Sad to see so many companies close down with many people are retrenched and unemployed in this pandemic. Is it right?

With the implementation of conditional movement control MCO 3.0, one of the key tax concerns that businesses will face during this period is the tax treatment of bad debts.

This tax question has become increasingly common “Should taxpayers use legal action to recover any debts for tax purposes?”.

Let’s talk about the bad debts written off in a tax perspective :

What is debts

Debts that are allowed as a deduction in ascertaining the adjusted income of a business is a trade debt that is irrecoverable either wholly or partly. Such debt is written off as bad. Trade debt is a debt that arises from the sales of goods or services and has been included in the gross income of the business.

Reasonable consideration under S34(2) of the ITA

Reasonable consideration should be taken before writing off a trade debt as bad and then allowed as a deduction in ascertaining the adjusted income of a business.

Reasonable steps to recover the debt should be taken before any decision is made to write off the debt. Subsection 34(2) of the ITA allows a trade debt which is reasonably estimated to be irrecoverable either wholly or partly, to be deducted from gross income in computing the adjusted income of the business

Inland Revenue Board Malaysia Public Ruling 4/2019 Tax Treatment of Wholly and Partially Irrecoverable Debts & Debt Recovery

Public Ruling No 4/2019 states bad debt is defined as a debt that is considered not recoverable after appropriate steps have been taken to recover it.

Public Ruling No 4/2019 described the basis of writing off a debt as bad and the actions to be taken to recover the debt as well as the evidence to prove such actions have been taken.

Determination Of Bad Debt

The bad debts written off are allowed as deduction, if:

* The debt is a debt that arises from the course of carrying on a business (i.e. trade debt).

* Trade debt shall be included in the gross income prior to the relevant YA.

Circumstances when a debt can be considered as irrecoverable

Debts which are irrecoverable become bad (either wholly or partly) when all reasonable steps have been taken to recover such debt. As long as there are any other reasonable steps for recovery , such debt cannot be written off as bad.

After reasonable steps for recovery as in paragraph 5.3.1 have been taken, a debt can be considered as wholly irrecoverable or bad on the occurrence of any one of the followings:

* Trade debt cannot be recovered.
* The debtor has died
* The debtor is a bankrupt
* The debt is statute-barred
* The debtor cannot be traced despite various attempts
* Any other circumstances where there is no likelihood of cost effective recovery

Reasonable steps have been taken to recover the trade debt:

All reasonable steps based on sound commercial considerations should be taken to recover the debt.

To support a claim for deduction of a bad debt written off for tax purposes, there should be sufficient evidence of such steps taken, including one or more of the following:

* Issuing reminder notices
* Debt restructuring scheme
* Rescheduling of debt settlement
* Negotiation or arbitration of a disputed debt
* Legal action

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Frustrated when IRB adds back your bad debts in a tax audit.

Time is bad, pandemic cause bad debts to rise. Learn IRB official guidelines on bad debt tax treatment.

Why?

Bad debt is always our tax authority focus area. 100% guarantee !

Let’s learn this tax case on IRB fight on bad debts: Quality Concrete Holdings BerhadvsKetua Pengarah Hasil Dalam Negeri.

In YA 2004, Quality Concrete Holdings Berhad (QCHB) claimed for tax deduction on bad debts of RM608,731.25 (balance of value work done: RM950,000.00). IRB disallowed the deduction on bad debts written off and imposed a penalty under Section 113(2) of the Income Tax Act 1967 (ITA 1967).

IRB argued that:

QCHB did not recognised the value of work done (i.e. RM950,000.00) as gross income for the year of assessment (YA) 1999 up to YA 2004.

Therefore, the deduction of bad debt should be disallowed according to Section 24 and 34 of ITA 1967:

“The amount of the debt shall be treated as gross income of the relevant person from the business

for the relevant period.”

QCHB argue …

The claim amount had been reported under the trade debtors account in the Balance Sheet as at 31.01.1998 for YA 1999.

The claim for the bad debt should be allowable according to Section 24(1)(b) of ITA 1967:

“any services rendered at any time in the course

of carrying on a business.”

