Budget 2009 Proposal Affecting Individual and Companies

Budget 2009 Proposal Affecting Individual and Companies

1. a)Introduction of withholding tax on payment related to Section 4(f) profit or gains – Section 109F of Income Tax Act (ITA)

Where any person is liable to make payment to a Non-Resident in relation to any gains or profits falling under section 4(f) which is derived from Malaysia, a withholding tax of 10% has to be paid to the Director General of Inland Revenue within one month (due date) after paying or crediting such payment. A penalty of 10% on the tax payable will be imposed if the tax is not paid by the due date. The payer is also not allowed to claim deduction for the amount paid. Example of the Section 4(f) income such as commission payable or any fee payable on guarantee for loan.

Effective date: 1 January 2009

b)Review of withholding tax for Technical fees – Section 109B

Withholding tax on Technical fee includes reimbursements such as traveling cost, local hotel accommodation, food and other related expenses.

It is proposed that local hotel accommodation be excluded from the calculation of Gross Income to Non-Resident for withholding tax purposes.

Effective date: 1 January 2009

c)Withholding tax on payment of installation cost and operation of Plant & Machinery to Non-Resident – Schedule 3 para 2D

If no withholding tax is deducted on the above payment to non resident, the capital expenditure incurred in the installation and operation of Plant and Machinery will not be allowed to claim capital allowance.

Effective date: Date Finance Act 2008 coming into operation

d)Approved Technical training by Non-Resident – Section 109B

Income received under Section 4A(ii) of ITA by Non-Resident for conducting approved technical training is exempted from 10% withholding tax (Section 109B).

Approved Technical training is a training program approved by the minister in the field of:-

-ICT, Electronics & Life Sciences for Post graduate

-Post basic course for Nursing or allied healthcare

-Aircraft maintenance engineering

Effective date: 30 August 2008 to 31 December 2012

e)Withholding tax on interest – Section 109C

No more withholding tax for Resident individual who placed deposit in Bank / Financial institution licensed under Banking and Financial Institution Act 1989 or the Islamic Banking Act 1983.

Interest derived from deposit placed in a financial institution by a Resident individual is fully exempted from tax.

The proposal is effective from 30 August 2008

Increase Tax Rebate for Resident individual – Secrion 6A(2) ITA

Tax Rebate for Resident individual with chargeable income not exceeding RM 35,000 is increased from RM 350 to RM 400 for Year of Assessment (YA) 2009.

Effective date: YA 2009

Treatment for Director’s fee and Bonus received – Section 25(2) ITA

Gross income from employment in relation to director’s fee or bonus is receivable in respect of the whole or part of the relevant period. When the director’s fee or bonus is received it is treated as income of the individual in the basis period where the amount is received.

Effective date: YA 2009

Approved Donation made by Company – Section 44(6) ITA

Currently, approved donation made by individual or Company is allowable but restricted to 7% of the aggregate income of the Company or individual. Effective from YA 2009 the percentage allowed for Company is revised to 10%. There is no revision for donation made by an individual. Below is the summary of the approved donation allowable for individual and for the company.

Summary / Individual / Company
YA 2001 – YA 2006 / No limit / 5%
YA 2007 / No limit / 7%
YA 2008 / 7% / 7%
YA 2009 / 7% / 10%

Amendment of tax return – Section 77B, 91A, 103(1A) and 103(9)

Section 2, 93, 96(1) and 106(3) ITA

Effective from YA 2009, a person who has submitted tax return on time or on due dates that is:-

For Company within 7 months from the date following the close of the accounting period
For individual with no business source of income on 30 April in the year following the year of assessment.
Individual with business source of income on 30 June in the year following the year of assessment.

Is allowed to make amendment in an amended return once only within 6 months from the due date of submitting the tax return.

The person has to specify in the amended return the additional chargeable income, the tax payable or additional tax payable and other particulars as may be required by the Director General of Inland Revenue.

An increase tax of 10% will be imposed on the original tax or additional tax if the amended return is made within 60 days from the due date of submitting the return.

