Basis periods

This article is relevant for candidates preparing for the ATX-MYS, Advanced Taxation exam, and is based on prevailing laws as at 31 March 2021 and relevant Public Rulings issued as at the time of writing (March 2021).

This focus of this article is the determination of basis periods for a company on the commencement of operations and when there is a change of accounting date. Additionally, it deals with the notification requirements regarding the estimation of tax on commencement of operations and upon the change of accounting dates.

This is not an introductory article; it is relevant to students coming to the end of their studies and finalising their preparations to sit the exam. Therefore, the target reader is assumed to be conversant with the relevant basic terms such as basis year, calendar year, basis period, year of assessment (YA) and accounting date.

Importance of correct determination of basis periods

Determining the basis period for a YA is important as it determines the period in which:

• income arising is recognised and duly reported;
• expenses are treated as incurred, thus deductible; and
• capital expenditure on assets is treated as incurred, and prima facie eligible for initial allowance and annual allowance.

Correctly determining the basis period is therefore significant in the following aspects of tax management:

• Accurately determining the adjusted income, the correct claim for capital allowances and, thus, the chargeable income and tax liability for a YA
• Providing a basis for the estimation of tax chargeable for the relevant basis periods, and
• Identifying the compliance responsibilities for the respective YAs.

Relevant provisions and public rulings

The provisions of the Income Tax Act 1967 relating to basis periods are as follows:

• Section 20 – Basis years
• Section 21 – Basis periods for persons other than companies, LLP, trusts etc; and
• Section 21A – Basis periods for a company, limited liability partnership (LLP), trust or co-operative society
• Section 42(2) – Overlapping periods
• Section 107C(4) and (4A) – Basis periods on commencement of operations
• Section 107C(11B) and 120(1)(i) – Failure to notify constitutes an offence and recoverability

As at March 2021, the following Public Rulings issued by the Inland Revenue Board (IRB) are currently applicable:

It should be noted that the above legislative references are provided for full information only as candidates are not required to be able to quote these when answering  ATX MYS exam questions. This article will cover the relevant rules contained within these sections and the guidance provided in the applicable Public Rulings.

With reference to the notification of a change of accounting date, it should be noted that students are expected to know the law as legislated in section 21A(3A), but are not expected to be conversant with the consequential revised tax instalments as detailed in paragraphs 6 and 7 of Public Ruling 8 of 2019.

Current year basis

Malaysia switched from the preceding-year basis to the current-year basis in the calendar year 2000. This was achieved by amending the provision in section 20 by inserting the word 'coinciding', so the section now reads as follows:

'For the purposes of this Act, the calendar year coinciding with a YA shall constitute the basis year for that YA.'

Consequently, the accounting period ending in the year 2000 constituted the basis period for YA 2000 (current year), while the accounting period ending in the year 1999 constituted the basis period for the YA 2000 (preceding year).

Basis periods for individuals and bodies of persons

Section 21 applies to all persons other than a company, LLP, trust body or co-operative society. This section is therefore applicable to individuals and bodies of persons. It stipulates that the basis year shall constitute the basis period for a year of assessment.

As the basis year is the calendar year, this means that for individuals and bodies of persons, the period included in a year of assessment is always the calendar year. This rule prevails even if, for example, an individual derives income from a business source.

Illustration 1
Mr Dee Lee Jern is employed as the accounts manager of a retail outlet. In the evenings, he runs a business supplying floral table arrangements to caterers and hotels.

The basis period for YA 2021 for Mr Dee is the calendar year 2021 – ie 1 January 2021 to 31 December 2021 for both his employment income and his business income.

Basis periods for a company, LLP, trust body or co-operative society

The main focus of this article is section 21A which governs the determination of basis periods for a company, LLP, trust body or a co-operative society. Candidates preparing for the ATX MYS exam are advised to be fully conversant with the rules contained within section 21A.

Section 21A contains nine subsections, the contents of which are outlined briefly below:

Operations [s21A(8)]

When a company, LLP, trust body or co-operative commences a business activity, it is said to have commenced operations for the purposes of section 21A. The determination of the date of commencement of the business activity involves a question of fact: generally, it refers to the date when the core or integral activity of the business commences.

