(Post-Budget 2003 Commentary) Highlights on tax amendments

 

23 September 2002. The budget presented by the Finance Minister on 20th September, is laudable for its long-term impact on the economy and national development.

For the first time, the word ‘Belanjawan' (meaning to ‘spend' in Bahasa Malaysia) is now replaced with the more appropriate term Bajet – to include both revenue AND expenditure. It is a message to the nation that we cannot afford to just keep spending but also look into the means to generate income, thus emphasising balancing income with expenditure.

The Finance Minister is also more focused on generating growth internally through domestic investment as opposed to foreign direct investment (FDI). This is an alternative strategy to attracting FDI with generous tax incentives and losing revenue in the long run.

The budget strategy for 2003

Four strategies have been proposed in this budget. Besides the usual finance and investment related strategy, an important element included is that of nurturing a progressive and harmonious society with high moral values and ensuring the well-being of the rakyat , especially in the rural areas. No amount of economic success will bear fruit if the people's moral values and well being are left out.

Other than proposing numerous tax incentives, the Government has also highlighted some amendments to the Income Tax Act 1967 as follows:

Resident status of individuals

This is a relatively complicated section on resident status of an individual that requires an individual who is in Malaysia for a period of less than 182 days in a particular year to be linked to another period (either before or after the particular year) of 182 days or more. In most instances, the compliance with this law means the individual has to be in Malaysia on the 31st December of a particular year and on the 1st January of the immediate following year because of the word ‘linked' used in the Act. This has been a stumbling block to year end vacation leaves or travel plans of foreign and expatriate workers in Malaysia. And a burden to employers who cannot allow their staff to take leave around this time of the year.

The amendment now makes it unnecessary for an individual to be physically present in Malaysia in those two crucial days to qualify to be a resident.

An individual who is tax resident in Malaysia enjoys many tax benefits. For example, a resident individual enjoys a number of personal relief like self, wife and insurance and medical deductions. These are not available to a non-resident. The tax rates too are different.

The amendment comes into force with effect from year of assessment 2002 and subsequent year of assessment. Many expatriate employees would breathe a sigh of relief with this amendment.

Occupation of premises for non-business purposes

This is an obscure and antiquated legislation that treats the mere occupation of premises by an individual rent-free, as a source of income. The income computed is a notional income based on the ratable value or the economic rent of the premises. This rarely used section is now deleted effective from year of assessment 2003 and subsequent year of assessment.

Derivation of special classes of income

Section 15A relates to gross income in respect of services rendered in connection with the use of property rights, installation of plant and machinery, technical services, advice, etc.

This amendment introduces a territorial limitation, thus making it clear that the derivation of gross income from Malaysia for these kind of services falling under Section 4A are limited only to those services which are performed in Malaysia. The amendment comes into force with effect from 21st September 2002.

Simplified calculation for special deduction from employment income

If an employer provides living accommodation to an employee, the benefit of that accommodation will be included as an income from employment of the employee. The Income Tax Act provides for some deductions to be made from the employment income, one among them being expenses incurred for the repair and maintenance of the living accommodation (excluding expenses of a capital nature and those related to the land).

The deduction to be allowed is presently specified in a laborious, verbose fashion making it rather difficult to understand for the layman, not to mention the taxman. The amendment now introduces a formula that simplifies calculation tremendously.

This is probably done to make life easier for the individual taxpayer when the self-assessment for individuals comes into force in 2004.

Director's liability to tax

Under an earlier amendment to Section 75, the responsibility to pay taxes (among other duties) fell on the principal officials of the company (manager, secretary, etc.) and the director. The time period in which the tax liability arose was not specified. In other words, the current director can become responsible for liabilities incurred by the company before he took office.

Effectively if the legislation is not amended, no new director would want to assume the directorship of a company with bad tax records!

A new section is now introduced that provides for the person who is a director of that company during the period in which that tax is liable to be paid, to be jointly and severally liable for such taxes. Such taxes can be recoverable from the director.

With the amendment, a new director can be appointed without him being liable for any old tax liability incurred before his time.

Compensation for loss of employment

Presently a sum of RM 4,000 is exempted for each year of completed service from any sum received by way of compensation for loss of employment. The exemption limit is now increased to RM 6,000 per year.

It would have been more equitable if the entire sum be exempted. There will be more socioeconomic justice if this had been done – after all the person is losing his job, and he needs all the money he can get! To avoid any abuse, the sum could be restricted to, say RM 100,000 and tax only the balance, if any.

Licensed Malaysian offshore bank

‘Licensed Malaysian offshore bank' is now given the meaning assigned to it by the Labuan Offshore Business Activity Act 1960 (Act 445). This is in consequence of the amendment of Section 60C which now excludes gross income, adjusted income or adjusted loss and statutory income attributable to an offshore business activity of a licensed Malaysia offshore bank.

Section 60C taxes the income of a resident person carrying on a business of banking from wherever accruing or derived, i.e. it is taxed on a world scope. Presetly this will include income earned in Labuan by such a person. This amendment seeks to exclude that part of the gross income or adjusted income or adjusted loss and statutory income attributable to an offshore business activity of a licensed Malaysian bank, namely from Labuan.

The amendment is effective from year of assessment 2003 and subsequent year of assessment.

Conclusion

The Budget did not give anything new to the man on the street. The good news however is that no new taxes are introduced either.

This budget is designed with very long-term objectives in mind. Probably, future budgets will be built on the foundation of the Budget 2003.