Taxation

Introduction

THE NATURE AND PURPOSE OF TAXATION

Nowadays taxes can be considered as the most important source of governmental income. Taxes differ from other sources of income in that they are compulsory tax and are unreturned, they are not paid in exchange for some specific thing, such as the sale of public property or the issue of public debt. While taxes are apparently collected for the sake of the welfare of taxpayers as a whole, the liability of the individual taxpayer is free of any benefit received. According to www.uv.es, taxpayers are commonly charged on labor income in order to funding retirement benefits, medical payments, other social security programs and other tax relief.

There are a few general purposes that should manage a rational system of taxation. Firstly is every state have to contribute in order to support the government as nearly as possible in proportion to their respective abilities. In that order they will enjoy under the protection of the state. No government in the world can run it's organizational without funds. Second purpose is the tax which means each individual is bound to pay ought to be certain and not arbitrary. It is means the time of payment, the manner of payment, the quantity to be paid all these must be clear and plain to the taxpayer or contributor and every other person as well. Next is every tax had to be charge at the time, or in the manner, that is most likely to be suitable for the taxpayer to pay it.

Subsequently is each tax should be so artificial as both to take out and keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state. Otherwise, these purpose needs to be reinterpreted from time to time, based on the tax law. Therefore, this can be well understood that the purpose of taxation is very simple and obvious for proper functioning of a state. Thus, taxes are charges levied against citizen's personal income or on other property or for some specified activity.

MALAYSIAN TAX ENVIRONMENT

The Concise Oxford Dictionary defined a tax as a “contribution levied on persons, property, or business for the support of government”. It means a right body is appointed to collect the tax for public purpose. Inland Revenue Board of Malaysia (IRBM) is the one who is responsible as a legislature in Malaysia.

Based on the Section 3 of the Act, it stated as below:-

“Subject to and in accordance with this Act, a tax to be known as income tax shall be charged for each YA upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia.”

The tax act as source of income for the Malaysia's government to discharges its appropriate functions for the protection and general welfare of the citizens. For example, the funds used to develop infrastructure, provide best public facility, pay salary for the army, public servants, and so on.

Section 4 of the Act indicates classes of income on which tax is chargeable regarding to:

· Gains and profits from trade, profession and business

· Salaries, remunerations, gains and profits from an employment

· Dividends, interests or discounts

· Rents, royalties or premiums

· Pensions, annuities or other periodic payments

· Other gains or profits of an income nature not mentioned above.

Encik Daniel, a resident in Malaysia is subject to Malaysian taxation. He will be taxed according to Income Tax Act 1967 (Act 53/1967) (ITA 1967). In accordance to Section 3 of the Act, only salaries, remunerations, gains and profits from an employment will be taxed. As an employment, Encik Daniel will have employment income. He will be taxed under Section 4(b). The correct form to use is Form BE. This form has to be submitted on or before 30th April 2010. In addition, Encik Daniel working as an manager in a private sector, earning monthly salary of RM10,000. This is Section 4(b) income. The income earned by Encik Daniel is considered as a direct tax.

Scheduler Tax Deduction (STD) scheme will apply to Encik Daniel employment income. His employer is required under the Act to deduct the tax payable by him on a monthly basis from his monthly salary. This requirement for employers is under Section 107 of ITA 1967.

Penalty of 10% will be charged on the outstanding amount after 30th June in the next year assessment. He is supposed to settle the payment within in 60 days. If not, additional 5% penalty will be charge.

If Mr. Daniel has only employment income, his employer is responsible to settle installment payment of tax payable on or before 20th April 2010. Based on scenario, Mr. Daniel has to settle the total tax payable on or before 30th April 2010.

While, If Mr. Daniel dissatisfied with the high tax charged on him, he may appeal to the Special Commissioner of income tax for the first determination. If Mr. Daniel is still dissatisfied with the decision, he may forward to the High Court. If Mr. Daniel agreed with the decision by High Court, the case will be closed. However, if the result is not behalf on his side, he may further to Appeal Court for the determination. Finally, Mr. Daniel may bring the case to the Federal Court to clarify in depth to get final decision. For example, we assume that Mr. Daniel won the case, he able to reduce the amount of tax charged.

