MALAYSIAN TAXATION - PARTNERSHIP WAN AZILAH WAN YUNUS ZURAINI ABDUL HADI MUZIRAWATI MD MUSTAFA Politeknik Kota Bharu
Published and printed by: Department of Commerce Politeknik Kota Bharu KM.2, Kok Lanas, 16450 Ketereh Kelantan Malaysian Taxation - Partnership Published Edition 2023 © Wan Azilah Wan Yunus, © Zuraini Abdul Hadi © Muzirawati Md Mustafa All rights reserved. No part of this publication may be reproduced,stored in a retrievalsystem, or transmitted in any form or by any means, electronic, photocopying, recording or otherwise without the prior written permission of the Department of Commerce, Politeknik Kota Bharu. Malaysian Taxation – Partnership / Wan Azilah Binti Wan Yunus, Zuraini Binti Abdul Hadi & Muzirawati Binti Md Mustafa i
PREFACE Tax laws are never easy to comprehend, even by tax expert or taxpayers. Taxpayers need to possess at least some fundamental guidelines and translation of the interpretation of tax statutes, rulings and guidelines and translation of the interpretation into computations of tax liabilities. Hence, the principal objective of the writing and compiling of this eBook, Malaysian Taxation - Partnership is to present knowledge in Partnership taxation, particularly in the context of computing provisional adjusted income, divisible income for the partnership and total income for partners. This eBook is divided into two parts; part one cover explanation on related topics of partnershipsincluding some examples on computing the provisional adjusted income, divisible income, and statutory income for partners so as total income. Part two consist of several tutorial questions in order to help students to understand the topic better. It is the wish of the writers, students as well as lecturers of taxation will find this eBook useful for them as one of reference regarding partnership taxation. The writers would like to take this opportunity to express our sincere gratitude to our families, colleagues and students who are directly or indirectly involved in completing this eBook and humbly apologize if there are any shortcomings. Wan Azilah Wan Yunus Zuraini Abdul Hadi Muzirawati Md Mustafa CommerceDepartment Polytechnic Kota Bharu ii
ABSTRACT iii Partnership is one of the types of business can be found in Malaysia. Partnership business is not exempt from the responsibility to pay taxes. This has been outlined in the Income Tax Act of 1967. However, the tax treatment for partnerships is that partnerships will not be taxed, but the partners are responsible for paying taxes. Therefore, in this topic students will learn on how to divide partnership income to partners for tax calculation purposes.
ABOUT THE AUTHORS WAN AZILAH WAN YUNUS started her service as a Diploma in Accounting Lecturer at Politeknik Sultan Haji Ahmad Shah in 1998 before continuing her service at Polytechnic Kota Bharu in 2011. She graduated with an Advanced Diploma in Accountancy from Institute Technology Mara in 1995. She been teaching Malaysian Taxation paper since year 2000. She also attended seminar and courses organize by Inland Revenue Board of Malaysia and private company to keep updated to current changes in Malaysian Taxation. ZURAINI ABDUL HADI holds a Degree in Accounting from University Kebangsaan Malaysia in 1999. Then she obtained a Master in Education (Technical) from University Tun Hussein Onn Malaysia in 2002. She started her career as an Accounting Lecturer in 2002 until 2019 at Polytechnic Port Dickson and Polytechnic Kota Bharu from 2020 until now. She has 19 years of experience teaching Malaysian Taxation. Her working experience started in 1999-2000 as an Account Assistant at Emville Golf Resort, Bangi Selangor. MUZIRAWATI MD MUSTAFA is the lecturer in Diploma in Accounting at the Commerce Department, Polytechnic Kota Bharu. Started working in Polytechnic from 2001 until now. She had experience teaching Malaysian Taxation course for almost 19 years. She had experiences in accounting, taxation and company secretary work at Jasa Tax & Accounting Services from 1999-2001. She has registered as an ordinary member with the Malaysian Insurance Institute in 2018. Obtained a Bachelor of Accounting from University Utara Malaysia in 1999 and Diploma in Education (Accounting) in 2003 from Maktab Perguruan Perlis. iv