For instance, a manufacturing business is deemed to commence its operations when its plant and machinery are in place and the inventory (stock) has arrived – ie when the manufacturing process is able to proceed. For a retail business, the commencement date is the day the business is first open to members of the public with its offering of goods, regardless of whether the first sale is actually made on this date. A hotel business is said to commence its operations when it is able to offer food, beverage and accommodation services/facilities to members of the public.

Apart from a business activity, the definition of 'operations' also includes the making of investments – ie the purchase of stocks and shares, the deposit of monies in the bank to earn interest, the making of any loans for interest, and the acquisition of any investment properties.
 

Basis periods on commencement of operations [s21A(4)]

A new subsection (4) was introduced to section 21A with effect from YA 2014. This has vastly simplified the determination of the basis periods upon commencement.

In essence, when an entity makes up its first set of accounts to any date falling in the first, second or third year YA after the date of commencement of operations, the period covered by the accounts (from the date of commencement) is accepted as the basis period for the first applicable YA. The YAs before that YA will therefore be deemed to have no basis periods.

The following illustration explains the determination of basis periods when a company commences operations:

Illustration 2
Ace Sdn Bhd was incorporated on 1 November 2020 and commenced operations on 1 December 2020.

It is contemplating closing its first set of accounts to one of the following alternative dates:

(i) 31 December 2020 (two months), thereafter to 31 December annually
(ii) 31 March 2021 (five months), thereafter to 31 March annually
(iii) 30 November 2021 (13 months), thereafter to 30 November  annually, or
(iv) 31 March 2022 (17 months), thereafter to 31 March annually.

The basis periods for the relevant YAs will be determined as follows:
 

It should be noted that in alternative (iv), where Ace Sdn Bhd makes up its first set of accounts to 31 March 2022, the basis period for YA 2022 will be 1 December 2020 (date of commencement of business) to 31 March 2022 – a period of 16 months. There will be no basis periods for the YAs 2020 and 2021.

Implication: tax estimates

Closely connected to the issue of commencement of operations is the issue of the furnishing of the first estimate of tax.

Using illustration 2, if Ace Sdn Bhd has a paid up ordinary share capital exceeding RM2.5m, it will have to furnish its first estimate of tax within three months of the commencement of its operations – ie by 28 February 2021. This compliance requirement is relevant to alternatives (iii) and (iv) because the first basis period is not less than six months [s107C(4)].

[Note: Where a company with a paid up ordinary share capital exceeding RM2.5m commences business operations in a YA where the basis period for that YA is less than six months, the company is exempt from the requirement to furnish an estimate of tax payable for that particular YA].

If Ace Sdn Bhd has a paid up ordinary share capital of less than RM2.5m at the commencement of its operations then it will be a small-and-medium enterprise (SME), as defined. As a SME, a moratorium will apply such that Ace Sdn Bhd, being a company incorporated and resident in Malaysia, will not be required to furnish an estimate of tax for that YA and the immediately following YA. This is the case in alternative (i) – ie Ace Sdn Bhd will not be required to furnish estimates of tax for YA 2020 and YA 2021.  

Where a SME company has no basis period for the YA in which it commences its operations, it will not be required to furnish estimates of tax for the two immediately following YAs [s107C(4A)(a)]. This is the case in alternatives (ii) and (iii), where Ace Sdn Bhd has no basis period for YA 2020 (the YA in which it commences operations), it will not be required to furnish estimates of tax for YA 2020, and the two immediately following YAs of YA 2021 and YA 2022.

Lastly, where a SME company has no basis period in the YA it commences and no basis period for the immediately following YA, it will not be required to furnish estimates of tax for the YA in which it commenced operations and the two immediately following YAs [s107C(4A)(c)]. Hence, in alternative (iv), where Ace Sdn Bhd has no basis period for the YA in which it commenced and also has no basis period for the immediately following YA, it will similarly not be required to furnish estimate of tax for YA 2020 and the two immediately following YAs of YA 2021 and YA 2022.