If the amended return is made between 61 days to 6 months from the due date of submitting the return, a further increase in tax of 5% will be imposed on the tax due on original or additional tax together with the 10% increased in tax. That is:-

Original tax / Additional tax X 10% X 5%

The payment of revised tax and relevant increase in tax will be due on the day the amended tax return is submitted to the Director General.

Any tax liability arise from amending the tax return within 60 days from the due date of submitting the return has not been paid within 60 days from the due date of submitting the return, a further 5% increase in tax on the unpaid sum will be imposed.

The Director General of Inland Revenue is deemed to have made on the day on which the amended return is furnished, an assessment or additional assessment in respect of that person.

Person who did not submit their tax return on due date or the return is submitted on due date but the Director General of Inland Revenue has issued an assessment under Section 91 of Income Tax Act (ITA) is not allowed to amend their tax return.

Example:

ABC Sdn. Bhd. financial year ended 31/01/2009 and submit tax return on due date i.e 31/08/2009. ABC Sdn. Bhd. made an amendment on YA 2009 tax return resulting an additional tax of RM 2,000.00 on 15/10/2009.

Amended tax return submitted between 01/09/2009 to 30/10/2009 (within 60 days)

Additional tax payableRM 2,000

10% increase in taxRM 200

Total tax payableRM 2,200

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If the tax has not been paid on 15/10/2009 and is due and unpaid after 30/10/2009, a further increase in tax of 5% will be levied. Therefore the total tax payable will be RM 2,200 + (RM 2,200 X 5%) = RM 2,310

Amended return submitted between 01/11/2009 to 28/02/2010 (within 6 months)

Additional tax payableRM 2,000

10% increase in taxRM 200

RM 2,200

Add: 5% increase in taxRM 110

Total Tax PayableRM 2,310

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The increase in tax for amending the tax return within 6 months from the due date of submitting the return is higher than the penalty provided in the Tax Audit Framework where the penalty is only 15% if the disclosure is made within 1 year after submitting the return. Total tax payable by using the above example is only RM2,000 X 15% = 2,300. The IRB is taking step to amend this provision to bring inline with the penalty imposed for amending the tax return.

Effective date: YA 2009

Notification of non-chargeability – Section 97A

Where in ascertaining the chargeable income of a person, it appears to the Director General that no assessment shall be made in respect of that person for any year of assessment by reason of no adjusted income, statutory income, aggregate income or total income, he may notify that person in writing that no assessment shall be made for that year of assessment and the computation with regard to it.

If that person is not satisfied with the assessment and computation made by the Director General, he has to make an appeal to the Special Commissioners of Income Tax within 30 days from the date of the notification by the Director General. Otherwise the assessment and computation for that YA will be considered as final and conclusive.

The above situation arise normally after tax audit or tax investigation where taxpayer has to ascertain whether any losses and capital allowance to be carried forward is within their expectation.

Effective date: 1 January 2009

Preventing person from leaving Malaysia – Section 104 ITA

Currently if a person has not paid the tax liability or failed to withhold the withholding tax paid to Non-Resident, the Director General can prevent that person from leaving Malaysia.

It is proposed that tax liability also include increase in tax due to under estimation of tax, increase in tax due to amending the tax return and withholding tax on gain or profit fall under Section 4(f) of the Non-Resident.

For a Company, “person” includes any person who is a director within the meaning of Section 75A.

Effective date: Date the Finance Act 2008 comes into operation

Small and Medium Enterprise (SME) – Section 107C (4A)

Currently, SME company is defined as a Resident company with a paid up capital in respect of Ordinary Shares of two million five hundred thousand ringgit (RM2,500,000) and less.

The companies do not have to file estimated tax for first 2 years of assessment after commenced operation. The tax rate for the first RM500,000 chargeable incomes for a year of assessment is at 20%.

The budgets proposed that, with effect YA 2009 a company will not be a SME if in addition to its definition:-

a)More than 50% of the paid up capital in respect of Ordinary Shares of the company is directly or indirectly owned by a related company

b)More than 50% of the paid up capital in respect of Ordinary Shares of the related company is directly or indirectly owned by the first mentioned company or;

c)More than 50% of the paid up capital in respect of ordinary shares of the first mentioned company and the related company is directly or indirectly owned by another company.

