TAXATION 1

TOPIC 4

Other sources of income

Section 4 ITA, 1967:

(c) Dividends and interest

(d) Rental and royalty
(e) Pensions, annuities or any other periodical payments
(f) Gains or profits not falling under the foregoing paragraph

Section 4 (c)

Dividend

1. Represents a distribution or payment out of profits of a company to its

shareholders in accordance with shareholding ratio.

2. Either in cash or in kind

3. However bonus shares are not considered as “dividend income”.

Basis of assessment

- The basis of assessing dividends is the calendar year basis. Dividend income
derived from Malaysia is treated as income of the basis year in which the dividend
is paid, credited or distributed.

- The dividend shall be deemed to be derived from Malaysia if it was paid,

credited or distributed by a company resident in Malaysia.

Are Malaysian dividends received by a Non resident taxable?

A non resident entitled to a Malaysian dividend is also liable to tax because that dividend
income is derived from Malaysia.

What are deductible expenses from dividend income?

- Interest on loan borrowing to purchase the shares

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Deduction of tax

Effective YA2008, dividend will be assessed as single tier system which will be
EXEMPTED in the hand of recipient.

Single tier system (w.e.f YA 2008)

Tax on company’s profit is final tax; dividends distributed to shareholders will be

exempted from tax.

Exempt dividend (individuals)

1) Dividend paid to any member by co-operative society

2) Dividend received by resident individuals from approved unit trust
3) Dividends paid out of exempt account
4) Dividend from Labuan Offshore Company
5) Dividend from company paying under single tier dividend system (YA2008 onwards)

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Section 4 (c)

Interest

- Compensation for delayed payment.

- Interest income can be assessed under Sect 4(a) if :
i. Derived from a source which form part of the stock in trade of business
Eg : Late interest charged to trade debtors
ii. Interest is receivable by a person from the business of lending money
Eg : Interest on loan

Basis of assessment

Interest income is assessed on a strict calendar year basis. Therefore, interest income
received during the calendar year ended 31 December 2001 is assessable in the YA 2001.

Interest income also assessed only when it is received.

Gross income from interest shall be deemed to be derived from Malaysia:

i) If the Government or a State Government is responsible for the payment of the interest;

ii) If a resident is responsible for the payment of interest;

iii) If the interest is on loan/borrowed money. The loan/money borrowed is used to

acquire assets, which are used for the production of income, where such income is
derived from Malaysia.

iv) If the interest is on a loan or debt. Any asset or property used as security for the loan
or debt is situated in Malaysia.

v) If the interest is charged as an expense against any income, where such income is
accrued in or derived from Malaysia.

Exemption

1. Effective from YA2008, interest income received by INDIVIDUALS from

moneys deposited in all approved institutions be fully exempted.
2. In respect of securities or bonds issued or guaranteed by the government
3. In respect of Islamic Securities instrument approved by the Securities
Commission
4. In respect of Bon Simpanan Malaysia issued by Bank Negara of Malaysia
5. Deposited in a bank licensed under BAFIA 1989/Islamic Banking Act 1983

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 6. Lembaga Tabung Haji
7. Malaysian Building Society Berhad
8. Cooperative society
9. Borneo Housing Finance Berhad

Withholding tax

Where interest derived from Malaysia is paid or credited to a non resident, a 15% tax
must be deducted from the interest and paid to the DG unless a double tax treaty either
specifies a lower rate of tax or exempts the interest from tax. The tax so withheld is to be
remitted to the DG within one month of the date of the payment or crediting.

Section 4 (d)

Rental

Definition

Any sum paid for the use or occupation of any premises or part thereof or for the hire of
anything.

Derivation of rental income

Rental income is deemed to be derived from Malaysia if:-

- The rented property is situated in Malaysia

- The operation is carried on in Malaysia

Eg. If the lessor and lessee sign the agreement outside Malaysia for the lease of a
building situated in Malaysia, the source of income is in Malaysia.

Basis of assessment

Rental income is assessable on the calendar year basis (1 Jan to 31 Dec) and on a receipt
basis.

Is rental income received by a non resident taxable?

If non resident rents out his immovable property to an individual in Malaysia, the rent
received would be deemed income from Malaysian source and therefore, taxable in
Malaysia.

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Adjusted Rental income

1. any excess of expenditure over income cannot be carried forward for offset
against the income of the subsequent year

 Eg. Rental income = RM20, 000 (allowable expenses = RM25, 000) There
will be adjusted loss. This adjusted loss will be forgone. Cannot carry
forward to next basis year.

