is required to furnish to the Director General a return in the prescribed form
under sections 77 and 77A within the relevant deadlines. Submission can be in hard copy
or through the e-Filing system and the delivery can be electronic, postal or hand delivery.
The IRB will inform taxpayers of the filing dates and grace period available on their website
under the Income Tax Return Filing Program for the relevant year of assessment.

Where the tax returns are to be submitted on an electronic medium or by way of electronic
transmission as determined by the DGIR, the taxable person is allowed to authorize a tax
agent to furnish on his behalf any return through electronic filing. The person authorizing
the agent is required to make a declaration in the prescribed form containing authorization
and confirmation that the information given to the agent is true and correct (sec 152A ITA).

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A significant feature of the filing of returns under SAS is that the tax return subm itted is
deemed to be a notice of assessment served on the company on the date of submission.
Hence, no notice of assessment would be issued by the IRB under the self -assessment
system. Where a taxpayer has not received a return form within three (3) months of a given
year, the DGIR must be duly informed of the non-receipt of returns [sec 77(2)].

Table 1.4
Type of form, due date for submission and method of submission for the filing
program (Note: This table in respect of the year of assessment 2019)

No Form Type and Category of Due date for Method of

taxpayer submission of submission
the return

Year of Remuneration 2018 Return of Employers

1 E/e-E 31 March 2019 e-filing

Company and non-company Postal/Hand delivery
employers (including Labuan
company and non-Labuan
company employers).

Year of assessment 2019 for individuals, partnership, associations, deceased

person’s estate and Hindu joint Family

1 BE/e-BE 30 April 2019 e-filing

Resident Individual Who Does Postal/Hand delivery
Not Carry on Any Business

2 B/e-BE 30 June 2019

Resident Individual Who
Carries on Business

3 P/e-P 30 June 2019

Partnership

4 BT/e-BT
Resident Individual
(Knowledge Worker / Expert
Worker)
▪ Does not
5 M/e-M carry on a
Non-Resident Individual business: 30
April 2019
6 MT/e-MT
▪ Carrying on a
Non-Resident Individual business:
(Knowledge Worker)
30 June 2019
7 TF/e-TF
Association

8 TP Postal/Hand delivery

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Deceased Person’s Estate

9 TJ Postal/Hand delivery
Hindu Joint Family

Year of assessment 2019 for companies, co-operative societies, limited liability

partnership and trust bodies

1 e-C e-Filing
(Mandatory for
Company companies and
obligatory for Labuan
companies)

2 C1/e-C1 e-Filing/Postal/Hand
Co-operative Society delivery

3 PT/e-PT Within 7 months

from the date
Limited Liability Partnership
following the
4 TA/e-TA close of the
accounting
Trust Body period (basis
5 TC/e-TC period for the
year of
Unit Trust / Property Trust assessment)
6 TR Postal/Hand delivery
Real Estate Investment Trust /
Property Trust Fund

7 TN
Business Trust

1.2.3 Notice of Chargeability to the DGIR

If a person chargeable to tax has not been required to furnish a return, that person is now
required to give notice to the DGIR of his or her chargeability before 30 April of the following
year. This amendment is effective from year of assessment 2004 (sec 77(1) ITA).

[Link] Collection of taxes

All companies must furnish to the IRB, for each year of assessment, estimates of tax
payable in the prescribed form C P 204 [sec 107C (1).

These prescribed forms must be filed with the IRB not later than 30 days before the beginning
of the company’s basis period [sec 107C (2)]. With effect from the year of assessment 2018,
companies must furnish to the DGIR its estimate or revised estimate of the tax payable on an
electronic medium.

And with effect from year of assessment 2019, limited liability partnership, trust body or co-
operative society must furnish to the DGIR its estimate or revised estimate of the tax payable

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on an electronic medium.

[Link] Small and medium enterprises (SME)

SME is exempted from filing an estimate of tax payable for a period of two years commencing
from the year of assessment in which the SME commences operations. Such an SME must be
incorporated in Malaysia and be resident in Malaysia [section 107C].

Where the SME commences operations in a year of assessment and it has no basis period for
that year of assessment and for the immediately following year of assessment the SME need
not furnish an estimate of the tax payable for that year of assessment and for the following two
years of assessments [section 107C(4A) (c)]

The estimate of the tax payable should not be less than 85% of the preceding year’s estimate
or revised estimate [Section 107C (3)]

Example 4

If the company’s accounting date is 30 June, then the prescribed forms providing estimates
of tax payable must be furnished to the IRB on or before 31 May of the year.

From year of assessment 2008, new small and medium enterprises are exempted from
submitting estimates of tax payable for the first two years of assessment beginning with the
date of commencement of operations.

With effect from year of assessment 2006, the estimate for the tax payable for companies should
not be less than 85% of the preceding year’s estimate, or revised estimate [sec107C (3)]

Example 5

If the tax estimated for the year of assessment 2011 is RM10,000, then the tax estimated to
be payable for year of assessment 2012 should be RM8,500 or higher.

The estimate of tax payable is to be paid in equal monthly instalments by the due date
beginning from the second month of the basis period for the year of assessment in respect
of which the estimate was made [sec 107C (5)].

In cases where a company just commenced operations, it is allowed to submit the estimate
within three (3) months from the date of the commencement of business [sec 107C (4) ITA].

Example 6

A company that commenced operations on 1 March 2019 and closes its accounts annually
to 31 December will be allowed to furnish the estimate of the tax payable on or before 31
M a y 2019, i.e. within three months of the date of commencement of business.

The instalment scheme for companies under sec 107C ITA is based on 12 monthly
payments. Each monthly instalment is due and payable to the IRB by the 15th of the
following month. If the company has just commenced business in a year of assessment, the

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instalments would be for the number of months of the basis period.

Example 7

ABC Sdn Bhd commenced operations on 1 March 2019. It closes its accounts to 31
December each year. The first instalment is due and payable on 10 September 2019 i.e. six
(6) months from the date of commencement. This is applicable only in the year of
commencement of the business.

For the year of assessment 2020, the first instalment is due and payable on 10 February
2020.

The tax can be paid when the return is filed seven months after the financial year of the
company. However, if the estimate is changed, a revised estimate would have to be
submitted.

A company may revise the estimated tax payable in the sixth and ninth months of the basis
period. The form CP 204A must be used for the revision. The DGIR will issue the notice
of instalment payment CP 205 together with the instalment remittance slip (CP 207) when
the estimate is submitted to the IRB.

The company may proceed to make the revised instalment payments without waiting for the
revised instalment scheme (CP 206) to be issued.

The estimate of the tax payable in the year following the commencement of the business
must be paid in equal monthly instalments by the due date commencing from the sixth month
of the basis period [sec 107C (6)].

Where an instalment payment direction is made by the DGIR and tax instalment is not paid
on the due date, a 10% penalty is levied on the sum due [sec 107C (9)].

The estimate of the tax payable should not be less than 85% of the preceding year’s estimate
or revised estimate. A penalty may be imposed if the amount of taxes estimated is found to
be below the 30% permitted limit. Therefore, a penalty of 10% would be imposed if the
difference is between the actual tax and estimated tax exceeds the 30% permitted limit [sec
107C (10)].

[Link] Revised estimates

A company may in the sixth and ninth month of the basis period for a year of assessment
furnish to the DGIR a revised estimate of its tax payable [sec 107C (7)]. When the revised
estimate exceeds the number of instalments paid, the difference is payable on the
remaining instalments in equal proportion. However, when the instalments paid exceed the
revised estimate, the payment of the balance of instalments can cease immediately.

Example 8

The estimated tax and the actual tax payable by a company for years of assessment 2009
to 2011 are summarized below.

