Miscellaneous receipts

This article is relevant to candidates preparing for ATX-MYS and the laws referred to are those in force at 31 March 2016. It discusses only the provisions in the Income Tax Act 1967 (the Act). While reading this article, candidates are expected to make concurrent references to the relevant provisions of the Act, as amended. Although some dates referred to may be in the past, the underlying principles and concepts covered in the article are still examinable and remain relevant for current candidates. Candidates are advised to read this article in conjunction with the syllabus and study guide and examinable documents that are relevant for the exam session they are preparing for.

This article is relevant to the section of the syllabus and study guide falling under item A3 – the nature and taxability of miscellaneous receipts including sums arising on disposal of, or otherwise dealing with, tangible and intangible assets; grants; subsidies; donations and contributions; awards; scholarships; gifts and inheritances.

Section A3 of the syllabus and study guide – Miscellaneous receipts – requires candidates to:

• understand the difference between capital and income receipts, and
• identify the reason for the taxability or non-taxability of various receipts.

To round up the discussion on miscellaneous receipts, this article will further consider specific provisions dealing with recovery, compensation receipts, release of debt, and finally an analysis of casual income.

Disposal of, or otherwise dealing with, tangible and intangible assets

Tangible assets
Examples of tangible assets which may be acquired, owned, and subsequently disposed of or otherwise dealt with include:

• Art pieces such as paintings, antiques, carvings and similar collectible works of art
• Collections of stamps, comics, etc, and
• Motor vehicles and properties

Intangible assets
These include goodwill, reputation, brand names, patents, software, intellectual property and franchises.

When the above assets are disposed of or otherwise dealt with (such as exchanged, donated, gifted or bequeathed), the question arises as to whether the gains (actual or deemed) are revenue or capital in nature to the owner-disposer.

If the owner-disposer is an individual, it is pertinent to consider whether the asset has been acquired, developed or held for personal enjoyment. In this respect, the nature of the asset may throw light on whether one or more of the badges of trade are involved.

Illustration 1
Mr Art-Lover collects paintings, carvings and manuscripts. In 2016, he sold a painting he acquired in 1998 from a then struggling artist, making a gain of RM200,000. Determination of whether the gain is capital or revenue in nature will depend on a number of factors including the following:

• how many paintings he owns and why he collects them
• whether he has sold any painting prior to this, and if so, how many and how often
• how he finances his collection activity
• how the potential buyer/s came to know about his paintings
• what his main occupation or vocation is and whether this is related to his art-collection activity.

The answers to the above will collectively build up a case for the transaction being treated as either capital or revenue in nature.

If the owner-disposer is a company, the presumption of profit-making motive and the exclusion of the personal enjoyment rationale may render the disposal somewhat more likely to be treated as a revenue transaction. Nevertheless, the badges of trade must still be duly considered to determine the true nature of the gain thus obtained.

Grants and subsidies

The general tax principle established through successive case law is that if a person receives a grant or a subsidy, the established purpose of the grant or the subsidy determines the nature of the amount received, i.e. whether it constitute gross income to the recipient and is duly subject to tax.

A grant or subsidy is usually given for a purpose or objective, which may include, for instance:

• to construct, acquire or replace a capital asset such as a building or business premise, plant and machinery
• to launch a project or a new business activity
• to help pay for the running expenses of a new business, to defray the manpower costs or the operating costs for the initial period of a commercial activity
• to help defray a business expense such as the employment of knowledge workers, or
• to encourage an activity such as research and development.

If the purpose/objective is capital in nature, for instance, for the acquisition or replacement of capital assets, the amount received is, prima facie, capital in nature. It will therefore not be taxable income in the hands of the recipient.

On the other hand, if the purpose is to compensate for a revenue loss or to cover or defray a revenue expenditure, the subsidy or grant is revenue in nature. It follows then that the amount received constitutes gross income and is duly subject to tax in the hands of the recipient.   