QCHB argued it is a trade debt arising in respect of carrying on a business irrespective of where and how the sum of RM950,000.00 was entered and described in the account.

QCHB had acted in good faith and the impugned assessment involved technical interpretation. Thus, penalty should not be imposed.

The decision from the court :

Agreed with IRB tax treatment on deduction of bad debt is disallowed under Section 34(2) of the ITA 1967.

Technical interpretation and good faith are not valid defenses for penalty under Section 113(2) of ITA 1967.

Thus, the penalty imposed under Section 113(2) of ITA 1967 is correct because QHCB had filed an incorrect return and gave incorrect information.

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𝐂𝐨𝐦𝐩𝐞𝐧𝐬𝐚𝐭𝐢𝐨𝐧 𝐫𝐞𝐜𝐞𝐢𝐯𝐞𝐝 𝐨𝐧 𝐜𝐨𝐦𝐩𝐮𝐥𝐬𝐨𝐫𝐲 𝐨𝐟 𝐥𝐚𝐧𝐝 𝐟𝐫𝐨𝐦 𝐠𝐨𝐯𝐞𝐫𝐧𝐦𝐞𝐧𝐭 𝐢𝐬 𝐭𝐚𝐱𝐚𝐛𝐥𝐞?

Overview of compulsory acquisition of land.

Compulsory acquisition is the power of the government to acquire private rights in a land without the willing consent of its owner or occupant in order to benefit society.

The compensation amount of acquisition is determined by the government.

𝗞𝗲𝘆 𝘁𝗮𝗸𝗲𝗮𝘄𝗮𝘆𝘀:

You will understand: -

1. Criteria to meet compulsory acquisition of land

2. Tax treatment on compulsory of acquisition of land-based on real tax case

𝐒𝐮𝐦𝐦𝐚𝐫𝐲 𝐨𝐟 𝐥𝐞𝐚𝐫𝐧𝐢𝐧𝐠𝐬:

Compulsory acquisition of land did not fall under the gross income unless the taxpayer when obtaining the said land had knowledge that it would be acquired by the government.

𝐖𝐡𝐚𝐭 𝐚𝐫𝐞 𝐭𝐡𝐞 𝐜𝐫𝐢𝐭𝐞𝐫𝐢𝐚 𝐭𝐨 𝐦𝐞𝐞𝐭 𝐜𝐨𝐦𝐩𝐮𝐥𝐬𝐨𝐫𝐲 𝐚𝐜𝐪𝐮𝐢𝐬𝐢𝐭𝐢𝐨𝐧 𝐨𝐟 𝐥𝐚𝐧𝐝?

1.There is no intention to sell the land.

2. During the purchase of the land, the owner should not aware of any government’s intention to acquire the land.

Tax treatment on compulsory acquisition of land-based on real tax case: Penang Realty Sdn. Bhd. v. Ketua Pengarah Hasil Dalam Negeri

A parcel of land was compulsorily acquired by the Government in August 1980 and was paid the sum of RM1,035,762.91 as compensation. IRB is claiming tax for the said compensation.

Penang Realty Sdn. Bhd. didn’t agree. The acquisition was compulsorily acquired and there is no intention to trade the land.

IRB argument - Gain on the disposal of land is taxable under section 4 of the Income Tax Act 1967 (ITA).

The decision by The Court

The proceeds received were not subject to income tax as the Company is no intention to trade the land and it was the compulsory acquisition of land.

𝐒𝐨𝐮𝐫𝐜𝐞𝐬:

http://lampiran2.hasil.gov.my/pdf/pdfam/PREALTYvsKPHDN.pdf

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Our Inland Revenue Board (IRB) has issued an updated version of the FAQ dated 3 June 2021 (after the original FAQ dated 2 June 2021).

Take note of the key updates before the FAQ changes again in view of the anticipated extension of lockdown.

Notification of new employee (Form CP22)
Submission of the Form CP22 can be made through the Customer Feedback Form
on the IRB’s Official Portal.

