Article On Capital Statement (2 August 2011)

An article on a tool used by Inland Revenue Board to catch tax cheats – Capital Statement, on the Star newspaper, Tuesday August 2, 2011:-

How tax cheats get caught

– By Kang Beng Hoe

THE term tax cheat used here refers to the determined tax evader and not to someone who made a good faith mistake due to the complexity of the tax law.

He is someone who sets himself up to evade tax either by not paying at all or regularly underpaying. He is unlikely to have kept books or records, or even if he did, they would likely be inadequate, or he would withhold them from the tax authorities.

Here the tax official is faced with the problem that actual undisclosed income cannot be proven directly. He will have to resort to indirect means to do so.

One of the most powerful tools that the tax official has on hand is the use of the net worth statement also known as capital statement.

The success of the net worth method is premised on the fact that income which has been hidden away will, over time, surface as assets in tangible forms such as landed property, stocks and shares, cars, jewellery etc. Why do you think the local tax office would keep tab of regular notifications from the land office and JPJ evidencing a taxpayer’s acquisition of a property or a motor vehicle?

The reasoning behind the net worth approach is quite simple. When a person accumulates wealth in the course of a year, he either invests it in assets or spends it. If there is an increase of net worth over the year, there is the presumption that this represents taxable income.

This presumptive approach has been adopted in parts of many tax systems. Critics say that the approach is confiscatory in nature and is a denial of the basic right of a person to protection of property. The courts though have endorsed the net worth method on the reasonable argument that a person who has accumulated substantial wealth should be able to show where it came from, if it is not from his known income sources.

The basic net worth formula looks at a person’s increase in net worth over a year. To this is added expenses, which are not tax deductible, including living expenses. The result is income for the year, which should have been reported. Compare this with what was reported and the taxman would have a figure, which represents understated income.

The use of this formula is repeated over a number of years so that the taxman will be able to determine the understatement of income over those years. The six-year time limit in our tax law will preclude looking beyond six years unless evidence of fraud is present.

An area of common dispute is the taxpayer’s living expenses as these are added to the net worth formula.

It is not uncommon for the taxpayer to hold himself out to the tax official as a man of frugal habits until confronted with evidence of lavish spending. The tax official is empowered by case law to make estimates of a taxpayer’s living expenses using all available evidence including third party verification.

The preparation of a net worth statement is laborious and time consuming. Expect detailed line-by-line examination of bank statements, financial statements to creditors and other relevant documents evidencing asset purchases or other spending. Safe deposit boxes are not safe hiding places as these could be sealed off pending examination of their contents.

Defences put up range from the typical to the bizarre:

Cash at start of the statement period had been claimed to have been hidden in mattresses, shoeboxes and garden sheds, etc.

Monies were borrowed from relatives, friends and business associates.

Assets were jointly owned by the spouse before the start of the enquiry period, or the taxpayer is the owner in name only and that the real owner may not be under investigation.

Net worth increases were due to gifts, inheritances, insurance proceeds and even gambling or lottery winnings.

The question often asked is whether offshore assets should feature in the net worth statement since offshore income is not taxable. The answer is yes unless it can be shown that the offshore funds were not funded from domestic taxable income.

It has been said that our tax system is founded on levels of trust. At one level, when we pay our taxes, we assume that our fellow citizens will pay theirs too. The tax cheat has thus betrayed this trust making us feel unfairly burdened. Effective enforcement by tax officials, using all available means, including the net worth method, is therefore crucial in any credible tax system.

It is also obvious to many that the net worth method could be used to reveal and prove illegal activities in areas other than tax evasion.

This is because the proceeds from such activities are often invested in visible assets.

When one hears the chorus “how can he afford it?” directed at a public official found flaunting his conspicuous acquisition, the public mind is showing its intuitive understanding of what it takes to show him up.

Kang Beng Hoe is an executive director of Taxand Malaysia Sdn Bhd, a member firm of Taxand, the first global organisation of independent tax firms. The views expressed do not necessarily represent those of the firm. Readers should seek specific professional advice before acting on the views. Kang can be contacted at

Article On Income Tax Treatment Of Non-Executive Directors (19 January 2011)

A good article I have read today on income tax treatment of non-executive directors of companies on The Star newspaper

The Star, starbiz, Wednesday January 19, 2011

Did you know non-executive directors are a special group of taxpayers?

Tax Insights – By Kang Beng Hoe

COMPANY non-executive directors are a special breed of taxpayers under our tax laws.

