Sec140B Deemed interest.

How was the tax treatment on amount due from Directors?
Section 140B of Income Tax Act 1967, Malaysia

Deemed interest from loan or advances to directors.

(Effective from year of assessment 2014)

What is the meaning of “Deemed Interest” under section 140B of ITA?

Section 140B of ITA 1967 provides that where a company gives loans or advances to its directors without interest or with interest below arm's length, the company is deemed to have a gross income consisting of interest from such loans or advances. This interest is taxable under paragraph 4(c) ITA 1967. The determination of the interest income is based on the formula provided under section 140B.

In other words, the Company have to bear the taxation on cost of interest on the amount due from directors, regardless whether the directors have or have not repay the cost of interest to the Company.

Who would be entitled to this provision?

This provision applies to loans or advances to a Director defined under subsection 75A(2) ITA 1967. The provision is only applicable for loans and advances which are finance by internal funds and not applicable for those financed by external funds or third parties.

The definition of Directors under Subsection 75A(2) ITA 1967:

(a) is occupying the position of director (by whatever name called), including any person who is Director's liability concerned in the management of the company's business; AND

(b) is, either on his own or with one or more associates within the meaning of subsection 139

(7), the owner of, or able directly or through the medium of other companies or by any other indirect means to control, not less than twenty per cent of the ordinary share capital of the company ("ordinary share capital" here having the same meaning as in the definition of "director" in section 2).

For examples, the persons who will subject to section 140B are as follow:-
     i) A Director and he is holding not less than 20% ordinary shares capital.
     ii) A Director and holding not less than 20% of the indirect ordinary shares capital.

For examples, the persons who will NOT subject to section 140B are as follow:-
     i) Member of the Company. ie Shareholders.
     ii) Employees.

This provision is effective from the year of assessment 2014. However, if the basis period of a company for the year of assessment 2014 is starts in 2013 the recognition of interest income for the purposes of section 140B is the interest on the outstanding loans or advances beginning from 1/1/2014.

Formula:

Balance of the loan as at month ended X ALR*/12

*ALR= Average Lending Rate

  

Illustration by LHDN

A Sdn Bhd closes its accounts on 30 April each year. For the accounting period 1 May 2013 to 30 April 2014 (year of assessment 2014), the company granted interest-free loans to the its directors on 1/7/2013 amounting to RM50,000. The directors did not make any repayments throughout the whole accounting period for the year of assessment 2014.

For purposes of section 140B, the interest income of the company for the year of assessment 2014 is computed on the balance of the loan for the period 1/1/2014 to 30/4/2014 only. The interest rate charged is based on the Average Lending Rate (ALR) as published monthly by Bank Negara Malaysia.

Computation Of Interest Based On ALR For ABC Sdn Bhd For

The Year of Assessment 2014

Month	Loan Balance(RM)	ALR (%)*	Interest Income Under Paragraph 4(c) ITA 1967 (RM)
Jan 2014	50,000	4.3	50,000 x 4.3% x 1/12 = 176
Feb 2014	50,000	4.3	50,000 x 4.3% x 1/12 = 176
Mar 2014	50,000	4.1	50,000 x 4.1% x 1/12 = 171
Apr 2014	50,000	4.1	50,000 x 4.1% x 1/12 = 171
Total			694

* Note – ALR rendered only for the purpose of illustration only. The actual rate is provided as follow. For accuracy purpose please refer to Bank Negara Malaysia’s website www.bnm.gov.my.

Actual ALR

Period		Average Lending Rate (ALR)
2013	1	4.69
	2	4.72
	3	4.70
	4	4.80
	5	4.72
	6	4.51
	7	4.46
	8	4.54
	9	4.55
	10	4.54
	11	4.56
	12	4.56
2014	1	4.53
	2	4.44
	3	4.54
	4	4.52
	5	4.47
	6	4.54
	7	4.61
	8	4.69
	9	4.72
	10	4.67

What if company charges interest on Directors?

If the interest charged is higher than the amount above, then Sec140B shall not apply. As a result, taxation would be higher.

If the interest charged is less than the amount above, then the amount determined under Sec140B shall be taken as deemed interest income and the actual amount charged is disregarded.

How do we avoid the tax imposed on loan or advances to Directors?

The answer is very simple, just not to provide loan or advances to Directors or, Directors to transfer ordinary shares until the balance of the ordinary shares held is less than twenty per cent of the company ordinary shares capital.

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.