Tax clearance letter
Tax clearance letter will be processed after all documents and information are furnished completely.
The application for the tax clearance letter can be submitted through:
1. e-SPC
2. the Customer Feedback Form on the IRB’s Official Portal.

Tax estimates (Form CP204) & Notification of change in an accounting period (Form CP204B)
Application for extension of time (EOT) for the above forms is no longer required as EOT is now given until 31 July 2021 for submission of the above forms.

Revised tax estimates (Form CP204A & Form CP502)
Application for EOT for the above forms is no longer required with EOT already given until 31 July 2021 for submission of the above forms.

Deferment of tax payment (Form CP204 & Form CP500)
Tourism, Cinema and Spa industries
The deferment of payment of CP204 (monthly installment of tax estimates) and CP500 (bi monthly installments for individuals) will apply for taxpayers with business activities under the tourism, cinema and spa industries.

These taxpayers will be identified based on the business code from their latest income tax returns filed with the IRB.

The deferment will be provided automatically to the eligible taxpayers.

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Confused over tax deduction on entertainment.
Let's refresh LHDN ruling on 100% tax deduction on entertainment

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How IRB detect individual taxpayer’s under-reported income?

Overview

On 20.12.2020, Inland Revenue Board (IRB) published an article “Should Capital Statement be made law in Malaysia?” in The Star Malaysia. Most of the taxpayers will come with a doubt on how IRB determine whether individual has under-reported profit or income.

Key takeaway

You will understand:

1.       What is capital statement

2.       Why capital statement so important?

3.       What we need to do?

Summary of learning

What is capital statement?

 1.       Capital statement is a statement to show the net worth of an individual.

 2.       It consists of:

-          CP102 (Pin 10/80): Statement of Personal & Private Expenses (Equivalent to Income Statement)

 -          CP103 (Pin 5/96): Statement of Net Assets (Equivalent to Balance Sheet)

 Why capital statement so important?

1.       Capital statement is a tool used by LHDN to analyse individual taxpayer’s reported tax amount, and to detect any under-reporting or evasion of income.

 2.       The basic formula is Income = Saving + Spending

-          It means each person earning should equal to their “Saving and Spending”.

-          Individual tax payer has to be aware of any surplus of saving or spending as it will expose to LHDN as signal of unreported income.

 3.       All figures in the capital statement must be supported by documentary evidence.

 4.       LHDN has the power to raise additional tax payables based on “best judgement assessment” if taxpayer:

 -          unable to explain the surplus or deficit in the capital statement.

-          fail to keep records or supporting documents.

What we need to do?

1.       To prepare a capital statement earlier to avoid any uncertainty on the movement of funds.

2.       To keep all the supporting documents / evidence on income and money spent.

3.       To prepare on a yearly basis to avoid memory loss on income earned or expenses spent.

Reference:

http://phl.hasil.gov.my/pdf/pdfam/20201220_The_Star_Should_Capital_Statement_Be_Made_Law_In_Malaysia.pdf

https://www.thestar.com.my/news/nation/2020/12/20/should-capital-statement-be-made-law-in-malaysia

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𝐈𝐬 𝐦𝐲 𝐩𝐫𝐨𝐩𝐞𝐫𝐭𝐲 𝐝𝐞𝐯𝐞𝐥𝐨𝐩𝐞𝐫 𝐜𝐨𝐦𝐩𝐚𝐧𝐲 𝐛𝐞𝐜𝐨𝐦𝐞 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐇𝐨𝐥𝐝𝐢𝐧𝐠 𝐂𝐨𝐦𝐩𝐚𝐧𝐲 (𝐈𝐇𝐂) 𝐦𝐚𝐜𝐚𝐦 𝐢𝐧𝐢? 𝐚𝐧𝐝 𝐤𝐞𝐧𝐚 𝐭𝐚𝐱 𝟐𝟒%

If

1. A property developer company completed and sold completed units,

2. Now only …receive interest income from fixed deposit

3. But ….the company has some vacant lands in its book

Our opinion :

1. The company is not dormant

2. The company has business operating expense.

3. The company has incurred capital expenditure (subdivision, submit plan…)

4. So …the company is not IHC.

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, legal or other professional advice. Please refer to your advisors for specific advice.

