MALAYSIA’S income tax law is comprehensive and is designed to catch all income with very few exceptions. You do not need to be in business to be taxed. Even ordinary individuals receiving casual, miscellaneous, isolated receipts could be caught within the income tax net.
Escaping from tax is only available for genuine gifts, receipts of a capital nature, windfall gains and certain types of foreign-sourced income received in Malaysia. Taking advantage of these exceptions will certainly invite a challenge by the Inland Revenue Board (IRB) because the burden of proof lies with the taxpayer.
In the current atmosphere, proving that a receipt is a gift is not easy. It must be genuine, and there should not be any consideration or expectation of any benefit in return. It should be made gratuitously, and it should be made out of love, affection and support to the donee, and the donor should have the capacity to make the donation, and the intention of the donation must be very clear.
Overall, the gift must be an act of generosity and expecting nothing in return. Similarly, a windfall gain is not easy to prove. It should be sudden, unexpected and should not be deliberate, nor should it be through an organised activity.
How is it taxed?
All casual miscellaneous income which does not fall within the other provisions in the Income Tax Act is likely to be caught under this “sweeping up” provision which states in Section 4(f) that all gains and profits not falling under any of the foregoing paragraphs 4(a) to 4(e) will be caught and taxed under income tax act. Although the words do not include special classes of income received by non-residents, the IRB in its public ruling has stated that similar types of income paid to non-residents will also be caught within this provision.
Malaysian tax residents will be taxed normally through their tax filings. Residents who are retired or who may not be filing tax returns since they are below the taxable threshold who receive one-off, isolated or miscellaneous, which brings them into a taxable position will have to file tax returns in that particular year. The nature of the income can be wide, and can include receipts such as commissions, one-off assistance, payment for providing guarantees for loans or transactions, introduction payments, facilitation fees and one-off service payments. It need not be received in cash, but also in-kind in the form of goods or services.
Non-residents who do not file tax returns in Malaysia will be caught through the withholding tax mechanism. The tax resident who pays the non-resident will have to withhold 10% of the payment as withholding tax and remit the amount to the IRB within one month from the date of payment or crediting. Failure to deduct will result in the payer not being eligible to claim a tax deduction and will still be liable for the unpaid withholding tax together with any late payment penalties if the payment is made after the one-month period.
However, the payer need not deduct the withholding tax if he has proof that the non-resident is bringing such income to tax in their home country as business income. If this benefit is to be invoked, the payer must make sure he has the necessary documents such as the non-residents audited accounts, tax filings, business registration records, etc. In normal circumstances, this is not easy to get from the non-resident and, consequently, it is safer for the payer to deduct the withholding tax where the non-resident is unable to provide the necessary documents to prove that he is bringing the income to tax as business income in his home country. Any gains and profits falling under Section 4(f) received by a non-resident from a Labuan offshore company is tax exempt.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).