(Tax Update) Tax Impact on Director’s Account

When a director provides significant advances to a company, it complicates their tax position.

IRBM will scrutinize the source of these funds, particularly for large advances, to verify tax compliance. Additionally, unrecorded “sales” in a director's account suggest possible underreporting of company income.

These director’s advances may be viewed as investments, with any returns (like interest) taxable as income for the director. IRBM ensure these transactions involve market-rate interest, are well-documented, and reported correctly.

In Malaysia, the tax implications of advances to and from directors are primarily governed by the Income Tax Act 1967 and the relevant Public Rulings issued by the Inland Revenue Board Malaysia (IRBM)

Here's a concise overview of the tax impacts and the corresponding legal references:

Tax Impact of Advance to Director

Benefit in Kind

Any interest-free or low-interest loans provided to a director are considered a benefit in kind and are taxable. The difference between the market rate of interest and the rate charged, if any, is deemed interest and must be included in the director's taxable income.

Reference: Public Ruling No. 11/2006, “Benefits in Kind”.

Deemed Interest

If the loan is interest-free or granted at an interest rate below the market rate, the company must calculate deemed interest, which is considered income of the company and a taxable benefit to the director.

Reference: Income Tax Act 1967, Section 39(1)(h).

Tax Impact of Advance from Director

Interest Income

If a director lends money to the company and charges interest, the interest income received by the director is taxable under his personal income tax.

Reference: Income Tax Act 1967, Section 4(a) which covers the taxability of income from sources of a revenue nature.

Documentation and Reporting

The company must ensure proper documentation of the loan, including the interest rate, terms of repayment, and use of the loan funds. These loans must be reported in both the company’s and the director’s tax filings.

Reference: Public Ruling No. 3/2010, “Director’s Remuneration”.

General Provisions

Arm's Length Standard

Any transaction between the company and its directors should meet the arm's length standard, particularly in the case of multinational corporations to avoid issues of transfer pricing.

Reference: Public Ruling No. 11/2006.

Disclosure and Record Keeping

Companies are required to maintain records of all transactions with directors, including loans and advances, to provide evidence of the nature and purpose of such transactions during audits.

Reference: Income Tax Act 1967, Section 82.

These points provide a structured look at how tax implications are handled regarding advances to and from directors in Malaysia, adhering to the provisions laid out in the Income Tax Act and the relevant Public Rulings.

Always consult with a tax professional or directly refer to the specific legal and tax documents for detailed applications and any updates to the tax ruling and guidelines.

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