Joe Ee Lee

How To Reduce Your Tax Payables

Through the years, taxes are perceived as one of the main cost of businesses. Taxpayers and business owners have been paying more attention to topics on tax savings, acknowledging the importance of tax planning and how this may have an impact on their budgets and cash flows.

Due to the ever-changing tax policies, it is of importance that taxpayers and business owners engage and work closely with tax experts. Careful considerations should be given to each business transactions, which leads to that million-dollar question – What is the tax impact?

Even though the amount of tax savings may not be apparent at times, the long-term savings is worth the hassle. Not to mention, being compliant with the Income Tax Act 1967 and the other tax policies in Malaysia, avoiding being penalized and fined for non-compliance is definitely one of the major cost savings!

Here are some tips for income tax savings that you may consider for your businesses:

The Basics: Making all the allowable tax deductions

Generally, allowable tax deductions, reliefs or allowances will reduce your taxable income. Here are some of the key issues to consider:

Debt financing may be a better option as interest expenses may be tax deductible.

Note: The interest expense is only deductible provided that the money borrowed is for:

  1. For the production of gross income (eg: for working capital)
  2. For assets used or held for the production of gross income.

(Source: Section 33(1)(a) of the Income Tax Act 1967 (“ITA”))

Depreciation and capital expenses are generally disallowed for tax deductions in Malaysia. However, expenses incurred on qualifying expenditures used in the production of gross income is allowed for deductions in the form of capital allowances – subject to Schedule 3 of the ITA.

  • Has this been fully utilized by the company?
  • Is the company eligible for claiming accelerated capital allowances? (eg: small value assets)

There have been various incentives offered by the Malaysian government to promote certain industries and activities. Companies may consider applying for these incentives to reduce their tax liabilities. Some of the common tax incentives may include the followings:

  • Reinvestment allowances
  • Pioneer status
  • Investment tax allowances

Note: There are certain terms and conditions attached to these tax incentives. During a tax audit, the IRB may make the necessary tax adjustments and impose penalties or fines if a Company is found to be in breach of these terms and conditions. It is therefore advisable for Companies to:

  • Conduct an annual review on these terms and conditions to ensure that they have been adhered to.
  • Keep proper records and documentations so that they can be readily available to the IRB in the event of an audit or investigation.

Being charitable is a part of tax savings too!

There are several approved donations or gifts where you may be granted a deduction from your aggregate income. You may check for the list of deduction here

One of the common donations made are to approved institutions or organizations. Take note however, that ONLY CASH DONATIONS (gift of money) are allowed for deduction. Please obtain and retain the original receipts from the approved organizations or institutions for tax deduction purposes. 

To check for the list of approved organisations or institutions under Section 44(6) of the ITA 1967, please click here.

An arrangement to declare director fees or contractor fees may be considered to utilize the effective tax rates.

Review your accounts and identify if the following items had been taken into consideration:

  • Are there any obsolete inventories to be written-off?
  • Are there any expenses to be accrued that have been omitted from the accounts?
  • Are there any long and outstanding debts? Are these debts recoverable?

Note: As the above tax deductions can only be made after certain criteria have been met, do ensure that the relevant records and documentations are retained properly in the event of a tax audit.

Consider the impact of withholding taxes if there has been payment made to non-residents.

The following may be claimed for the usage of company motor vehicle:

  • Capital allowances
  • Petrol or mileage claims
  • Repair and maintenance of motor vehicles
  • Insurance and road tax


  • A clear distinction should be made between business and private use of the motor vehicles.
  • Where motor vehicles are provided to directors or employees of the Company, the enjoyment of these benefits may need to be disclosed in the statement of remuneration (EA Form).

The Intermediate: Taking note on income that are taxable

Section 24 of the ITA now provides that any sum received in the course of carrying out a business constitutes income which should be duly subject to tax in that year.

Any sum received in advanced will be taxed in the year of the receipt, even though there have been no debts arising, or services have not been performed or property has not been used or enjoyed yet – where the sum may be wholly or partially refundable.

This however does not include security deposits or refund deposits.

Companies may need to put this into consideration while drafting their sales proposals, agreements etc.

Companies that provide loans or advances to directors are subject to deemed interest under Section 140B of the ITA.

Companies should take this into consideration before providing any advances or loans to directors. Where advances or loans had been granted to the directors, plan and keep track on repayment terms to avoid long outstanding amount which may impact the taxability of the deemed interest.

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Capital Statements in Malaysia

What is a Capital Statement?

A capital statement, also known as “penyata modal” in Bahasa Malaysia, is a tool used by the Inland Revenue Board (“IRB”) in Malaysia to detect tax under-reported by an individual. The capital statement comprises two forms:

Usually, individuals are required to prepare the above for a period of 5 years, including the “base year” – the opening balance of an individual’s assets and liabilities.

Who is targeted for capital statements?

How Does a Capital Statement Work?

The mechanism behind a capital statement is that your income or earnings should either be spent, or saved. Your reported income or other sources of income (eg: capital gains) should be able to substantiate your spending habits and support your growth in your net worth.

