Evaluating The Tax Environment And Planning In Malaysia Accounting Essay

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There are two important agencies responsible to collect tax in this country known as Inland Revenue Board of Malaysia (IRBM) and The Royal Custom and Excise Department. Tax is important for a country to obtain income in order to provide public services and build good infrastructure.

1.1 Malaysian tax environment

Income of any person including a company, accruing in or derived from Malaysia or receive in Malaysia from outside Malaysia is subject to income tax (mida.gov, 2010). The Malaysian's law governing income taxation is the Income Tax Act 1967 (Act 53/ 1967). There are many types of income subject to tax such as business, employment, dividend, interest or discounts, rents, royalties or premiums, pensions, annuities or periodical payments.

1.1.1 Scope of charge

A topic must fall surrounded by the ambit of 'scope of charge' as provided in s 3 of the act in order to the liable to income tax such section 3 of the Act provides:

"Subject to and in accordance with this Act, a tax to be known as income tax shall be charged for each Year Assessment upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia." (Choong, 2008)

Section 3 sets out two conditions where income tax is normally liable imposed on a territorial basis only for the income accruing in or derived from Malaysia. Secondly, resident individuals and other non-corporate entities are always taxed on foreign-sourced income remitted into Malaysia. Even though, foreign-sourced income received by resident companies is not subject to tax even if such income is remitted to Malaysia. Income tax would be compulsory by indication to a Year Assessment upon a person's income and such person is known as a chargeable person.

1.1.2 Sources of income

The following sources of income are liable to tax under section 4 as follow:

Gains and profits from a trade, professional and business

Gains or profits from an employment (salaries, remunerations, etc)

Dividends, interests or discounts

Rents, royalties or premiums

Pensions, annuities or other periodic payments

Other gains or profits of an income nature

Special classes of income on which tax is chargeable

Section 4A notwithstanding the provisions of s 4 and subject to this Act, the income of a person not resident in Malaysia for the basis year for a YA in respect of:

Amounts paid in consideration of services rendered by the person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any plant, machinery or other apparatus purchased fro, such person.

Amounts paid in consideration of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme.

Rent or other payments, not being payments of film's rentals, made under any agreement or arrangement for the use of any moveable property.

Chargeable income is arrived at after adjusting for allowable expenses incurred in the production of the income, capital allowance and initiatives where applicable. Section 34 of the Income Tax Act 1967 allows specific provisions for bad or doubtful debts. However, no deduction for book depreciation is allowed although capital allowances are granted. Unabsorbed business losses may be carried forward indefinitely to offset against business income.

1.2 Nature and purpose of taxation

A tax is recognized as income tax shall be charged for each year of assessment (YA) upon the income of the resident which is derived inside or outside of Malaysia. However, effective 2004, income received in Malaysia from over sea sources is exempted from paying Malaysian tax. For handling this kind of transaction, a system must be developed to make the transactions much easier and effective.

1.2.1 Nature of taxation

According to Yeo (2002), Malaysian Taxation consists of direct taxes and indirect taxes.

Direct taxes

According to Goh (2010), in Malaysia, taxing income is under the main legislation of The Income Tax Act 1967 (ITA). Malaysian income tax is imposed on a territorial, not worldwide, basis. Effect from YA 2009, the current corporate tax rate is 25%. However, the applicable tax holidays, incentives and exemptions can significantly reduce the effective tax rates. A single-tier tax system has been in force from YA 2008 with the elimination of the imputation system.

Indirect taxes

According to Goh (2010), the body that manages of indirect taxes in Malaysia is The Royal Customs and Excise Department Malaysia (Customs). These are the types of tax that included in indirect taxes:

Customs duty

Customs duties are levied upon specified goods imported into or exported from Malaysia and are to be paid by the importer or exporter, as the case may be. The relevant rates are set out in the Customs Duties Order 2007 PU (A) 441/2007 whereas valuation of the goods would be in accordance with the Customs (Rules of Valuation) Regulations 1999 PU (A) 507/1999 giving effect to the WTO Valuation - WTO Guidelines.

Excise duty

Excise duties are levied upon specified goods manufactured in or imported into Malaysia.

Sales tax

Sales tax is charged and levied on all taxable goods:

* manufactured in Malaysia and sold, used or disposed of, by any person who is, or is

required to be, licensed under the Sales Tax Act 1972; or

* imported into Malaysia by any person for home consumption.

The minister of finance has prescribed the rate of sales tax to be levied, ranging from 5% to 15% of the value of the goods or other applicable rates.

