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					Chapter 4
Investment Income
          Investment Income

1.   Dividend income [sec 4(c)]
2.   Interest income [sec 4(c)]
3.   Discount income [sec 4(c)]
4.   Rental income [sec 4(d)]
5.   Royalties income [sec 4(d)]
6.   Pension income [sec 4(e)]
7.   Annuity income [sec 4(e)]
8.   Other income [sec 4(f)]
              Dividend Income

• Assessable under sec 4(c) of ITA 1967 but may be
  assessed under sec 4(a) if the stock, share or other
  source to which the dividend relates forms or has
  formed part of the stock in trade of a business.
• Definition is not stated in the Act, but in general,
  dividend represents DISTRIBUTION or PAYMENT OUT OF
  PROFITS or undistributed profits of a company, whether
  in MONEY or OTHER PROPERTY to its shareholders in
  accordance with the shareholding ratio.
• Dividend would results a reduction of the assets of a
  company and an increase of wealth of the shareholders.
             Dividend Income

The followings are NOT classified under dividend:
  – Bonus Shares (no change in percentage of
    holding)
  – Capital reduction scheme - require sanction from
    High Court
  – Distribution of assets arise from liquidation is not
    income
  – Right issues
  – Shares buyback
 Derivation of Dividend Income

Sec 14: All dividends paid, credited or
  distributed by resident company are
  DEEMED TO BE DERIVED from Malaysia
   (Determination of resident status for
    company is by establishing the fact that mgt
    & control of the company are exercised in
    M’sia - i.e. held at least once director
    meeting in M’sia)
          Basis of Assessment

• Dividend is taxable in the year of assessment
  when:
  – dividend is being paid
  – dividend is being credit OR
  – dividend is being distributed
  Date of declaration/date of approval is
    IRRELEVANT
   Imputation vs single tier system
• Prior to 1 Jan 2008, dividend is taxable on the hand of
  individuals because Malaysia applies imputation system (tax
  at corporate level and shareholder level).
• However, commencing from YA 2008, Malaysia decided to
  switch over to single tier system, where profit will be taxed
  at company level. This is the final tax. Dividend received by
  shareholders are exempted.
• During transitional period of 6 years (1.1.2008 – 31.12.2013),
  companies may elect not to switch to single tier system
  (companies that still have credit sec 108 account on
  31.12.2007) If this is the case, the dividend is still taxable on
  the hand of individuals.
              Dividend Income
  Sec 108 stipulates that dividends paid, credited or
  distributed by resident companies are subject to
  deduction of tax at source at the current corporate rate.
  Thus, dividend received by shareholder is NET OF TAX.
  For the purpose of calculating the taxable income of
  individuals, dividend should be GROSS UP by current
  corporate rate (YA 2009: 25%)

Gross dividend = Net dividend/ (1 – tax rate)
  However, the recipient of the dividend would be able to
  claim a set-off under sec 110 against his/her tax payable
  If not fully utilised, the excess/balance will be refunded
  to the taxpayer.
            Dividend Income
Example:
• In 2009, Mr Karim received dividend amount
  RM 7500 from Syarikat Kaya Cepat Bhd. The
  company did not elect to switch to single tier
  system. Calculate the taxable dividend
  income for Mr Karim.
• Answer: Gross dividend = RM 7500/(1 – 0.25)
                       = RM 10,000
          Dividend Income


For dividend in specie (other than money),
  the dividend value is equal to market
  value of the property at the TIME OF
  DISTRIBUTION of the dividend.
           Dividend Income
Example:
  in 2009, Harimau Sdn Bhd distributed 100,000
  GTT shares to its shareholders. The market value
  of the GTT shares at that time of distribution is
  RM 3.75 per share. Harimau Sdn Bhd did not
  elect to switch over to single tier system.
Answer:
  Market value is deemed net dividend (net of 25%
  tax) and thus the total amount of dividend paid
  by the company is RM500,000 [tax is deemed to
  have been deducted at 25% which is RM125,000]
     Cum-dividend vs Ex-dividend

