SECOND ECONOMIC STIMULUS PACKAGE 2009

In response to the current global economic crisis, the honourable Deputy Prime Minister and Finance Minister, Y.A.B. Dato’ Sri Mohd Najib Tun Abdul Razak announced the Second Stimulus Package on 10 March 2009.

A brief summary of the relevant tax measures proposed is stated below:

a) Carry back of current year business losses of up to RM100,000 for years of assessment 2009 and 2010 to the immediately preceding year. The proposal is not available to amongst others, a person who:

i) has been granted pioneer status or approval for investment tax allowance under Promotion of Investments Act 1986;

ii) has made a claim for re-investment allowance under Schedule 7A of the Act;

iii) has been granted an exemption under Section 127(3)(b) or 127 (3A) of the Act;

iv) has made a claim for deduction under the Income Tax (Deduction for Investment in an Approved Food Production Project) Rules 2006; the Income Tax (Deduction for Cost of Acquisition of Proprietary Rights) Rules 2002; or the Income Tax (Deduction for Cost of Acquisition of Foreign Owned Company) Rules 2003;

v) has been exempted from tax on its income under Section 54A of the Act;

vi) is an investment holding company under Section 60FA;

vii) carries on insurance business under Section 60, inward re-insurance business under Section 60A or offshore insurance business under Section 60B;

viii) carries on takaful business under Section60AA; or

ix) in the case of an individual, has no source consisting of a business.

b) With effect from year of assessment 2009, interest of up to RM10,000 each year expended by an individual citizen who is a resident to finance the purchase of one residential property, the sale and purchase agreement of which has been executed between 10 March 2009 and 31 December 2010, is allowed deduction for 3 consecutive years from the year in which the interest is first expended.

c) With effect from year of assessment 2009, qualifying capital expenditure of up to RM100,000, incurred by a person between 10 March 2009 and 31 December 2010, on renovation or refurbishment of a premise which is used for the purpose of a business of his, shall be allowed an allowance equal to one-half of that expenditure. The list of proposed qualifying renovation or refurbishment expenditure is as follows:

i. general electrical installation;

ii. lighting;

iii. gas system;

iv. water system;

v. kitchen fittings;

vi. sanitary fittings;

vii. door, gate, window, grill and roller shutter;

viii. fixed partitions;

ix. flooring;

x. wall covering;

xi. false ceiling and cornices;

xii. ornamental features or decorations excluding fine art;

xiii. canopy or awning;

xiv. fitting room or changing room;

xv. children play area; and

xvi. recreational room for employee.

d) Paragraph 71 of Schedule 3 of the Act provides that where a person incurs qualifying expenditure in relation to an asset which he owned for a period of less than two years and such asset is disposed of, balancing charge equal to any allowance claimed in respect of the qualifying expenditure shall be made against that person, except by reason of death of that person. With effect from year of assessment 2009, the Director General of Inland Revenue is empowered to consider other reasons he thinks appropriate for not clawing back the allowance claimed.

e) For an individual who ceased employment on or after 1 July 2008, the exemption from tax on payment for compensation for loss of employment has been raised from RM6,000 to RM10,000 for each completed year of service.

f) Effective from the year of assessment 2009, double deduction is granted for remuneration incurred on employing Malaysian citizens and residents retrenched on or after 1 July 2008 and the termination has been registered with the Director General of Labour, the Ministry of Human Resources. The incentive is applicable for the employment of full time employees between the period from 10 March 2009 to 31 December 2010. The double deduction incentive is restricted to remuneration not exceeding RM10,000 per worker per month for a maximum period of 12 months.

This incentive is not applicable where the employment is for the replacement of a former employee or the former and present employers are associates or controlled companies as defined under Section 139 of the Act.

g) For the banking and financial institutions, with effect from year of assessment 2009, the interest which is due and payable for the period of twelve consecutive months related to the deferment on the repayment of a housing loan taken by a retrenched Malaysian citizen before termination of his employment, will be taxed on a receipt basis. This is on conditions, amongst others that the request for the deferment of the housing loan repayment is made between 10 March 2009 and 9 March 2010 and that the individual was retrenched on or after 1 July 2008.

h) Effective from year of assessment 2009, Accelerated Capital Allowance (ACA) of 40% annual allowance is given to a Malaysian resident on qualifying expenditure incurred under Schedule 3 of the Act between 10 March 2009 and 31 December 2010. For asset acquired under hire-purchase, only qualifying expenditure incurred during that period shall be eligible for the ACA. The incentive shall not apply to a person who in the period from 10 March 2009 to 31 December 2010:

i) has been granted incentives under the Promotion of Investments Act 1986;

ii) has made a claim for re-investment allowance under Schedule 7A of the Act;

x) has been granted an exemption under Section 127(3)(b) or 127 (3A) of the Act; or

xi) qualifies for an allowance at a higher fraction under the Act or any rules made under Section 154 of the Act.

Declare Dividend disregard accumulated losses

Can a company declare dividend out of a profit year and disregard accumulated losses?

• Companies Act had stipulated that no dividend shall be paid by the company except out of profits [S365(1)].

• No part of the capital of the company may be distributed as dividen as this would constitute a reduction of capital in a manner not permitted by the law.

• Profits are calculated by applying prudent accounting standards and practice so as to determine the source of dividends. However, when it comes to deciding whether it is lawful for a company to pay a dividend, profits as calculated under the law will be preferred as there is no legal necessity to make good any losses in fixed capital or depreciation of fixed capital (in accounting, loss or depreciation of fixed assets is allowed for in computing profits) and the profits made in the current financial year can be lawfully distributed by way of dividend without making good trading losses of earlier years.
• This means that if a company had suffered loss in the past, but has currently made a profit, legally this current profit can be distributed.
• However, directors are required to exercise reasonable commercial prudence to ensure going concern of the company and therefore, would usually make provisions for the past losses (accumulated losses) to be recovered before a dividend is declared.