Malaysia Business Income Tax: Advance Payments Explained

1. Introduction

When it comes to business income recognition in Malaysia, one key area involves the treatment of debts arising from services rendered or property use. This is governed under Section 24(1A) of the Income Tax Act 1967 (“ITA 1967”).

The law has evolved over time, especially after the landmark case of Clear Water Sanctuary Golf Management Berhad (“CWSGMS”) vs KPHDN and the legislative amendment effective from Year of Assessment (“YA”) 2016.

2. Existing Legislation (Before YA 2016)

Any debt owing to a person was treated as gross business income only when services had already been rendered, or property had already been used/enjoyed.

In simple terms: Income was taxable when earned, not when received in advance.

Case Reference: CWSGMS vs KPHDN

• CWSGMS received annual membership subscriptions as advance payments.
• These payments granted members the right to use the golf club facilities.
• If membership was terminated or transferred, the unused portion of advance fees was refunded.
• CWSGMS recorded the unutilized portion as liability (deferred income), not taxable revenue.

The Inland Revenue Board (IRB) disagreed and attempted to tax the advance subscription.

Outcome:

• The High Court and Court of Appeal both ruled in favour of CWSGMS.
• Reasoning: The phrase “services rendered” requires that actual services must have been provided for income recognition.
  

3. Present Legislation (From YA 2016 Onwards)

To address the above ruling, Section 24(1A) was amended.

Now, any debt arising from services to be rendered in the future or the use/enjoyment of property in the future must be treated as gross business income at the time received, even if services have not yet been performed.

If the payment (or part of it) is subsequently refunded, a tax deduction is allowed for the refunded amount.

In practice:

• Service provider → Must treat advance payments as taxable business income.
• Customer/recipient → Cannot claim tax deduction until the relevant period when services are actually rendered.

4. Key Takeaways

• Before YA 2016 → Advance payments not taxed until services rendered.
• After YA 2016 → Advance payments taxed immediately as business income.
• Refunds → Deductible in the year refunded.
• Implication → Businesses must carefully account for advance payments, deposits, and prepayments to avoid under-reporting taxable income. 

Frequently Asked Questions (FAQ)

1. Do I need to declare advance payments as income immediately?
   Yes, under the current law (post-YA 2016), all advance payments are treated as gross income, even before services are rendered. 
2. What happens if I refund part of the advance payment?
   The refunded amount can be deducted from your gross income in the year the refund occurs. 
3. How did the CWSGMS case affect the law?
   It showed a gap in the legislation where advance payments were not taxable until services were provided. This led to the amendment in 2016. 
4. If my business collects deposits, do I need to report them as income?
   Yes, unless the deposit is clearly refundable and not tied to services/property usage. Otherwise, deposits are generally treated as taxable advance income. 
5. Does the customer get a tax deduction immediately upon paying in advance?
   No. The customer can only claim deduction in the period when the services are actually consumed.

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We work closely with industry specialists, authorities, and associated professionals within ANC Group to provide the best-in-class integrated tax planning solutions. ANC specialists coordinate the accounting and taxation services to bring your business to success.

If you need professional tax advisory services regarding the Malaysia Income Tax Act 1967, our team is ready to assist you. Contact us here to discuss how we can support your business