An Article From Inland Revenue Board On Single Tier Tax System (26 November 2009)



Prior to 1 January 2008, Malaysia adopted the imputation system which required the imposition of tax on the profit at corporate level and again at shareholders level. The principle behind the imputation system is to overcome the double taxation of income. Under the imputation system, companies resident in Malaysia are required to deduct tax at source at the prevailing corporate tax rate on dividends paid to their shareholders. The same income would be taxed twice if the credit is not imputed to the shareholders.

The single-tier tax system was introduced in Budget 2008 to replace the imputation system with effect from year of assessment 2008. Under this system, corporate income is taxed at corporate level and this is a final tax. Companies may declare single tier exempt dividend that would be exempt from tax in the hands of their shareholders.

There are a few reasons for the move to the single tier system. First, the imputation system was not able to accommodate increasingly sophisticated business transactions. Second, the obligation of resident companies to maintain the franking account which entailed high compliance costs. Third, to remove the constraint that a company might have distributable profit and yet could not frank dividend because of insufficient credits.


Imputation System

Single Tier System

• Tax paid by a company is not a final tax

• Tax is deducted from dividend paid, credited or distributed to shareholders

• Shareholders are taxed on gross dividends received and entitled to claim section 110 set-off

• Tracking mechanism through section 108 account

• Tax paid by a company is a final tax

• No tax is being deducted from dividend paid, credited or distributed to shareholders

• Dividends are exempt in the hands of shareholders

• No tracking mechanism is required


The section 108 balance is a tax credit balance which a company can pay dividend under the imputation system. Many companies may still have substantial section 108 balances as at 31 December 2007. If the single tier system were implemented without any transitional period, companies would have forfeited those credits and most shareholders, especially individuals, would lose out on the tax refunds. Thus the government has allowed a six-year transitional period (1 January

2008 to 31 December 2013) to enable companies with unutilized balances to continue to pay franked dividends during the period. Shareholders who received such dividends are entitled to claim section 110 set-off against their tax payable.

During the six-year transitional period, all resident companies are required to comply with the transitional provisions. The transitional provisions spell out, among other things:

i) the six-year transitional period allowed resident companies to utilize their section 108 balances as at 31 December 2007;

ii) companies with nil section 108 balances as at 31 December 2007 would automatically be able to declare single tier exempt dividend from 1 January 2008;

iii) companies that have utilized all the section 108 balances anytime during the transitional period are not entitled to deduct tax from dividend paid or distributed. Instead, the companies are to declare single tier exempt dividends there from; and

iv) companies have the option of disregarding the section 108 balances in order to declare single tier exempt dividends during the transitional period.

A) For the purpose of applying the transitional provisions, reference would be made to section 108 balance as at 31 December 2007. The balance is determined as follows:

i) the amount of the balance for the credit of that company at the end of the basis period for year of assessment 2007 would be increased by: a) any tax paid during the period from the first day of the basis period of that company for the year of assessment 2008 to 31 December 2007; or

b) the final instalment paid under section 107c of the Income Tax Act 1967 for companies whose financial years end on 31 December.

ii) the amount of the balance for the credit of that company would be decreased by:

a) any dividend paid during the period from the first day of the basis period of that company for the year of assessment 2008 to 31 December 2007; or

b) any tax discharged, remitted or refunded until 31 December 2007.

As a concession, companies are allowed to increase their section 108 balances as at 31 December 2007 by an amount equivalent to:

a) amount of section 110 set-off on dividends received on or before 7 September 2007; and

b) the amount of advance payment made on or before 7 September 2007. (Refer to Appendix 1)

B). Determination of section 108 balance during the transitional period.

i) during the transitional period, any tax paid or tax charged on any assessment or composite assessment made after 31 December 2007 are not to be added to the 108 balance or revised 108 balance.

ii) section 108 balance or the revised balance would be adjusted downwards by the followings:

a) any dividend paid from 1 January 2008 to 31 December 2013; or

b) amount of tax paid which has been taken into computation of section 108 balance is discharged, remitted or refunded from 1 January 2008 to 31 December 2013. (Refer to Appendix 2)


