Taxation in year 2000 and beyond

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Taxation in year 2000 and beyond

Extracted from The Star, 23^rd Aug 1999

In Malaysia, the law governing income tax is the Income Tax Act (ITA), 1967. Currently, Malaysia has a preceding-year basis of assessment where a year is taken to be the calendar year.

The taxable income (referred to as chargeable income under the ITA) of a person for a year of assessment is ascertained by reference to the income for the basis year immediately preceding the year of assessment.

Consequently, a basis year is always the 12 months to Dec 31. Nevertheless, the Act recognises that business organisations may have accounting year ends other than Dec 31 and hence allows the accounting year to be the basis period for income derived from a business source.

Current-year basis

With the introduction in April 1999 of the Income Tax (Amendment) Bill 1999, there would be a significant change in the manner in which income is assessed. For from the year 2000, the basis year and the year of assessment would be the same calendar year.

For example, the basis year for year of assessment 2000 is Jan to Dec 31, 2000. Therefore, income earned in the year 2000 would be assessed on a current-year basis and not on a preceding-year basis.

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Two basis periods

There will be two basis periods in the year of assessment 2000.

First there will be assessment on a preceding-year basis and, second, there will also be an assessment on a current-year basis. Income from the former would benefit from the waiver while income from the latter will be assessed on a current-year basis.

Self-assessment system

The introduction of self-assessment in Malaysia, commencing 2001, is part of a reform process to bring about a new assessment procedure into the 21^st century. The taxation system is thus expected to undergo the most significant change since the inception of the ITA in 1967.

This move to introduce self-assessment would involve a substantial shift in accountability onto taxpayers in terms of their compliance obligations. At the same time, the Inland Revenue Board is expected to play a more prominent role in auditing taxpayers at random and, if they are found to have given inaccurate information, they will be subject to varying penalties, depending on the severity of the offence.

Treatment of adjusted losses

As mentioned earlier, the assessments currently made on a preceding year basis would be replaced with a current-year assessment system with effect from year of assessment 2000.

Although income derived in 1999 will be waived, losses arising in the year will have to be set-off against all income before any excess can be carried forward to the subsequent year. The types of income include rent, royalty, employment and business income.

An adjusted loss incurred in the carrying on of a business for a particular year of assessment is deducted in arriving at total income for that year of assessment. Hence, current-year losses can be deducted from all sources of income in the current year of assessment.

However, if current-year losses cannot be fully offset due to insufficient aggregate income, the portion not absorbed will be carried forward indefinitely and be utilised only against the statutory income from all business sources.

These business losses cannot be offset against non-business sources such as employment and dividend income. The statutory income of a business need not arise from the same source as that of the adjusted loss.

Moreover, capital allowances too are deemed to be claimed by the taxable person for purposes of the waiver year. However, capital allowances that are not utilised for the business year in the waiver year can be carried forward to the following year.

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Business accounts

The ITA recognises that business firms may have accounting year-ends which do not follow the calendar year and hence allows the accounting year to be the basis period for income derived from a business source.

In this regard, the basis period of a firm preparing accounts to June 30 for year of assessment 2001 would straddle over two years, that is July 1, 2000 to June 30, 2001.

Waiver of income tax

The move to waive tax on income earned in 1999 is to ensure that taxpayers will not be paying tax twice in one year with the switch in tax assessment from the preceding-year to current-year basis from 2000.

The new measures mean that taxpayers would continue to pay tax in 1999 for income earned in basis-year 1998, but in the year 2000 all Malaysian taxpayers will “pay as they earn” for income earned in the same year. The income tax, therefore, will be assessed and collected upon income derived on a concurrent-year basis.

With this move, the collection machinery is in essence upgraded to enable the collection of taxes based on “taxpayer’s ability to pay” rather than postponing payment by a year.

Although income earned in 1999 s waived, taxpayers are still required to submit their completed tax returns in the following year, that is, 2000.

This waiver, however, will not apply to foreign employees and non-resident individuals who commence or terminate their employment in Malaysian in 1999. It would also not apply to taxpayers who are subject to withholding tax where it is a final tax.

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Meaning of derived income

For the purpose of waiving income in 1999, income derived means income arising and not necessarily income receive in the basis year.

For example, income received in the basis period 1999 but relating to employment or business transactions in the basis-year 1998 will be subject to tax in the year the income arises. Likewise, gratuity received in 1999 upon retirement in 1998 will be considered as income for 1998 and not derived during the waiver year.

Dividend income

Since dividend income received in 1999 is not waived, such income will be taxed on marginal tax rates. The example in the Table above illustrates the computation of income tax on on-exempt dividend income.

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