(TAX UPDATE) Your Company Just Lent You Money Interest Free. LHDN Already Disagrees.

(TAX UPDATE) Your Company Just Lent You Money Interest Free. LHDN Already Disagrees.

Introduction

You are the director of your own Sdn Bhd. Business is doing okay, cash is sitting in the company account, and you draw down a loan from the company to cover something personal. No interest charged, no rush to repay, nothing on paper that looks alarming.

To you, this feels like a non issue.

To LHDN, this is already a tax event.

The provision you need to know: Section 140B

Section 140B of the Income Tax Act 1967 was introduced effective Year of Assessment 2014. It provides that where a company gives a loan or advance to its director, financed from the company's internal funds, and charges no interest or an interest rate below the arm's length rate, the company is deemed to have derived gross income consisting of interest from that loan. This deemed interest is assessed as income under paragraph 4(c) of the Act.

Read that again. The company is deemed to have earned interest income. It does not matter that not a single ringgit of interest actually changed hands. The tax exposure sits with the company, not the director.

The Inland Revenue Board's own guidance on this, Public Ruling No. 8/2015, "Loan or Advances to Director by a Company," was issued specifically to explain how this deeming provision operates in practice.

Who exactly does this catch

This is the part most owner-directors get wrong. Section 140B does not apply to every director on your board. It only applies to a director as defined under subsection 75A(2) of the Act, which covers a person who occupies the position of director and who, either on his own or together with associates within the meaning of subsection 139(7), owns or controls not less than 20 percent of the ordinary share capital of the company.

In plain terms, a professional director with no meaningful shareholding sits outside this provision. But here is the catch for the typical Malaysian SME. In most of these companies, the director is also the major shareholder. So in practice, Section 140B reaches almost every owner-director drawing funds from their own company.

One more limiting condition worth noting. This provision only bites where the loan is financed from the company's internal funds, meaning surplus funds such as retained earnings or capital injected into the business. If the loan is financed through external borrowings or third party funds, Section 140B does not apply, though other tax consequences may still arise on that borrowing cost.

How LHDN calculates the deemed interest

The mechanics are formula driven, not discretionary. LHDN takes the outstanding loan balance at the end of each calendar month, applies the Average Lending Rate published monthly by Bank Negara Malaysia, and divides by 12 to arrive at that month's deemed interest. These monthly figures are summed across the basis period to arrive at the company's deemed interest income for the year.

Here is a working example. Assume your company's director's loan balance stays flat at RM500,000 for all 12 months, and the applicable Average Lending Rate holds at an illustrative 6.5 percent throughout. On that assumption, the deemed interest income for the year works out to roughly RM32,500.

Your company pays tax on that RM32,500, in full, even though the company never actually received a single sen of it. If the loan balance moves during the year, or the ALR changes mid year, the actual deemed interest figure will differ and needs to be recomputed month by month.

How to stay out of this trap

The fix is straightforward in principle. The company must actually charge the director interest, and that interest must be equal to or higher than the amount LHDN would otherwise deem under the Section 140B formula. Charge less than that benchmark, and LHDN simply disregards what you charged and substitutes its own deemed figure.

Practically, this means directors' loan accounts need proper interest computation built in from day one, not patched in retrospectively when the tax computation is being prepared. It also means loan balances should be tracked monthly, since the deeming calculation itself runs on a monthly balance basis, not an annual average.

KTP's View

Section 140B has been in force since 2014, so this is not new law, but it remains one of the most commonly missed items in SME tax computations, precisely because the transaction looks harmless from the director's chair.

No cash left the company in the director's mind, so no tax should be due. The Act sees it differently, and the deemed income sits on the company's tax return whether or not it was ever intended as income at all.

If your company carries a director's loan account with no interest charged, or interest charged below the Bank Negara Average Lending Rate, that balance needs a proper review before your next tax computation is filed. This is exactly the kind of item that surfaces in an LHDN audit years after the fact, together with the exposure for earlier years of assessment.

This article is general educational content on Section 140B of the Income Tax Act 1967 and does not constitute tax advice on any specific company's facts. If this applies to your company's director's loan account, speak to your tax agent before your computation is filed.

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