Related company means a company which has a paid up capital in respect on Ordinary Shares of more than RM2,500,000 at the beginning of the basis period for a year of assessment.

The budget also proposed that SME Companies incurred Capital Expenditure on Plant and Machinery are allowed to claim accelerated capital allowance of 100% within 1 year for special allowance on small value assets. There is no restriction on the claim for small value asset.

Effective date: YA 2009 to YA 2010

Power to substitute the price and disallowance of interest on certain transaction – Section 140A

Effective from 1 January 2009 a new law is introduced to curb transfer pricing between associated person resident or non resident in relation to transaction in acquisition or supply of property or service in the basis period for a year of assessment. The law required that the pricing of the transaction be at the arm’s length price.

The Director General is given the power to determine the price in respect of the transaction to reflect an arm’s length price if he believes the price fixed in the transaction is either less than or greater then the price which it might have been expected to fatch if parties to the transaction had been independent persons dealing at arm’s length.

The Director General is also given the power to disallow any interest, financial changes, other consideration payable for any losses suffered in respect of any financial assistance grant by a person to an associated person who is resident if the Director General is of the opinion that in the basis period for a Year of Assessment, the value or aggregate of all financial assistance is excessive in relation to the fixed capital of the associated person.

The transaction or financial assistance shall construe as a transaction or financial assistance between:-

a)Person one of whom has control over the other

b)Individual who are relative of each other; or

c)Persons both of whom are controlled by some other person

Rules to regulate the application of Section 140A will be issued by the Finance Minister.

Advance Pricing Arrangement (APA) - Section 138C

The new section allows the Director General to enter into an advance pricing arrangement with a person who carries out a cross border transaction with an associated person.

Effective date: 1 January 2009

Tax rate for Resident individual – Schedule 1, Part 1, Para 1

Tax rate for resident individual reduced by 1% for chargeable income between 35,001 and 50,000 and maximum 27% with chargeable income exceeding 100,000 in YA 2009 as per table below:-

Chargeable Income / Current Rate / Proposal
0 – 2,500 / 0% / 0%
2,501 – 5,000 / 1% / 1%
5,001 – 20,000 / 3% / 3%
20,001 – 35,000 / 7% / 7%
35,001 – 50,000 / 13% / 12%
50,001 – 70,000 / 19% / 19%
70,001 – 100,000 / 24% / 24%
100,001 – 250,000 / 27% / 27%
Exceeding 250,000 / 28%

Effective date: YA 2009

Tax rate for Non-Resident individual – Schedule 1, Part 1, Para 1A

Tax rate for Non-Resident individual is reduced from 28% to 27%.

Effective date: YA 2009

Award for long Service, Past Achievement or Service Excellence – Schedule 6, Para 25C

Award for Long Service, Past Achievement or Service Excellence to employee also include innovation or productive award.

The exemption for an employee is RM2,000 per year for perquisite (whether in money or otherwise) received.

For Long Service Award the employee must served with the same employer for more than ten years in order to qualify for the exemption.

Effective date: YA 2008

Reinvestment Allowance (RA)– Schedule 7A, Para 1, 1A,1B, 2(A), 7(b), 8(a), 9 & 11 of ITA

Currently Resident Company which incurred in the basis period for a year of assessment Capital Expenditure on a factory, Plant or Machinery used in Malaysia for the purpose of a “Qualifying Project” shall be given Reinvestment Allowance of an amount equal to 60% of the Capital Expenditure, if the company has been in operation for not less than 12 months. The Reinvestment Allowance will be clawed back if the asset in which RA was given is disposed of within 2 years. The qualifying capital expenditure of the acquirer is the residual expenditure of the asset if the asset is transferred from company within the same group. Incentive mutually exclusive to RA are companies awarded/claiming:

