Upcoming tax exemptions and incentives in 2018
KUCHING: Last week, Prime Minister Datuk Najib Tun Razak announced the Budget 2018, with initiatives that deal with the well-being of the rakyat while addressing wide-ranging issues, from the rising cost of living, to shaping the workforce of the future.
The team at Deloitte Malaysia, Kuching, shares some of its views on the recently unveiled budget.
Question: Thin capitalisation (ThinCap) rules supposed to be implemented by January 1, 2018. I was expecting announcement on detailed implementation or further deferment of thin capitalization rules but did not hear any. Was it not announced or did I miss out something?
Answer: The Budget indicated that ThinCap rules will be replaced with Earning Stripping Rules (ESR). ESR is basically an anti-avoidance rules to counter aggressive tax planning by using interest deduction.
Under the ESR, interest deduction on inter-company loans will be restricted to a percentage of Earning Before Interest and Taxes (EBIT) or the Earning Before Interest, Tax, Depreciation and Amortisation (EBITDA). Drawing guidance from the ESR introduced by OECD, the rate may range from 10 per cent to 30 per cent of EBIT or EBI.
As an example, if a company EBIT is RM30 million and if ESR is fixed at 10 per cent of EBIT, then interest allowed for tax deduction will be restricted to RM3 million.
While ESR is set to be effective from January 1, 2019, specific details such as the percentage and deduction rules will be announced later.
Question: It was announced in the Budget that incentive for 4 and 5-stars hotels will be extended from the original expiry date of December 31, 2018 to December 31, 2020. How about hotel with rating of 3 stars and below? Will there be any incentive?
Answer: The announcement did not mention incentive for hotels with rating of 3-stars and below as there is existing incentive for such hotel category.
Hotels with rating of 3-stars and below may qualify for tax holiday up to 70 per cent of its statutory income for five years or investment tax allowance (ITA) of 60 per cent on qualifying capital expenditure incurred for five years, deductible up to 70 per cent of the company’s statutory income.
Despite the above, 4 to 5 star hotels located in East Malaysia still enjoy better incentive as compared to 3-stars hotels with 100 per cent tax holiday for five years or ITA of 100 per cent for five years.
Question: I am a Malaysian sole proprietor in Kuching. I have three properties under my name and are currently rented out. Property 1 is a shop house with monthly rental of RM1,800. Property 2 is a double storey terrace house near UNIMAS which I have rented it to students from UNIMAS for RM1,500 per month.
My third property is a condominium in Kuching City rented to an expatriate for RM3,000 per month. Iunderstand that Budget 2018 proposed a 50 per cent income tax exemption for rental income received by Malaysian resident individuals. I would like to know how this proposal is applicable to me.
Answer: The 50 per cent income tax exemption is given to Malaysian resident individuals that fulfill the following conditions: a) Rental income received not exceeding RM2,000 per month for each residential home; and b) The residential home must be rented under a legal tenancy agreement between the owner and the tenant. In your case, rental income from Property 1- shop house is not eligible for the 50 per cent income tax exemption as the exemption is confined to ‘residential’ homes. Likewise, rental income received from Property 3, a condominium is also not eligible for exemption as the rental exceeds RM2,000 per month. Your Property 2 however, is eligible for the 50 per cent tax exemption provided that proper legal tenancy agreement is in place.
Please also take note that the income tax exemption will only be given from years of assessment 2018 to 2020.
Question: Malaysia recognises its needs to have more women remaining in the labour force for it to continue its increased in gross domestic product (GDP). We heard that there are few measures announced in the 2018 Budget to encourage women workforce, can you share with us?
Answer: The 2018 Budget has indeed taken serious consideration to retain woman to stay in the workforce. Measures taken include:
1.Working women in their five-month pregnancy working in the public sector is allowed to leave work an hour earlier. Husband working within the same location can enjoy similar benefit.
2.Maternity leave will be increased from 60 to 90 days a year for private sectors.
3.Tax exemption up to 12-consecutive months employment income for women who return to the workforce after being on a career break for at least two years as at October 27, 2017. The exemption can be claimed in years of assessment 2018 to 2020. Application must be submitted to Talent Corporation Malaysia Berhad by December 31, 2019 to be eligible for the exemption.
4.GLCs are required to establish childcare centre in their main offices.
5.New offices in Kuala Lumpur is compulsory to have childcare facilities.
Question: We engage IT consultants to customise the Enterprise Resource Planning software used by our group. They also assist us in implementing additional modules to meet operational requirements. How are we impacted by 2018 Budget?
Answer: Prior to 2018 Budget, the development cost may not qualify for tax deduction and capital allowance. Fortunately, it was announced that such costs qualify for capital allowance (20 per cent for initial allowance and 20 per cent for annual allowance) starting from the year of assessment 2018. However, it is unclear whether the cost is claimable upon being incurred or only upon the software being used for business purposes. We hope the authorities could clarify on this matter as the development of a new software could straddle over years.
Question: Since the past decades, my company has been producing furniture from rubberwood. We intend to automate our processes but have exhausted our reinvestment allowance claims. What tax saving measures should I be aware of?
Answer: The Government granted two-years extension to the 100 per cent Accelerated Capital Allowance (ACA) and 100 per cent Automation Equipment Allowance (AE). These allowances collectively amount to 200 per cent of qualifying capital expenditure and is limited to the first RM4 millions of qualifying capital expenditure made in labour intensive industries (such as rubber, plastic, wood and textile products).
These are fully claimable within one year. If your automation plan involves the use of autonomous robots, the ACA and AE are increased to the first RM10 million under measures announced for Industry 4.0 (fully claimable within two years of assessment).