To avoid manipulation and to safeguard the government from the adverse effect of having substantial outflow of fund due to unexpected increase of tax refunds during the transitional period, the government has imposed conditions as stated below:

i) franked dividends paid by companies must be in cash in respect of ordinary shareholdings. Companies are neither allowed to credit to nor to contra the dividends against their shareholders’ accounts;

ii) companies cannot pay franked dividends and single tier exempt dividends to ordinary shareholders concurrently if the companies still have section 108 balances. Companies must utilized all 108 balances in their section 108 accounts before declaring single tier exempt dividends;

iii) shareholders are not entitled to section 110 set-off if the shareholding period is less then 90 days from the date of acquisition to the date of disposal. However, this condition does not apply to shares in companies listed on Bursa Malaysia;

iv) for companies that receive franked dividend (which are of non business source), the statutory income from franked dividends is deemed to be the total income with effect from year of assessment 2008;

v) companies may declare single tier exempt dividends or to pay dividends in specie to their preference shareholders.


Some of the benefits and drawbacks of the single tier system are as follows:


i) reduce administrative cost and enhance efficiency (for companies and government) as there is no need to maintain section 108 balances;

ii) companies with huge section 108 balances may pay special dividends during the transitional period. Companies with capital gains and non taxable accounting profits are also able to declare dividends without any constraint. Thus shareholders may enjoy higher dividend yields;

iii) high income bracket individuals need not pay tax on the differential between his marginal tax rate and the corporate tax rate; and

iv) reduces tax leakages as the dividends are exempt from tax. Any manipulation to shift tax burden on dividends ceased to serve its purpose.


i) the holding costs (interest on loans, bonds etc) that are attributable to the financing of investments will no longer be tax deductible once dividends becomes single tier exempt dividends. Corporations need to undertake a tax review on how their investments are held and funded.

ii) issuers of fixed rate preference shares need to ascertain whether the coupon rate specified is a gross or net rate as there may be additional cost on payment of dividends;

iii) individuals with lower income such as pensioners and retirees will not enjoy any tax refunds. Such refunds may represent an important source of fund for this category of persons. Tax exempt bodies and non-profit organizations will also lose the right to tax refunds; and

iv) increase cash flow for government as companies may maximize dividend payouts during the transitional period.


The change in the tax structure from imputation to the single tier system is the most significant change in Malaysia’s tax laws. The government realized that imputation system is not sustainable anymore in the long run. If tax rates were to be reduced further in the future, the government needs a system that will allow company tax to be deemed as a final tax. The government certainly has taken a bold step to move in the right direction.

This article is contributed jointly by (Lim Hong Eng, Norfaidah Daud, Julie Yeap Siew Kuan & Marliza Mohamed) Technical Department Inland Revenue Board of Malaysia

Date: 27 February 2008

The article was published in Berita Hasil, April 2008 issue

Appendix 1 Determination Of Section 108 Balance As At 31 December 2007

Appendix 2 Determination Of Section 108 Balance During The Transitional Period

Sample Disclosure – Share Based Employee Compensation Scheme, ESOS (25 November 2009)

Share-based Employee Compensation Scheme – ESOS

The Company’s Employee Share Options Scheme (“ESOS”) is a share-based, equity-settled employee compensation scheme. The ESOS allows the employees of the Company acquiring the shares of the Company upon fulfilling certain conditions.

The total fair value of share options granted employees is recognised as an employee costs in the income statement with the corresponding increase in the share option reserve in the equity section of the Company over the vesting period of the ESOS taking into account the probability that the ESOS will vest.

The fair value of ESOS is measured at Grant Date, taking into account, if relevant, the market vesting conditions upon which the options were granted but excluding the impact of any non-market vesting conditions. Non-market vesting conditions are included in the assumptions about the number of options that are expected to become exercisable on Vesting Date.