• Cum dividend : purchaser of the shares
  knows he will receive a dividend that had
  been declared. Cost of shares include the
  dividend amount, thus dividend received is
  NOT TAXABLE
• Ex-dividend : purchaser knows he will not
  receive dividends as it belongs to the seller.
                   Deductions
• Only WHOLLY & EXCLUSIVELY expenses
  – Any excess of expenses over dividend cannot be
    carried forward to the next year. (e.g. interest on
    loan used in order to purchase share)
  – However, with the implementation of single tier
    system, no expense are allowed to be deducted
    from dividend income
                        Exemptions
Para 12A Schedule 6 of ITA 1967
• Dividend paid, credited or distributed to a member of a co-operative
   society
• Dividend paid out of an exempt income account arising from tax
   incentives enjoyed by a resident company under
    • ITA 1967 (e.g. reinvestment allowance, approved service project,
       venture capital companies)
    • Promotion of Investment Act 1986 (pioneer status, investment tax
       allowance, industrial adjustment allowance).
• Foreign income received by resident companies (except for companies
   involved in banking, insurance, sea and air transport) and unit trust.
• Dividend income paid by companies with credited balance in the sec 108
   account and have made irrevocable option to elect for single tier system
            Interest Income

• In case law, interest is defined as being
  compensation for delayed payment or
  payment by reference to time for the use of
  money.
• Interest is different from premium. Premium
  normally associates with capital risk while
  fixing the terms of contract.
             Interest Income

• Assessable under sec 4(c) or sec 4(a) of the
  ITA 1967. Assessable under sec 4(a) business
  income if
  – it is received from trading debts
  – it is received in the ordinary course of the
    business
  – it is earned by specialised industries like
    bank/insurance
   Derivation of Interest Income

• Interest income is taxable if
  – the income is derived /deemed to be
    derived from M’sia
  – the income is received in M’sia from
    overseas (for resident companies in air or
    sea transport, insurance or banking)
       Derivation of Interest Income
Interest is deemed to be derived from M’sia when:
 1. Payment is made by government /state government
 2. Interest charged as outgoing expenses against income
    accruing/derived from Malaysia
3. Payment by resident person for debt secured by any
    property or asset situated in Malaysia
4. Payment by resident person for money borrowed to
    employ/buy assets and that assets is used or held for
    the production of Malaysian derived income.
           Basis of assessment
– Past interest income: taxable in the year it first
  becomes receivable when it has been received [sec
  27(1)]
– Past interest income and overlapping: apportioned
  according to the relevant period on a time basis
  [sec 27(2)(a)]
– Past interest income, overlapping and part of
  income accrued > 5 years period: the whole
  income is taxable on the 5th year [sec 27(2)(b)].
           Basis of assessment

– Past interest income, whole amount received > 5
  years: income is taxable in the 5 years before the
  beginning of YA when DGIR was made known [sec
  27(2)(c)].
– Future interest income: taxable in the year of
  receipt [sec 27(3)]
                 Interest

Non resident:
• will be subject to 15% withholding tax on
  interest income (or any other rate
  determined by relevant DTA)
Resident individuals:
• 5% if interest being paid by approved
  financial institutions (except when the
  interest is exempted).
                 Deduction

• A strict & rigid Sec 33 (Wholly &
  Exclusively) test applies.
  Example:
 If a loan is obtained by a company for the
  purpose of lending the money to its employees
  (thus the co will get interest income), then
  interest expenses incurred on the loan is
  deductible/allowable against interest income.
                Exemptions

• List of interest income derived from Banks &
  Financial Institutions that exempted from
  income tax at page 112 - 114 (Jeyapalan’s
  book).
     Exempted Interest on Bond

                      Bond
Government
                  Companies                      Central Bank
EXEMPTED
                                         Bon Simpanan Malaysia
    Convertible
                  Non Convertible             EXEMPTED
    TAXABLE

                            Listed co. EXEMPTED
                                Non listed co.
                                         Not Rated TAXABLE
                                          Rated EXEMPTED
             Discount Income

• Assessable under sec 4(c)
• Definition: where a person acquired the bill of
  exchange ( or promissory notes) before maturity at
  an amount less than its face value. Profit accrued by
  holding the bill until maturity or sale before maturity
  is called as discount.
• Does not include : discount allowed by traders on
  purchase of goods or discount received from
  creditors for earlier payment
Derivation of Discount Income