Service tax

Service tax is payable on any taxable service provided by any taxable person, that is, a person carrying on the business of providing such taxable service. The rate of tax is 5%.

Currently, income tax is assessed on the income earned in the preceding year according to the Self-Assessment Systems (SAS). A person obtains gains from Malaysia can either be taxed under the Income Tax Act 1967 or the Real Property Gains Tax 1976 depending on the nature of the gains obtained.

1.2.2 Purpose of taxation

According to comperativetaxation.treasury.gov (2010), the main purpose is to finance the government expenditure. Most of the government income comes from tax. No government in the world can operate its administrative office without funds and it has no such system incorporated in itself to generate profit from its performance. According to treasury.gov.my (2010), the government of Malaysia had distributed the money that they had collected through tax into the ministry in the cabinet. Generally, it had been known as budget that will be debated in the parliament during October every year. There are many ministries that exist like Ministry of Education, Ministry of Tourism, Ministry of Health and many more.

For example, government had set aside RM 899 million to Ministry of Tourism to done some promotion and increase the quality of tourism infrastructure to attract tourist outside from Malaysia. Government also gives priority to home stay and eco-tourism program. As a return, the money that the tourist spends in Malaysia can increase the currency of Ringgit Malaysia.

On the other hand, government also helps private company's project by providing basic infrastructure in order to be more competitive in the market. For example the development of MATRADE centres construction of 6 UITM campus and Customs Complex in Bukit Kayu Hitam. The government also set aside RM 2.4 million for Ministry of Information, Communication and the Art and to implement 'High Speed Broadband' in order to stabilize Information Communication Technology (ICT) sector. Since that Malaysia is on its track to become developed country, broadband penetration should be upgraded.

1.2.3 Conclusion

As a conclusion, effective from the year of assessment 2004, income received in Malaysia by any person other than a resident, company carrying, banking, insurance, sea or air transport for a year of assessment derived from sources outside Malaysia is exempted from tax. By implementing tax system in the government, it can help the economy and giving good facilities to the tax payers.

Scenario 1 (Personal Tax Liabilities)

Encik Daniel had been working as a manager in a private company since 1st December 1992. He served on that company until he was retired on 30th June 2009. He received payments and benefits while him still in an employment and after his retirement by the company. Puan Sara is Encik Daniel's wife and she is unemployed. Self Assessment System stated tax payers need to compute their own income tax liabilities in the current year as well while he submits his return to tax authorities in the following year. Here, we are providing the computation of the income tax payable by Encik Daniel and Puan Sara for the year assessment 2009.

Encik Daniel

Income Tax Computation

Year Assessment 2009

RM

RM

RM

First Company ( 1st January - 30th June 2009)

S 4 (b) Employment Income

S 13 (1) (a)

Gross Salary (8 600 + 300) / 0.89 = 10 000

60,000

Gratuity ( Exempted)

Nil

60,000

S 13 (1) (b)

Watch

Exempted

Furnishing (140 x 4)

560

Medical Expenses

Exempted

Holiday Package :

Air Fares (13 000 - 3 000)

10,000

Accommodation

Exempted

10,560

S 13 (1) ©

13 (1) ( c )

Lower of

1 200 x 4 = 4 800

(30% x 60 000) x 4/6 = 12 000

4,800

S 13 (1) (d)

Withdrawal from Unapproved Fund

Employees Portion

40,000

Interest Earned

10,000

50,000

125,360

Second Company (friend) (1st August - 31st December 2009)

S 4 (b) Employment Income

S 13 (1) (a)

Director fees (10 000 x 5)

50,000

Entertainment allowance ( 1 000 x 5)

5,000

55,000

S 13 (1) (b)

Mobile phone

Exempted

Motor car (5 000 x 5/12)

2,083

Driver (600 x 5)

3,000

Servant (400 x 4)

1,600

Gardener (300 x 4)

1,200

7,883

S 13 (1) ( c )

August (Hotel) (250 x 31)

7,750

Unfinished House (2 000 x 4)

8,000

15,750

78,633

Aggregate Income

203,993

Less : Approved Donation

(2,000)

Total Income

201,993

Less : Relief

Reliefs

Self

8,000

Medical expenses for his parents

4,500

Basic supporting equipment - Wheel chair

1,100

Medical examination

500

Purchase of books

900

Wife

3,000

Children

14,000

Life Insurance Premium and Employees Provident Fund

6,000

(38,000)