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assessment estimated tax actual taxes difference 30% of the actual

year furnished by payable (at) between tax payable
the taxpayer estimated and
(et) actual tax

(a) (b) (c) (c – b) (d)

RM RM RM RM RM
2017 10,000 14,000 4,000 4,200
2018 Nil 3,000 3,000 900
2019 Revised 7,000 2,000 2,100
estimate
5,000

The computation to determine the penalty (if any) is based on the following formula:

[(AT – ET) – (30% x AT)] x 10%

Where: AT: is the actual tax
ET: is the estimated tax

Based on the information provided, the penalties (if any) for each of the years of assessment
2009 to 2011 are computed as follows:

Year of assessment 2017

[(AT – ET) – (30% x AT)]
(RM14,000-10,000) – (30% x 14,000)
= RM4,000 – 4,200
= (RM200)

In this instance, a penalty of 10% will not be imposed for year of assessment 2009. The shortfall
(RM4,000) is below the margin permitted (RM4,200).

Year of assessment 2018

The penalty that is to be imposed is computed as
follows: [(AT – ET) – (30% x AT)] x 10%
(RM3,000 – Nil) – (30% x 3,000) x 10 %
= RM2,100 x 10%
= RM210 (penalty).

Year of assessment 2019

[(AT – ET) – (30% x AT)] x 10%
(RM7,000 – 5,000) – (30% x 7,000) x 10 %
[(RM2,000 –2,100) x 10%
= (RM100)

In this instance, a penalty of 10 % will be not be imposed for year of assessment 2019. The
shortfall (RM2,000) is below the margin permitted (RM2,100).

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However, as these are only estimates and the actual quantum will only be known several months
later, a company, trust body or co-operative society are allowed to revise the estimates in the
sixth and ninth months, or in both months of the basis period (sec 107C).

Example 9

A company initially estimates its tax payable for purpose of filing Form CP 204 as RM4,000.
It revises the estimate to RM6,000 in the sixth month. It was subsequently found that the
actual liability is RM10,000. The penalties calculated will be as follows:

RM
Actual tax 10,000
Estimated tax 6,000
Shortfall 4,000
Less: Margin allowed
(30% of the actual tax) 3,000
Difference 1,000
Penalty on the difference: RM1000 x 10% = RM100.

In addition to this penalty, there is a late payment penalty of 10% and 5%. Details of
computing late payment penalties are as follows:
• 10% penalty will be imposed if a particular instalment is not paid within 30 days
from the due date.
• Another five (5) % will be imposed after 60 days from the due date if the sum is
still outstanding.

Example 10

A company is required to pay the final instalment of RM1,000 on or before 30 May. The
company failed to do so, and the unpaid sum continues to be outstanding even after two
(2) months. The penalty to be imposed is computed as follows:

RM

Amount outstanding 1,000

End of 30 days
10% on amount outstanding 100
Total now due 1,100
Amount outstanding at the end of 60 days 1,100
Penalty for late payment
5% of amount outstanding 55
Amount due and payable 1,155

The additional penalty of five (5) % will be imposed only at the end of the 60-day period.
Therefore, if a company pays the RM1,100 on the 40th day, it only incurs a late payment
penalty of RM100. There is no penalty after this 60-day period, but civil action would be
instituted by IRB to recover the outstanding sum.

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[Link] Settlement of Balance

If the estimated tax is less than the actual tax but is still within the 30% margin, the company
is required to compute the difference and settle this sum within seven (7) months after the
closing of the accounts.

Example 11

If the accounting date of the company is 30 September 2018 and the tax difference between
what was estimated (RM1,000) and the tax actually payable (RM1,200) is RM200, the sum
of RM 200 must be settled on or before 30 April 2019.

All instalment payments must reach the IRB on or before the 15th day of each month. In
situations where the IRB raises an additional assessment, an advance assessment or a
composite assessment (example: as a result of tax investigation), these sums must be
settled within 30 days after the service of the notice of assessment. In actual practice,
instalments are normally allowed after mutual agreement between IRB and the taxpayer.

[Link] Direction by DGIR to Make Instalment payments

The DGIR may direct any company to pay tax by instalments on account of tax which is or
may be payable [sec 107C (8)]. Such a direction may occur in tax investigation cases.

[Link] Notification of tax refundable

Section 111(1A) provides for the notification of tax refundable in the case where a company
has paid tax in excess of the amount payable. This section deems the notice to have been
served on the company on the day the tax return is furnished to IRB.

1.2.7 Individuals, partnerships, co-operatives and other non-corporate taxpayers

[Link] Assessments (Current year basis)

With effect from 1 January 2000, the current year basis of assessment involves not only
companies but also individuals, associations, partnerships, trusts and co-operatives.

From year of assessment 2004, sec 77(1) stipulates that all persons (other than a company,
limited liability partnership, trust body or co-operative society) must file returns not later than
30 April in the year following the relevant year of assessment.

[Link] Payment of taxes

Under sec 107B, individuals earning employment income are subject to monthly tax deductions
from their monthly remuneration by their employers via the Scheduler Tax Deduction (STD)
Scheme. The Scheduler Tax Deduction Scheme is a mechanism to collect tax from employees
on a monthly basis. The employer is required to deduct the scheduler tax deduction portion from
his employee’s salary under Income Tax (Deduction from Remuneration) Rules 1994.

An individual who derives income from business and investment sources is also required

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to pay instalment payments in respect of tax on his business and investment income from
year of assessment 2004.

Section 107B also provides for the compulsory payment of tax by instalments from taxpayers
other than those with employment income. The tax authorities will issue the Notice of Instalment
Payment (Form CP500) at the beginning of each year. The 6 bi-monthly instalments are required
to be paid within 30 days from the due date of the 1st of every month stated in the notice. A
revision of the amount to be paid by installments can be made not later than 30th June of that
relevant year.

As in the case of companies, all instalment payments must be paid within 30 days of the
due date. Failure to do so will attract a penalty of 10% on the balance outstanding. A further
five (5) % on the amount outstanding will be imposed after a period of 60 days.

[Link] Collection of taxes (Individuals, partnerships, Co-operatives and other non-

Corporate taxpayers

Unlike the case of companies, the IRB does not issue a notice of instalment payment to
individual taxpayers based on the previous year’s estimates. These payments will have to
be settled by the due date or 30 days from the due date. Failure to do so will involve the
imposition of a penalty by the IRB. The taxpayer, of course, can apply to the IRB to revise
the estimate of the tax payable.

If there is any difference between the actual tax liability and the estimated tax payable, the
difference must be settled within 30 days from the date of issue of the notice of assessment
or the last instalment, whichever is the later. Care must be exercised in estimating the taxes
payable because the IRB imposes penalties for estimates that are below the 30% of the
actual taxes due and payable. Penalties are imposed for excess above the 30% permitted
margin.

[Link] New arrivals

Individuals who arrive in Malaysia and are not chargeable to tax for a year of assessment
but would be chargeable in the following year of assessment must inform the DGIR within
two (2) months of arrival to the effect that he or she are so chargeable [sec 77(3)].

1.2.8 Self-assessment involving “other taxpayers”

Individuals, partnerships, trust bodies, unit trusts, co-operative societies and other non-
corporate taxpayers will be assessed under the self-assessment system commencing year
of assessment 2004. The Income Tax (Amendment) Act 2002 was enacted to facilitate the
implementation of self-assessment on “other taxpayers” and it introduced important
changes to the manner returns are filed, assessment raised, and taxes paid. Changes
introduced in relation to basis periods, filing of returns and other miscellaneous matters are
outlined below.