 Discount is said to be derived from Malaysia if
 the bill of exchange is transacted in Malaysia
 and gives rise to profit. The profits from
 discounts are taxed only when it is realised
 (i.e. on maturity date/date of sales, whichever
 is earlier).
                Exemptions
Discount income received on
• Securities or bonds issued or guaranteed by
  the government
• Debentures other than convertible loan stocks
  approved by the securities commission
• Malaysian savings bonds issued by Bank
  Negara in the hands of individuals, unit trusts
  and listed closed-end fund
              Rental Income
• Definition: Sec 2 of ITA 1967
  – Any sum paid for the use or occupation of any
    premises or part thereof or for the hiring of
    any thing.
• Rental is assessable under sec 4(a) or 4(d).
  Based on IRB Ruling, rental income falls
  under sec 4(a) business income if taxpayer
  owns minimum unit of properties under any
  of the following categories:
                        Rental Income
                                                    No of units owned
Factory                                                  At least 1
Warehouse                                                At least 1
Commercial building/Office/shopping complex
•   whole complex                                        At least 1
•   std lot                                        At least 3 & total area
                                                    at least 1000 sq. ft.
Shop house                                            2 & situated in
                                                     commercial area
Resident property (house/condominium/ apartment)         At least 4
(not including property rented to employees)
Mixture of properties                                    At least 4
    Derivation of Rental Income
– Movable property: place the property is
  used OR place where business of lessor is
  carried on
     • Examples of movable properties are plant,
       machinery and motor vehicles
– Immovable properties : properties are
  situated in Malaysia
     • Examples of immovable properties are land,
       commercial building and residential properties
                     Basis of Assessment
• Rental income is assessed on receipt basis but
  it will be treated as gross income for the period
  when it first becomes receivable [ sec 27(1)].
• Past rental income, overlapping, time barred
  [sec 27(2)(a) to (c)]*
• Advanced rental is assessable in the year of
  receipt, for the period when the income first
  become receivable [sec 27(3)].
• Not including deposit : deposits are assessable in
  the year of conversion.
* Similar to derivation of interest income
            Rental Income

• Deductible expenses in relation to the rent
  incurred in a later period are not
  deductible in the later year period. Such
  expenses are deductible to basis period in
  which the income is assessable.
             Rental Income
Example:
Ho received rental income of RM 6,000 for the
  3 months period on 1/12/09. In the month of
  Jan 2010, he did some repair works at the
  cost of RM 2,000 on the rented property. In
  which Y/A the rental income would be
  assessable & in which basis period should
  repair cost be deducted?
              Rental Income
Answer:
• Rental income would be assessable in the
  year of assessment 2009 because advanced
  rental is taxable in the period when it is
  received.
• Repair cost would be deductible in the year
  of assessment 2009 although it is incurred in
  2010 because that cost is not incurred in
  production of income in year 2010.
              Rental Income
• Deductible expenses: Wholly & Exclusively test
• Examples:
   – cost of repairs & maintenance
   – insurance premium on fire/burglary for
     property
   – cost of supervision & rental collection
   – assessment and quit rent for the property
   – interest on mortgage
   – cost of renewing tenancy agreement
                  Rental Income
• Examples (continue):
   – cost of obtaining tenant to replace old tenant. Cost of
     obtaining first tenant is NOT ALLOWABLE, for instance
     advertising, legal expenses.
   – Cost incurred for pest control
   – Sewage charges
• Rent from each property is treated as a separate source of
  income or separate 3 groups (residential properties,
  commercial properties and vacant land)
• Rental payments of moveable property and technical
  services made to non-resident persons are subjected to 10%
  withholding tax. This is the final tax.
               Rental Income
• Taxpayer who derives gross rental income
  from an industrial building that is
  leased/rented out is eligible for expenses and
  capital allowances.
• If disposal of an industrial building resulted in
  a balancing charge, the balancing charge is
  added to adjusted rental income
• Rental loss is not allowed to carried forward
            Premium Income
• Definition: a form of once and for all payment
  made by the lessee as a consideration for the
  right to enter into a lease agreement or for the
  grant of the lease on immoveable properties.
• Generally, premium is held to be capital receipt.
• But it is assessable under sec 4(d), if the premium
  is received by a persons carrying on business of
  renting properties. Premium can also be paid by
  instalments.
          Premium Income
• Derivation of income: immovable properties
  are located in Malaysia.
• Only the landlord is assessable to tax
• For tenants, premium paid is not deductible
  expenses
                Royalty Income
•    Royalty is defined in the Act as
    1. Any sums paid as consideration for the use,
       or the right to use:
      •   copyrights, artistic/scientific works, patents, designs
          or models, plans, secret processes or formulae, or
          tapes for radio/television broadcasting, films
      •   know-how or information concerning technical,
          industrial, commercial or scientific knowledge,
          experience or skill
             Royalty Income

