This article is relevant to candidates preparing for ATX-MYS and the laws referred to are those in force at 31 March 2016. It discusses only the provisions in the Income Tax Act 1967 (the Act). While reading this article, candidates are expected to make concurrent references to the relevant provisions of the Act, as amended. Although some dates referred to may be in the past, the underlying principles and concepts covered in the article are still examinable and remain relevant for current candidates. Candidates are advised to read this article in conjunction with the syllabus and study guide and examinable documents that are relevant for the exam session they are preparing for.
This article is relevant to the section of the syllabus and study guide falling under item A3 – the nature and taxability of miscellaneous receipts including sums arising on disposal of, or otherwise dealing with, tangible and intangible assets; grants; subsidies; donations and contributions; awards; scholarships; gifts and inheritances.
Section A3 of the syllabus and study guide – Miscellaneous receipts – requires candidates to:
To round up the discussion on miscellaneous receipts, this article will further consider specific provisions dealing with recovery, compensation receipts, release of debt, and finally an analysis of casual income.
Examples of tangible assets which may be acquired, owned, and subsequently disposed of or otherwise dealt with include:
These include goodwill, reputation, brand names, patents, software, intellectual property and franchises.
When the above assets are disposed of or otherwise dealt with (such as exchanged, donated, gifted or bequeathed), the question arises as to whether the gains (actual or deemed) are revenue or capital in nature to the owner-disposer.
If the owner-disposer is an individual, it is pertinent to consider whether the asset has been acquired, developed or held for personal enjoyment. In this respect, the nature of the asset may throw light on whether one or more of the badges of trade are involved.
Mr Art-Lover collects paintings, carvings and manuscripts. In 2016, he sold a painting he acquired in 1998 from a then struggling artist, making a gain of RM200,000. Determination of whether the gain is capital or revenue in nature will depend on a number of factors including the following:
The answers to the above will collectively build up a case for the transaction being treated as either capital or revenue in nature.
If the owner-disposer is a company, the presumption of profit-making motive and the exclusion of the personal enjoyment rationale may render the disposal somewhat more likely to be treated as a revenue transaction. Nevertheless, the badges of trade must still be duly considered to determine the true nature of the gain thus obtained.
The general tax principle established through successive case law is that if a person receives a grant or a subsidy, the established purpose of the grant or the subsidy determines the nature of the amount received, i.e. whether it constitute gross income to the recipient and is duly subject to tax.
A grant or subsidy is usually given for a purpose or objective, which may include, for instance:
If the purpose/objective is capital in nature, for instance, for the acquisition or replacement of capital assets, the amount received is, prima facie, capital in nature. It will therefore not be taxable income in the hands of the recipient.
On the other hand, if the purpose is to compensate for a revenue loss or to cover or defray a revenue expenditure, the subsidy or grant is revenue in nature. It follows then that the amount received constitutes gross income and is duly subject to tax in the hands of the recipient.
Grant and subsidies from the Federal Government or State Governments
In Malaysia, there is a specific gazette order [Income Tax (Exemption) (No.22) Order 2006] to deal with the tax treatment of government grants. On 26 January 2010, the Inland Revenue Board has also issued Guideline 1/2010 on the tax treatment of grants and subsidies received from the Federal Government and State Governments.
The tax treatment is summarised as follows:
On 1 March 2016, ABC Sdn Bhd (year end 31 December) received the following from the Federal Government:
The tax treatment is as follows:
When dealing with donations and contributions received, the relevant questions to ask are as follows:
Suffice it to say that if the amount was given for any service or for use of any amenity or money, it will constitute gross income properly subject to income tax.
If these amounts are received in connection with the exercising of an employment, it is part of the gains and profits from employment. If it is in connection with the carrying on of a business, then it constitutes part of business income. If it is neither in connection with an employment nor a business, but is nevertheless revenue in nature, it is likely to be classified as ‘other income’ [under section 4(f)].
On the other hand, if the amounts given are truly donations/contributions, with no consideration in any form given in return, then such sums should not be treated as income and falls outside the scope of income tax.
Where an award has a monetary value, or is convertible to money, the questions to ask are:
If the answer is ‘yes’ to any of the first three questions, the conclusion will likely be that the award constitutes revenue income. If the answer is ‘yes’ to the fourth question and ‘no’ to the first three questions, then, the conclusion may tend towards the ‘non-income’ category.
Case law has established that:
If an award is concluded to be revenue in nature but is not employment income, further consideration should be given as to whether it can be classified as ‘other income’ [under s.4(f)].
Having said that, Paragraph 25C of Schedule 6 specifically provides for an exemption of up to RM2,000 per year per employee in respect of any perquisite received pursuant to an employment, whether of money or otherwise, in respect of any of the following:
By contrast, amounts received by way of scholarships are generally tax exempt. Paragraph 24 of Schedule 6 specifically exempts
‘Any sums paid by way of or in the nature of a scholarship or other similar grant or allowance to an individual, whether or not in connection with an employment of that individual.’
To complete the picture, the law [section 34(6)(l)] provides that a company which gives a scholarship to a needy student for tertiary education is eligible for a tax deduction provided that the requisite conditions are satisfied.
As regards gifts and windfall, it is pertinent to consider whether they are income in nature, or whether they are purely fortuitous. If a gift is received in return for any service rendered or use or enjoyment of any property or amenity, it is more likely to be considered to be of a revenue nature.
Under the law of gifts, if an asset or money is given and no consideration is given in return, it is a gift and does not constitute income.
Cash and properties inherited are not income in nature. As an example, if Mr A inherited a property worth RM1 million upon the demise of his father, the receipt of property does not represent income to him because it is not for services rendered.
However, an annuity receivable under the terms of a trust (created under a will) constitutes income in the hands of the beneficiary. The annuity is deemed derived from Malaysia [under section 63(3)(a)], and is taxable as an annuity [under section 4(e)].
It is pertinent to be cognisant of the following provisions dealing with recovery, compensation and release of debts:
Section 22 deems as gross income any sums receivable or deemed to have been received by way of:
(a) insurance, indemnity, recoupment, recovery, reimbursement or otherwise in respect of expenditure for which a tax deduction has been previously taken, or under a contract or indemnity, and
(b) compensation for loss of income.
Section 30(4) deems as gross business income any amount of debt released (or forgiven) where a tax deduction has been taken or any capital allowance has been claimed in respect of the original expense/outgoing.
Lastly, can section 4(f) be used to sweep up any miscellaneous sum of money received as ‘income’?
Not so, the amount received must be ‘profit or gains’, not appreciation of capital. In this connection, Rowlatt J. has opined:
...’profit or gains’ means something in the nature of interest or fruit as opposed to principal or tree.
Where an emolument accrues by virtue of some service rendered by way of action or permission or both…, that is included within the words 'profit or gains'‘
While profit from an isolated transaction not amounting to a business receipt would not be chargeable under section 4(f) on the basis that it is not revenue in nature, casual profits or income are chargeable under section 4(f).
A casual profit is one which arises to a person from an activity outside his ordinary trade or vocation but which nevertheless is a profit or income item accruing to him by virtue of services rendered or a receipt from property not chargeable elsewhere.
Payments for services are income even where there is no repetition. Below are some examples of casual income:
Written by a member of the P6 (MYS) examining team