education about malaysian taxation principles and practice

SCOPE OF CHARGE

1.0 Introduction
In Malaysia, the law governing income taxation in the Income Tax Act 1967 (Act 53/1967). A transaction must fall within the ambit of 'scope of charge' as provided in s 3 of the Act in order to be liable to income tax. if it is not within the ambit of s 3, no income tax due is in respect of such a transaction. In short, it is tax free.

2.0 Scope of charge
Section 3 of the Act provides :
"Subject to and in accordance with this Act, a tax to be known as income tax shall be charged for each Y/A upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia."

Section 3 sets out two circumstances where income tax liability arises, namely :
(a) the transaction must be 'income' in nature and such income is accrued in or derived from Malaysia ; or
(b) the transaction must be 'income' in nature and it is received in Malaysia from outside Malaysia (foreign source income).
Income tax would be imposed by reference to a Y/A upon a person's income. such person is known as a chargeable person.

2.1 Source of income
The Act does not define the meaning of 'income' but merely categories the income under ss 4 and 4A as follows :

a. Classes of income on which tax is chargeable
Section 4 Subject to this Act, the income upon which tax is chargeable under this Act is
income in respect of :
(a) gains or profits from a business, for whatever period of time carried on,
(b) gains or profits from employment,
(c) dividends, interest or discounts,
(d) rents, royalties or premiums,
(e) pensions, annuities or other periodical payments not falling under any of the foregoing
paragraphs,
(f) gains or profits not falling under any of the foregoing paragraphs.

b. Special classes of income on which tax is chargeable
Section 4A Notwithstanding the provisions of s 4 and subject to this Act, the income of a
person not resident in Malaysia for the basis year for a Y/A in respect of :
(i) amount paid in consideration of services rendered by the person or his employee in
connection with the use of property or rights belonging to, or the installation or operation of
any plant, machinery or other apparatus purchased from, such person;
(ii) amounts paid in consideration of technical advice, assistance or services rendered in
connection with technical management or administration of any scientific, industrial or
commercial undertaking, venture, project or scheme; or
(iii) rent or other payments, made under any agreement or arrangement for the use of any
moveable property,
which is derived from Malaysia is chargeable to tax under this Act.
Although income has been classified into sub-paras (a) to (f) under s 4 and sub-paras (i) to (iii) under s 4A, they are not mutually exclusive. In ALB Co Sdn Bhd v Director General of Inland Revenue [1979] 1 MLJ 1 (PC), the Privy Council held that although rental income was classified under s 4(d), it can be classified under s 4(a) if it was received in the ordinary course of business.

The transaction must fall within either s 4 or 4A, being income in nature, before it is liable to income tax. In Dickson v Abel (45 TC 353), the court held that payment by way of gift was not taxable on the recipient as it was not within the taxable sources as listed by the legislation. Gift is a capital receipt. Thus, it is tax free.