[Link] Basis periods

A basis year for an individual constitutes a basis period for a year of assessment (sec 21

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ITA) as amended with effect from year of assessment 2004 and will be the calendar year
thereafter. Likewise, the basis period for partnerships, too will be the calendar year.
However, the changes in the basis period provisions do not affect co-operatives and trusts
which continue to adopt the financial year as the basis year.

[Link] Filing of returns

Individuals and partnerships are to file their tax returns by 30 April following the year of
assessment.

One other significant feature is the issuance of separate tax returns to an individual and his
wife. The filing of tax return under self-assessment will constitute a deemed assessment
issued on the date the return is filed with the IRB. Tax is due and payable on the same date
as the filing deadline.

[Link] Instalment payment schemes for persons other than a company

Section 107B introduces a scheme for compulsory payment of tax by instalments

comprising all taxpayers but excluding individual taxpayers who are under the scheduler
tax deduction scheme.

• Method of instalment payments

The notice of instalment payment outlines the scheme for each taxpayer requiring them to
make six bi-monthly payments in a year.

In cases where the tax payable under an assessment exceeds the tax payable under an
instalment scheme, the excess must be settled in the month subsequent to the final
instalment.

• Penalty on overdue tax

If the tax payable is not paid within the stipulated 30 days, a penalty of 10% will be added
to the tax due [sec 103 (4)].

In cases of a default in payment of any one instalment, the balance of the tax outstanding at
the time of default will be due and payable immediately and a penalty of 10% of that balance
will be imposed. However, when the relevant instalment is subsequently paid, the DGIR may
treat the instalment as having been paid on its due date [sec103 (5)].

Where the 10% penalty has been imposed and a taxpayer has still not settled the tax inclusive
of penalties within 60 days of the imposition of the penalties, a further penalty of 5% on the
balance will be imposed.

1.2.9 Filing of tax returns by individuals under SAS (effective from YA 2004)

Under self- assessment, every individual is required to furnish a return if the taxpayer
has:
a) chargeable income for a year of assessment; or

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b) when there is no chargeable income but:

i) had chargeable income for the previous year of assessment; or
ii) had furnished a return for the previous year of assessment. [Sec 77(1)].

The tax return to be submitted to the IRB must state the amount of chargeable income and
tax payable by the individual. The responsibility of determining the tax liability is now
passed on from the IRB to the individual taxpayers, who would compute his or her own
income and settle the taxes with the Collection Branch. The individual taxpayer is required
to ensure the correctness of the information furnished in the annual return.

• Waiver to file return

The DGIR has powers under sec 77(2) to waive the necessity of an individual to file a return
by way of a notification.

1.2.10 Duty to keep records

Section 82A requires every person to keep documents and records for a period of seven
(7) years from the end of a year of assessment for ascertaining the person’s chargeable
income and tax payable.

For the purpose of sec 82A ITA, the term “documents” mean:
a) statement of income and expenditure; and
b) invoices, vouchers, receipts and such other documents as are necessary to
verify the particulars in a return.

1.2.11 Submission date

As mentioned earlier, an individual has to complete the tax return for a year of assessment
and submit it on or before 30 April in the year following year of assessment. The tax return
for the year of assessment 2011 is to be submitted on or before 30 April 2012. Failure to
submit tax return by the required date will result in penalties being imposed by IRB for late
or non-submission of return.

A return for a year of assessment shall specify the chargeable income and amount of
income tax payable (if any) on the chargeable amount for that year. The return must contain
particulars as may be required by the DGIR.

1.2.12 Deemed assessment

The practice of issuing a notice of assessment ceased with effect from year of assessment
2004. This is because the return submitted by the individual is deemed to be a notice of
assessment and is assumed to have been served on the taxpayer on the day the return is
furnished to the IRB.

1.2.13 Penalties for non-compliance

If the taxpayer had not declared all the income in the tax return, the IRB may impose a
penalty up to 100% of tax undercharged if the omission is detected during a tax audit.

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However, when a taxpayer voluntarily declares income that he has not previously reported
prior to a tax audit, penalties would be imposed as indicated in Para 1.2.18 below [Tax Audit
and Tax Investigations]

1.2.14 Circumstances when assessments are raised

The IRB will continue to raise assessments and issue notices under the following circumstances,
that is, when:
i) an estimated assessment is made following a failure to furnish returns within the
stipulated time period;
ii) an additional or reduced assessment is made; or
iii) the individual who was not taxable for a particular year, subsequently derives
further income in respect of that year which renders him to fall within the taxable
range after the adjustments were made by the individual or IRB.

1.2.15 Tax deduction Scheme

Income tax imposed on employment income will continue to be collected through monthly
salary deductions under the Scheduler Tax Deduction (STD) scheme.

Where a taxpayer has derived income from a business or a partnership source, rental
source, royalty or other non-employment source, the taxpayer is required to make six (6) bi-
monthly instalments, commencing from the month of March. The quantum of each
instalment will be estimated by the IRB. If the individual disagrees with the amounts
estimated by the IRB, he or she may make a written application for a revision estimate. The
application for a revised number of instalments is to be made not later than 30 June of
the particular year.

1.2.16 Due date of payment of taxes

Under self-assessment, the tax deemed assessed is due and payable by 30 April in the year
following the year of assessment. Consequently, payment for the outstanding sum has to
be settled before the tax return filing deadline, that is, 30 April.

Example 12

Robin’s estimated tax for the year 2018 is RM72,000, He had received a directive from the
Collections Branch to make the following schedule payments for year of assessment 2018:

No. of instalments RM12,000 each for six (6) instalments

Schedule of payment RM

1 March 2018 12,000

1 May 2018 12,000
1 July 2018 12,000
1 September 2018 12,000
1 November 2018 12,000

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1 January 2019 12,000

Total instalments paid 72,000
Actual tax to be paid 80,000
Discrepancy 8,000

The due date to pay the instalment to the Inland Revenue Board is within 30 days of the date
stated in the notice. The first instalment is to be paid within 30 days from 1 March 2018, i.e. 30
March 2018, the outstanding balance is to be settled by Robin on or before 30 April 2019.

1.2.17 Appeals

Under the self-assessment system, a tax return is deemed to be an assessment. When a

person is dissatisfied with the assessment he receives or is deemed to have received, he
can appeal to the IRB in writing not later than 30 days after the service of the tax return (sec
99). In the self-assessment system, the concept of an appeal against a deemed assessment
means that a taxpayer can appeal against the position taken by him in the tax return. The
prescribed form for an appeal is Form Q. The notice of assessment is considered final and
conclusive if no appeal is made against the assessment within the 30-day period. Even if
he has made an appeal, the taxpayer is still required to pay the tax assessed within
the 30-day period. A reduced assessment will be issued if the appeal is successful, and the
tax will be refunded.

The IRB must review all appeals within 12 months from the date of receipt of the notice
of appeal. The IRB may get a further extension of 6 months to review the objection if the
Minister of Finance allows. The appeal may be referred to the Special Commissioners and
subsequent appeals can be referred to the High Court and ultimately to the Court of Appeal
if the matter in the appeal cannot be resolved, and the unresolved issue relates to a point
of law. No further appeals are allowed in tax cases.

1.2.18 Tax audit and tax Investigations

Tax audits are an integral aspect of the self-assessment system. A tax audit is used by the
IRB to monitor compliance with tax laws. The tax audit will typically involve a detailed
examination of the taxpayer’s business records to ensure the income reported and tax paid
by the taxpayer is in accordance with the law and regulations. The IRB may audit a taxpayer
at any point in time either in the form of a desk audit and/or a field audit.