Pioneer Status
Investment Tax Allowance
Group relief for companies under Section 44A of the ITA
Deductions under any rules made under Section 154 of the ITA where those rules provide that RA should not apply to that company/person
exemption from tax on income under exemption orders made under paragraph 127(3)(b) or subsection 127(3A) of the ITA where those orders provide that RA not apply to that company/person

Qualifying project means:-

a)a project undertaken by a company, in expanding, modernising, or automating its existing business in respect of manufacturing or processing of a product or any related product within the same industry or in diversifying its existing business into any related product within the same industry;

b)a project undertaken by a company which is participating in industrial adjustment approved under Section 31A of the Promotion of Investment Act 1986, in expanding its existing business or modernising its production techniques or processes;

c)an agricultural project undertaken by a company in expanding, modernising or diversifying its cultivation and farming business excluding the business of rearing chicken and ducks; or

d)a project undertaken by a person in transforming his business of rearing chicken and ducks from an opened house to a closed house system as verified by the Minister of Agriculture

Budget 2009 proposed that:-

to qualify for RA, the resident company must be in operation for not less than 36 months instead of 12 months currently.
RA will be clawed back if the asset in which RA was given was disposed of within 5 years as against 2 years currently.
a company purchased an asset from a related company within the same group (controlled sales) will not be allowed to claim RA (currently the acquirer is allow to claim RA if he qualified for it)
non-qualifying activities continue to enjoy RA if qualifying period has commenced before YA 2009
deleting the word Processing from the definition of Qualifying Project
define the word “Manufacturing” in the definition of Qualifying Project it means:-

a)conversion by manual or mechanical means of organic or inorganic materials into a new product by changing the size, shape, composition, nature or quality of such materials;

b)assembly of parts into piece of machinery or product; or

c)mixing of materials by a chemical reaction process including biochemical process that changes the structure of a molecule by the breaking of the intra molecular bonds or by altering the spatial arrangement of atom in the molecule,

but does not include-

aa)the installation of machinery or equipment for the purpose of construction;

bb)a simple packaging operations such as bottling, placing in boxes, bags and cases;

cc)a simple fixing;

dd)a simple mixing of any products;

ee)a simple assembly of parts;

ff)any activity to ensure the preservation of products in good condition during transportation and storage;

gg)any activity to facilitate shipment and transportation;

hh)any activity of packaging or presenting goods for sale; or

ii)any activity that may be prescribed by the Minister, notwithstanding the above interpretation.

‘ “simple” generally describes an activity which does not need special skills, machines, apparatus or equipment especially produced or installed for carrying out the activity.’

Effective date: YA 2009

Section 108 account

The budget proposed that during the basis period of YA 2008 to 31December 2013 where a company received a tax discharged, remitted or refund from the IRB and the amount exceeded the Section 108 Balance or revised Section 108 Balance, the excess shall be a debt due to the Government. Such debt to the Government shall be due and payable on the last day of the seven month (due date) from the close of the accounting period of the company in which the tax is discharged, remitted or refunded. Where the amount of tax due is not paid on the due date, a penalty of 10% on the debt is imposed without any notice being served.

The above shall also apply to company with NIL Section 108 Balance or has disregarded the Section 108 Balance.

Effective date: date the Finance Act 2008 comes into operation

Tax rate for REIT (Real Estate Investment Trusts) income received – Para 6(1)(i), Schedule 1 - Part X

Unit Holders / Current (YA 2008) / Proposal Effective
(YA 2009)
i) Resident & Non Resident
individual
ii) Other local entities
(Club, Association, Hindu Joint
Family) / Withholding tax 15% Final / Withholding tax 10% Final
Non Resident company / Withholding tax 26% / Withholding tax 25%
Foreign institutional investor / Withholding tax 20% Final / Withholding tax 10% Final

Cost of dismantling an asset used for the purpose of a business – Schedule 3, Para 67C

It is proposed that when an asset used for the purpose of a business is disposed and pursuant to written law or agreement, that person has to incur cost for dismantling and removing the asset and subsequently restore the site on which the asset is located.

The cost will be allowed to be included in the Residual Expenditure (or written down value) of the asset provided that:-

a)the asset should not be use for any other business of that person or any other person.