Commencement of operations of a company in a group, etc [s21A(5)]

Where a company commences operations and:

• is required under any law to make up its accounts to a specified date, or
• being a member of a group of companies, makes up its accounts to a date to be coterminous  with the rest of the group,
  

the period covered by the accounts – ie from the date of commencement of operations to the end of the accounting period, shall constitute the basis period of the first YA.

Illustration 3
Alpha Sdn Bhd is a new company incorporated on 1 August 2020. It is a member of the Beta group of companies which all make up their accounts to 31 December annually. Alpha Sdn Bhd commenced operations on 1 October 2020 and makes up its first set of accounts to 31 December 2021 to be coterminous with the group. Thereafter, Alpha closes its accounts annually to 31 December, in line with the group.

Alpha’s first YA is YA 2021 with the basis period covering 1 October 2020 to 31 December 2021.

Change of accounting date [s21A(3)]

Where an existing company, LLP, trust body or co-operative society has made up its accounts for a period of 12 months ending on a day in the basis year, and then it fails to make up its subsequent accounts to the corresponding day in the following year, there is said to be a change of the accounting date.

There could be many commercial reasons for such a change including the need to be co-terminus with the new holding company or with the group or the adoption of a 52-week financial year.

Whatever the reason may be, such a change of accounting date will trigger the need for a direction of basis periods by the DGIR pursuant to section 21A(3). Public Ruling 8 of 2014 [still current and applicable] provides guidance on how the DGIR will direct such basis periods.

The illustration below demonstrates the terms which will be used in this article. However, it should be noted that these are not technical terms.

Illustration 4
XYZ Sdn Bhd made up its accounts annually to 31 March. In 2021, it decided to change its accounting date to 30 September. The terms used and their respective periods are:

• the last normal accounts – 1 April 2019 to 31 March 2020
• the last normal YA – YA 2020
• first set of new accounts – 1 April 2020 to 30 September 2021
• failure year – YA 2021 (the year in which the company fails to make up its accounts to the normal accounting date of 31 March)
• following year – 2022
• the third year – 2023

The underlying principles [see paragraph 5.2 of Public Ruling 8 of 2014, Example 8 and Example 9] adopted when the DGIR directs are:

• there shall be no missing YA – ie no YA should be left out
• there shall not be two or more sets of accounts closed in the same YA
• where an accounting period must be divided between two YAs and there is an uneven division of the basis periods between the two YAs, any fraction of a month should be treated as falling into the first period (refer to illustration 7, later in the article).

How the DGIR will direct may be better explained in this table.

From the above illustrations, it may be concluded that the length of the period covered by the accounts after changing the accounting date – ie whether it is less than 12 months or more than 12 months – is no longer relevant.

Self-assessment

While the law states that the DGIR will direct the basis periods when there is a change of accounting date, this may not happen in practice under self-assessment. Thus, the explanatory notes to the company tax return form [Form C] for each year of assessment provide similar guidance to that outlined in the illustrations above for cases where there is a change of accounting date. This seems to suggest that the determination of the basis periods based on the above principles may be made by the taxpayer without having to refer to the DGIR for direction.

Overlapping basis periods [s42(2)]

With the amendment of section 21A with effect from the YA 2014, there is now little likelihood that basis periods for successive YAs will overlap. Still, in the unlikely event that it does occur, section 42(2) prevents the double taxation of the same adjusted income in successive YAs. This is achieved by excluding the relevant amount when computing the adjusted income of the second YA if the same income has been subject to tax in the first YA.

Notification of a change of accounting date

Section 21A(3A) requires a company, LLP, trust body or a cooperative society to notify the DGIR of any change of accounting date.

Illustration 5
A company changes its accounting date from 30 June to 31 December. The accounts are as follows:

Illustration 6
A company changes its accounting date from 30 June to 31 March. The accounts are as follows:

It should be noted that a failure to notify the DGIR of a change in accounting date constitutes an offence under section 120(1)(i)

Conclusion

Basis periods represent a fundamental area of the Malaysian tax system and an important part of the ATX-MYS syllabus. Hence, it is important for candidates to be fully conversant with all the component concepts.

Written by a member of the ATX-MYS examining team