A desk audit is conducted at the IRB’s offices. Under a desk audit, the IRB will request the
taxpayer to provide the relevant tax computation and supporting documentation which will
be sent to the IRB’s offices. A field audit is one that is conducted at the taxpayer’s premises
and involves the examination of all the taxpayer’s records (business and non-business).

The IRB issued an updated Audit Framework to be effective from1 April 2018 [‘the 2018
Audit Framework’) replacing the earlier framework issued on 1 May 2017. Some of key
feature of the updated framework are as elaborated below:

(a) Timeline to furnish documents and information

The IRB will make a written request for documents and information to be furnished
for audit purposes. These must be supplied within 14 days [previously 21 days].

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Where documents and information are not furnished, the IRB will commence audit
without any further notice.

(b) Expanded scope of audit

The audit can be expanded to include associated, related and controlled
companies at the discretion of the DGIR, including those with common directors.
Section 139 provides for situations where a person shall be taken to be in control
of a company.

(c) Audit completion and tax adjustments

The IRB will endeavor to complete the audits within 3 months [previously 4
months] and the taxpayer has 18 days [previously 21 days] to respond to any tax
issues and the adjustments proposed.

(d) Voluntary disclosure and penalties

The IRB encourages voluntary disclosure. Taxpayers who meet the deadline for
filing the relevant income tax return and makes a voluntary disclosure will suffer
reduced penalty rate as follows:

Table of penalty rate for voluntary disclosure

Voluntary disclosure – period Rate of penalty [%]

1 Within 60 days from the tax return filing 10

deadline
2 After 60 days but less than 6 months from 15.5
the tax return filing deadline
3 More than 6 months from the tax return filling 35
deadline

Note that under section 124(3) the DGIR has the discretion to abate or remit any
penalty imposed under the ITA.

1.2.19 Tax Investigation

An income tax investigation aims to trace understated income by examining books of

accounts and other primary records or documents as required to be maintained under the
provisions of sections 82 and 82A ITA. The first job of the investigation officer is to establish
that the income is taxable in the taxpayer’s hands and has failed to declare it in the returns.
The officer would then have to obtain all evidence to show that the omission is willful with
intent to evade.

1.2.20 Differences between a tax audit and a tax investigation

The main differences between tax audit and tax investigations are summarized in Table 1.5.

Table 1.5
Differences in tax audit and Investigation

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Investigation tax audit

Scope of coverage Wide coverage Specific/limited scope

Approach Surprise visit Advance notice
Focus Fraud/Evasion Tax compliance/
Technical adjustment

Interviews Interrogative Normally friendly

Interview focus On key matters General
Search during Extensive/Thorough Limited search
inspection
Nature of assessment Composite assessment Additional assessment
Frequency Direction by DGIR Periodic (once in five
years)
Period covered No time limit in cases of Normally one to three
fraud years

1.3 Basis of assessment-Commencement, Cessation and Change of accounting

date

1.3.1 Introduction

Basis period means the period of income relative to a year of assessment. In the current
year basis of assessment, the basis period for a year of assessment is the year to 31
December coinciding with the year of assessment (with the exception of a company, limited
liability company, trust body or co-operative society whose basis period will depend on the
financial year which may not necessarily be the calendar year). For example, the basis year
for the year of assessment 2020 shall be the calendar year from 1 January 2020 to 31
December 2020

1.3.2 Basis Year for the Year of assessment

Under section 20 with effect from 1 January 2000 the calendar year coinciding with the year
of assessment shall constitute the basis year for the year of assessment.

Calendar year Basis year Year of assessment

1.1.2020 - 31.12.2020 2020 2020

1.3.3 Basis period

The term “basis period” refers to the taxable period relative to the year of assessment.
Under the current year basis environment, the basis period for a year of assessment is the
calendar year coinciding with the year of assessment; with the exception of a company,
limited liability partnership trust body or co-operative society whose basis periods would
depend on the accounting period which may not necessarily be the calendar year. With
effect from year of assessment 2000, the basis period coincides with the year of
assessment.

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Some other changes were also made to the law relating to basis period and assessment
year in sec 21 and 21A ITA with effect from 1 January 2000. These changes are outlined
below:

(i) The new sec 21 ITA states that the basis year for a year of assessment in relation
to a source of a person other than a company, limited liability partnership, trust
body or co-operative body is the basis period

(ii) Section 21A ITA was introduced to specifically refer to basis periods of a
company, trust body or co-operative society in line with the self-assessment
system. Section 21A (1) ITA provides, with exceptions, that the basis year for a
year of assessment shall constitute the basis period for that year of assessment,
in relation to a source of a company, limited liability partnership, trust body, or co-
operative society. Thus, the income for the period 1 January 2011 to 31 December
2011 will be brought to charge in the year of assessment 2011.

(iii) Section 21A (2) ITA provides that where a company, limited liability partnership,
trust body and co-operative body has made up the accounts of its “operation”
for a period of 12 months ending on a day other than 31 December in the
basis year, that period shall constitute the basis period for that year of
assessment for any of its sources of income. In other words, all sources
(business and non-business sources) are covered in this section.

1.3.4 Meaning of operation

The word ‘operation’ has been defined in sec 21A (8) ITA to mean an activity which
consists of the carrying on of a business, an activity which consists wholly in the making
of investments, an activity consisting of both a business and the making of investment
or an activity which consists of the making of investments prior to the commencement of a
business or after the cessation of a business.

1.3.5 Basis period for a business source for persons other than a company, limited
liability partnership, trust body and co-operative society

Commencing YA 2004, section 21 of the ITA was amended in tandem with the
implementation of self-assessment system (SAS). The section provides that the calendar
year is the basis period for a year of assessment in relation to the source of income of a
person other than a company, limited liability partnership, trust body and co-operative
society. Accordingly, the basis period for a YA for each source of income (i.e. business,
employment, rental and interest etc.) is the year ended 31 December.

If a new business commences and the first accounts are prepared for 12 months, the basis
period is the period ending on 31 December.

If a new business commences and the first accounts are prepared for a period of less than or
more than 12 months ending on 31 December, the basis period is the period ending on 31
December. The basis period for the first year of assessment however would be less than 12
months; and it will be 12 months in subsequent years of assessment.

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1.3.6 Determination of the basis period for a person other than a company, limited
liability partnership, trust body or co-operative society

1.3.7 Accounts prepared for a period of less than 12 months ending on 31 December

If a new business commences and the first accounts are prepared for a period of less than or
more than 12 months ending on 31 December, the basis period is the period ending on 31
December

Example 13

Ravi commenced his sole proprietorship on 1.10.2017 and the first accounts were closed on
31.12.2017 [less than 12 months] and subsequently on 31 December each year. In this case
the basis period for the relevant year of assessment would be:

Basis period Period

2017 01.10.2017 - 31.12.2017 3 months
2018 01.01.2018 - 31.12.2018 12 months
2019 01.01.2019 - 31.12.2019 12 months
2020 01.01.2020 - 31.12.2020 12 months

1.3.8 Accounts prepared for a period of more than 12 months ending on 31 December

If a new business commences and the first accounts are prepared for a period of more than 12
months ending on 31 December, the basis period is the period ending on 31 December.

Example 14

Assuming Ravi commenced his sole proprietorship on 1.10.2017 and the first accounts were
closed on 31.12.2018 (i.e. in December the following year and more than 12 months) and
subsequently on 31 December each year, then the basis period for the relevant year of
assessment would be:

YA Basis period Period

2017 01.10.2017 - 31.12.2017 3 months
2018 01.01.2018 - 31.12.2018 12 months
2019 01.01.2019 - 31.12.2019 12 months
2020 01.01.2020 - 31.12.2020 12 months

1.3.9 Accounts prepared for a period of less than 12 months and not ending on 31
December

If a new business commences and its first accounts are prepared for a period of less than 12
months not ending on 31 December, the basis period is the period ending on 31 December.

