This article is relevant for candidates preparing for Paper P6 (MYS), Advanced Taxation, and is based on prevailing laws as at 31 March 2014 and relevant Public Rulings issued as at the time of writing (March 2015). (1)
This focus of this article is the determination of basis periods for a company on the commencement of operations and when there is a change of accounting date.
This is not an introductory article; it is relevant to students coming to the end of their studies and finalising their preparations to sit the exam. Therefore, the target reader is assumed to be conversant with the relevant basic terms such as basis year, calendar year, basis period, year of assessment (YA) and accounting date.
Importance of correct determination of basis periods
Determining the basis period for a YA is important as it determines the period in which:
- income arising is recognised
- expenses are treated as incurred, and
- capital expenditure on assets is treated as incurred.
Correctly determining the basis period is therefore significant in the following aspects of tax management:
- Accurately determining the adjusted income, the correct claim for capital allowances and, thus, the chargeable income and tax liability for a YA
- Providing a basis for the estimation of tax chargeable for the relevant basis periods, and
- Identifying the compliance responsibilities for the respective YAs.
Relevant provisions and public rulings
The provisions of the Income Tax Act 1967 relating to basis periods are as follows:
- Section 20 – Basis years
- Section 21 – Basis periods for persons other than companies, LLP, trusts etc
- Section 21A – Basis periods for a company, limited liability partnership (LLP), trust or co-operative society
- Section 42(2) – Overlapping periods
As at March 2015, there are six Public Rulings issued by the Inland Revenue Board (IRB), four of which are currently applicable:
|Public Ruling||Subject matter|
|4 of 2001||Basis period for a non-business source (individuals and persons other than companies)|
|5 of 2001||Basis period for a business source (co-operatives) – [Replaced by PR8 of 2014]|
|6 of 2001||Basis period for a business source (individuals and persons other than companies/co-operatives)|
|7 of 2001||Basis period for business and non-business sources (companies) – [Replaced by PR 8 of 2014]|
|7 of 2011||Notification of change of accounting period|
|8 of 2014||Basis period of a company, LLP, trust body and co-operative society|
It should be noted that the above legislative references are provided for full information only as candidates are not required to be able to quote these when answering Paper P6 (MYS). This article will cover the relevant rules contained within these sections and the guidance provided in the applicable Public Rulings.
Current year basis
Malaysia switched from the preceding-year basis to the current-year basis in the calendar year 2000. This was achieved by amending the provision in section 20 by inserting the word 'coinciding', so the section now reads as follows:
'For the purposes of this Act, the calendar year coinciding with a YA shall constitute the basis year for that YA.'
Consequently, the accounting period ending in the year 2000 constituted the basis period for YA 2000 (current year), while the accounting period ending in the year 1999 constituted the basis period for the YA 2000 (preceding year).
Basis periods for individuals and bodies of persons
Section 21 applies to all persons other than a company, LLP, trust body or co-operative society. This section is therefore applicable to individuals and bodies of persons. It stipulates that the basis year shall constitute the basis period for a year of assessment.
As the basis year is the calendar year, this means that for individuals and bodies of persons, the period included in a year of assessment is always the calendar year. This rule prevails even if, for example, an individual derives income from a business source.
Mr Dee Lee Jern is employed as the accounts manager of a retail outlet. In the evenings, he runs a business supplying floral table arrangements to caterers and hotels.
The basis period for YA2014 for Mr Dee is the calendar year 2014 – ie 1 January 2014 to 31 December 2014 for both his employment income and his business income.
Basis periods for a company, LLP, trust body or co-operative society
The main focus of this article is section 21A which governs the determination of basis periods for a company, LLP, trust body or a co-operative society. Candidates preparing for the Paper P6 (MYS) exam are advised to be fully conversant with the rules contained within this section.
Section 21A contains eight subsections, the contents of which are outlined briefly below:
This subsection lays down the general provision that, unless stated otherwise elsewhere in section 21A, the basis year (ie the calendar year), shall constitute the basis period for a YA.
This subsection stipulates that, where a set of accounts have been made up for a period of 12 months ending on a day other than 31 December, that period shall constitute the basis period for the YA.
This subsection stipulates that, where there is a change in the year-end date from its normal date, the director-general of Inland Revenue (DGIR) is empowered to direct the basis periods for the failure year and the subsequent year.
This subsection deals with the determination of basis periods where a company, LLP, trust body or co-operative society first commences operations.