Chargeable Income

163,993

Tax on first RM 150 000

27,825

Tax on next RM 13 993 at 27%

3,778

Income tax payable

31,603

Puan Sara

Income Tax Computation

Year Assessment 2009

RM

RM

S 4 (d) Rental Income

Monthly rental (900 x 12)

10,800

Less : Expenses

Installation of kitchen cabinet

Nil

Repairs and maintenance of the house

1,200

Interest on loan

5,000

Fire insurance

900

Quit rent

700

(7,800)

Aggregate Income

3,000

Less : Approved Donation

(500)

Total Income

2,500

Less : Relief

Self

8,000

Computer

3,000

(11,000)

Chargeable Income

Nil

Encik Daniel and Puan Sara

Income Tax Computation

Year Assessment 2009

Joint Assessment

RM

RM

Income :

Encik Daniel

201,993

Puan Sara

2,500

Aggregate Total Income

204,493

Less : Reliefs

Self

8,000

Wife

3,000

Computer

3,000

Children

14,000

Medical Examination

500

Medical expenses for his parents

4,500

Basic supporting equipments - wheel chair

1,100

Purchase of books

900

Life Insurance Premium and Employees Provident Fund

6,000

(41,000)

Chargeable Income

163,493

Tax on first 150 000

27,825

Tax on next 13 493 x 27%

3,643

Income Tax Payable

31,468

According to Choong (2008), when a taxpayer submits the return form for YA 2008 in the YA 2009, the tax benefits accorded to him is what is proposed in the 2008 Budget on 7 September 2007, which has been subsequently gazette as the Finance Act 2007 (Act 683/2007). Individuals without business source like Encik Daniel suppose to use BE Form and the deadline for submitting his tax return for the year assessment 2009 is 30th April 2010. The scheduler tax deductions will be made from his monthly salary from employment. Without regards to the business sources, the IRBM will issue the tax installment scheme with six bimonthly installments. Each installment should be paid within 30 days of the due date. The due dates for paying the balance of tax of the year assessment 2009 are 30th April 2010. The timeframe for a valid appeal against an assessment to the IRBM within 30 days of the deemed assessment on submission of the tax return. If the Inland Revenue Board cannot come to an agreement with Encik Daniel, the appeal will be forwarded to the Special Commissioners of Income Tax for determination.

There is several tax planning opportunities within the scenario. Firstly, the tax escaping tactic available to taxpayer is retirement savings. Encik Daniel can take the advantage of the benefits provided in the tax law by investing in retirement plans. Deduction for education expenses also an opportunity within the tax payer. Other than that, Encik Daniel can use the tax benefit for paying the health costs. Many individuals go without health insurance but employees and the self-employed can use the tax deduction for Health Savings Accounts and self-employed health insurance to provide medical coverage for themselves and their families. Below, there are some planning opportunities that Encik Daniel supposes to take attention.

Based on our computation for Encik Daniel's tax for the year assessment of 2009, they are two options for him to follow. First, comparing between join assessment and separate assessment, Encik Daniel are recommended to use join assessment with Puan Sara. According to result on our computation, by using the join assessment Encik Daniel has to pay RM 31 468 which is less than using separate assessment that Encik Daniel need to pay RM 31 603 while Puan Sara Nil.

On the other hand, he also can implement for separate assessment, which is we recommended if Encik Daniel spending more on a certain needs by having the more relief items in his assessment such as:

Total relief of medical expenses for his parents is RM 4 500, the maximum relief is RM 5 000 so then, we suggest to Encik Daniel paid RM 500 to the nursery for his parents.

We recommended Encik Daniel to further his study to the higher level. If he already got Masters go for the Doctorate level, based on his previous qualification. So, he will get RM 5 000 relief.

By further his studies, Encik Daniel qualified to get additional RM 100 relief with purchase any books or magazines for his education purposes.

Encik Daniel also can absorb the cost of the computer purchases from Puan Sara to him assessment. Here, Encik Daniel got relief of RM 3 000

He also can start to deposit on SSPN account for the future of his fourth child. He will get RM 3 000 relief.

To fulfill his free time, he should to have some recreation activity such playing golf. He can purchase golf equipment and get the total relief of RM 300

For his children's future, we advise Encik Daniel to buy education and medical insurance for them and he succeed to get RM 3 000 relief.

Suggest Encik Daniel to perform his Zakat or Fitrah in order to entitle him to get the rebates based on the amount incurred.

