Income tax is an annual charge levied on both earned income(wages, salaries and commission) and unearned income (dividends, interest, rents).In addition to financing a governments operations, progressive income taxation is designed to distribute wealth more evenly in a population and to serve as automatic fiscal stabilizer to cushion the effects of economic cycles.
Only income accruing in or derived from Malaysia is taxable. Foreign income remitted into Malaysia by resident and non-resident is excused from tax. The categories of income that fall under income tax are:
- Gains/profits from business
- Income from employment
- Interest, dividends, and discounts
- Rents, royalties or premiums
- Pensions, annuities or other periodical payments
- Gains/profits not stated above
Under Self Assessment Scheme (SAS) the taxpayer is responsible to accurately calculate the amount assessable, file returns, and pay any tax due within the stipulated date.
A person is considered as a tax resident if the person is in Malaysia for any of the following period of time-
- At least 182 days in a year.
- A period less than 182 days but that period is connected to another period following or preceding where the person was present in the country for 182 or more consecutive days.
- 90 days or more during the year and the individual was present in Malaysia for at least 90 days in any three out of four immediate preceding years, or
- The individual is a resident for a particular year if he/she is resident for the immediate following year and for each of the three immediate preceding years.
The tax residential standing of an individual is important because it decides his/her rate of tax, if the individual is sanctioned personal relief and discounts, and the income on which he/she is taxed.
For resident individuals, the income of less than Ringgit Malaysia (RM) 2,500 is not taxable. With a revision of Section 45(2) of Income Tax Act of 1967, a wife is automatically assessed separately on her income, unless the husband or the wife gives in writing before April 1 each year for the income to be assessed together. In the event of the spouse not being resident, he/she may make the election only if he/she is a citizen.