This subsection deals with the situation where a company commences operations and is required to make up its accounts to a specified day.
|(6)||This subsection provides that a company, LLP, trust body or co-operative society with existing operations shall adopt the same basis period for any new or additional operations. In other words, there shall be only one basis period for all sources of income of the entity.|
|(7)||This subsection explains that commencement of operations refers to an entity commencing its own operations or commencing to carry on the operations of another company, LLP, trust body or co-operative, not previously carried on by that company.|
This subsection defines 'operations' as including a business activity and/or the making of investments.
When a company, LLP, trust body or co-operative commences a business activity, it is said to have commenced operations for the purposes of section 21A. The determination of the date of commencement of the business activity involves a question of fact: generally, it refers to the date when the core or integral activity of the business commences.
For instance, a manufacturing business is deemed to commence its operations when its plant and machinery are in place and the inventory (stock) has arrived – ie when the manufacturing process is able to proceed. For a retail business, the commencement date is the day the business is first open to members of the public with its offering of goods, regardless of whether the first sale is actually made on this date. A hotel business is said to commence its operations when it is able to offer food, beverage and accommodation services/facilities to members of the public.
Apart from a business activity, the definition of 'operations' also includes the making of investments – ie the purchase of stocks and shares, the deposit of monies in the bank to earn interest, the making of any loans for interest, and the acquisition of any investment properties.
Basis periods on commencement of operations [s21A(4)]
A new subsection (4) was introduced to section 21A with effect from YA 2014. This has vastly simplified the determination of the basis periods upon commencement.
In essence, when an entity makes up its first set of accounts to any date falling in the first, second or third year YA after the date of commencement of operations, the period covered by the accounts (from the date of commencement) is accepted as the basis period for the first applicable YA. The YAs before that YA will therefore be deemed to have no basis periods.
The following illustration explains the determination of basis periods when a company commences operations:
Ace Sdn Bhd was incorporated on 1 November 2014 and commenced operations on 1 December 2014.
It is contemplating closing its first set of accounts to one of the following alternative dates:
(i) 31 December 2014 (two months), thereafter to 31 December annually
(ii) 31 March 2015 (five months), thereafter to 31 March annually
(iii) 30 November 2015 (13 months), thereafter to 30 November annually, or
(iv) 31 March 2016 (17 months), thereafter to 31 March annually.
The basis periods for the relevant YAs will be as follows:
It should be noted that in alternative (iv), where Ace Sdn Bhd makes up its first set of accounts to 31 March 2016, the basis period for YA 2016 will be 1 December 2014 (date of commencement of business) to 31 March 2016 – a period of 16 months. There will be no basis periods for the YAs 2014 and 2015.
In practice, a company’s first set of accounts is unlikely to exceed 16 or 17 months. This is because the Companies Act stipulates that a company must hold the first annual general meeting (AGM) within 18 months of its date of incorporation.
Implication: tax estimates
Closely connected to the issue of commencement of operations is the issue of the furnishing of the first estimate of tax.
Using illustration 2, if Ace Sdn Bhd has a paid up ordinary share capital exceeding RM2.5m, it will have to furnish its first estimate of tax within three months of the commencement of its operations – ie by 28 February 2015. This compliance requirement is relevant to alternatives (iii) and (iv) because the first basis period is not less than six months [s107C(4)].
[Note: Where a company with a paid up ordinary share capital exceeding RM2.5m commences business operations in a YA where the basis period for that YA is less than six months, the company is exempt from the requirement to furnish an estimate of tax payable for that particular YA].
If Ace Sdn Bhd has a paid up ordinary share capital of less than RM2.5m at the commencement of its operations then it will be a small-and-medium enterprise (SME), as defined. As a SME, a moratorium will apply such that Ace Sdn Bhd, being a company incorporated and resident in Malaysia, will not be required to furnish an estimate of tax for that YA and the immediately following YA. This is the case in alternative (i) – ie Ace Sdn Bhd will not be required to furnish estimates of tax for YA 2014 and YA 2015.
Where a SME company has no basis period for the YA in which it commences its operations, it will not be required to furnish estimates of tax for the two immediately following YAs [s107C(4A)(a)]. This is the case in alternatives (ii) and (iii), where Ace Sdn Bhd has no basis period for YA 2014 (the YA it commences operations), it will not be required to furnish estimates of tax for YA 2014, and the two immediately following YAs of YA 2015 and YA 2016.