They are treated differently from their position recognised in contract law. Directors are not employees; they do not have a master-servant relationship with the company of which they are directors. They have what is commonly known as a contract “for” service with the company. This is distinct from an employee’s contract, a master-servant relationship evidenced by a contract “of” service.

If this sounds confusing, it is. An eminent judge in Britain drew the difference between a ship’s master, a chauffeur and a reporter on the staff of a newspaper all being employed under a contract of service whereas a ship’s pilot, a taximan and a newspaper contributor are employed under a contract for services.

Directors are holders of “office” for a term, which is not defined in the tax legislation and is said to be of “indefinite context”. However, under most tax laws, including ours, directors are included in the definition of “employees” and the term “employment” includes the holding of an “office”.

What is the significance of this rather convoluted tax treatment? Well, the reason is not difficult to guess: to garner more taxes for our tax collectors.

Without this extended definition, directors pay tax on their fees and other cash benefits such as attendance allowances and nothing else.

Their treatment as employees means that they are taxed on “perquisites” and “benefits-in-kind”, which they receive as directors of the company that pays them.

The home utilities costs incurred by a director, if paid for by the company, would be a “perquisite”. The value of accommodation provided to a director would be a “benefit-in-kind”.

The law on the taxability of “benefits-in-kind” derives from the English common law, i.e. the judicial pronouncement of courts in England.

In a landmark case, the House of Lords took the view that a benefit which is not convertible into money would not constitute income and should not be taxable on the employee receiving it. The case involved a bank manager who was allowed to occupy the upper floor of the said bank premises. The tax authorities sought to regard the value of the living accommodation as income to the employee. The court took the view that since the manager could not convert the benefit into money by say, assigning his occupying right to another person for cash, the benefit was not income to him. This decision became a general principle, that a benefit would only be taxable if it is capable of being converted into money or money’s worth.

Our tax laws, in light of this principle, contain a specific provision to tax a housing benefit provided to an employee, thus effectively nullifying the general rule.

No similar specific provision has been enacted to tax benefits such as the use of a car. Thus, a director who has been provided the use of a car might argue that this benefit is not convertible into money and he should pay no tax on it.

He would find his claim thwarted by the fact that specific words have been added to the taxing provision to tax a benefit (not being a benefit convertible into money).

These words are clearly designed to put our present day non-executive director (and all employees as well) receiving non-monetary benefits on quite a distinct fiscal path from that of our legendary bank manager.

So non-executive directors should be in no doubt that the tax man would seek to tax many, if not all the benefits which they receive as directors. The benefits are becoming more varied, with levels of remuneration packages increasing.

This is in part due to the recognition by companies, particularly public companies, that directors’ responsibilities and the risks associated with them have increased substantially in recent years.

A recent study of directors’ remuneration of financial institutions made a strong case that fees and other payments should be trending upwards if talented and experienced individuals are to fill a depleting pool of qualified directors.

Public companies generally make payments to their non-executive directors in some of the following forms:

  • Director fees. These are generally fixed to motivate responsibility.
  • Meeting fees are paid to encourage participation.

Both fees are taxable in full. A recent change in the law allows the fees to be taxed in the year they are received rather than in the year for which they are paid.

Fees received from a foreign tax resident company are not taxable on the basis of it being foreign income. Exceptionally a Malaysian incorporated company can be tax resident outside Malaysia if it is managed and controlled from outside the country.

Ex-post and ex-gratia payments are made to recognise long service and substantial contributions.

These are taxable in full unless they meet the criteria of “retirement gratuities”.

Stock awards paid to cultivate a longer-term perspective and sense of belonging are taxable on the market value of the stocks.

In certain instances, the use of a personal service company of the director to receive the fees could be used to benefit from the lower 20% rate.

However care should be taken in structuring this to avoid challenge as a tax avoidance arrangement.

The question often arises as to whether the expenses of travelling to attend board meetings could be deductible against the fees received where such costs have to be borne by the director.

The general principle is that travelling from home to office is not deductible and the tax authority will apply this rule to disallow such a claim.

  • Kang Beng Hoe is an executive director of Taxand Malaysia Sdn Bhd, a member firm of the Taxand global organisation of independent tax firms. The views expressed do not necessarily represent those of the firm. Readers should seek specific professional advice before acting on the views.

Article On How To Cut Entertainment Tax (8 December 2009)

A good article I have read today on how to determine tax deductibility of entertainment expenses in Malaysia on the Star newspaper

”Tuesday December 8, 2009

How to deduct entertainment tax from income tax

RSM EYE – By Lee Voon Siong

To determine deductibility of expenses incurred can be very tedious and bewildering

FOR income tax purposes, any expenses incurred in the course of a business will only be eligible for tax deduction if the expenses are solely incurred in producing the business income.