Encik Daniel

Income tax Computation

Year Assessment 2009

RM

RM

RM

First Company( 14th Jan 2009-30th Jun 2009)

S4 (b) Employment income

S13 (1) (a)

Gross salary (8,600 + 300 ÷ 0.89 × 6)

60,000

Gratuity (Exempted)

Nil

S13 (1) (b)

Watch (Exempted)

Nil

Furniture

560

Medical expenses (Exempted)

Nil

Holiday Packages:

Air Fares

10,000

Accommodation (Exempted)

Nil

10,560

S13 (1) (c)

Lower of:

30% of 60,000 × 4÷ 6 = 12,000

Rental for unfurnished House:

1,200 × 4 = 4,800

4,800

S13 (1) (d)

Withdrawal from unapproved fund

Employer's

40,000

Interest Earned

10,000

50,000

Total income

125,360

Second Company (1st Aug 2009- 31 Dec 2009)

S4 (b) Employment income

S13 (1) (a) :

Director fees (10,000 × 5)

50,000

Entertainment Allowances (1,000 × 5)

5,000

55,000

S13 (1) (b):

Mobile phone

Exempted

Motor car (5,000× 5/12)

2,083

Driver (600× 5)

3,000

Servant (400×4)

1,600

Gardener (300× 4)

1,200

7,883

S13 (1)( c) :

August (Hotel) (250×31)

7,750

Unfurnished house (2,000 × 4)

8,000

15,750

Aggregate income/Total income

78,633

Less: Approved donation

(2,000)

76,633

Total income

201,993

Computation:

Total income

201,993

Less: Personal reliefs

Self relief

8,000

Medical examination

500

Child relief :

Second Child

4,000

Third child

9,000

Fourth child

1,000

Wheel chair

1,100

Books

900

Personal computer

3,000

Medical expenses

4,500

EPF & insurance premium (300 × 12)

6,000

38,000

Chargeable income

163,993

Puan Sara

Income tax Computation

Year Assessment 2009

RM

RM

RM

S4 (d) Rental income

Monthly Rental (900 × 12 )

10,800

Less : Expenses

Installation of kitchen cabinet

Nil

Repairs ad maintenance

1,200

Interest on loan

5,000

Fire insurance

900

Quit rent

700

7,800

3,000

Less: Approved donation

500

Total income

2,500

Total income

2,500

Less: Personal relief

(2,500)

Chargeable income

Nil

Tax payable by Encik Daniel for year assessment of 2009:

Total Income = RM 163,993

1st RM 150,000 = RM27, 825

Next 13,993@ 27 % = RM 3,778

Tax payable = RM 31,603

Due date for submitting Tax Return For The Year Of Assessment Of 2009.

According to Inland Revenue Board of Malaysia, for individuals without business source which is BE Form, the due date is on or before 30th April 2010. This had permanently been set up by the government of Malaysia. If Encik Daniel did not submit the BE Form by 30th April 2010, he will faces a penalties.

How the tax payment will be made to his employment income?

Encik Daniel is an employee for a private company which he had work from the year of 1992. His tax payment will be made by his employer by using the Scheduler Tax Deductions. Based on Inland Revenue Board, Scheduler Tax Deductions is an income tax deduction mechanism from employee's current monthly remuneration in accordance with the schedule of monthly tax deductions. Encik Daniel's employer will make a monthly deduction to reduce the employee's burden to pay the tax. As shown in the calculations parts, Encik Daniel needs to pay in total of RM 31,603.00. It is a burden for his to pay all the tax in a lump sum. So by practicing the STD method, it will help Encik Daniel to reduce his burden to pay the tax charge towards him.

Due Date for paying the tax in balance of any tax due.

If there any tax balance need to pay off, Encik Daniel must made the payment by 30th April 2010. Under the section 103 Income Tax Act 1967, any tax due and payable but has not been paid by the taxpayer by the due date shall be increased by 10% and any balance remaining unpaid upon the expiration of 60 days from the due date shall be further increased by 5% of the balance unpaid.

The Timeframe for a valid appeal against an assessment

A taxpayer must lodge an appeal to the IRB within 30 days of the deemed assessment on submission of tax return

If the Inland cannot come to an agreement with Encik Daniel in the case of an appeal, to whom the appeal will be forwarded for determination?

The appeal will be forwarded to the Special Commissioners of income tax for determination. If Mr. Daniel is still dissatisfied with the decision, he may forward to the High Court.

