Learning Objective TAX COMPUTATION
TAX COMPUTATION • A tax computation is an adjustment of the net profit/loss as per audited accounts to income chargeable for tax purposes.
STEPS IN TAX COMPUTATION • NPBT (Net Profit Before Tax) • Adjusted Income • Statutory Income • Aggregate Income • Total Income • Chargeable Income
Income Statement Income 30,000 Less: Expenses 5,000 --------- NPBT 25,000 --------- Tax Computation + - NPBT 25,000 --------- If NPBT= Chargeable income then : All expenses are tax deductible All receipts (income) are taxable However, adjustments are required in nearly every case TAX COMPUTATION
STEPS TO ADJUSTED INCOME • Starting point of a tax computation is NPBT • Deduct income which are not taxable and income to be assessed as investment income • Add items which are not tax deductible to arrived at the adjusted income.
Income Statement Sales 23,000 Less: Salary 3,000 Depre 2,000 5,000 18,000 Add: Rental 7,000 --------- NPBT 25,000 --------- Tax Computation + - NPBT 25,000 Depre 2,000 Rental 7,000 27,000 7,000 7,000 ------------ Adj Inc 20,000 ----------- TAX COMPUTATION
TOTAL INCOME Aggregate Income (AI) Less: Current year business losses Permitted expenses (S 60(F)) Approved donations ( restricted to 5% of AI) Zakat (restricted to 2.5% of AI)** Total Income
CHARGEABLE INCOME/ TAX PAYABLE Total Income Less: Personal relief ( for resident individual) Chargeable Income Applying tax rates: First 500,000 @ 20%(paid up cap<= 2.5 m) Balance @ 28% Income tax payable
NET TAX PAYABLE/ REPAYABLE Income tax payable Less: Section 110 ( Dividend tax credit) Section 132 ( Bilateral tax credit) Section 133 (Unilateral tax credit) Net tax payable/ (Tax repayable)
TAX COMPUTATION Candidates have a weak understanding of : • Adjusted Income • Statutory Business Income • Aggregate Income • Unabsorbed Business Losses
TAX COMPUTATION • NPBT • Adjusted Income Add: Balancing charge Less: Capital allowances • B/f • Current year initial and annual allowance • Balancing allowance • Statutory Income Less: Unabsorbed business loss b/f Add: Non-business income (dividend/interest/rental) • Aggregate Income Less: Current year business loss • Chargeable Income
TAX COMPUTATION Statutory Income (SI) Less: - RA ( restricted to 70% of SI) - ITA (Tax Incentives) - Unabsorbed business losses b/f Net Statutory Business Source
INVESTMENT INCOME DIVIDENDS, RENTAL, ROYALTY AND INTEREST
TAX COMPUTATION • NPBT • Less: Rental separately assessed • Adjusted Income Statutory Income Less: Unabsorbed business loss b/f Add: Rental Aggregate Income Less: Current year business loss • Chargeable Income
Insurance Recoveries • Compensation • Gains from disposal of assets • Bad Debts recovered • Sales of scarp Interest • Bus or non bus • FSI or DSI • Exemptions • Deductions Other Income Dividends Rental
INCOME SEPARATELY ASSESSED • Non Business underS 4(c)-4(f)) should not be included as business income. Eg Interest , dividends, rental
Dividends- Source Dividends Paid, credited or distributed Resident Co Non Resident Co MSI FSI
Source – Change of Residence Status Dividends Paid, credited or distributed Non Resident Co :Year 1 Resident Co : Year 1 Resident :Year 2 Non Resident : Year 2 1st day after which management & control ceased in Malaysia On or after 1st day which management & control in Malaysia DEEMED FSI MSI
Source – Change of Residence StatusEg ABC Sdn Bhd is a resident Co in YA 2005 but a non resident in YA 2004. 1st day the control and management exercised in Malaysia is 30.6.2005. Dividends paid, credited or distributed on or after 30.6.2005 shall be deemed to be derived from Malaysia.
Dividend in Specie • Dividends in the form of shares or asset. • Value of net dividend = MV of the shares or asset
Dividends in Specie Dividends Shares (MV 720) Assets ( MV 360) Taxable Dividends 1000 500
Taxable Dividends • Dividends is taxed at gross Gross dividends = (net x 100/72) • Tax credit deducted at source of 28%. • Exempt dividends is without the tax credit.
