non business income. income chargeable to tax 2 s 4 (a) – business s 4 (b) – employment s 4 (c)...
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NON BUSINESS INCOME
Income Chargeable to Tax
2
S 4 (a) – Business
S 4 (b) – Employment
S 4 (c) – Dividends, Interest or Discounts
S 4 (d) – Rents, Royalties or Premium
S 4 (e) – Pensions, Annuities or Other Periodical Payments
S 4 (f) – Others
Section 4, ITA 1967Section 4, ITA 1967
WHAT DISTINGUISHES BUSINESS AND NON BUSINESS INCOME
Section 4 Income categories Not always distinguishable
American Leaf Blending There is scope for overlapping between the paragraphs.
ONE COMPANY
Many Income streams
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DIVIDENDINCOME
DIVIDEND
WHERE IS IT DEFINEDCompanies Act?ITA?
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DIVIDEND
WHAT EXACTLY IS A DIVIDEND-
In Accounting
Accounting
Accounting can yeild the wrong result for tax purposes Where the accounts are based on an analysis of the
facts that is wrong in law -CIR v Gardner Mountain & D’ Abrumenil Ltd
Where accounts prepared in accordance with GAAP are found to be based on factual assumptions which are insufficiently reliable -Owen v Southern Railway of Peru Ltd
Where accounts prepared in accordance with GAAP are simply inconsistent with the true facts -BSC Footwear Ltd v Ridgway
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Dividends
distribution/payment
out of profits/undistributed profits
Cash
Shares Property
10
CASES CONSIDERED
HILL V PERMAMENT TRUSTEE CO A company sold its land, livestock and all other assets and
ceased trading. The profits from the sale of assets not acquired for resale were not assessed to tax and were divided among shareholders.
Q. Was the sum received income or capital (corpus) Lord Russell “ moneys paid in respect of shares in a limited
company may be income or corpus…… A limited company not in liquidation can make no payment by way of return of capital to its shareholders except as a step in an authorised reduction of capital. Any other payment made by it by means of which it parts with moneys to its shareholders must and can only be made by way of dividing profits. Whether the payment is called “dividend” or “bonus” or any other name, it still must remain a payment on division of profits.”
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CIR V TRUSTEES OF JOHN REID
The trustees held shares in a trading company incorporated in South Africa and had received a dividend which stated that it was “payable out of capital profits” i.e “ the excess of the sale price over the cost of the warehouses and offices”
Held: the dividend is “income” and accordingly assessable on the trustees. It was not competent for the court to look beyond the dividend and examine the source of the profits out of which it was paid.
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TPT V DGIR The Company sold its rubber estate for Rm. 2,200 in Dec 1973. The
proceeds were placed in FD. On 3 Feb 1974, the company resolved to make “an advance payment of Rm.3.50 to shareholders for every Rm.1 share. The appellant received Rm 35,000. On Sept 1974, another resolution was made to give Rm2.50 for every Rm1.The appellant received Rm 25,000.
In Sept 1978, the Company resoiled to be wound up voluntarily and a liquidator was appointed.
Liquidator demanded repayment of “loans”. Revenue Department declared it was not “loan” but dividend Taxpayer contended that it was “Loans”
Held: It was dividends
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SO when can a “capital” payment be made to a shareholder?
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CIR V BURREL Rowlatt J. “… you cannot distinguish a
thing after liquidation; that in liquidation there is neither capital nor profits…when the liquidation begins all distinction disappears, and there are only surplus assets, and the shareholders only get this money in that character and you can no longer affect it with the character of profits which have borne Income Tax.
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16
Hilton International Ltd v Hilton (1988, 4NZ CLC96) Dividends may not be declared if this would be result in the company being unable to pay its debts as the debts fall due.
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CAN unrealized capital profits (book value profits) be distributed as dividends.
Scotland,
Westburn Sugar Refineries v IRC (1960) SLT 297 Held : no cash dividend can be paid out of unrealized capital profits but a bonus issue of the shares maybe made.
England,
Dimbula Valley (Ceylon) Tea Co Ltd v Laurie(1961) Ch 353
SO WHATS THE POSITION OF
BONUS ISSUE RIGHTS ISSUE SHARE BUY BACK
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DIVIDEND
INVESTMENT INCOME- 4(c) TRADING INCOME- 4 (a)
TIE BREAKER- Section 60F
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Derivation of Dividend Income-section 14
RESIDENT Company- Dividends paid,credited or distributed is deemed derived from Malaysia
NON RESIDENT company- only dividends paid,credited or distributed up to the date it becomes non resident is deemed derived from Malaysia
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INTERESTINCOME
RICHES V WESTMINISTER Lord Wright “The essence of interest is that it is
a payment which becomes due because the creditor has not had his money at the due date. It may be regarded either as representing the profit he might have made if he had the use of the money, or conversely the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation…”
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Interest
Investment income – S 4(c)
Business income – S 4(a)
o trading debts
o ordinary course of business
o earned by bank / insurance company
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Derivation of Interest Income
Paid by the Government / State
Government
Paid by resident personAsset Used in the production of Malaysian income
Debt Secured by property/asset situated in Malaysia
or
Interest expense is deductible against any income accruing in/derived from Malaysia
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Basis Period of Interest Income
S 27(1)
Gross income consists of any interest when it first becomes receivable in the relevant period shall be treated as gross income of the relevant person for the relevant period when it has been received.
