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:
- For the production of gross income (eg: for working capital)
- 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.