Received some money but not sure whether it's subject to income tax?
Is all income received subject toincome tax ?
Received some money but not sure whether it's subject to income tax? Or even what kind of tax it could be subject to?
You can't answer that question without knowing how to differentiate between capital and revenue receipts. Find out how in this course!
Refer to the comparison if you need a quick reference.
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 realization 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 Receipt
Let's go over each of the exact variables that make these scenarios possible.
The amount received from the realization 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 realization 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)x
To understand the meaning of the amount received on surrender of a right, let’s script a scenario. You’ve signed a contract as a business owner to another successor who will take over the business. This successor is halting you from running your business, therefore must pay you compensation as it is
considered as termination in the source of income. The whole exchange will be recognized 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.
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.
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.
Amount obtained in exchange for a right is essentially the same as selling your license. 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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