hip me ners’ and Step 4: Calculation of aggregate income and total TABLE OF CONTENTS PREFACE ABSTRACT ABOUT THE AUTHORS TABLE OF CONTENTS 1.0 INTRODUCTION 2.0 DEFINITION OF PARTNERSHIP UNDER ITA 1967 3.0 TYPES OF PARTNERS 4.0 CREATION AND EXISTANCE OF A PARTNERSHIP 5.0 TAX RETURN FOR PARTNERSHIP 6.0 ASSESSMENTOF PARTNERSHIP BUSINESS INCOME 6.1 Stepsin calculating tax for partners in partners 6.2 Step 1 : Calculation of provisional adjusted inco 6.3 Step 2: Calculation of divisible income 6.4 Step 3: Calculation ofstatutory income for part 7.0 income for partner’s 6.4.1 Allocation of capital allowance among the partners 6.4.2 Allocation of donation among partners CHANGES IN PARTNERSHIP TUTORIAL EXERCISE REFERENCES v ii iii iv v v 1 1 2 4 5 5 5 6 8 10 12 12 12 17 25
1.0 INTRODUCTION A partnership is not a person in law, it is not a separate and assessable entity for tax purposes (Rose v FC of T). A partnership is, however, required to lodge a return. The partnership return determines what is the net partnership income or partnership loss. Each partner must then include in his personal return his individual share of these amounts and pays tax accordingly. 2.0 DEFINITION OF PARTNERSHIP UNDER INCOME TAX ACT (ITA) 1967 A partnership is defined in Section 2 of the Income Tax Act (ITA) as “an association of any kind (including joint ventures, syndicates and cases where a party to the association is itself a partnership) between parties who have agreed to any of their rights, powers, property, labour or skill for the purpose of carrying on a business and sharing the profits there from but it excludes a Hindu joint family although such a family may be a partner in a partnership.” 1 TAX TREATMENT ON PARTNERSHIP ➢ Partnership is not chargeable to tax. ➢ Tax levied to the partners who shared the business. ➢ Partner refer to individuals or companies.
According to the Malaysian Partnership Act 1961, a partnership is defined as a relationship that subsists between persons carrying on business in common with a view of profit. A partnership is not a person within the meaning of sec 2 of the ITA. Consequently, no assessment can be raised for income tax purposes on the partnership. Instead each individual partner is assessed on his or her share of the partnership income. 3.0 TYPES OF PARTNERS 2 Full partners Coporate partners 5 types of partners Salaried partners Limited partners Sleeping partners
a. Full partners These are the “real” partners who share in the conduct of the business and in the profit or lossess it generates. Their income is assessed to tax under Sec 4(a) as income from a business or professional source. b. Salaried partners Such partners, although held out to the world as partners, are in fact merely employees of the partnership drawing a fixed salary with or without commissions or bonuses. They do not share in the losses of the partnership. The income of salaried partners ia assessed to tax under Sec 4(b) as income from an employment source. In some cases, however the income of salaried partners is assessed under sec 4(a) as income from carrying on a business. An example of this is in the case of share brokers who are salaried partners in broking firm. These persons do not draw salaries but derive commissions on the business they put through the organization. c. Sleeping partners Such partners only contribute capital to the business. They leave the conduct of the business to others. Their income is assessed under Sec 4(a). d. Limited partners Such partners only subscribe to a certain fixed amount of capital and their liability is limited to this amount. They do not take part in the management of the partnership business and normally have no powers to bind the organization. A body corporate can be a limited partner. In ascertaining the share of profits of a limited partner the same rules as those relating to full partners are applied. e. Corporate partners This is a company which is a full partner in a partnership with individuals. It may also refer to two or more companies which form a partnership. 3