Example 15

Assuming Ravi commenced his sole proprietorship on 1.3.2017 and the first accounts were

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closed on 30.9.2017 and subsequently on 30th September each year, then the basis period
for the relevant year of assessment would be:

YA Basis period Period

2017 01.03.2017 - 31.12.2017 10 months
2018 01.01.2018 - 31.12.2018 12 months
2019 01.01.2019 - 31.12.2019 12 months
2020 01.01.2020 - 31.12.2020 12 months

1.3.10 Accounts prepared for a period of more than 12 months and not ending on 31
December

1.3.11 If a new business commences and its first accounts are prepared for a period
of more than 12 months and not ending on 31 December, the basis period is
the period ending on 31 December.

Example 16

Assuming Ravi commenced his sole proprietorship on 1.3.2017 and the first accounts were
closed on 30.9.2018 and subsequently on 30th September each year, then the basis period
for the relevant year of assessment would be:

YA Basis period Period

2017 01.03.2017 - 31.12.2017 10 months
2018 01.01.2018 - 31.12.2018 12 months
2019 01.01.2019 - 31.12.2019 12 months
2020 01.01.2020 - 31.12.2020 12 months

1.3.12 The Determination of Basis Period for An Existing Business of a Person Other
Than A Company, Limited Liability Partnership, Trust Body or Co-Operative
Society and Change of Accounting Date

In the case of an existing business, when there is a change of accounting date, whether the
normal accounts are closed on 31 December or other than 31 December, the basis period
for the business is the year ending on 31 December.

1.3.13 Normal accounts not ending on 31 December and the new accounts are prepared
for a period less than 12 months

In this case the basis period for the relevant year of assessment in the year the accounting
date was changed, and the subsequent years of assessment would be 31 December.
Example 17

Assume Ravi, who has been in business for since 2016, closes his sole proprietorship business
accounts to 30 June. Say he changes the accounting date to 31 December with effect from 2018
and the accounts in 2018 was closed to 31 December. The basis period for the relevant years
of assessment would be as follows:

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YA Basis Period Period

2018 01.01.2018 - 31.12.2018 12 months
2019 01.01.2019 - 31.12.2019 12 months

1.3.14 Normal accounts not ending on 31 December and new accounts are prepared for
a period more than 12 months

Where say a cricket club that normally closes the accounts for a period ending on 31 July
changes the accounting date and now closes it to 31 December, the basis period will be
the year ended 31 December.

Example 18

MK Cricket Club normally prepares its accounts to 31 July of each year. In 2018 the club then
changed its accounting date to close on 31.12.2018 (after the normal accounts were closed on
31.7.2013). Subsequent accounts were closed on 31 December each year.

In this case the basis period for the relevant years of assessment would be as follows:

YA Basis Period Period

2018 01.01.2018 - 31.12.2018 12 months
2019 01.01.2019 - 31.12.2019 12 months

1.3.15 An individual joining a partnership

If an individual join a new partnership, the basis period in respect of the partnership source is
determined as in the case of a new business.

Example 19

Mr. Ravi joined a partnership which commenced its business on 1.3.2018. It closes the accounts
to 30th September. The accounts prepared by the partnership are as follows:

YA Accounting Period Period

2018 1.03.2018 - 30.09.2018 7 months
2019 01.10.2018 - 30.09.2019 12 months
2020 01.10.2019 - 30.09.2020 12 months

The basis periods for Mr. Ravi’s partnership source are as follow:

YA Basis Period Period

2018 1.03.2018 - 31.12.2018 10 months
2019 01.01.2019 - 31.12.2019 12 months
2020 01.01.2020 - 31.12.2020 12 months

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1.3.16 Joining an existing partnership and the partnership’s normal accounting date
is maintained

If an individual join an existing partnership, and the partnership’s normal accounting period
is maintained, then the basis period in respect of the partnership source for the individual
is determined so that the basis period will be always year ended 31 December.

Example 20

Mr. Ravi joined an existing partnership on 1.2.2014. The partnership normally closes its
accounts on 31 March as follows:

YA Accounting Period Period

2018 01.04.2013 - 31.03.2018 12 months
2019 01.04.2018 - 31.03.2019 12 months
2020 01.04.2019 - 31.03.2020 12 months

The basis periods for Mr. Ravi’s partnership source are as follows:

YA Basis Period Period

2018 01.02.2018 - 31.12.2018 11 months
2019 01.01.2019 - 31.12.2019 12 months
2020 01.01.2020 - 31.12.2020 12 months

1.3.17 Joining an existing partnership and the partnership’s normal accounting date is
changed

If an individual joins an existing partnership, and the partnership’s normal accounting period is
changed, then the basis period in respect of the partnership source for the individual who joined
the partnership is determined so that the basis period will be always year ended 31 December
for the relevant year of assessment.

Example 21

Mr. Ravi joined ABC Partnership on 1.7.2014. The said partnership which normally closes its
accounts on 31 December changed its accounting date to 30 June. The partnership’s accounts
are prepared as follows:

Accounting Period Period

01.01.2013 - 31.12.2013 12 months

01.01.2014 - 30.06.2014 6 months
01.07.2014 - 30.06.2015 12 months
01.07.2015 - 30.06.2016 12 months

In this case the basis period for the partnership source for the new partner and the existing
partners are as follows:

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New partner:
Mr Ravi
YA Basis period
2013 nil
2014 01.07.2014 - 31.12.2014
2015 01.01.2015 - 31.12.2015
2016 01.01.2016 - 31.12.2016

Existing partners

YA Basis period
2013 01.01.2013 - 31.12.2013
2014 01.01.2014 - 31.12.2014
2015 01.01.2015 - 31.12.2015
2016 01.01.2016 - 31.12.2016

1.3.18 BASIS PERIOD OF A COMPANY, LLP, TRUST BODY OR CO-OPERATIVE

SOCIETY FOR FIRST YEAR OF ASSESSMENT

Section 21A (4) covers basis periods of a company, limited liability partnership, trust body
or co-operative society which commences operations in a basis year for a year of
assessment. Thus, from the YA 2014 where a company, limited liability partnership, trust
body or co-operative society (a) commences operations on a day in a basis year for a year
of assessment (referred to as the “first year of assessment”) and (b) makes up its accounts:

(a) for a period of less than 12 months ending on a day in that basis year, that period
shall constitute the basis period for the first year of assessment;

(b) for any period of months ending on a day in the immediately following basis year,
that period (referred to as the “second year of assessment”) shall constitute the basis
period for the year of assessment immediately following the first year of assessment.
There shall be no basis period in relation to any of its sources of income for the first year
of assessment; and

(c) for a period of more than 12 months ending on a day in the basis year immediately
following the second basis year, that period shall constitute the basis period for the year
of assessment immediately following the second year of assessment. There shall be no
basis period in relation to any of its sources of income for the first year of assessment and
the second year of assessment.

1.3.19 When first accounts are closed in the same year:

Example 11
Ravi Trading Sdn. Bhd. submitted its accounts after commencing operations:

Accounts Accounting period Duration of Period

First 1.3.2018 – 31.10.2018 8 months
Second 1.11.2018 – 31.10.2019 12 months

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The basis periods under section 21A (4) for the company are as follows:
Year of assessment Basis period Duration of Period
2018 1.3.2018 – 31.10.2018 8 months
2019 1.11.2018 – 31.10.2019 12 months

The first set of accounts closed in 2018. The accounting period of eight months will be
accepted under section 21A (4) is accepted as the basis period for the first year of
assessment even though it is less than 12 months and closes on a date other than 31
December.

