Taxable income for individuals, businesses

ALL revenue income derived from a source within Malaysia are subject to tax unless specifically exempted. Foreign source income remitted into Malaysia are exempted from tax.

The classes of income that are subject to tax for an individual include the following:

Employment income

Employment income which must be reported in the employee’s tax return includes the following:

Salary, wages, commission, bonus, gratuity, perquisite or allowances (perquisite would include the following payments made by the employer on behalf of the employee: utility bills, income tax, children’s education expenses, individual club membership, employee share option scheme and loan interest);

Benefits-in-kind such as car, driver, corporate club membership, mobile phone, household furniture and appliances; and

Value of living accommodation, servant and gardener.

Certain expenses are allowable against the employment income such as professional membership fees, and travelling and entertainment expenses. The onus is on the employee to prove to the Internal Revenue Board that the expenses were incurred for business purposes.

Employment income which is exempted from tax and need not be reported includes:

Leave passages provided to the employee, his spouse and children up to a maximum of RM3,000 for one overseas trip and up to a maximum of three local trips per year;

Retirement gratuities (on meeting certain conditions);

Employees Provident Fund withdrawals; and

Dental or medical treatment or child care benefit.

Dividend income

The tax treatment will be as follows:

Normal dividends: Dividends are received net of tax by individual shareholders. The gross amount of the dividend is declared in the tax return.

A Section 110 tax credit (27%) can be claimed against the income tax suffered on the dividend income. If a resident individual’s marginal tax rate is lower than 27%, the excess tax credit can either be refunded or used to set off against the tax payable on other sources of income.

Tax exempt and foreign dividends: These dividends are exempted from income tax and need not be declared in the tax return.

Expenses which are deductible against the dividend income are:

Commission or brokerage fee;

Stamp duty on transfer of shares; and

Interest on loan obtained to purchase the shares.

Interest income

Interest income received is subject to income tax and is required to be reported in the tax return. However, interest paid by a financial institution in Malaysia to a resident individual is not required to be reported in the individual’s tax return as the withholding tax of 5% is treated as a final tax.

Rental income

Rental income is required to be reported in the tax return and is normally treated as an investment income.

Expenses which are allowable against the rental income are:

Quit rent and assessment;

Insurance premium on the property;

Replacement costs on assets used in the property;

Repairs and maintenance;

Interest on loan obtained to purchase the property;

Commission and agency fee;

Advertisement for letting out of property.

Expenses incurred on advertisement, commission and legal fees for the first tenancy agreement are not allowed as these expenses are capital in nature.

Rental losses are not allowed to be utilised to set-off against other sources of income.

Business income

The taxable income of a business is determined after deduction of the following:

All expenses and outgoings incurred wholly and exclusively in the production of the business income;

Capital allowances; and

Any unabsorbed business losses brought forward.

Expenses which are wholly and exclusively incurred in the production of the business income would include:

Interest on loan used in the business;

Rental in respect of any land or building occupied;

Employee costs;

Specific provision for doubtful debts/bad debts; and

Repairs and maintenance.

Depreciation on fixed assets is not deductible.

However, capital allowances can be claimed provided the fixed assets are owned by the taxpayer and are in use for the business at the end of the basis period.