4.0 CREATION AND EXISTENCE OF A PARTNERSHIP. A partnership can be formed by at least two persons but not exceeding 20 persons agreeing to carry on a business with a view to make profit. Normally, a partnership agreement is drawn out between partners. In certain circumstances, however a partnership may exist even though there is no partnership agreement. In determining whether or not a partnership exists, the following guidelines can be used: i) Preparation of profit and loss accountsshowing the partners’ share of profits or losses. ii) Manner in which partners operate their bank accounts and whether there are limitations to the signing of cheques. iii) Name used in carrying on the business asshown in trade directories and business correspondence. iv) Recordsshowing partners’ remuneration, drawing, capital contribution and interest paid for capital loaned to the business. EXISTANCE OF PARTNERSHIP 4 Carrying a business; Making profits; Sharing rights andresponsibilities; Have risk and reward foreach partner
5.0 TAX RETURN FOR PARNERSHIP 6.0 ASSESSMENT OF PARTNERSHIP BUSINESS INCOME 6.1 STEPS IN CALCULATING TAX FOR PARTNERS IN PARTNERSHIP 5
The income of a partnership for any period is computed in the same manner and on the same basis as that of a person carrying on a trade or business. This income is usually different from the figure of profit in the partnership accounts. The profit figure is normally net after certain adjustments are made for partners’ salaries, interest on a partner’s capital and other personal expenses charged in the partnership accounts. Such appropriations are not allowed for tax purposes. FORMAT FOR CALCULATING PROVISIONAL ADJUSTED INCOME 6 6.2 STEP 1: CALCULATION OF PROVISIONAL ADJUSTED INCOME
Hani & Hana Enterprise Profit and Loss Account Year Ended 31 December 20XX It is assumed that Hani and Hana are entitled equally of the profit/loss of the partnership profits. You are required to compute : The Provisional adjusted income forthe partnership for year assessment 20XX. Example 1: The following is an extract from a partnership business styled as Hani & Hana Enterprise. RM RM Sales 260,000 (-) Cost ofsales (200,000) Gross profit 60,000 Less: Expenses Revenue items 20,000 Depreciation 5,000 Partners’ salaries 10,000 Partners’ private expenses 5,000 (40,000) Net Profit 20,000 Answer For Example 1: Hani & Hana Enterprise The Provisional Adjusted Income for the basis year 20XX RM RM Net profit as per accounts 20,000 Add: Depreciation 5,000 Partners’ salaries 10,000 Partners’ private expenses 5,000 (20,000) Provisional Adjusted Income 40,000 7
6.3 STEP 2 : CALCULATION OF DIVISIBLE INCOME. The divisible income for the basis period of the partnership isthe provisional adjusted income less: a) Partners’ wages or salaries b) Interest payable to a partner, and c) Private expenses of the partners charged to the partnership account. Example 2: Using the information in example 1 compute the Divisible income for Hani & Hana Enterprise for year assessment 20XX Answer For Example 2: RM RM Provisional Adjusted Income 40,000 Less: Partners’salaries- Hani 5000 - Hana 5000 Partners’ private expenses-Hani 5000 (15,000) Divisible Income 25,000 8 FORMAT FOR CALCULATING DIVISIBLE INCOME
Exercise 1: Computation of Provisional adjusted income and Divisible income. Answer For Exercise 1: 9
6.4 STEP 3 : CALCULATION OF STATUTORY INCOME FOR PARTNER’S AND STEP 4 : CALCULATION OF AGGREGATE INCOME AND TOTAL INCOME FOR PARTNER’S Partners A B C Divisible Income X X X Partners’ Salary X X X Allowances X X X Bonus X X X Interest on Capital X X X Private Expenses X X X Adjusted Income XX XX XX (+) Balancing charge (divide equally or based on agreement) (-) Balancing Allowance Capital Allowance (divide equally or based on agreement) Statutory Income of business (partnership) X (x) (x) XX X (x) (x) XX X (x) (x) XX (+) Other Statutory Income S.4(b) Salary S.4(c) Dividend &Interest S.4(d) Rental & Royalty S.4(e) Pension & Annuity S.4(f) Other than Sec 4(a) – (e) X X X X X X X X X X X X X X X Aggregate Income XX XX XX (-) Donation (divided equally or based on agreement) Total Income (x) XX (x) XX (x) XX STEP 3 STEP 4 10