Lastly, where a SME company has no basis period in the YA it commences and no basis period for the immediately following YA, it will not be required to furnish estimates of tax for the YA in which it commenced operations and the two immediately following YAs [s107C(4A)(c)]. Hence, in alternative (iv), where Ace Sdn Bhd has no basis period for the YA in which it commenced and also has no basis period for the immediately following YA, it will similarly not be required to furnish estimate of tax for YA 2014 and the two immediately following YAs of YA 2015 and YA 2016.
Commencement of operations of a company in a group, etc [s21A(5)]
Where a company commences operations and:
- is required under any law to make up its accounts to a specified date, or
- being a member of a group of companies, makes up its accounts to a date to be coterminous with the rest of the group,
the period covered by the accounts – ie from the date of commencement of operations to the end of the accounting period, shall constitute the basis period of the first YA.
Alpha Sdn Bhd is a new company incorporated on 1 August 2014. It is a member of the Beta group of companies which all make up their accounts to 31 December annually. Alpha Sdn Bhd commenced operations on 1 October 2014 and makes up its first set of accounts to 31 December 2015 to be coterminous with the group. Thereafter, Alpha closes its accounts annually to 31 December, in line with the group.
Alpha’s first YA is YA 2015 with the basis period covering 1 October 2014 to 31 December 2015.
Change of accounting date [s21A(3)]
Where an existing company, LLP, trust body or co-operative society has made up its accounts for a period of 12 months ending on a day in the basis year, and then it fails to make up its subsequent accounts to the corresponding day in the following year, there is said to be a change of the accounting date.
There could be many commercial reasons for such a change including the need to be co-terminus with the new holding company or with the group or the adoption of a 52-week financial year.
Whatever the reason may be, such a change of accounting date will trigger the need for a direction of basis periods by the DGIR pursuant to section 21A(3). Public Ruling 8 of 2014 provides guidance on how the DGIR will direct such basis periods.
The illustration below demonstrates the terms which will be used in this article. However, it should be noted that these are not technical terms.
XYZ Sdn Bhd made up its accounts annually to 31 March. In 2015, it decided to change its accounting date to 30 September. The terms used and their respective periods are:
- the last normal accounts – 1 April 2013 to 31 March 2014
- the last normal YA – YA 2014
- first set of new accounts – 1 April 2014 to 30 September 2015
- failure year – YA 2015 (the year in which the company fails to make up its accounts to the normal accounting date of 31 March)
- following year – 2016
- the third year – 2017
The underlying principles [see paragraph 5.2 of Public Ruling 8 of 2014, Example 8 and Example 9] adopted when the DGIR directs are:
- there shall be no missing YA – ie no YA should be left out
- there shall not be two or more sets of accounts closed in the same YA
- where an accounting period must be divided between two YAs and there is an uneven division of the basis periods between the two YAs, any fraction of a month should be treated as falling into the first period (refer to illustration 7, later in the article).
How the DGIR will direct may be better explained in this table.
From the above illustrations, it may be concluded that the length of the period covered by the accounts after changing the accounting date – ie whether it is less than 12 months or more than 12 months – is no longer relevant.
While the law states that the DGIR will direct the basis periods when there is a change of accounting date, this may not happen in practice under self-assessment. Thus, the explanatory notes to the company tax return form [Form C] for 2014 provide similar guidance to that outlined in the illustrations above for cases where there is a change of accounting date. This seems to suggest that the determination of the basis periods based on the above principles may be made by the taxpayer without having to refer to the DGIR for direction.
Overlapping basis periods [s42(2)]
With the amendment of section 21A with effect from the YA 2014, there is now little likelihood that basis periods for successive YAs will overlap. Still, in the unlikely event that it does occur, section 42(2) prevents the double taxation of the same adjusted income in successive YAs. This is achieved by excluding the relevant amount when computing the adjusted income of the second YA if the same income has been subject to tax in the first YA.
Basis periods represent a fundamental area of the Malaysian tax system and an important part of the Paper P6 (MYS) syllabus. Hence, it is important for candidates to be fully conversant with all the component concepts.
Written by a member of the Paper P6 examining team
(1) It is to be pointed out that although Public Ruling 8 of 2014 was issued after the cut-off date of 31 March 2014 for the June 2015 exam, its contents are nevertheless taken into consideration in this article on an exception basis. The reason for the inclusion of the Public Ruling 8 of 2014 is that it explains the laws as at 31 March 2014, and its inclusion renders this article complete, circumspect and up to date.