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Two senior staffs of an audit firm have been arrested for allegedly falsifying a company’s finances in a bid to cheat the taxman.

They were arrested at the Malaysian Anti-Corruption Commission (MACC) headquarters.

They were remanded to assist in the investigation under Section 16 (b)(A) of the MACC Act.

Full story in the link https://bit.ly/3fusChF.

Do you know they can be remanded  under 113(1)(b) of Income Tax Act - Give any incorrect information in matters affecting the tax liability of a taxpayer or any other person?

Do you know they can be remanded under 114(1) of Income Tax Act - Wilfully and with intent to evade or assist any other person to evade tax?

Do you know they can be remanded under 114(1A) of Income Tax Act - Assist or advise (without reasonable care) others to under declare their income?

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3分钟看完所得税罚款配套 Income Tax Offences Part 2

• 无法保留正确的记录和文档 - RM300.00至RM10,000.00 /监禁不超过1年/两者

• 无法遵守IRBM要求提供某些信息的通知 - RM200.00至RM20,000.00 /监禁不超过6个月/两者

• 在3个月内未通知地址更改 - RM200.00至RM20,000.00 /监禁不超过6个月/两者

• 4月30日之后交税 (non business) -10％罚款应纳税额

• 6月30日之后交税 (business)- 10％罚款应纳税额

• 在截止日期的30天后分期付款 - 10％罚款应纳税额

• 实际税款比修订后的税款估算高出30％ - 实际税收余额和估计税收的差额的10％

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What is CP204 Estimation of Tax Payable?

Overview

 Every companies (a company, limited liability partnership, trust body or co-operative society) are required to determine the estimated tax payable and submit by using CP204 to IRB.

 Key takeaway

You will understand:

1. What is CP204?

2. When is the due date for initial submission?

3. When to pay for the instalment?

4. How to determine the estimated tax payable for initial submission?
5. How to do for the revision of CP204?

6. What is the consequences for non-submission, late payment of CP204 and underestimated of tax estimation?

Summary of learning

 1. What is CP204?

CP204 is the prescribed form for initial submission for estimated tax payable.

CP204A is the prescribed form for revision of estimated tax payable.

2. When is the due date for initial submission?

For existing company

The tax estimate must be submitted not less than 30 days before the beginning of the basis period.

For example, if the Company’s basis period is from 01.01.2021 – 31.12.2021, the initial submission of CP204 will fall on November 2020.

For newly incorporate company

The tax estimate must be submitted within 3 months after the commencement of business.

3. When to pay for the instalment?

The instalment payment must be made before 15th of the second month of the basis period.

For example, if the Company’s basis period is from 01.01.2021 – 31.12.2021, the payment for first instalment must be made before 15.02.2021.

4.How to determine the estimate of tax payable for initial submission?

For existing company

The tax estimate must not be less than 85% of the revised tax estimate or tax estimate for the immediately preceding Year of Assessment.

For example, if the Company’s last CP204/CP204A is RM10,000, the tax estimate for initial submission must not be less than RM8,500.

5.How to do for the revision of CP204?

The company is allowed to do the revision of an estimate of tax payable on 6th month or 9th month or both by using the Revised Estimate of Tax Payable Form (CP204A) through the electronic medium.

6. What is the consequences for non-submission, late payment of CP204 and underestimated the tax estimation?

Non-submission of CP204

Under subsection 120(1)(f) of the Income Tax Act 1967, taxpayer is liable to a fine of RM200 – RM20,000 or to imprisonment for a term not exceeding six months or both.

Late payment of CP204

A 10% penalty will be imposed on the balance of unpaid tax payable which the company fails to pay the monthly instalment before 15th of the month.

Underestimated for tax estimation

If the tax payable exceeds the estimation by more than 30%, the difference is subjected to a 10% penalty.

Source

Notification of change of accounting period of a company/ limited liability partnership/ trust body/co-operative society  http://phl.hasil.gov.my/pdf/pdfam/PR_08_2019.pdf

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