Grant and subsidies from the Federal Government or State Governments
In Malaysia, there is a specific gazette order [Income Tax (Exemption) (No.22) Order 2006] to deal with the tax treatment of government grants. On 26 January 2010, the Inland Revenue Board has also issued Guideline 1/2010 on the tax treatment of grants and subsidies received from the Federal Government and State Governments.

The tax treatment is summarised as follows:

• Grants and subsidiaries received by a person from the Federal or State Government are exempt from tax at the gross income level.
• Revenue expenditure financed by a grant or subsidy are not tax deductible.
• Expenditure on capital assets financed by a grant or a subsidy does not qualify for capital allowances.
• Grants and subsidies are exempt from tax  in the basis period in which the grant or subsidy is received or in the basis period in which the relevant expenditure (which is financed by the grant/subsidy) is incurred, whichever is earlier.

Illustration 2
On 1 March 2016, ABC Sdn Bhd (year end 31 December) received the following from the Federal Government:

1. A grant of RM50,000 to help finance its acquisition of robotic equipment which will cost RM200,000 when it is fully installed in 30 September 2016.
2. A subsidy of RM25,000 being a reimbursement of costs incurred in the implementation of its business process efficiency project carried out during the period of July-December 2015 at a cost of RM25,000.

The tax treatment is as follows:

• The grant and subsidy of RM50,000 and RM25,000 are tax exempt in the hands of ABC Sdn Bhd.
• ABC Sdn Bhd is eligible to claim capital allowance on the robotic equipment based on a qualifying plant expenditure of only RM150,000 (200,000 – 50,000).
• The RM25,000 of expenses in relation to the business process efficiency project are not tax deductible as they have been wholly financed by the tax exempt subsidy.
• The RM50,000 is exempted in the year of assessment 2016, i.e. when it is received.
• The RM25,000 is exempted in the year of assessment 2015, i.e. when the expense was incurred.  

Donations and contributions

When dealing with donations and contributions received, the relevant questions to ask are as follows:

• What is the real purpose of the purported donation or contribution?
• Why was the donation/contribution given?
• Is it for services rendered or to be rendered?
• Is it for the use of any amenities or money?

Suffice it to say that if the amount was given for any service or for use of any amenity or money, it will constitute gross income properly subject to income tax.

If these amounts are received in connection with the exercising of an employment, it is part of the gains and profits from employment. If it is in connection with the carrying on of a business, then it constitutes part of business income. If it is neither in connection with an employment nor a business, but is nevertheless revenue in nature, it is likely to be classified as ‘other income’ [under section 4(f)].

On the other hand, if the amounts given are truly donations/contributions, with no consideration in any form given in return, then such sums should not be treated as income and falls outside the scope of income tax. 

Awards and scholarships

Awards
Where an award has a monetary value, or is convertible to money, the questions to ask are:

1. Is the award given in connection with an employment or a post held?
2. Is it for long service?
3. Is it for excellence in job performance?
4. Is the award purely for the personal qualities of the recipient?

If the answer is ‘yes’ to any of the first three questions, the conclusion will likely be that the award constitutes revenue income. If the answer is ‘yes’ to the fourth question and ‘no’ to the first three questions, then, the conclusion may tend towards the ‘non-income’ category.

Case law has established that:

• Tips given to an employee taxi driver by satisfied customers are treated as income arising from employment notwithstanding that they were not paid by the employer.
• The testimonial or benefit match proceeds given to a retiring footballer are not income in nature because they are a form of appreciation for his personal qualities or attributes.
• The benefit match proceeds given to a footballer pursuant to a contract term are nevertheless considered income in nature.

If an award is concluded to be revenue in nature but is not employment income, further consideration should be given as to whether it can be classified as ‘other income’ [under s.4(f)].

Having said that, Paragraph 25C of Schedule 6 specifically provides for an exemption of up to RM2,000 per year per employee in respect of any perquisite received pursuant to an employment, whether of money or otherwise, in respect of any of the following:

• long service (defined as more than ten years with the same employer)
• past achievement
• service excellence, or
• innovation or productivity award.

