How to Determine the Tax Basis Period for a Company?
Why it is important to
determine the basis period for a company?
There are generally 2 reasons:-
-
Tax law compliance
-
To do with “Deduction”. Usually pre-commencement
expenses are not deductible.
The basis period of a company, limited liability
partnership, trust body or co-operative society has been defined in Section 21A of Income Tax Act 1967.
Section 21A (3)
of Income Tax Act 1967 [Effective from
year of assessment 2014]
Presently,
it is provided in Section 21A(3) of the Income Tax Act 1967 that, where a company, limited liability
partnership, trust body or co-operative society has made up the accounts of its
operations for a period of twelve months ending on a day in a basis year and
there is a failure to make up accounts of the company, limited liability
partnership, trust body or co-operative society ending on the corresponding day
in the following basis year, the Director General may direct that the basis
period for the year of assessment in which the failure occurs, or the basis periods
for that year and the following year of assessment, shall consist of a period
or periods (which may be of any length) as specified in the direction.
However,
no legislation exists (apart from the public rulings issued by the Inland
Revenue Board) to govern the basis periods for the relevant years of assessment
for the same failure which applies to a company, limited liability partnership,
trust body or co-operative society that normally makes up the accounts for a
period of 12 months ending on 31 December.
History
Subsection 21A (3) is amended by
Act 761 of 2014 para 8(a), by substituting for the words "other than 31
December" the words "in a basis year", has effect for the year
of assessment 2014 and subsequent years of assessment.
Likely Tax Effects and Implications
The above proposal enables the Director General to direct
the basis periods of all companies, limited liability partnerships, trust
bodies or co-operative societies that change their accounting year end.
Illustration:
(Dates used in examples has ignored the effective date of
Subsection 21A (3) of ITA 1967)
Examples
|
Accounting Period
|
Basis Period
|
Remarks
|
ABC1 Sdn Bhd made up its account from 1 May 2010 to 30
April 2011, subsequently it has changed its accounting period ended from 1
May 2011 to 30 June 2012, thereafter to 30 June each year.
|
1 May 2010 to 30 April 2011
1 May 2011 to 30 June 2012
1 July 2012 to 30 June 2013
|
1 May 2010 to 30 April 2011 (YA2011)
1 May 2011 to 30 June 2012 (YA2012)
1 July 2012 to 30 June 2013 (YA2013)
|
The tax basis period will follow the accounting period
as the “continuity of year of assessment” is present. ie YA2012, Ya2013 &
YA2014.
|
ABC2 Sdn Bhd made up its account from 1 July 2010 to 30
June 2011, subsequently it has changed its accounting period ended from 1
July 2011 to 31 December 2011, thereafter to 31 December each year.
|
1 July 2010 to 30 June 2011
1 July 2011 to 31 December 2011
1 January 2012 to 31 December 2012
|
1 July 2010 to 30 June 2011 (YA2011)
1 July 2011 to 31 December 2012 (YA2012)
|
Both accounting periods was added together as one tax
basis period as its year end (ie. 31 December 2012) is coincident with
YA2012.
|
ABC3 Sdn Bhd made up its account from 1 January 2012 to
31 December 2012, subsequently it has changed its accounting period ended
from 1 January 2013 to 31 March 2014, thereafter to 31 March each year.
|
1 January 2012 to 31 December 2012
1 January 2013 to 31 March 2014
|
1 January 2012 to 31 December 2012 (YA2012)
1 January 2013 to 31 August 2013 (YA2013)
1 September 2013 to 31 March 2014 (YA2014)
|
Accounting period ended 31 March 2014 has “jump from
2012 to 2014”, it has “skipped” the year 2013 and therefore need to split the
accounting period for tax basis period determination. The period consists of
15 months, 8 months allocated to YA2013 and 7 months allocated to YA2014.
|
Section 21A (4)
Income Tax Act 1967 [Effective from year of assessment 2014]
With
the intention of providing more clarification to the existing legislation, it
is proposed that, subject to subsections
(5) and (6), where a company, limited liability partnership, trust body or
co-operative society commences operation on a day in a basis year for a year of
assessment (hereinafter referred to as the "first year of
assessment") and makes up its account:-
(a) for a period of less than twelve months
ending on a day in that basis year, that period shall constitute the basis
period for the first year of assessment;
(b) for any period of months ending on a day
in the immediately following basis year (hereinafter referred to as the
"second basis year"), that period shall constitute the basis period
for the year of assessment (hereinafter referred to as the "second year of
assessment") immediately following the first year of assessment, there
shall be no basis period in relation to any of its sources of income for the
first year of assessment; or
(c) for a period of more than twelve months
ending on a day in the basis year immediately following the second basis year,
that period shall constitute the basis period for the year of assessment
immediately following the second year of assessment and there shall be no basis
period in relation to any of its sources of income for the first year of
assessment and the second year of assessment.
