A CAPITAL statement is a tool used by income tax authorities worldwide to estimate, in a “rough” manner, fluctuations in an individual’s wealth by comparing one year to another.
In preparing capital statements, certain assumptions will inevitably be made, as the exercise generally covers specific periods, perhaps up to five years. Consequently, the starting position may not be fully supported by underlying documents, which may no longer be available due to the passage of time. This is often where differences between the taxpayer and the Inland Revenue Board (IRB) arise.
Keep it within the law
Another fundamental point sometimes misunderstood by both taxpayers and the authorities is the request for information that may be irrelevant under the law. Information sought by the tax authorities should be confined to the five-year limitation period provided under the legislation.
Another common issue is requests relating to offshore financial matters. This is relevant only where the offshore income is remitted into Malaysia; otherwise, offshore income is generally not taxable in Malaysia.
The Malaysian tax system is confined to the territory of Malaysia as opposed to most countries which apply a worldwide scope of taxation. Probing into how foreign assets and income were derived is not relevant to capital statements where the matter does not involve Amla (anti-money laundering, anti-terrorism financing law) or illegal funds covered by other specific legislation. Such requests can be unproductive, as time and resources may be spent gathering information that would not result in taxable income in Malaysia.
Validity of the Special Voluntary Disclosure Programme (SVDP)
Taxpayers were assured that once they voluntarily participated in the SVDP, the tax years covered under the programme would be regarded as closed. Lately, however, it has been noticed that, in a small number of cases, taxpayers who participated in the SVDP are being asked to provide information for those years.
While such instances appear limited, continued scrutiny could affect trust and confidence between taxpayers and the tax authorities. Even where such actions occur only in a minority of cases, they may have a wider ripple effect on taxpayers’ perception of the programme and the assurances given by the tax authorities.
Although the IRB has the power under the law to request information without limitation, taxpayers would reasonably expect such powers to be exercised diligently and within the statutory limits, while excluding the years they had voluntarily disclosed under the SVDP.
Determining private expenditure and income
This is another area where a major difference can arise between the IRB and the taxpayer. It is not uncommon for the IRB, when reviewing a taxpayer’s computation of personal expenditure or income, to disregard the taxpayer’s figures and supporting information and substitute them with the total debits or credits reflected in the individual’s bank accounts, treating these as personal expenditure or income.
This may result in an inaccurate assessment of the individual’s actual expenditure or income. The authorities are entitled to treat such amounts as personal expenditure or income where they have direct or indirect evidence to support the figures. However, the taxpayer should not be left to bear the burden of disproving figures adopted without adequate supporting evidence.
Who should bear the burden of proof?
Since this is a tool used to determine undisclosed income under the administrative provisions accorded to the IRB under the relevant Act, the taxpayer has the responsibility, in the first instance, to demonstrate that fluctuations in wealth are reflected either in taxable income or non-taxable receipts.
Where the IRB disagrees with the taxpayer’s figures and substitutes its own computation of personal expenditure or income, the IRB should provide reasonable evidence and a clear basis for the figures adopted. Otherwise, such actions may create a perception that the powers are being exercised too broadly, contrary to the image the IRB seeks to project as a tax authority that is friendly, fair and helpful to taxpayers.
It should be noted that there is no mention of capital statement in the Income Tax Act, but this is a useful tool for identifying potential undisclosed income. However, since it is only a “rough” tool, the IRB should provide sufficient leeway to accommodate the limitations of capital statements. A simple solution is to accept adjustments going both ways up to 10%-20% to meet reasonableness test.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).