Scholarships
By contrast, amounts received by way of scholarships are generally tax exempt. Paragraph 24 of Schedule 6 specifically exempts

‘Any sums paid by way of or in the nature of a scholarship or other similar grant or allowance to an individual, whether or not in connection with an employment of that individual.’

To complete the picture, the law [section 34(6)(l)] provides that a company which gives a scholarship to a needy student for tertiary education is eligible for a tax deduction provided that the requisite conditions are satisfied.

Gifts

As regards gifts and windfall, it is pertinent to consider whether they are income in nature, or whether they are purely fortuitous. If a gift is received in return for any service rendered or use or enjoyment of any property or amenity, it is more likely to be considered to be of a revenue nature.

Under the law of gifts, if an asset or money is given and no consideration is given in return, it is a gift and does not constitute income.

Inheritances

Cash and properties inherited are not income in nature. As an example, if Mr A inherited a property worth RM1 million upon the demise of his father, the receipt of property does not represent  income to him because it is not for services rendered.

However, an annuity receivable under the terms of a trust (created under a will) constitutes income in the hands of the beneficiary. The annuity is deemed derived from Malaysia [under section 63(3)(a)], and  is taxable as an annuity [under section 4(e)].

Recovery, compensation, and release of debt

It is pertinent to be cognisant of the following provisions dealing with recovery, compensation and release of debts:

Section 22 deems as gross income any sums receivable or deemed to have been received by way of:

(a) insurance, indemnity, recoupment, recovery, reimbursement or otherwise in respect of expenditure for which a tax deduction has been previously taken, or under a contract or indemnity, and
(b) compensation for loss of income.

Section 30(4) deems as gross business income any amount of debt released (or forgiven) where a tax deduction has been taken or any capital allowance has been claimed in respect of the original expense/outgoing.

Other income – section 4(f)

Lastly, can section 4(f) be used to sweep up any miscellaneous sum of money received as ‘income’?

Not so, the amount received must be ‘profit or gains’, not appreciation of capital. In this connection, Rowlatt J. has opined:

...’profit or gains’ means something in the nature of interest or fruit as opposed to principal or tree.

Where an emolument accrues by virtue of some service rendered by way of action or permission or both…, that is included within the words 'profit or gains'‘

While profit from an isolated transaction not amounting to a business receipt would not be chargeable under section 4(f) on the basis that it is not revenue in nature, casual profits or income are chargeable under section 4(f).

A casual profit is one which arises to a person from an activity outside his ordinary trade or vocation but which nevertheless is a profit or income item accruing to him by virtue of services rendered or a receipt from property not chargeable elsewhere.

Payments for services are income even where there is no repetition. Below are some examples of casual income:

• Commissions paid to a director for guaranteeing bank overdrafts or bank loans.
• An employee lent money in return for normal interest plus a share of the profit of the transactions for which the money was used – both the interest and the share of profits were taxable.
• Brokerage fees – A medical doctor brokered a property deal between a patient and his friend's father. The seller voluntarily gave an ‘ang pow’ (a customary red envelope containing money) of RM10,000 to the doctor as a token of appreciation. The RM10,000 represents income [under section 4(f)] to the doctor because it is for the service he rendered in bringing together the buyer and seller.
• Fees for the occasional hosting as the master of ceremony, fees for the occasional newspaper articles, or the giving ad-hoc lectures, are all casual but nevertheless income in nature.
• Introduction fees – An airline pilot recommended a supplier of raw materials to a local manufacturer. The supplier voluntarily paid RM5,000 to the pilot. One view is that the payment may not be income as it is wholly voluntary, there being no contract, stipulation or even implied term of payment. However, it may also be argued that RM5,000 was for the introduction service, therefore rightly to be brought to tax as other income.

Written by a member of the P6 (MYS) examining team