Encik Daniel

Income Tax Computation

Year Assessment 2009

RM

RM

RM

First Company ( 1st January - 30th June 2009)

S 4 (b) Employment Income

S 13 (1) (a)

Gross Salary (8 600 + 300) / 0.89 = 10 000

60,000

Gratuity ( Exempted)

Nil

60,000

S 13 (1) (b)

Watch

Exempted

Furnishing (140 x 4)

560

Medical Expenses

Exempted

Holiday Package :

Air Fares (13 000 - 3 000)

10,000

Accommodation

Exempted

10,560

S 13 (1) ©

13 (1) ( c )

Lower of

1 200 x 4 = 4 800

(30% x 60 000) x 4/6 = 12 000

4,800

S 13 (1) (d)

Withdrawal from Unapproved Fund

Employees Portion

40,000

Interest Earned

10,000

50,000

125,360

Second Company (friend) (1st August - 31st December 2009)

S 4 (b) Employment Income

S 13 (1) (a)

Director fees (10 000 x 5)

50,000

Entertainment allowance ( 1 000 x 5)

5,000

55,000

S 13 (1) (b)

Mobile phone

Exempted

Motor car (5 000 x 5/12)

2,083

Driver (600 x 5)

3,000

Servant (400 x 4)

1,600

Gardener (300 x 4)

1,200

7,883

S 13 (1) ( c )

August (Hotel) (250 x 31)

7,750

Unfinished House (2 000 x 4)

8,000

15,750

78,633

Aggregate Income

203,993

Less : Approved Donation

(2,000)

Total Income

201,993

Less : Relief

Self

8,000

Medical expenses for his parents

5,000

Basic supporting equipment - Wheel chair

1,100

Education fees

5,000

Medical examination

500

Purchase of books

1,000

Computer

3,000

Net deposit in Skim Simpanan Pendidikan Nasional

3,000

Purchase of sports equipment

300

Wife

3,000

Children

14,000

Life Insurance Premium and Employees Provident Fund

6,000

Education on medical insurance

3,000

(52,900)

Chargeable Income

149,093

Tax on first RM 100 000

14,325

Tax on next RM 49 093 at 27%

13,255

Income tax payable

27,580

Puan Sara

Income Tax Computation

Year Assessment 2009

RM

RM

S 4 (d) Rental Income

Monthly rental (900 x 12)

10,800

Less : Expenses

Installation of kitchen cabinet

Nil

Repairs and maintenance of the house

1,200

Interest on loan

5,000

Fire insurance

900

Quit rent

700

(7,800)

Aggregate Income

3,000

Less : Approved Donation

(500)

Total Income

2,500

Less : Relief

Self

8,000

Chargeable Income

Nil

Encik Daniel and Puan Sara

Income Tax Computation

Year Assessment 2009

Joint Assessment

RM

RM

Income :

Encik Daniel

201,993

Puan Sara

2,500

Aggregate Total Income

204,493

Less : Reliefs

Self

8,000

Medical expenses for his parents

5,000

Basic supporting equipment - Wheel chair

1,100

Education fees

5,000

Medical examination

500

Purchase of books

1,000

Computer

3,000

Net deposit in Skim Simpanan Pendidikan Nasional

3,000

Purchase of sports equipment

300

Wife

3,000

Children

14,000

Life Insurance Premium and Employees Provident Fund

6,000

Education on medical insurance

3,000

(52,900)

Chargeable Income

151,593

Tax on first 150 000

27,825

Tax on next 1 593 x 27%

430

Income Tax Payable

28,255

2.1 Partnership

According to Daft (1997), a partnership is an unincorporated business owned by two or more people. People who involve in partnership will share responsibilities and capital and will contribute their expertise. All of this can be specified in the agreement between both parties to avoid misunderstandings and to ensure that the business run smoothly. However, it doesn't mean that agreement is a must in order to form partnerships.

Law governing tax

Subsequent to allowing for s 2 of the Act and the case laws precedence, the following factors need to be present before a partnership is thought to exist:

carrying on business;

sharing of rights and responsibilities;

a view to profit;

element of risk and reward for each partner

The presence of a partnership agreement is convincing for the existence of partnership but this is never definite. Although every now and then a person may be called a 'salaried partner', he would be accessed on employment income if there exist a master and servant relationship.