1.3.20 When first accounts are closed in the following year:

Example 12
Ravi Trading Sdn. Bhd. submitted its accounts as follows:

Accounts Accounting period Duration of period

First 1.6.2017 – 30.4.2018 11 months
Second 1.5.2018 – 30.4.2019 12 months

The basis periods for the company are as follows:

Year of assessment Basis period Duration of period

2018 1.6.2017 – 30.4.2018 11 months
2019 1.5.2018 – 30.4.2019 12 months

The first set of accounts closed in 2018. The accounting period of 11 months is accepted
under section 21A (4) as the basis period for the first year of assessment i.e. YA 2018.

1.3.21 When accounts are for more than 12 months and end in the third year:

Example 13
Accounts of Ravi Construction Sdn. Bhd. are submitted as follows:

Accounts Accounting period Duration of period

First 1.11.2017 – 30.4.2019 18 months
Second 1.5.2019 – 30.4.2020 12 months

The basis periods for the company are as follows:

Year of assessment Basis period Duration of period

2019 1.11.2017 – 30.4.2019 18 months
2020 1.5.2019 – 30.4.2020 12 months

In years of assessment 2017 and 2018, there are no basis periods. The first set of
accounts involved three calendar years (i.e. 2017, 2018 and 2019). The first accounting
period of 18 months is accepted under 21A (4) as the basis period for the first year of
assessment, that is, year of assessment 2019.

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With the amended sec 21A (4) ITA, issues concerning overlapping basis periods and the
need for apportionment of adjusted business income or loss and submission deadlines of
tax returns and estimates of tax payable are eased.

Example 14

Ravi Baywater Sdn. Bhd. has been in operations since 2014 and makes up its accounts
ending 30 April each year. The company starts a new business on 1 July 2018.
The basis period for the new business follows the accounting period of the existing
business. The basis period for the new business for year of assessment 2019 is therefore
1 July 2018 to 30 April 2019.

1.3.1 When a company joins a partnership

When a company joins a partnership, the company is regarded as having a new business.
The basis period of its existing business becomes the basis period of the partnershi p
source.

Example 15

Ravi Natural Polymer Sdn. Bhd’s accounts are closed on 30 September each year. It joins
a new partnership which commences business on 1April 2019. The first accounts of the
partnership are prepared to 30 September 2019 and are subsequently prepared to 30
September each year.

The basis periods for the company in respect of its new partnership business source are:
Year of Assessment 2019: 1 April 2019 to 30 September 2019
Year of Assessment 2020: 1 October 2019 to 30 September 2020

1.3.22 Basis Period of a Company, LLP, Trust Body or Co-operative Society

Following a Change of Financial Year End

The words “other than 31 December” in sec 21A(3) was replaced by the words “in a basis
year” and the is effective from the YA 2014, This significant amendment allows the
Director General to direct the basis periods of all companies, limited liability partnerships,
trust bodies or co-operative societies that change their accounting year end.

Under sec 21A(3), where a company, limited liability partnership, trust body or co-operative
society has made up its accounts for a period of 12 months ending on a day in the basis
year (previously ‘other than 31 December’) and there is a failure to make up the accounts
of the company, limited liability partnership, trust body or co-operative society to a
corresponding day in the following year, the DGIR may direct that the basis period for the
year of assessment in which the failure occurs or the basis periods for that year and the
following year of assessment, shall consist of a period or periods (which may be of any
length) as specified in the direction.

The DGIR will accept the accounting period made up by the taxpayer in the failure year
provided that there is no missing year of assessment and there does not exist two or more
accounts closing in the same year of assessment. The provision applies to all cases

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regardless whether the accounts before the failure year were closed on 31 December or on
a date other than 31 December i.e. the amendment to section 21A (3) now makes this
closing dates irrelevant.

1.3.23 Failure Year

The concept of a ‘failure year’ is found in section 21A (3) ITA. A failure year is the year in
which the business fails to prepare its accounts for a financial year or financial period or
accounting period ending on the corresponding day in the relevant year of assessment.

Section 21A (3) of the ITA states that:

“Where a company, limited liability partnership, trust body or co-operative society has made
the accounts of its operations for a period of 12 months ending on a day other than 31
December and there is a failure to make up accounts of the company, limited liability
partnership, trust body or co-operative society ending on the corresponding day in the
following basis year, the Director General may direct that the basis period for the year of
assessment in which the failure occurs, or the basis periods for that year and the following
year of assessment, shall consist of a period or periods (which may be of any length) as
specified in the direction”.

Therefore, a “failure year” is the first year in which there is a failure to close the accounts
to the normal accounting date (where the normal accounting date is not 31 December).

Below are tax treatment of situations where the accounting date change and a ‘failure year’
occurs, and the new accounting date ends in the same year , ends in the following year or
ends in the third year and the determination of the basis period for the relevant year of
assessment consequent upon the change of accounting date whether the previous
accounting date was 31 December or not 31 December.

1.3.24 When the accounting period is changed for less than 12 months and ending
in the same year:

Ravi Trading Sdn. Bhd. normally closes its accounts on 31 March every year and changes
the accounting date to 31 December (less than 12 months) in the year 2017

Year of assessment Accounting period Period

2018 1.4.2017 – 31.3.2018 12 months
Failure year 1.4.2018 – 31.12.2018 9 months
2019 1.1.2019 – 31.12.2019 12 months
2020 1.1.2020 – 31.12.2020 12 months

The basis periods for the company are:

Year of assessment Basis period Period

2018 1.4.2017 – 31.3.2018 12 months
2019 1.4.2018 – 31.12.2019 21 months
2020 1.1.2020 – 31.12.2020 12 months

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The failure year is 2019 when the accounts should have been closed to 31 March 2019.
Therefore, the basis periods determined by the DGIR will be for the years of assessment
2019 and 2020.

The accounts for the period from 1 April 2018 to 31 December 2018 and 1 January 2019
to 31 December 2019 will be combined and taken as the basis period consisting of 21
months for YA 2019.

1.3.25 When the accounting period is changed for a period of less than 12 months
and ends in the following year:

Ravi Motors Sdn. Bhd. usually closes its accounts on 31 December each year and changes
its date to 31 May in the year 2018.

Year of assessment Accounting period Period

2017 1.1.2017 – 31.12.2017 12 months
Failure year 2018 1.1.2018 – 31.5.2018 5 months
2019 1.6.2019 – 31.5.2019 12 months

The basis periods for the company are:

Year of assessment Basis period Period

2017 1.1.2017 – 31.12.2017 12 months
2018 1.1.2018 – 31.5.2018 5 months
2019 1.6.2018 –31.5.2019 12 months

Note:
The failure year is 2018 when the accounts should have been closed to 31 December
2018. The basis periods for the years of assessment 2018 and 2019 will now be
determined by the DGIR.

Even though the accounting period for the failure year is less than 12 months, that period
would be accepted as the basis period for the year of assessment 2018 as the accounts
was closed in that year.

1.3.26 When the accounting period is changed for a period of more than 12
months and ends in the following year:

Example 9

Ravi Productions Sdn. Bhd. usually closes its accounts on 30 June each year. It changes
the accounting date to 30 November in the year 2019.

Year of assessment Accounting period Period

2018 1.7.2017 – 30.6.2018 12 months
Failure year 2019 1.7.2018 – 30.11.2019 17 months
2020 1.12.2019 – 30.11.2020 12 months

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The basis periods for the company are as follows:

Year of assessment Basis period Period

2018 1.7.2017 – 30.6.2018 12 months
2019 1.7.2018 – 30.11.2019 17 months
2020 1.12.2019 – 30.11.2020 12 months

The failure year is 2019 when the account should have been closed to 30th June 2019.
The basis periods for 2019and 2020 will be now determined by the DGIR. Even though
the accounting period is more than 12 months i.e. 17 months, that period will be
accepted by the DGIR as the basis period for YA 2019.