Divisible Income = RM 25,000 (as per example 2) Allocation of Divisible income (base on the profit/loss agreement), for Hani and Hana their profit/loss agreement is to divide it equally. Hani = RM25,000 x ½ = RM12,500 Hana = RM25,000 x ½ = RM12,500 Computation of Statutory income and total income for Hani and Hana for year assessment 20xx: STEP 4 (-) Donation (1,500) (1,500) Total income 31,000 ======== 13,500 ======== Example 3: Using the information in example 1 and 2 including with additional information below: a) Capital allowance for the year assessment 20xx is RM5,000. b) Donation is RM3,000. c) Hani received rental income RM12,000. Compute the statutory income and total income for Hani and Hana for year assessment 20xx. Answer for example 3: Hani (RM) Hana (RM) Partners’ salaries 5,000 5,000 Partner’ private expenses 5,000 0 Divisible income 12,500 12,500 Adjusted income 22,500 17,500 - Capital allowance (2,500) (2,500) Statutory income for business (partnership) +Otherincome: Rental 20,500 12,000 15,000 - Aggregate income 32,500 15,000 11
6.4.1 Allocation of capital allowance among partners Since a partnership is not a legal person it cannot own fixed assets. These therefore belong jointly to the individual partners. Capital allowances are allocated only amongst those who are partners at the end of the relevant basis period in their profit-sharing ratios. Any capital allowances allowed for income tax purposesin respect of assets are calculated for the year of assessment and these are divided among the partners in accordance with the profit-sharing ratios. Any allowance that cannot be set off due to the insufficiency of profits is carried forward and forms part of the allowances for the next assessment year. 6.4.2 Allocation of donation among partners Donations made by a partnership will be apportioned to partners at the time the donation is made. Therefore, when there are changes in a partnership, the date of donation made and the partners’ profit-sharing ratio must be taken into consideration when computing donations of each partner. 7.0 CHANGES IN PARTNERSHIP Where a change occurs in a partnership, as a result of retirement, death or dissolution of the partnership or the admission of a new partner, a new partnership in effect comes into being. In the case where at least one partner from the old partnership is also a partner in the new partnership and the nature of trade of both the partnership is virtually the same, then the partner who is in the old and new partnerships is deemed to have one continuing source of income in respect of the old and new partnership. 12
Answer for example 4: The changes will affect as follows: a) Period of accounting b) Sharing of profit and loss c) Capital contribution d) Partners Salary e) Interest on Capital Example 4: 31 Dis 20xx 20xx. 20xx. 20xx amounted to RM6,000. 20xx. 13
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FORMAT OF COMPUTATION: A TO Z PARTNERSHIP COMPUTATION OF PROVISIONAL ADJUSTED INCOME AND DIVISIBLE INCOME YEAR ASSESSMENT 20XX Net profit (before taxation) xx (+) Partners’ remuneration Partners’ Salary x Allowances x Bonus x Partners’ Interest on capital x Private and domestic expenses of partners x Non Allowable Expenses x [donation, fine, depreciation etc] (-) Non Business Income RPGT (x) Dividen, Rental, Interest Gain on disposal of asset (x) (x) (-) Double Deduction (x) Povisional Adjusted Income- Sec 55(2) XX (-) Section 55(3) Partners’ Salary Partner A x Partner B Partner C x x (x) Interest on Capital Partner A x Partner B Partner C x x (x) Private Expenses Partner A x Partner B Partner C x x (x) Divisible Income XX 15
