Putting hard-earned money to good use is something on which we can all agree. Unfortunately, this joy is short-lived when we deal with taxes down the line.
Fortunately for you, it is in our business to help you save that precious cash of yours. Ever wondered why some income received are subjected to income tax and not others? Or even what kind of tax it could be subject to?
You’ve clicked on the right place. We’ll be answering all of those questions in this week’s article.
But first, you need to know the basics. You can’t answer that question without knowing how to differentiate between capital and revenue receipts.
Here’s the rundown.
Revenue receipt Capital receipt Taxable Not taxable (but may be subject to RPGT in case of dealing with property or RPC shares) Income generated from operating business activities Amount received from the realisation of a capital asset or investment Amount received in substitution of income Termination of the source of income Amount received for the use of right Amount received on surrender of a right Recurring Non-recurring
How to Identify Capital Receipts
Let’s go over each of the exact variables that make these scenarios possible.
(1) The amount received from the realisation of a capital asset or investment essentially refers to the profit made on the sale of real estate or disposal of your investment.
If you received an amount from the realisation of investment or capital assets, it will be considered a capital gain which is NOT subject to tax.
Capital gains are not taxed in Malaysia, except for gains derived from the disposal of chargeable assets (i.e. real property or on the sale of shares in a real property company).
(2) To understand the meaning of the amount received on the surrender of a right, let’s script a scenario.
You’ve signed a contract as a business owner with another successor who will take over the business.
This successor is halting you from running your business and must pay you compensation as it is considered a termination in the source of income.
The whole exchange will be recognised as a capital receipt and is not taxable.
Now that you’re familiar with capital receipts, you can rest assured that these scenarios do not require you to pay taxes.
How to Identify Revenue Receipts
All revenue receipts are taxable under the ITA. Familiarizing yourself with these scenarios will help you to steer clear of unnecessary taxes.
(1) Income generated from the operating activities of the business means the profit created by the business’s operations. In other words, revenue is generated from your business’s day-to-day operations.
(2) In contrast, what if you received an amount in substitution for income? Let’s play out a scenario. For example, you and a customer signed a contract which states that for every month, you will exclusively be selling the company’s products and services to this customer for a year.
Unfortunately, after a few months, there were some altercations and your customer decides to terminate the contract mid-way. Of course, you outright disagree with the decision and demand compensation for the termination of the contract.
Now this demanded compensation is considered a substitution of income. Initially, you were supposed to make a designated number of sales from the agreement, but the broken off contract has derailed that expected number of sales; thus, the customer pays the compensation. The amount received in substitution of income is taxable as it is considered a revenue receipt.
(3) Amount obtained in exchange for a right is essentially the same as selling your licence. This occurs when you sold the license of usage over your product, which is charged through royalties. The amount is listed under a revenue receipt, which is taxable.
The Takeaway
- Revenue receipts are taxable
- Capital receipts are non-taxable —unless when it comes to property.
- A good rule of thumb is that revenue receipts are recurring in nature, while capital receipts are one-off expenditures, and non-recurring.
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