1.3.27 When the accounting period is more than 12 months and ends in the third
year:

Example 10

Ravi’s Curry House Sdn. Bhd. usually closes its accounts on 31 December and changes
the accounting date to 31 March.

Year of assessment Accounting period Period

2018 1.1.2018 – 31.12.2018 12 months
Failure year 1.1.2019 – 31.3.2020 15 months
2020 1.4.2020 – 31.3.2020 12 months

The basis periods for the company are as follows:

Year of assessment Basis period Period

2018 1.1.2018 – 31.12.2018 12 months
2019 1.1.2019 – 31.8.2019 8 months
2020 1.9.2019 – 31.3.2020 7 months
2021 1.4.2020 – 31.3.2021 12 months

The failure year is 2019 when the accounts should have been closed to 31 December
2019 but instead it was closed to 31 March 2020. The DGIR will now determine the basis
periods for the years of assessment 2019 and 2020. The accounting period 1 January
2019 to 31 March 2020 involves two years of assessment i.e. YA 2019 and 2020.

The basis periods for the years of assessment 2019 and 2020 are therefore determined
by dividing accounting period into two basis periods, eight months for YA 2019 and
seven months for YA 2020. Note that the longer of the two periods is allocated to the
first of the two periods.

1.3.28 When a company with existing operations commences new operations:

Where a company which is already carrying on one or more operations commences a new
operation, the basis period for the new operations follows the basis period of the existing
operation.

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1.3.29 Furnishing of estimates

Connected with this amendment, SME that first commenced operation in a year of
assessment and has no basis period for that year of assessment and the immediately
following year of assessment is not required to furnish an estimate of tax payable for that
year of assessment and the immediately following two years of assessment , provided that
as at the commencement of the operations of the SME and also as at the beginning of the
immediately following two years of assessment the paid up share capital of the company is
not more than RM2.5 million.

Example 19

Company AB Sdn Bhd is a SME and commenced operations on 1 October 2014. The first
account was closed to 31 March 2016.

YA 2014 2015 2016 2017 Law

Basis No No Yes Yes 21A(4)(c)
period
Estimate Not Not Not Required 107C(4A)
of tax required required required (c)
payable

Law: Section 21A (3) and (4) and section 107C(4A) (c) with effect from YA 2014.

1.3.30 Summary of public rulings on basis periods

(i) Public Ruling 7/2001 [Basis period for Business and non-Business Sources
(Companies]

This ruling supersedes PR 2/2000 dated 1 March 2000 and applies to the new Section 21A
ITA. The ruling dated 30 April 2001 is effective from the year of assessment 2001.

(ii) Public Ruling 6/2001 – Basis period for a Business Source (Individuals and
persons other than companies and Co-operatives

The above ruling (6/2001) applies to Sections 20 and 21 of the ITA and supersedes PR
3/2000 dated 1 March 2000. The new ruling considers the determination of the basis period
for the subject persons within the context of commencing a new business. The ruling is
effective from the year of assessment 2001.

(iii) Public Ruling 5/2001 – Basis period for a Business Source (Co-operatives)

The ruling applies to Sections 20 and 21 of the Act and supersedes PR 2/2000 dated 1
March. 2000. The new ruling considers the determination of the basis period for co-
operatives on commencement of a new business, changing its accounting date and joining
a partnership. The ruling is effective from the year of assessment 2001.

(iv) Public Ruling 4/2001 – Basis period of a non-business source (Individuals and
persons other than companies)

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The ruling that supersedes PR 1/2000 applies to Section 20 and 21 of the Act and deals
with the determination of the basis period for a non-business source of income. It provides
that the basis year for a year of assessment is the basis period for that year of assessment.
However, a co-operative may elect that the basis period for its non-business income be the
basis period of its business income. The ruling is effective from the year of assessment
2001.

(v) Public Ruling 8/2014 - Basis period for a company, limited liability partnership,
trust body and co-operative society

This ruling issued on 1 December 2014 clarifies the application of section 2 and 21A in
determining the basis period for a company, a limited liability partnership, a trust body and
a co-operative society on the commencement of operations, and the determination of the
basis period for the said entities which has been in operation and then change its
accounting date.

(vi) Public Ruling 4/2017 - Basis period for a business source for persons other than
a company, limited liability partnership, trust body and co-operative society

Commencing YA 2004, section 21 of the ITA was amended in tandem with the
implementation of self-assessment system (SAS). Section 21 now provides that the calendar
year is the basis period for a year of assessment in relation to the source of income of a
person other than a company, limited liability partnership, trust body and co -operative
society. In other words, for any person other than a company, limited liability partn ership,
trust body and co-operative society, the basis period for a YA for each source of income is
the year ended 31 December.

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Quick Questions and answers

Question 1

The scope of charge in taxation can be divided into three ‘domains’ i.e. territorial basis,
modified territorial basis, and world income basis. Hence, the chargeability of a person on
his income will depend on the tax system of that particular country.

Required:
Explain with examples the above three (3) bases of taxation with respect to the present
system of Malaysian taxation.

Answer

(i) Territorial Basis

The taxpayer is chargeable only on income accrued in or derived from Malaysia. Foreign
income that is remitted is taxable but is exempted under paragraph 28 schedule 6. This
principle is applied to all taxpayers (such as an individual, a company, trust body and body
of persons) irrespective whether they are resident or not in Malaysia

(ii) Modified territorial Basis

This scope of charge only applies to non-resident persons carrying on specialized businesses
such as banking, insurance, sea and air transport business.

(iii) World Income Basis

Under sec 60C of ITA, 1967, income from business sources of specialized industries such
as banking, insurance, sea and air transport resident in Malaysia are chargeable to tax on
a world scope basis. In such a situation, taxpayers are chargeable to tax on the business
income from wherever derived, irrespective whether the income is remitted to Malaysia or
not but are given offsets for double taxation. The income of the non-resident banks, and
financial institutions, insurance, shipping and airlines operators are, however, subject to tax
on a territorial basis.

Question 2

A good taxation system should comprise, among others, the principles of equity and neutrality in
order to achieve the objective of a country’s tax system.

Required:
Explain the principles of equity and neutrality embodied in the Malaysian tax system.

Answer

• Equity
Equity is the most important principle in any tax system. It refers to taxes being imposed
equally and fairly on all taxpayers. A tax system should not impose radically different tax

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burdens on taxpayers with similar abilities to pay. The tax system should ensure that each
corporation pays a fair share of tax in relation to their commercial profits. However, certain
tax provisions allow certain taxpayers to pay relatively less income taxes.

• Neutrality
The effect of tax laws on taxpayers’ decisions on how to carry out a particular transaction
or to engage in any activity should be kept to a minimum. Taxpayers should not be unduly
encouraged or discouraged from engaging in certain activities. The main objective of the tax
system is to raise revenue, not to change behavior. A tax is levied in a neutral way if there
is no significant difference in effective taxation between different categories of firms. An
ideal business tax system would be neutral with respect to different industries, asset types,
and degrees of risk. Thus, the non-neutrality of a tax system refers to possible differences
in effective treatment across different sectors or sizes of firms. Thus, providing tax incentives
to specific industries could possibly lead to the non-neutrality of the tax system. Therefore,
if the tax incentives are not properly structured, it could lead to an unbalanced distribution
of economic activities which could be harmful to the country.

