PRACTICE NOTE 3/2020: Clarification on Gross Income from Business Source

With effective from YA 2020, the issuance of Practice Note No. 3/2020 clarifies, in addition to having paid up ordinary shares of up to RM 2.5mil and gross business income of not exceeding RM 50mil, the gross income has to be from business source (i.e. manufacturing/ trading or service activities) to be eligible for tax treatment under paragraph 2A and 2D Part 1, and subparagraph 19A(3) Schedule 3 of ITA 1967 i.e. where the chargeable income shall be taxed at the preferential tax rate of 17% on the first RM600,000.

Please take note the following when estimating CP204 for the year of assessment 2021; 
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Issues	Tax Treatment
​Investment Holding Company ​(Kindly refer notes below for further explanation)	(i) subject to section 60F of the ITA 1967, a company which is an investment holding not listed on Bursa Malaysia, is deemed to have no gross income from a business source and is not eligible for the preferential tax rate. ​(ii) subject to section 60FA of the ITA 1967, a company which is an investment holding listed on Bursa Malaysia, is deemed to have gross income from a business source and is eligible for the preferential tax rate.
​Company or LLP which does not have gross income from business sources but has other incomes, for example: rent and interest (including temporarily closed business operations).	If other income such as rent and interest are not assessed as income from the source of a business under paragraph 4(a) of the ITA 1967, the company which does not have gross income from business sources is not eligible for the preferential tax rate.
​Company or LLP which has gross income from foreign business sources.	Gross income from foreign business sources shall be taken into account in determining gross business income not exceeding RM50 million.
​Company or LLP enjoying certain incentives/tax incentives such as pioneer status or investment tax allowance.	​Exempted gross income from business source shall be taken into account in determining gross business income not exceeding RM50 million.

Highlight for Investment Holding Company

An IHC is deemed to have no gross income. However, when the company comprehensively and actively provides maintenance or support services in relation to the properties rented, the rental income shall be business source and assessed under Section 4(a) of the ITA 1967, therefore eligible for the preferential tax rate provided all other criteria i.e. paid up capital and gross business income limit are also met.

​With reference to the Public Ruling No. 12/2018, to "provide maintenance or support services" means services that include:
(a) doing generally all things necessary (e.g. cleaning and repair services) for the maintenance and management of the real property such as the structural elements of the building, stairways, fire escapes, entrance and exits, lobbies, corridors, lifts, escalators, compounds, drains, water tanks, sewers, pipers, wires, cables or other fixtures and fittings; and 

(b) doing generally all things necessary for the maintenance and management of the exterior parts of the real property such as playing fields, recreational areas, driveways, car parks, open spaces, landscape areas, walls and fences, exterior lightings or other external fixtures and fittings,

where the services are actively provided by the person himself who owns or lets out the property or that he hires another person or another firm to provide the said services.

A person is deemed NOT actively and comprehensively providing maintenance or support services and as such, the rental income is NOT assessed under Section 4(a) of the ITA 1967 when:
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(a) the owner of the property merely provides security services and/ or other facilities; or
(b) facilities are provided and maintained by the joint management corporation of the property and the owner only pays maintenance fees, thus the services enjoyed by the tenant are merely an extension of the owner's right as proprietor of the property unit.

The clarification though the practice note (effective YA 2020) impacts primarily on businesses earning only rental income assessed under Section 4(d) of the ITA 1967 where tax rate will now be at 24%. Taxpayers should therefore be mindful of the change in tax rate when assessing the estimate of tax installment (via Form CP204) moving forward.

​Should you need further clarification, please do not hesitate to contact us.

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