2. Capital allowances cannot be claim because there is no business in operation.

3. Outgoings and expenses wholly and exclusively incurred in the production of

gross income are allowed as deduction from gross rental income (Section 33). The
outgoings and expenses which are normally allowed are :-

 Repairs and maintenance

 cost of insurance and administration of the property such as legal fees, fire
insurance, renewal the tenancy cost
 Interest on loan – interest expenses incurred on loan obtained to acquire an
asset which produces income.
 assessment rates and quit rents
 Cost of replacement of fixed assets included in the rented property. E.g.
Furniture.

4. Advance Rental is taxable in the year receipt notwithstanding that it may subject
to refund. However “deposit” which is refundable will not be subject to tax in the
year receipt. As such, properly differentiate between “advance rental” and
“deposit” would give tax implication.

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Section 4 (d)

Royalty

Royalty is define as,

 Any money paid as consideration in respect of the publication of, or for the use
of, or the right to use any
1. literary or artistic or scientific works, copyrights, patents, designs or
models, trademarks, recording discs or tapes or any similar rights or
property
2. technical, scientific, commercial or industrial know how or information

Briefly, payments for the use of all tangible property such as equipment, blueprints and
models, payments for the supply of know-how such as scientific, commercial and
industrial knowledge, information or assistance will be deemed as royalties. It will also
include payments received for the operation of mines, quarries or other places of
extraction of natural resources.

Derivation of Royalties (Section 15)

In general, royalties are usually derived from the place where the copyright or patent is
used or the place where the mine or forest is situated.

However, in Malaysia, the deeming provision of Section 15 provides that gross income in
respect of a royalty is deemed to be derived from Malaysia under any one of the
following circumstances :-

 where the Government or State Government has the responsibility for the
payment of a royalty; or
 where the responsibility for the payment of the royalty in the basis year for a year
of assessment lies with person who is resident in Malaysia for that basis year; or
 where the royalty is charged as an outgoing or as an expense against any income
accruing or derived from Malaysia

Eg.

A company, Popedum Sdn Bhd, which is tax resident in Malaysia, is required to pay to
Popia Plc (a company incorporated in UK) a royalty for the use of a patent. Since the
royalty payment is borne by Popedum Sdn Bhd, the royalty received by Popia Plc is
deemed to be sourced in Malaysia and hence is liable to Malaysian tax.

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Basis of Assessment

Royalty income is chargeable to tax under Section 4(d) and is assessed on a calendar year
basis.

Type of royalties

1. Royalties on Literary and Artistic Work (Sch 6 Para 32B and 32)

(a) publication of, or the use of or the right to use, any literary work or any
original painting (Sch 6 Para 32B) – Exempted up to RM20, 000.
(b) publication of, or the use of or the right to use, any artistic work (Sch 6
Para 32) – Exempted up to RM10, 000.
(c) Recording discs or tapes (Sch 6 Para 32) – Exempted up to RM10,000

2. Income from musical composition (Sch 6 32D)

Exempted up to RM20, 000 received by an individual resident in Malaysia in respect of

any musical composition.

Translation of books or literary work at the specific request of any agency of the
Ministry of education or the Attorney General’s Chambers (Sch 32A) will received an
exemption of RM12,000.

5. Income from cultural performances approved by the Minister (Sch 6 Para 32C)

Exempted in full for income received by an individual resident in Malaysia in respect

of his performances in cultural performance.

6. Honorarium (Sch 6 Para 32E)

Income of an individual for the basis year for a YA being payment by way of fee or
honorarium in respect of services provided such as by Lembaga Akreditasi Negara is tax
exempt.

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Section 4 (e)

Pensions

A pension is a payment made to an individual who has retired or ceased to hold an office
or employment. It is a recurring payment.

A pension is taxable under Section 4 (e).

Derivation

Gross income in respect of a pensions paid by the Government or a State Government is

deemed to be derived from Malaysia.

Basis of assessment

 Calendar year basis (individuals) and financial year (companies)

Exemptions

1. wound and disability pensions granted to armed forces personnel and pensions
granted to wives or dependent relatives of members of any of those forces killed
on war service;
2. disability pensions granted in respect of war service injuries to members of civil
defenses organization ;
3. widows’ or orphan pensions provided under any written law or paid under an
approved scheme to or for the benefit of the widow, child or children of deceased
contributor;
4. pensions derived from Malaysia by a person on reaching retirement :
 in respect of services rendered in exercising a former employment in
Malaysia; and
 where the pensions is paid other than under any written law, from a
pension provident fund, scheme or society which is approved scheme,
Provided the retirement is:-
 on reaching the age of 55 ; or
 on reaching compulsory age of retirement from employment
 Due to ill-health.
Adjusted income

Generally, no amounts are deducted from gross pension’s income

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Section 4 (f)

Other gains or profits

Eg:

 Commission received for offering assistance in buying/selling of properties;

 Fees received for introducing clients/customers to businessman
 Amount received from offering occasional advice, consultation or assistance of
any kind
 Amount received from occasional television appearances, broadcasting, lectures,
and newspaper articles.