For example, you reported an income of RM100,000 during the year. In the same year, you:

Year 1
DetailsAmount (RM), Year 1


Motor Vehicle

Fixed deposit

Branded bag

Savings account






Net capital90,000
Less: Opening balance
Net increase in assets90,000
Add: Expenses (food etc.)10,000
Apparent income100,000
Less: Reported income(100,000)
Total discrepancies

In a perfect scenario, there should be no discrepancies as shown above – all spending or savings has been appropriately disclosed and income has been fully disclosed and reported.

Your reported income of RM100,000 is enough to substantiate the net increase of assets of RM90,000 and expenses of RM10,000.

Let us have a look at another scenario.

In the following year (Year 2), your reported income remains the same at RM100,000. In Year 2, you:

Year 2
DetailsAmount (RM), Year 1Amount (RM), Year 2



Motor Vehicle

Fixed deposit

Branded bag

Savings account












Less: Liabilities (Loan)


Net capital90,000210,000
Less: Opening balance


Net increase in assets90,000120,000
Add: Expenses (food etc)10,00015,000
Apparent income100,000135,000


Fixed deposit income

Reported income






Total discrepancies34,000

Based on this scenario, your apparent income is RM135,000 but it can only be proved by the reported income of RM100,000 and fixed deposit interest of RM1,000. There is a shortfall of RM34,000. Your total income is insufficient to prove the net increase in assets of RM120,000 and expenses of RM15,000.

How did you obtain the extra cash of RM34,000? Have all income or gains been appropriately disclosed in the capital statement?

From the illustrations above, this is an example of how the IRB estimates your income by analysing your net worth and spending, eventually determining if there is indeed an under-statement of tax reported.

How to Prepare a Capital Statement?

A capital statement is prepared based on cash basis instead of the usual accounting accruals concept. The methodology is to understand the flow of cash of an individual.

The concept of a capital statement may seem simple. However in reality, preparing a capital statement is a very tedious and complex exercise. A capital statement specialist deals with voluminous data, tracing and verifying transactions, including exercising professional judgement on the treatment of the transactions (as circumstances varies between individuals).

Due to the complexity and its specialised nature, many would engage a professional to prepare the capital statement and to represent them in negotiations with the IRB.

What to Include in a Capital Statement?

Below is a non-exhaustive summary and examples of items to be included in the capital statement. 

Please note that individuals are required to include in the capital statement the assets, liabilities, income and expenses of their spouse(s) as well. Below is the list of items – of the individual and spouse(s) and its examples.

  • Capital injected
  • Balance of current accounts
  • Profit or loss
  • All properties acquired and owned by the individual under investigation, spouse(s), including properties jointly owned; or
  • Any land/properties acquired, or amount paid by the individual for immediate family members, third parties etc.
  • Quoted shares
  • Unquoted shares
  • Trust accounts etc.
  • Savings accounts
  • Current accounts
  • Investment linked accounts
  • Fixed deposits
  • Cash in safe deposits etc.
  • Furniture or appliances for long term personal use (eg: fitness machines, laptops, handphones, computers, PDA, televisions etc.)
  • Motor vehicles acquired and registered under the name of the individual under investigation and spouse(s)’s;
  • Motor vehicles purchased by the individual for immediate family members, third parties etc.
  • Branded bags
  • Jewelleries
  • Antiques
  • Watches etc.
  • Term loans
  • Hire Purchase
  • Personal loans
  • Advances obtained from private limited companies
  • Credit cards
  • Amount owing to individuals etc.
  • Loans to other individuals
  • Loans or advances to private limited companies
  • quoted and unquoted shares
  • land/properties
  • motor vehicles
  • As per the list of expenses in CP102
  • Employment income
  • Dividends received
  • Commissions received
  • Contract income received
  • Rental income
  • REITs
  • Income from fixed deposits or current account
  • Repatriation of funds from outside Malaysia to Malaysia
  • Windfall
  • Funds inherited

What are the issues faced in preparing a capital statement?

Most often than not, the main issue faced by many is the ability to produce supporting documents or information to support transactions transacted years ago. Unlike companies or businesses, individuals are less likely to keep proper documents on their personal transactions.

Upon issuing the CP102 and CP103, usually taxpayers are given 30 days by the IRB to prepare the capital statement. Extension of time may be applied, based on the discretion of the IRB.

Due to time constraints, many taxpayers had struggled to search for documents and recalling transactions that was made years ago. This may place the taxpayer at a disadvantage.

Without proper documents, taxpayers are unable to provide justifications or a basis to disagree with the IRB’s adjustments, if any.

Is preparing a capital statement compulsory? Do I need to prepare a capital statement?

Currently preparing a capital statement is not compulsory. However, it is a good practice to prepare the capital statement annually.

Preparing a capital statement will help you identify potential risks and eliminate them. With this practice, documents and the necessary information would have been kept properly and recorded. This would smooth and ease the process in the event of an investigation.

Asides from the above, you will be able to keep good track of your personal financial affairs as well as being able to determine an estimate of your net worth.

What should I do if I receive a CP102 and CP103 from IRB/LHDN?

Contact your tax agent immediately. If your tax agent is unable to assist you, please contact us.

Our taxation service cover areas in Ipoh, Kampar, Tapah, Taiping, Chemor, Cameron Highlands, Sitiawan, Manjung, Bidor, Penang, Kedah, Alor Setar, Kelantan, Kuantan, Pahang, Perlis, Terengganu, Kuala Lumpur, Selangor, Melaka, Johor Bahru, Seremban and other areas in Malaysia. 

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