COMPUTATION OF STATUTORY INCOME AND TOTAL INCOME FOR PARTNER’S FOR YEAR ASSESSMENT 20XX Partners A B C Divisible Income Partners’ Salary Allowances Bonus Interest on Capital Private Expenses Adjusted Income X X X X X X XX X X X X X X XX X X X X X X XX (+) Balancing charge (devide equally or based on agreement) (-) Balancing Allowance Capital Allowance (devide equally or based on agreement) Statutory Income X (x) (x) XX X (x) (x) XX X (x) (x) XX (+) Other Statutory Income S.4(b) Salary S.4(c) Dividend &Interest S.4(d) Rental & Royalty S.4(e) Pension & Anuity S.4(f) Other than Sec 4(a) – (e) Aggregate Income X X X X X XX X X X X X XX X X X X X XX (-) Donation (devided equally or based on agreement) (x) (x) (x) Total Income XX XX XX 16
TUTORIAL 1 DML Enterprise is a partnership between Danish, Mila and Lim. The business was started since 2020 and accounting period ends on 31st December annually. The partnership agreement provided for the following. Danish Mila Lim Salary per annum RM60,000 RM48,000 RM36,000 Capital contribution RM50,000 RM40,000 RM30,000 Entertainment allowance per month RM1,000 RM800 RM500 Private expenses per month RM2,500 RM2,000 RM1,500 Profit & loss sharing ratio 5 3 2 Interest on capital 6% 6% 6% On 1 st July 20x7, Mila has left the partnership. The new partnership agreement are asfollow: Danish Lim Salary per month RM7,000 RM5,000 Capital contribution RM80,000 RM70,000 Entertainment allowance per month RM1,500 RM1,200 Private expenses per annum RM36,000 RM26,400 Profit & loss sharing ratio 6 4 Interest on capital Remain the same TUTORIAL EXERCISE 17
Additional information: a) Provisional Adjusted Income for the year of assessment 20x7 was RM375,300. b) DML Enterprise has contributed a sum of RM20,000 to the approved institution on Jun 20x7. c) Capital allowance was RM30,000 and the balancing charges was RM1,850 for the year of assessment 20x7. You are required: i. Compute the partnership divisible income for the year of assessment 20x7. ii. Calculate the total income for each partner for the year of assessment 20x7. (25 marks) TUTORIAL 2 a) Zarra, Aina and Shahrul have been partner in Winter Partnership since 2009. The partnership accounting year ends on 31st December annually. Given below is income statement of the partnership. WINTER PARTNERSHIP Profit and Loss Account for the year ended 31st December 2022 RM Administration expenses (1) 15,400 Salary (2) 183,000 Interest expenses (3) 20,000 Office rental 17,900 Depreciation 3,230 Stationeries 530 General expenses (4) 1,600 Net profit 108,340 350,000 RM Gross profit 345,000 Dividend income (net) 5,000 350,000 18
Additional information; 1. Administration expensesincludes RM400 for Shahrul private expenses. 2. Salary consist of salary for workers and partners. 3. Interest expensesincludes partner’sinterest on capital. 4. Included in general expenses is donation RM500 to a political party. 5. Capital allowance for the year of assessment 2022 is RM2,500. Terms and agreement of the partnership are asfollow; Zarra Aina Shahrul Capital contribution RM150,000 RM100,000 RM95,000 Salary per year RM60,000 RM54,000 RM48,000 Interest on capital 6% 2% 2% Profit and loss sharing ratio 5 4 3 On 1 st October 2022 Shahrul left the partnership and Aleef entered as a new partner. Term of the new partnership are as follow; Zarra Aina Aleef Capital contribution RM150,000 RM100,000 RM100,000 Salary per year RM60,000 RM60,000 RM54,000 Interest on capital 6% 5% 4% Profit and loss sharing ratio 5 4 4 19
You are required to: a) Calculate divisible income for the partnership. (15 marks) b) Calculate total income for each partner for the year assessment 2022. (10 marks) Muhibah Enterprise Income Statement For the year ended 31 December 2022 RM RM Sales (-) Cost of Goods Sales Opening Stocks Purchases 908 400 150 000 450 000 600 000 Closing stock (200 000) (400 000 Gross Profit 508 40 -) Expenses Salary Depreciation Interest on capital Administration expenses Sales expenses Repairs General expenses Donation 1 2 3 63 900 18 000 9 750 7 000 5 000 8 500 2 000 4 450 (118 600 Net Profit 389 80 The terms of agreement between Zamri and Chow are as follows: 20 TUTORIAL 3 Muhibah Enterprise is a partnership formed by Zamri and Chow over the last five years. Partnership accounting year ending on 31 December annually.
