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Advance payments are taxable!

Is business income taxed on accrued or receipt basis?

Prior to year of assessment 2016, it was a generally accepted principle that business income is taxable when the services have been rendered.

On 29 Dec 2015, the Finance Act was passed and S.24(1)(b) and S.24(1)(c) of Income Tax Act (ITA) was amended which now read “... any services rendered or services to be rendered at any time in the course of carrying on a business” and “... any property dealt or to be dealt with at any time in the course of carrying on a business” respectively.

And S. 24(1A) was introduced which states that money received by a person in respect of any services to be rendered or the use or enjoyment of any property shall be treated as gross income for the relevant period in which the money is received notwithstanding that no debt is owing to the relevant person in respect of such services or such use or enjoyment.

Implications from the amendments

a. With effect from year of assessment 2016, when a customer pays in advance for services to be performed in the future, the money received by the taxpayer is deemed as an income and is subjected to tax in the same assessment year when the money is received..

Some examples of services where clients may pay in advance: tuition fees, concert tickets, packages beauty treatments, annual golf membership fees, subscription services, prepaid mobile phone credit, stored value card (e.g. Touch n Go), etc.

b. This requirement would also apply to rental payment for the use of property.

c. For any portion of the advance payment which is refunded to the customer, the refunded amount is tax deductible in the year of the refund.

d. The Inland Revenue Board of Malaysia (IRBM) has clarified that “security deposit”, “forfeit deposit” and “return deposit” are not advance payment for services, where it is clearly meant to be a refundable security deposit.

e. Sale of goods are not affected by these amendments.

Comments from StanleyCo

1. This requirement under the ITA is a clear divergence from the generally accepted accounting principle where income is only recognised when services are performed.

2. Taxpayer who provides both goods and services, should clearly segregate the advance payment between goods and services – as each carries different tax treatment.

3. Clients are advised to clearly identify all advance payments received for services and reconcile this to the revenue/income reported for tax purposes.

Let’s talk:

At StanleyCo, our management team is consisted of chartered accountants, licensed tax agents, GST agents and chartered secretaries. Please contact us if you need assistance with the topic above.

Disclaimer: Every effort has been made to provide accurate information. However, the information and regulations contained in this article are subject to changes and amendments by the relevant authority at any time. As such, the information in this article may not be current.

And the information provided in this article is general commentary only and shall not be considered as advice or recommendation. As all tax situations are specific to their facts and will differ from the situations in this article - if you have specific tax questions you should consult a licensed tax agent.

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