At each balance sheet date, the Company revises its estimates of the number of options that are expected to become exercisable on Vesting Date. It recognises the impact of the revision of the original estimates, if any, in the income statement, and a corresponding adjustment to equity over the remaining vesting period. The equity amount is recognised in the share option reserve until the option is exercised, upon which it will be transferred to share premium account, or until the option expires, it will be transferred to retained earnings of the Company.

The proceeds received net of any directly attributable transaction costs are credited to equity when the options are exercised.

Sample Disclosure – Accounting Policy Of Employee Equity Compensation Benefits (ESOS) (24 November 2009)


The Employees’ Share Option Schemes (“ESOSs”) of the Company and a subsidiary grant the Group’s eligible employees options to subscribe for shares in the Company and the subsidiary at pre-determined subscription prices. These equity compensation benefits are recognised as an expense with a corresponding increase in equity over the vesting period as share option reserve. The total amount to be recognised is determined by reference to the fair value of the share options at grant date and the estimated number of share options expected to vest on vesting date.

An Article On How GST Affects Small and Medium Businesses (23 November 2009)

An article by KPMG Tax Services Sdn. Bhd. on how implementation of Goods and Services Tax (“GST”) would affect small and medium businesses:-

“The Star, Monday November 23, 2009

How GST affects small, medium businesses


Awareness of compliance requirements vital before it’s introduced

THE goods and services tax (GST), if implemented, will not only affect big businesses. The compliance requirements apply once a business achieves a certain prescribed annual sales turnover level. This registration threshold has not been announced.

However, it is worthwhile noting that the licensing threshold for sales tax and service tax, which GST will replace, currently ranges from RM100,000 to RM300,000. If this is any indication, GST registration will be an obligation for many smaller businesses. This is taking into account that GST will be imposed on practically all supplies of goods and services and at every stage of the supply chain.

Credit offset mechanism: In simple terms, businesses supplying taxable goods and services have to charge GST on supplies made (referred to as output tax). The GST paid on purchases (input tax), including capital equipment, supplies and materials can be offset against the output GST. This is referred to as the credit offset mechanism.

The net amount would have to be remitted to the Royal Malaysian Customs. Businesses that are largely export-oriented are likely to be in a refund position. To claim the credit offset, businesses are required to obtain and keep tax invoices from suppliers. While this may sound simple, the tracking, record keeping and reporting can be a challenge to many businesses.

Below are some thoughts for small and medium-scale enterprises (SMEs) as the Government ponders on the implementation of the GST, particularly the registration threshold.

Awareness of responsibilities: Notwithstanding the size of the business, the law imposes the same compliance obligations once the registration threshold is reached. Once the registration threshold is announced, affected businesses will need to follow closely the developments and to understand their responsibilities under the GST regime.

While the business is essentially just collecting and remitting GST for the Government, non-compliance will result in penalties on the business itself.

It is hoped that the Government would leverage off the experience from other countries that have successfully implemented GST and roll out comprehensive awareness programmes to help, in particular SMEs, prepare for the GST. These could include organising briefings at various locations, setting up small offices, kiosks, helpdesks and hotlines throughout the country.

Compliance cost: GST imposes additional compliance costs for businesses. These come in the form of additional work to account for the tax, tracking of the input taxes paid, undertaking reconciliations and filings of GST returns.

In addition, where a business pays cash or has short credit periods from its suppliers, this may result in the business needing extra finances to purchase supplies when GST is first introduced. This is a timing issue which should iron itself out over time as credits are claimed. In this respect, there have been requests that the tax return cycles for SMEs be extended to ease the cashflow burden under the GST regime.

Customer reactions: As often happens, customers react to news of discounts or price increases. It is generally anticipated that GST will result in a price hike on certain goods.

The level of increase depends partly on the rate of tax announced. Experiences in other countries have shown that customers generally go on a shopping spree shortly before the introduction of the tax, followed by a period of relative inactivity after the tax is introduced.

Anticipating this, it may be necessary to do some stock planning to cater for a pre-GST rush. This, however, has to be balanced by the fact that stock in hand when GST is introduced, may not be entitled to any input tax credit.

