Tax Treatment on Donations or Contributions: What Every “Person” Needs to Know

(Tax Update) Tax Treatment on Donations or Contributions: What Every “Person” Needs to Know

IRBM’s Practice Note No. 1/2025 dated 24 March 2025 provides clarification on how donations or contributions received by any person are treated for tax purposes, especially when such funds are used to support business or charitable operations.

2. Key Tax Principles

Scope of Income Tax
Under Section 3 of the ITA, income tax applies to any income received or derived from Malaysia (or received in Malaysia from abroad).
Donations or contributions may fall under taxable income if they show features of income, such as:
- Being received repeatedly
- Flowing from a source of income
- Being part of regular business activities
When Donations Are Taxable
Donations or contributions are taxable under Paragraph 4(a) of the ITA if:
- The recipient is running a business.
- The funds are used to generate income or sustain business operations.
Example:
A special education school charging fees and receiving donations to subsidize student tuition may be taxed on such donations if used to support its operational costs, unless it is an approved IOF.

3. Treatment for Institutions, Organizations, or Funds (IOFs)

General Rule
Donations received by IOFs that are not approved under Section 44(6) of the ITA are taxable if not fully used for charitable purposes.
Deductible Expenses
IOFs can deduct expenses incurred to achieve their charitable objectives, including costs of fund-raising and direct aid (e.g. food programs, donations to victims).
Example:
If a foundation receives RM200,000 in donations and spends RM165,000 on charitable programs and operations, only the surplus of RM35,000 is taxable under Paragraph 4(a).

4. Tax Exemption via Approval under Section 44(6)

Eligibility for Tax Exemption
IOFs may apply for approval under Section 44(6) to enjoy tax exemption under Paragraph 13(1)(a), Schedule 6 of the ITA.
Application Requirement
Submissions must be complete and sent to the Tax Policy Department, Inland Revenue Board of Malaysia (IRBM). Guidelines are available on the IRBM website.

5. How the New Tax Treatment on Donation Affect “Persons”

Donations Now Taxable if Used for Business
Under Practice Note 1/2025, if small businesses receive donations and use them to generate revenue or support their business activities, these donations are treated as taxable income. This means small businesses must include such donations in their taxable income calculations.
No Automatic Exemption
Donations are not automatically exempt from tax for small businesses. Only donations to, or from, approved organizations that meet specific criteria are eligible for tax deductions or exemptions.
Deductions for Approved Donations
Small businesses can still claim tax deductions for donations made to LHDN-approved institutions, but these deductions are limited to 10% of aggregate income. Proper documentation (official receipts) is required to claim these deductions.
Increased Compliance Burden
Small businesses must now maintain clear records to show how donations are used and ensure compliance with the updated tax rules.

Conclusion
All “persons” receiving donations or contributions must evaluate the purpose and usage of these funds. Whether you are running a business or a charitable organization, understanding the tax implications is crucial.

Unapproved IOFs using donations to support operations must account for potential tax exposure, while tax-exempt status under Section 44(6) offers a compliant pathway to exemption.

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