Question 3

Section 138A of the Income Tax Act 1967 provides for the Director General of the Inland Revenue
Board to make a Public Ruling in relation to the application of any provisions of the ITA. It is
published as a guide for the public and officers of the Inland Revenue Board of Malaysia. It sets
out the interpretation of the Director General of Inland Revenue in respect of the particular tax law
and the policy as well as the procedure applicable to it. In this respect the DG has issued several
public rulings relating to basis periods for various entities.

Required:
State the public ruling issued to date by the Inland Revenue Board and state briefly the areas
covered by the said rulings.

Answer

The Inland Revenue Board has issued five rulings to date covering both corporate and non-
corporate entities. Briefly they are as follows:

Public Rulings issued by Areas covered by the public rulings

the Inland Revenue Board

Public Ruling No. 4/2001 This ruling covers the basis period of a non-business source
i.e. those relating to individuals and persons other than
companies.
Public Ruling No. 6/2001 This ruling covered the determination of the basis period of a
business source in respect of individuals and persons other
than companies.
Public Ruling No. 7/2011 This ruling explained the requirement of the taxpayer to notify
the DGIR of any changes in accounting period of a company,
trust body and co-operative society
Public Ruling No. 8/2014 This ruling outlined the basis period determination of a
company, limited liability partnership, trust body and co-
operative society

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Public Ruling No.4/2017 This latest ruling in the series on basis period outlines the basis
period for a business source for persons other than a
company, limited liability partnership, trust body and co-
operative society in respect of the commencement of a new
operation, changing of the accounting date of an existing
business and situations where an individual is joining a
partnership.

Question 4

State three (3) factors which should be taken into consideration by the employer when
implementing the Scheduler Tax Deduction System (STD) in respect of its employees.

Answer

The following considerations must be taken into account:

(a) The monthly remuneration
(b) The marital status
(c) The number of children

Question 5

Ravi Sdn. Bhd., a Malaysian incorporated company commenced business on 1 July 2017
and the first account was closed its accounts on 30 June 2018, and subsequently closed to
30 June every year.

Answer

For Ravi Sdn Bhd, the first set of accounts would be for a period of 12 months. Accordingly,
the first year of assessment for the company will be the year of assessment 2018 and the
basis period would be the period 1 July 2017 to 30 June 2018 [see PR No. 3/2014].

Question 6

Ravi Software Inc. was incorporated in Hong Kong. Under the laws of Hong Kong, Ravi Software
is required to close its accounts on 30 April each year. Ravi Software commenced trading in
Malaysian on 1 January 2017 and made up the accounts of its business as follows:

Basis period Assessment year Period

1 January 2017 to 30 April 2017 2017 4 months
1 May 2018 to 30 April 2018 2018 12 months
1 May 2019 to 30 April 2019 2019 12 months

Answer

In this case, since the law of the country where the company was incorporated requires the
company to close its accounts to 30 April, the DGIR will accept the first set of accounts drawn for
the period of four months from 1 January 2016 to 30 April 2016 as the basis period for the year
of assessment 2016.

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Question 7

Ravi Software Sdn. Bhd. is a newly incorporated Malaysian company. The company is a
subsidiary of Malaysian Software Bhd. which closes its accounts to 30 September each
year.

Ravi Software Sdn. Bhd. commenced trading on 1 July 2016 and prepared its first set of
accounts to 30 September to coincide with the Malaysian Software Bhd’s financial year end.

Required:
What is the basis period for Ravi Software Sdn Bhd for the years of assessment 2016-2018?

Answer

The basis periods and the relevant years of assessment of Regional Com puters Sdn. Bhd.
will be as follows:

Basis period Year of assessment

1 July 2016 to 30 September 2016 2016
1 October 2016 to 30 September 2017 2017
1 October 2017 to 30 September 2018 2018

Question 8

Ravi Cafe Sdn. Bhd. is a successful restaurant operator and was in business for several
years and closes the accounts to 30 June each year. When the premise next to the
restaurant fell vacant Ravi Cafe Sdn Bhd opened a spice and herb business and
commenced business on 1 May 2016.

Required:
Determine the basis period for the years of assessments 2016-2019 for the restaurant
business and the spice and herb business.

Answer

The basis periods and the relevant years of assessment for the restaurant business and the spice
and herb business will be as follows:

Year of Restaurant business Spice and herb business

assessment
Basis period Basis period

2016 1 July 2015 to 30 June 2016 (12 1 April 2016 to 30 June 2016
months) (3 months)
2017 1 July 2016 to 30 June 2017 (12 1 July 2016 to 30 June 2017
months) (12 months)
2018 1 July 2017 to 30 June 2018 (12 1 July 2017 to 30 June 2018
months) (12 months)

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Question 9

Ravi Sdn Bhd is a Malaysian resident company carrying on the business of distributing motor
spare part. It commenced business on 1 April 2018. The first account was closed to 30 September
2018 and subsequently to 30 September each year.

Required:
Determine the basis period for the year of assessment 2018 and 2019 for Ravi Sdn Bhd.

Answer

Year of assessment Basis period

2018 1 April 2018 to 30 September 2018

2019 1 October 2018 to 30 September 2019

Question 10

Assuming Ravi Sdn Bhd commenced the business on 1 September 2018 and closed the first
account to 31 March 2019 and subsequently to 31 March each year, determine the basis period
for the year of assessment 2019 and 2020 for Ravi Sdn Bhd.

Answer

Year of assessment Basis period

2019 1 September 2018 to 31 March 2019

2020 1 April 2019 to 31 March 2020

Question 10

What would be the basis period for the relevant years of assessment Ravi Sdn Bhd in Question
9 if the company having commenced on 1 April 2018, closed the first accounts to 31 March 2020?

Answer

Year of assessment Basis period

2020 1 April 2018 to 31 March 2020

2021 1 April 2020 to 31 March 2021

Question 11

Assuming Ravi Sdn Bhd normally makes up accounts to 30 June every year but decided to
change the accounting date to 30 September and produced the following accounts:

(a) Year ended 30 June 2017

(b) 1 July 2017 – 30 September 2018
(c) 1 November 2018 – 30 September 2019

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Required:
What would be the basis period for the years of assessment 2017- 2019

Answer

The normal accounting date is 30 June; and the new accounting date is 30 September. There is
a failure to make up the accounts to a 12-months period in the year 2018 (where it is now 30
September instead of 30 June). 2018 is therefore a failure year and the DGIR will direct the basis
period for the year of assessment 2018 and/or 2019. Based on the re-direction, the basis period
for the relevant years of assessment would be as follows:

Year of assessment Basis period

2017 1 July 2016 – 30 June 2017

2018 1 July 2017 – 30 September 2018
2019 1 July 2018 – 30 September 2019

Question 12

Assuming Ravi Sdn Bhd normally makes up accounts to 31 December every year but decided to
change the accounting date to 31 March in 2019 for financial convenience in line with other
investments, and accordingly the company had prepared the following accounts:

(a) Year ended 31 December 2018

(b) 1 January 2019 – 31 March 2020
(c) 1 April 2020 – 31 March 2021

Required:
What would be the basis period for the years of assessment 2018- 2021?

Answer

The normal accounting date is 31 December. The accounting date was changed to 31 March and
affects the year 2019 and 2020. The Public Ruling 8/2015 indicates that in the case of an uneven
basis period, the fraction of the month should be included in the first basis period. In the case of
a period of 15 months, the division would be: 8 months in the first half and 7 months in the second
half. Thus, the basis period for the relevant years of assessment would be as follows:

Year of assessment Basis period

2018 1 January 2018-31 December 2018

2019 1 January 2019 – 31 August 2019 (8 months)
2020 1 September 2019 – 31 March 2020 (7 months)

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