Purchase of business assets: Like customers, businesses should also plan their purchases during the GST transition period. This is because currently many goods (particularly capital goods) have an embedded sales tax in them which is not deductible or creditable.

On the other hand, buying the same goods by the business after GST would allow the business to claim a credit for the GST (which will replace sales tax). This is an advantage for the business and the effective cost of the goods would then be lower (other things remaining equal).

As a rule of thumb, while household consumers are likely to shop before GST is introduced, businesses which are GST registration candidates should perhaps delay purchases to a time when GST is effective. This does, however, require some assumption that prices will otherwise remain static.

To register or not to register: Some businesses will inevitably fall below the registration threshold. While it may appear a good thing that the business is not subject to the compliance burden of the tax, other factors need to be taken into consideration whether or not to register.

For one, unless the business is licensed, it would not be entitled to claim the input tax credits on purchases. This leads to input tax paid being a cost to the business (this may be a good thing from the customers’ perspective; GST is not imposed when they purchase the goods).

However, in a situation where the customers of the business are other GST registered businesses, the supplier may be obligated to license itself as it is likely that the customer would insist on buying from another registered person to enable him to claim the input tax credit.

Noting the additional burden that GST puts on SMEs, the Government could consider making concerted efforts in conducting education campaigns as well as addressing and deciding on compliance issues before the introduction of GST. Treatment of specific transitional issues needs to be announced upfront to facilitate a smooth transition to the GST regime.

The writers are executive directors of KPMG Tax Services Sdn Bhd.

Sample Disclosure – Accounting Policy Of Biological Assets (22 November 2009)

Biological Assets

All expenses incurred in land preparation, planting and development of crops up to maturity are capitalised as biological assets; all expenses subsequent to maturity are recognised directly in income statement.

Biological assets are stated at revalued amount, which is the fair value at date of revaluation less any accumulated impairment losses. Fair value is determined by market-based evidence by appraisal that is carried out by professionally qualified valuers. Revaluation of biological assets are carried out at sufficient regularity and any material differences are adjusted accordingly to ensure that the carrying value of the assets does not differ materially from the fair values determined as at balance sheet date.

Any revaluation surplus is credited to the revaluation reserve account, except that if the surplus reverses the previously recognised revaluation decrease in income statement of the same asset, such surplus would be recognised in income statement until it completely reverses the previously recognised revaluation decrease before any excess amount of surplus is recognised in the revaluation reserve account within equity. Such revaluation reserve account is classified as part of non-distributable reserves within equity section of the Company.

A revaluation decrease is first recorded as a set-off against the amount of previously recognised revaluation surplus in equity of the same asset and any balance of revaluation decrease thereafter are recognised in income statement.

Upon disposal or retirement of biological assets, the differences between the disposal proceeds and the carrying value of such biological assets are recognised as gains or losses in income statement accordingly. Any balance of revaluation reserve account for such assets are then transferred to retained earnings and thereafter is available for distribution to the equity holders of the Company.

Sample Disclosure – Accounting Policy Of Inventories, Oil Palm Sector (20 November 2009)


Inventories of the Group and of Company comprise the following:-

  • Harvested Oil Palm Fruits
  • Work-in-progress and Finished Palm Oil Products
  • Oil Palm Seedlings
  • Stores and Consumable Supplies

The above inventories are stated at the lower of cost (determined using first-in-first-out basis) and net realisable value. Cost of harvested oil palm seeds, oil palm seedlings and stores and consumable supplies comprise costs incurred in bringing the these inventories to their present location and condition. The cost of work-inprogress and finished palm oil products includes materials, labour and an appropriate proportion of manufacturing overhead.

Net realisable value represents the estimated selling price less all estimated costs to completion and costs to be incurred in marketing, selling and distribution as relevant to each type of inventories.

The carrying value of any obsolete inventories is written off as an expense in income statement.

Allowance for decrease in value is made for obsolescence and deterioration for each specific type of inventories accordingly should these inventories are carried within the Group and the Company longer than their normal operating cycles.