Donations given to the approved institution Zamri Chow Profit sharing ratio 1/2 ½ Interest on capital 6% 6% Partners salary (monthly) RM1700 RM1700 Capital contribution RM60 000 RM50 000 On 1 st June, 2022, they agreed to take Shah Jehan as a new partner. New conditions in the agreement are asfollows: - Zamri Chow Shah Jehan Profit sharing ratio 40% 30% 30% Interest on capital 8% 8% 8% Partners salary (monthly) RM1900 RM1900 RM1700 Capital contribution RM70 000 RM50 000 RM30 000 Additional Information :- 1. 2. 3. . 4. Capital allowances for the year ended 31 December 2022 was RM9000. Totalsalary includes wages and salariesfor disabled employee RM300 per month. General expenses include provision for bad debt RM500 and payments for persona l expenses made by the partners for the period from June 1, 2022 to December 31, 2022. Zamri RM 550 Chow RM 400 Shah Jehan RM 550 21
You are required to: Calculates Total Income for each partners in Muhibah Enterprise for the year of assessment 2022. (25 Marks) TUTORIAL 4 Haiqal and Rizqi are partners in a printing business. The partnership’s provisional adjusted income was RM178,000 for the basis year 2022. Below are the informations regarding the partnership. 1. Both partners were paid a monthly salary RM3,000 each. 2. Haiqal and Rizqi contributed RM30,000 and RM45,000 each as capital. 3. Izwan joined the partnership on 1 st February 2022 and contributed a capital of RM40,000. He was also paid a monthly salary RM3,250. 4. The total capital allowance claimed was RM4,800 and balancing charge RM3,000. 5. On 15 January 2022, the partnership donated RM6,000 to Perak state government. 6. The partnership accounting period ends 30 June annually. 7. Other information: I. The interest rate on capital is 10% per annum. II. Profit and loss will be distributed equally among the existing partners. 8. Haiqal received net dividend RM3,750 from ABC Bhd and Rizqi received dividend RM5,000 (gross) from a Malaysian company. 9. Izwan had rental income RM4,500. Required a. Calculate the divisible income for each partner for year assessment 2022. b. Calculate total income for each partner for year assessment 2022. (25 marks) 22
TUTORIAL 5 a) State FIVE (5) factors that determine the existence of a partnership. (5 marks) b) Nurin and Misha are partners in RISHA Boutique. The boutique’s extracted profit and loss account for the year ended 31st December 2022 was as follow; RISHA BOUTIQUe Profit and Loss Account For the year ended 31 December 2022 RM RM Gross profit 1,255,000 -) Expenses Revenue Expenses 700 000 Depreciation 60 000 Office renovation 57 000 Partner’s Salary Nurin 14 400 Misha 12 000 Partner’sInterest on Capital Nurin 2 500 Misha 1,500 Purchase of CCTV 3 000 Private expensesfor Nurin 1 600 (852 000 Net Profit 403 00 You are required to; Calculate Divisible Income for Risha Boutique for the year of assessment 2022. (15 marks) 23
c) After almost 10 years in the partnership business, Malik withdrew his capital on 30 June 2022. The profit sharing ratio between Malik, Ahmad dan Rosa was 5:3:2. Then the profit sharing became 1:1 between Ahmad and Rosa after Malik left. The capital allowance for the year of assessment 2022 was RM10,000. You are required to: i. Explain the tax treatment of the capital allowance and identify who are entitled to claim the capital allowance for the year of assessment 2022. ii. Calculate capital allowance for the entitled partners. (5 marks) 24
Ahmad Adiebah, Abdul Razak Azizah, MdSalih Noorul ‘Ashikin. (2023). Malaysian Taxation II. Azimat Advance Ventures Alan Yeo Miow Cheng. (2018) Malaysian Taxation. 23rd Edition. YSB Management Sdn. Bhd Choong Kwai Fatt. (2021). Malaysian Taxation Principles and Practice. 27th Edition. Infoworld Jeyapallan Kasipilai (2019). A Guide to Malaysian Taxation. 5 th Edition. Oxford Fajar Income Tax Act 1967 www.hasil.gov.my REFERENCES 25