   Definition (continue)
   2. Income derived from the alienation of any
     property, know how or information
     mentioned in para (a) of this definition.
• When foreign enterprise derives royalty
  income from M’sia, the definition will differ
  according to Double Taxation Agreement.
  DTA’s royalty definition would prevail.
   Derivation of Royalty Income


• Royalty income is taxable if
  – the income is derived /deemed to be derived
    from M’sia
  – the income is received in M’sia from overseas
    (for resident individuals)
   Derivation of Royalty Income
• Royalty is deemed to be derived in M’sia for:
  – payment made by the Government/State
    Government
  – payment made during a basis year by an
    individual who is a resident for the same
    basis year
  – if royalty is charged as an outgoing expense
    against any income accrued in/derived from
    M’sia
    Deduction & Exemption
Deduction:
– The same rules applies (wholly & exclusively
  test and sec 39)
Exemption:
– Income RM 6,000 from royalty/payment in
  respect of publication, the use/right to use
  any artistic work (other than original
  painting), or royalty from recording
  disc/tapes.
                Exemptions
– Income of RM 12,000 from:
    • officially requested by MOE, MOHE or Attorney
      General’s Chambers for translation of books or
      literary works
– Income of RM 20,000 from:
    • royalty/ other payment for the publication, use/right
      to use any literary work or any original painting
    • Any musical composition
– Full exemption on cultural performances approved by
  the Minister
*Note: No exemption is available in respect of emoluments
  in the exercise of the individual’s official duties).
                Annuity Income
• Assessable under sec 4(e)
• Definition: a definite sum of money payable
  on a regular basis , either in perpetuity for
  life/fixed term under a contract, will or
  settlement
  – Capital installment is not annuity
  – Exempt: annuity income receive from Malaysian
    life insurers & takaful operators( i.e. life insurers &
    takaful operators whose ownership/membership
    are held in majority by Malaysian citizens.
            Basis of assessment
•  Gross income from annuity will be assessed in
  the year it first becomes receivable, when it is
  received. [sec 27(1)]
• If a person is entitled to the annuity income
  accruing in/derived from Malaysia, and is able
  to obtain receipt thereof on demand, the
  annuity is deemed to be received by him
  although it is not physically in his hands [sec
  29(1)]
               Pension Income
• Assessable under sec 4(e)
• Definition: a periodical payment made to
  individual who has permanently ceased to
  exercise an employment, either voluntarily or
  contractual.
• Payment of pension involves two parties:
  – Recipient: employee, his wife/child/relatives/
   dependants.
  – Payer: employer/successor of the employer
         Derivation & Exemptions
• Pensions are deemed to derived from M’sia if
   – paid by government/state government [s 17(1)]
   – paid from pension fund/under pension scheme/ by
     virtue of membership of a pension society AND the
     admin of the fund/scheme/ society is in M’sia *s17(2)+
   – the person paying the pension is resident in M’sia
     [s17(3)]
• Lump sum withdrawal is not subject to income tax as
  it is a capital receipt.
• Exemption : refer page 127 (Jeyapalan’s book).
            Other gains of profit
• Assessed under sec 4(f)
• A catch-all sweeping section with the
  requirement that the item included in its scope
  must be income from gains or profits ,which are
  ejusdem generis (i.e. of the same general class) with
  the preceding paragraphs [4(a) to (e)] though not
  falling precisely within any of them
• Example: alimony payment and sums payable under
  a separation order.

				
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