2.2.2 How the partnership is taxed

According to Yeo (2002), as a partnership is not a "person", no assessment can be raised on the partnership but each individual partner is assessed on his share of the partnership income. It means that the partnership is taxed individually. The computation of partnership income is the same as that of computation for a business source except that no deductions are allowed for partners' wages and interest payable on a partner's capital. Meanwhile, the private expenses charged to the partnership accounts in arriving at the provisional adjusted income of the partnership.

2.2 We are providing the computation for NS Educational for the year of assessment 2006.

Income Tax Computation

NS Educational Partnership

Year Assessment 2006

RM

RM

Partnership (1.1.06 to 31.12.06) YA 2006

Net profit per account

125,700

Add: (Non-allowable expenses)

Private use of car by Siow (20% x RM12,000)

2,400

Donation

19,000

Depreciation

24,000

Interest on capital

10,800

Trade exhibition

-8,700

Partners' salaries

150,000

197,500

Provisional adjusted income

323,200

Less:

Partners' salaries

150,000

Interest on capital

10,800

Private use of car by Siow (20% x RM12,000)

2,400

-163,200

Divisible income

160,000

b) Computation of each partner's income from the partnership for the year ended 31 December 2006

The profit sharing ratio between Ng and Siow for:

1.1.2006 - 31.3.2006

1:01

1.4.2006 - 31.12.2006

3:02

1 January - 31 March 2006 ( 3 months)

Ng

Siow

Total

Profit sharing ratio

50%

50%

RM

RM

RM

Private expenses

-

600

600

Salary

22,500

15,000

37,500

Interest on capital

1,500

1,200

2,700

Divisible income

20,000

20,000

40,000

1 April - 31 December 2006 ( 9months)

Profit sharing ratio

60%

40%

Total

RM

RM

RM

Private expenses

-

1,800

1,800

Salary

67,500

45,000

112,500

Interest on capital

4,500

3,600

8,100

Divisible income

72,000

48,000

120,000

Less

Approved donation

-7,800

-5,200

-13,000

Annual allowance

-5,400

-3,600

-9,000

Statutory income

174,800

126,400

301,200

2.3 Tax Planning Opportunities for Individual with Business Income

According to Neiman (2010), as a self-employed individual, you have a number of income tax planning opportunities. Here are some you may wish to consider:

2.3.1 Shifting and Timing Income

Shifting income to family members is one of the taxes planning opportunities. It is an advantage for people who run its own business to shift their income to a family member who is in a lower marginal tax bracket. For example, your little brother income is lower than your income; you may shift the income to your little brother in order to reduce your tax. Your family member may benefit from the increased income and you may benefit by the decreased tax liability. It's also possible that the overall amount of federal income taxes paid by the two of the family members would be lower. IRBM, the bodies that responsible to collect the tax can come out with question about the unreasonable amount of compensation paid to a family member, considering the services actually provided by the family member. That is something that you must be aware.

As a self-employed taxpayer, you also have greater control and flexibility on timing the receipt of your income. This means that you have more control when you pay tax on the income.

2.3.2 Planning Retirement

The second tax planning opportunities is determining a retirement plan. If you're working by yourself and have no employees, a retirement account to grow tax deferred will be created in order for you to place pre-tax Ringgit Malaysia (RM) until withdrawal. On another case, if you have employees, your business may have to provide coverage for them as well. It depends on your specific circumstances on what types of retirement plan that your business should be create.

2.3.3 Reviewing Employee Benefit Plans

Besides retirement plans, there are other employee benefit plans--such as cafeteria plans and medical benefit plans. The employer may wish that their business can create one or more such plans. In order to maintaining and attracting the employees, the employee benefit plans play important functions. Sole proprietors may also gain certain limited benefits under these plans.

2.3.4 Considering Business Expenses and Other Deductions

As the business owner, you have to make sure your business is taking advantage of all of the deductions it's entitled to, including deductions for certain startup costs. For example, a deduction of the expenses for a business trip even though you are on vacation. One major area of concern for many self-employed individuals is the high cost of health insurance. Fortunately, some of your health-care related expenses may be tax deductible. For example, you may be entitled for the self-employed health insurance deduction, which would enable you to deduct the cost of health insurance that you provide for yourself, your spouse and your children.

2.4 Conclusion

Another possible tax planning strategy applies to partnerships that anticipate a loss and at the end of each tax year, partnerships file the informational Form 1065 (Partnership Statement of Income) with the IRS, and then report the amount of income that accrued to each partner on Schedule K1. This income can be divided in any number of ways, depending on the nature of the partnership agreement and in this way; it is possible to pass all of a partnership's early losses to one partner in order to maximize their tax advantages.

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