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

5

DIVIDENDINCOME

DIVIDEND

WHERE IS IT DEFINEDCompanies Act?ITA?

6

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

9

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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20

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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23

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.

26

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.

27

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

33

RENTAL NCOME

34

Sources of Rent

Moveableproperties

Immoveableproperties

ship

car

machinery

land

shophouse

apartment

35

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

11

144 Floors44

Minimum unit owned

37

Derivation of Rental Income

Being used in Malaysia

Landed properties

Assets

Situated in Malaysia

38

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.

39

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.

40

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

41

Non Deductible Expenses

Cost of obtaining the first tenant (initial expenses), eg

o advertising

o commission

o legal expenses on the

first rental agreement

42

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)