SMEs and tax on their dividends

This is the second question and answers session provide by PricewaterhouseCoopers on various aspects of Budget 2004.

Q. THE Finance Minister has announced that for small and medium scale companies the chargeable income of the first RM500,000 will be taxed at 20%.  

The remaining chargeable income will be taxed at 28%.  

Please explain what is meant by small and medium scale companies and the effect on its dividend distribution. 


A. A small and medium scale company (SME) is a company resident in Malaysia which has a paid-up capital in respect of ordinary shares of RM2.5mil and less at the beginning of the basis period for a year of assessment.  

Example, if a company has a financial year end of Dec 31 and the basis period is from Jan 1, 2003, to Dec 31, 2003, the company would be deemed a SME if on Jan 1, 2003, the ordinary share capital is RM2.5mil and below. 

The dividends distributed by the SME shall be franked at 28% even though the first RM500,000 of chargeable income is taxed at 20%. 


Q. Since the Year of Assessment 2001, I am very worried that our company’s auditor is not able to audit the company’s accounts in time to allow our tax agent to prepare and submit the company’s tax return to the Inland Revenue Board (IRB).  

My company’s financial year end is Dec 31 and I believe there are a lot of companies with the same financial year end. 

The tax law requires us to submit the tax return within six months following the close of the financial year.  

Before Year of Assessment 2001, we are given eight months to submit the tax return.  

Even with an eight months extension it is sometime a struggle to get the accounts audited in time.  

Instead of giving us more time to prepare and submit the tax return, why have the authorities shortened the time period? 


A. While the law requires companies to submit their tax returns within six months from the close of the financial year, the IRB have as a concession, following appeals from the various trade and professional bodies, administratively allowed companies to submit their tax returns seven months following the close of their financial year end.  

This concession has been given since Year of Assessment 2001. 

Now it has been proposed to amend the law to allow companies seven months to submit their tax returns. 


Q. I am a disabled and drive to work everyday. Is it true that road tax for the disabled people like me would be abolished? If it is true when is the effective date? 


A. Yes, it is proposed that with effect from January 2004, road tax would be exempted on cars, vans and motorcycles owned by the disabled.  

The exemption is subject to the following conditions:- 

·cars, vans and motorcycles are manufactured locally; 

·the applicant is registered with the Social Welfare Department; 

·the applicant possesses a valid driving license; 

·the vehicle is registered under the name of the applicant; and 

·exemption is only given for one vehicle at any one time. 


Q. I recently bought a second-hand condominium unit costing RM175,000.  

I was advised by my property agent that in the recent Stimulus Package announced by the Prime Minister, a deduction would be given on the interest expense since the unit price is less than RM180,000.  

However, my tax agent claims that I would not be entitled a deduction because the unit is not new. Please advise. 


A. Your tax agent is correct in saying that you would not be eligible for the deduction of interest expense.  

The proposed Section 46A of the Income Tax Act, 1967, prescribes that the property must be purchased from a housing developer or statutory body or co-operative society.  

Since you have not purchased it from the housing developer or statutory body or co-operative society, you would not be entitled for the deduction.  


Q. I am planning to set up a new company with an authorized share capital of RM500,000 to complement the activity of my existing company which was set up last year.  

My friends told me that with effect from the year of assessment 2004, certain incorporation expenses are allowable for tax purposes.  

However, the tax agent of my existing company told me that “pre-commencement” expenses are not allowable and have added back this expenses in the tax computation.  

Can you please provide me with more information? 


A. First of all, “pre-commencement” expenses and incorporation expenses are different types of expenses.  

Examples of incorporation expenses are cost of preparation of memorandum and article of association, fee for registration of company name etc.  

Expenses like rental, salaries, utilities incurred before a company commenced its operations are “pre-commencement” expenses. From this definition, incorporation expenses is a sub-set of “pre-commencement” expenses. 

Currently, incorporation expenses for a company with an authorised share capital of RM250,000 and below is deductible for tax purpose.  

During the Budget 2004 announcement, it is proposed that the deduction be extended to companies with authorized share capital not exceeding RM2.5mil. 

In this connection, your new company can claim its incorporation expenses but other pre-commencement expenses is still not allowable. 


Q. In view that there is a 20% increase in import duty and excise duty on cigarettes, will the prices of the cigarettes increase? 


A. The prices of cigarettes will definitely be increased substantially. The issue is by how much?  

This will depend on how much of the increase will be passed onto the consumers by the tobacco companies.  

The higher costs are likely to increase the incidence of cigarette smuggling and would have to be addressed by the authorities. 

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