It is important to establish the deductibility of an expense as in the event of a field audit which results in the Inland Revenue Board (IRB) discovering an understatement of tax due to claims on expenses which are not tax deductible, a taxpayer will not only suffer additional tax but also a 45% penalty.

With effect from year of assessment 2004, entertainment expense will only be eligible for 50% tax deduction except for specific circumstances where it will qualify for full deduction.

This article will explain the three steps to determine the amount of entertainment expenses allowable as a deduction.

Are the expenses incurred entertainment expenses as defined in the income tax law?:

Entertainment is defined to include:

(i) the provision of food, drinks, recreation or hospitality of any kind; or

(ii) the provision of accommodation or travel in connection with or for the purpose of facilitating entertainment of the kind mentioned in (i) by a person or an employee of his in connection with a trade or business carried on by that person.

Are the entertainment expenses solely incurred in producing the business income?:

Expenses allowable for accounting purpose do not necessarily qualify for tax deduction. The entertainment expenses must be wholly and exclusively incurred in producing the business income to be eligible for tax deduction. Domestic and private expenditure charged to the business accounts will not be tax deductible. For example, entertainment expenses incurred by a sole proprietor in taking his family out for a meal will not be deductible as it is private in nature.

Are the entertainment expenses eligible for full tax deduction?

Expenses incurred on the following entertainment will qualify for full tax deduction:

1. the provision of entertainment to employees. Examples of such expenses include free meals and refreshments, annual dinners, outings and family day.

2. the provision of entertainment by a person who carries on a business of entertaining. Where a taxpayer is in the business of providing entertainment to paying customers, the cost of providing such entertainment will be deductible.

Examples of expenses which are tax deductible include provision of cultural shows by restaurants or hotels at their premises to entertain their customers and meals provided by airlines or other transportation business to its passengers.

3. the provision of promotional gifts at trade fairs or trade or industrial exhibitions held outside Malaysia for the promotion of exports from Malaysia.

Expenses incurred on gifts to customers or visitors who attend the above events will qualify for tax deduction. These would include samples of products, small souvenirs, bags, and travel tickets

4. the provision of promotional samples of products of the business of that person. It should be noted that only the products of the taxpayer given out as promotional samples will be allowed full deduction.

Examples of such expenses include:

● A complimentary drink or meal provided by a restaurant.

● Free samples of products manufactured/distributed by the business.

● Free samples of new products.

5. the provision of entertainment for cultural or sporting events open to members of the public, wholly to promote the business of that person.

Examples of cultural or sporting events and the entertainment expense related to such events are shown in Table A.

TableA Example Of Entertainment Expenses Related To Cultural and Soprts Events

Taxpayers can do some tax planning in maximising their entertainment expenses claim by using the above provision. For instance, entertainment expenses incurred by a property developer in organising a carnival for the purpose of launching a new project or new property release will normally qualify for a 50% tax deduction. By including a cultural or sporting event, the property developer will be able to claim full tax deduction.

6. the provision of promotional gifts within Malaysia consisting of articles incorporating a conspicuous advertisement or logo of the business. The gifts need not be products of the business. However, the gifts must have a conspicuous advertisement or logo of the business.

7. the provision of entertainment which is related wholly to sales arising from the business of that person. Examples of such expenses include:

● Food and drinks for the launching of a new product.

● Redemption vouchers given for purchases made.

● Discount vouchers, shopping vouchers, concert or movies tickets, meal or gift vouchers and cash vouchers.

● Free gifts for purchases above a certain amount.

● Redemption of gifts based on a scheme of accumulated points.

● “free” maintenance/service charges or contribution to sinking fund by property developers.

● Lucky draw prizes to customers.

● Expenditure on trips given as an incentive to dealers for achieving the sales target.

● Provision of light refreshments to customers when making sales.

Entertainment expenses which are not eligible for 100% tax deduction under Step 3 above will only qualify for 50% tax deduction.

The tax treatment of some of the entertainment expenses are shown in Table B.

Table B Tax Treatment On Selected Entertainment Expenses

The process of determining the deductibility of entertainment expenses can be very tedious and often bewildering.

To ensure that the expenses are appropriately categorised, it is in the interest of taxpayers to educate their staff to provide details such as who they entertained and the purpose of the entertainment. Proper records such as invoices, receipts, payment vouchers, etc must be kept to support the claim in case of tax audit by the IRB.

● Lee Voon Siong is executive director of RKT Tax Consultants Sdn Bhd.”


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