TAX PLANNING OPPORTUNITIES

From the computation that has been done we found out that Encik Daniel tax payable is RM31603 while Puan Sara is NIL. Consequently the total tax payable for Encik. Daniel is high. In order to reduce the amount of tax payable or to save additional money from the taxes Encik. Daniel have to do some tax plans and arrangement for his planning affairs. As a result we can come out with few suggestions in order to reduce the tax chargeable.

PERSONAL RELIEF

Table below shows about the Mr. Daniel reliefs for the year assessment of 2009. There is also the suggestion column which is recommendation for him in order to reduce the total tax charged by increasing the total reliefs.

RELIEFS

2009

SUGGESTION

Medical examination

RM800

RM500

Purchase of books or magazines or journals

RM900

RM1,000

Purchase of personal computer

-

RM3,000

Net deposit in “Skim Simpanan Pendidikan Nasional”

-

RM2,000

Purchase of sport equipment

-

RM200

Medical insurance

RM3,000

RM3,000

Medical Expenses for own Parents

RM4500

RM5000

Education Fees

-

RM5000

Total Relief

RM9200

RM19700

Total Income

RM201993

RM201993

(-) Total Relief

RM 9200

RM 19700

Chargeable Income

RM 192733

RM 182293

Tax on the First RM 150000

RM27825

RM 27825

Tax on Balance

RM 11538

RM 8719

Total Tax Charged

RM 39363

RM 36544

Based on the table above we can conclude that the actual chargeable income is RM 192733 while based on our suggestion is RM 182293. The difference between these two chargeable incomes is RM 10440. Consequently he is able to reduce the total tax charged worth RM 2819.

BENEFITS IN KIND

According to the Section 13(1)(b) of the Act, the benefits are not convertible into money. These benefits are provided by the employer for their employees. There are two conditions of leave passage which is applicable for Encik Daniel.

First his employer will give fully support for meals and accommodation if Encik Daniel and family travel in Malaysia for three times. If exceeding more than three times, Encik Daniel has to choose the three most expensive bills to get an exemption.

While second condition is applicable for one leave passage. This travel is between Malaysia and overseas. His employer will support him at maximum of RM3000 for his one leave passage. Both benefits in kind are provided direct for En Daniel, Puan Sara and their childre

EN. DANIEL SHOULD GO FOR JOINT ASSESSMENT

Since the tax chargeable for Encik Daniel is high they can elect to go for joint assessment since his wife Puan Sara only having a small portion income. Here the solution showed the comparison between elect for joint assessment and otherwise.

Total income

RM

RM

Encik Daniel

201,993

Puan Sara

2,500

Total Income of Joint Assessment

204,493

Less: Personal reliefs

Self Relief

8,000

Medical Examination

500

Child relief :

Second Child

4,000

Third child

9,000

Fourth child

1,000

Wheel chair

1,100

Books

900

Personal computer

3,000

Medical expenses

4,500

EPF & insurance premium (300 × 12)

6,000

Spouse Relief

3,000

(41,000)

Chargeable Income

163,433

1st RM 150,000 = RM 27,825

Next 13,433@ 27% = RM 3,627

Tax payable = RM 31,452

Before Joint Assessments = RM 31,603

After Join Assessments = RM 31,452

Different = RM 151

Based on the tax planning above if En Daniel elects to go for joint assessment he can absolutely reduce their tax up to RM151 which is a little less than the original tax chargeable.

SAVING

Encik Daniel can come out with a plan by making up some savings in the approved financial institutions. From his savings, Encik Daniel is able to earn dividends. This dividend income is fully exempted from been taxed.

Therefore, Encik Daniel is able to reduce the total chargeable income and also pay less for tax payable. Once the dividends income is exempted from been taxed, it encourages resident to make savings in the future.

PARTNERSHIP

Partnership can be defined as a legal relationship which subsists between two or more persons who carry on a business in common with the object of making a profit (Veer D.J.T 2008). The partnerships consist of two to twenty persons. It can be more if they are among professional. The main objective of partnerships is to carry out on business and make profits. Based on the scenario, both Ng and Siow are considered as “Partners”. The organization names Ng educational must be registered with registered with registrar of business unless an exemption is given.

The Law governing the taxation of partnership and how the partnership is taxed?

According to the section 2 of the Act, partnership exist when they want to carry on a business, willing to share rights and responsibility, profit and risk.

Partnership does not pay any tax but sharing of profits from partnership will be taxed. Each partner is responsible for the tax on the share of partnership profit. In self assessment computation, tax returns of Ng and Siow must include their share of partnerships profit and loss.

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