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Basis Period of Interest Income
S 27(2) Overlapping Period
Where the gross interest income receivable overlaps two or more basis periods, then the interest will be apportioned to the relevant period and it is deemed accrued evenly.
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Basis Period of Interest Income
S 27(2) Overlapping Period (cont’d)
Where part of an overlapping period for which interest is receivable elapsed more than 5 years before the day on which the receipt of that interest income first become known to the Director General, then the interest income is deemed to have accrued evenly over the part of the overlapping period which did not so elapse.
[Proviso (b) of S 27(2)]
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Basis Period of Interest Income
S 27(3) Overlapping Period (cont’d)
Where the interest income receivable wholly elapsed more than 5 years before the Director General first knew about the receipt, the interest income shall be treated as gross income which began 5 years before the beginning of the Y/A.
[Proviso (c) of S 27(2)]
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Basis Period of Interest Income
S 27(3)
Where the gross interest income is received in advance for more than a basis period, the interest income would not be apportioned but instead be treated as gross income of the period in which it is received.
30
Exempt Interest
Interest on
Securities/bonds issued/guaranteed by the Government
Debentures (other than convertible loan stock) approved by the Securities Commission
Bon Simpanan Malaysia issued by Bank Negara Malaysia Savings certificates issued by the Government
Individual
Unit trust
Listedclosed-end
fund
31
Exempt Interest
savings / fixed deposit (< 1 year)
from bank / finance company
≤ RM100,000
ResidentIndividual
32
Interest Net of Tax
ResidentIndividual
Gross interest
Less: 5% tax (S 109C)
Net interest received
RM
xx
(x)
xx
Final tax
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RENTAL NCOME
34
Sources of Rent
Moveableproperties
Immoveableproperties
ship
car
machinery
land
shophouse
apartment
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Rent as Business Source
Public Ruling No. 1/2004
Where the property concerned is managed & let in such a systematic/organized manner that the letting can be regarded as carrying on a business Actively provides ancillary or
support services/facilities
36
Rent as Business Source
Public Ruling No. 1/2004
FactoryWarehouseOffice / shopping complex- whole complex- standard lotShophouseResidential propertyMixture of properties
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144 Floors44
Minimum unit owned
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Derivation of Rental Income
Being used in Malaysia
Landed properties
Assets
Situated in Malaysia
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Basis Period of Rental Income
S 27(1)
Rental income is assessed on receipt basis but it will be treated as gross income for the period when it first becomes receivable.
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Basis Period of Rental Income
S 27(3)
Rental received in advance
are assessable in the year of
receipt, notwithstanding
that it may be subject to
refund.
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Deductible Expenses
Quit rent
Assessment rate
Cost of repairs & maintenance of property
Insurance premium on fire/burglary
Cost of supervision & rental collection
Cost of obtaining tenant to replace the old
tenant
Interest to finance the property
Cost of renewing rental agreement
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Non Deductible Expenses
Cost of obtaining the first tenant (initial expenses), eg
o advertising
o commission
o legal expenses on the
first rental agreement
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ROYALTYNCOME
43
Derivation of Royalty Income
Paid by the Government / State Government
Paid by resident person
Royalty is deductible against any income accruing in/derived from Malaysia
44
Exemption of Royalty Income
Para 32
Para 32A
Para 32B
Para 32C
Para 32D
RM6,000
RM12,000
RM20,000
Full amount
RM20,000
Sch 6 Exemption
Translation
Literary work
Original painting
Cultural performance
Artistic workRecording disc/tapes
Musical composition
Resident Individual
45
references
text
CHAPTER 4-Non business income CHAPTER 16- investment holding,
investment dealing company, venture capital company, leasing income.
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Question
Sam Co Pte. Ltd, entered into distributorships agreements with several countries including Malaysia, Korea, & S’pore. The bulk of the agreements were with Malaysia.
The Company had a computer system in Hong Kong whereby orders could be taken and relayed to the supplier in UK. In fact orders could be processed from anywhere the officers of the Company were in, doing promotions, through a laptop.
The goods will be shipped from UK to Malaysia or Korea as required. Invoices to the customer were issued by Sam Co Pte. Ltd and they
obtained payments. Where should the profits be taxed. Are there alternatives.
What are the considerations you should take into account. Substantiate with legal cases and articles. Minimum 10-15 cases
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Question Express Bus Co. operated its service for several routes
in Malaysia and S’pore Also sold tickets in S’pore through an agent. In accounts Malaysian tickets were shown separately
from tickets sold in S’pore. Return tickets were also sold in Malaysia to people who
resided in S’pore Where are the profits derived from. What are the issues
you should consider. Support your contention with legal cases and a critical analysis.
Minimum 10-15 cases
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LIBRARY PROJECTMake a digital compilation of all tax casesFrom the commencement to 2009. Malaysia Singapore Hong KongEach case must include the: Full text case and hyperlinked to A Fully illustrated summary with annimation of each case The cases must be divided into chapters according to topics Eg.Tax administration,Business Income,Non
Business Income,Employment Income,Capital allowances,Deductions....
There must be one section for Tax cases on Financial instruments-eg derivaties.
(Marks to be allocated 20)
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