Exempt Dividends • Tax exempt dividends • Dividends declared from exempt account under various tax incentives
Interest – Basis Period When received, tax in the period receivable. • Interest payable for 1.3.2004 to 28.2.2005 amounting to RM 1,200 is received on 6.4.2005. • Gross income for interest for the basis period ending 31.12. 2004 = 10/12 x 1,200 = 1,000
Rental – Basis Period • Period similar to interest. • Rent payable for 1.3.2004 to 28.2.2005 amounting to RM 1,200 is received on 6.4.2005. • Gross income for rent for the basis period ending 31.12. 2004 = 10/12 x 1,200 = 1,000
Rental in Advances27(3) Rule: When received treated as taxable income. Peter rents his house for RM 12,000 per annum for 2005 and 2006. Peter receives the RM 24,000 in 1.1.2005. The RM 24,000 is taxable in YA 2005.
Deductible: Repairs Cost of insurance (fire) Administrative: Supervision (Guard) Rent collection Lease (renewal) Replacement of furnishing Air conditioners, furniture [PR1/2004] Quit rent &assessment Interest Non deductible: Improvement / extension Lease (new / 1st time) Rental –s 4(d) Expenses
Rental –s 4(d) Income • Insurance recoveries: • Repairs of premises • Deposit Refunded (Payee) • Not taxable • Taxable when it becomes not refundable • Deposit Refunded (payer) • Not deductible
NON TAXABLE INCOME • Capital receipts (e.g. gains from sale of fixed assets ); • Gains on foreign exchange arising from non-trade transactions (e.g. repayment of long-term loans or advances, purchase of fixed assets); • Unrealized gains on foreign exchange arising from trade transactions; • Foreign-sourced income ( with exception) • Distributions received in respect of surplus assets of a company under liquidation;
NON TAXABLE INCOME • Compensation received from compulsory acquisition of land by Government or State Government where the land is held for long term investment purposes; • Income specifically exempted under the Act or by way of Ministerial Order. • Eg. Grant or subsidy received from Federal or State government
Assessable Gross Income • Market value of any stock taken for private purposes withdrawn from business for gifts or donation other than disposal – Section 24(2), (3) • Recovery of bad debt which has previously been allowed as a deduction - Sec 30(1) • Waiver of debts by creditors which pertains to any amount of expenditure previously allowed as a deduction – Sec 30(4)
Insurance Recoveries Receipts Capital Revenue • Trading stock. • Repairs to fixed assets. • Life or accident insurance of “keyman” which premiums are deductible before. Fixed assets
More likely revenue; Acquisition and replacement of contracts is normal incidents of the business Disposing of services Less likely; Not a normal incident of the business Disposal of capital asset ( Cripple the profit making structure) Termination of Agency Contract
Kelsall Parson Commission agent for manufacturers through agency contracts Cancellation of one among several contracts. The agreement had one year to run. Normal incident of the taxpayer business. Barr, Combie & Co Ltd TP manages ship 98% of the business comes from one contract which was terminated The contract relates to the profit making structure Termination of Agency Contract
Damages Types Loss of assets Loss of profit • Temporary “loss of use” of an asset - RR. • Physical damage to assets - CR. • Permanent loss of use or sterilization of assets - CR. • Making good for the loss of income or profit - RR. • “Fill a hole” in the profits of the recipient-RR.
Foreign Exchange Transactions Receipts Revenue Capital • Appreciation of capital asset not forming part of the assets employed as circulating capital in the trade. • Accrues to circulating capital and arises in the ordinary course of business.
Decision Tree On Deductibility Y Allowed by ITA (S33, 34, 34A, 34B) or Gazette Order Deductible N Y Not Deductible Prohibited by ITA (S39) N N Y Satisfies General Deduction Test (S33(1))
General Deduction Test “All outgoings and expenses wholly and exclusively incurred during that period by that person in the production of gross income from that source”
Conditions For Tax Deduction • Revenue expenses • Wholly & exclusively • Incurred • In the production of income from that source
General Deductibility Test Revenue Expenditure Capital Expenditure • Brings an asset or advantage or enduring benefit • Relates to fixed capital • Initial expenditure • Business structure • One-Off • Relates to circulating capital • Business process • Recurring
General Deduction Test • Outgoing & Expenses • Encompass business losses due to theft, defalcation of employees, bad debts and etc. • Not affected by accounting treatment. • Wholly & Exclusively • Direct purpose of the business. • Apportionment is reasonable. • Benefit to 3rd party irrelevant
General Deduction Test In The Production Of Gross Income Incurred • For the purpose of earning income • Pre-commencement expenses generally not allowed as deduction. • Legal liability exists--Paid, payable or becoming payable. • Includes undischarged accrued liabilities. • Excludes mere provisions.
Provision for warranties Provision for retirement benefits Deductibility Provisions Provision for Bad debts Provisions for stock obsolescence General Specific