Guidelines for tax treatment on interest income for pawnbroking industry

The IRB has issued on 3 June 2011 the Guidelines for tax treatment on interest income for the pawnbroking industry. The guidelines explain the basis of recognition and the tax treatment of interest income for the pawnbroking industry.

Pursuant to Section 24 of the ITA, interest income arising from the pawnbroking business shall be recognised and accrued from the date the charge begins. The IRB has now given a concession to the conventional and Islamic (Ar-Rahnu) pawnbroking industry to recognise interest income from the date of redemption if the charge was made in the basis period for the year of assessment 2009 and subsequent years. Examples are provided in the Guidelines to illustrate the tax treatment.

During the transition period (Y/A 2009, 2010 and 2011), the following concessions are given to pawnbrokers to allow them to adapt to the change in practice:

a. For the pawnbroker who closes the accounts on 30 September to 31 December for Y/A 2009, the IRB has agreed to accept the income reported for Y/A 2008 and before on the cash basis or accrued basis as already adopted previously without any adjustment and penalty imposed.

b. For the pawnbroker who closes the accounts on 31 January to 31 August for Y/A 2009, the IRB has agreed to accept the income reported for Y/A 2009 and before on the cash basis or accrued basis as already adopted previously without any adjustment and penalty imposed.

The claim for deduction of expenses pursuant to Section 33(1) and 39(1) is based on the accrual principle.

For the purposes of tax audit, the IRB will accept the income recognition method adopted by the pawnbroker for the Years of Assessment 2008 or 2009 (where applicable) and prior years without adjustment. However, where there is under-declaration of income and over-claiming of expenditure based on the existing basis of revenue recognition, then penalties will be imposed under the Section 113 (2) of ITA 1967.

No penalties will be imposed under Section 107B(4) and 107(C) ITA 1967 for the difference in the amount of tax payable and estimated tax payable for the Years of Assessment 2009 and 2010. Where a penalty has been imposed, the pawnbroker should submit an appeal to prove that the difference had arisen from adjustments due to changes in the tax treatment as provided for by the guidelines.

Islamic pawn-broking (Ar-Rahnu)

With effect from 2007, the Islamic pawnbroking (Ar-Rahnu) is also subject to the provisions of Pawnbrokers Act 1972 [Act 81] and come under the purview of the Ministry of Housing and Local Government (MHLG). Since the concepts of conventional pawnbroking and that of the Islamic pawnbroking have certain differences, the MHLG has exempt Islamic Pawnbrokers from certain provisions of the Pawnbrokers Act 1972 [Act 81] and Pawnbrokers (Control & Licensing) Regulations 2004 [P.U. (A) 317/2004].

Guidelines for the Implementation of Islamic Pawnbroking business (Ar-Rahnu) approved under the Pawnbrokers Act 1972 [Act 81] and Pawnbrokers (Control and Licensing) Regulations 2004, issued by the MHLG, are attached to the principal Guidelines.

Members are requested to read the Guideline for Tax Treatment on Interest Income for Pawnbroking Industry carefully and thoroughly for the detailed changes. You may also view the Guidelines at http://www.hasil.gov.my/pdf/pdfam/GarisPanduanIndustriPajakGadai.pdf.