History
“Subsection 21A(4) is substituted by Act 761 of 2014, has
effect for the year of assessment 2014 and subsequent years of assessment.
The previous Section 21A(4) of the ITA 1967 state that, where a company, limited liability
partnership, trust body or co-operative society commences operations on a day
in a basis year and makes up its accounts for a period of twelve months ending
on a day other than 31 December, there shall be no basis period in relation to
any of its sources of income for the first year.
However, the provision is silent on the determination of the
basis periods for those cases where the accounts are made up for a period of
less than or more than twelve months. As a result, references are sought to the
relevant public rulings issued by the Inland Revenue.
Likely Tax Effects and Implications
The
above proposal is intended to simplify the determination of the first basis
period of a company, limited liability partnership, trust body or co-operative
society upon its commencement of business operations. With the above proposal,
the issues of overlapping basis periods, apportionment of adjusted business
income or loss, and submission deadlines of tax returns and estimates of tax
payable can be mitigated.
Illustration:
ITA 1967
|
Examples
|
Accounting Period
|
Basis Period
|
Remarks
|
Sec
21A(4)(a)
|
ABC Sdn Bhd commences its business on 1 May 2013 and
made up its account to 30 November 2013, thereafter to 30 November each year.
|
1 May 2013 to 30 November 2013
1 December 2013 to 30 November 2014
|
1 May 2013 to 30 November 2013 (YA2013)
1 December 2013 to 30 November 2014 (YA2014)
|
|
Sec
21A(4)(b)
|
DEF Sdn Bhd commences its business on 1 May 2013 and
made up its account to 31 March 2014, thereafter to 31 March each year.
|
1 May 2013 to 31 March 2014
1 April 2014 to 31 March 2015
|
1 May 2013 to 31 March 2014
(YA2014)
1 April 2014 to 31 March 2015 (YA2015)
|
There will be no basis period for the first year of
assessment. ie YA2013
|
Sec
21A(4)(c)
|
GHI Sdn Bhd commences its business on 1 November 2013
and made up its account to 31 January 2015, thereafter to 31 January 2015.
|
1 November 2013 to 31 January 2015
1 February 2015 to 31 January 2016
|
1 November 2013 to 31 January 2015 (YA2015)
1 February 2015 to 31 January 2016 (YA2016)
|
There will be no basis period for the first and second year
of assessment. ie YA2013 and YA2014
|
Section 21A(5) of the ITA 1967 states that, where a company commences operations and
(a)
is
required under any law of the place of incorporation to make up its accounts
ending on a specified day; or
(b)
being
a company within a group of companies makes up its accounts ending on the same
day as that of all other companies in that group,
the period which begins from the day the
company commences operations until the end of the accounting period of the
company shall constitute, for those operations of that company, the basis
period for a year of assessment.
However,
the “actual date” of the commencement date of a business is not specified in
the Law. It is important to define the “actual date” of the business commencement
date because of the pre-operating expenses are not deductible. A business is
said to be commenced if its integral
activity was carried out.
What is the basis period for
persons other than company, limited liability partnership, trust or
co-operative society?
It must be always the calendar year as the basis year (ie
1 January to 31 December).
Reference:
http://www.hasil.gov.my/pdf/pdfam/Section_21A.pdf
Disclaimer
The information provided in this blog is based on taxation laws
and other legislation, as well as current practices, including legislative
proposals and measures contained in the 2014 Malaysian Budget announced on 25
October 2013
This booklet is intended to provide a general guide to a subject
matter and should not regarded as a basis for ascertaining the liability to tax
in specific circumstances. No responsibility for loss to any person acting or
refraining from acting as a result of any material in this publication can be
accepted by YapSupremeServices. Recipients should not act on the basis of this
publication without seeking professional advice.
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