Situation A

Galaxy Sdn. Bhd. (GSB) is a one-stop office cleaning service provider. On 1 September 2022, GSB signs an agreement with a regular customer, Lavender Sdn. Bhd. (LSB) to provide cleaning services for the latter from 1 January 2023 to 31 December 2023 at a price of RM 90,000. GSB closes its accounts on every 31 December. The agreed due date of payment falls on 14 December 2022.

The service will only be provided in 2023. Does GSB have to pay tax for the RM 90,000 in Year of Assessment (YA) 2022?

Situation B

Everything remains the same as Situation A except for the payment due date. Let’s say the payment due date is on 1 January 2023. However, LSB made an advance payment of RM 90,000 on 1 October 2022.

As there is neither a contractual obligation to pay nor any debt owing in YA 2022, is the RM 90,000 taxable in YA 2022?

Background

To come to an answer for the above questions, we must first know what is stipulated in our laws with regard to the situations above.

Prior to YA 2016, section(s.) 24(1)(b) of the Income Tax Act (ITA) 1967 only dealt with debts arising in respect of any services rendered which were treated as gross income in the YA the debt arises. In other words, advance payments received were treated as gross income from a business only when the service is rendered.

With effect from YA 2016, s.24(1)(b) has been revised and a new s.24(1A) has been inserted to deal with debts arising and sums received in the course of business in respect of services to be rendered. The updated s.24(1)(b) states that a debt owing that arises in respect of services to be rendered would be treated as the gross income of the person from the business in the relevant period. Basically, the debt is considered income when the liability to pay arises.

The new s.24(1A) determines that any sum received by a person in respect of any services to be rendered in the future is to be treated as the gross income from the business in the relevant period the sum is received, even if no debt is owing to the person in respect of such services.

The Inland Revenue Board (IRB) of Malaysia has issued Public Ruling 4/2020 - Tax Treatment of Any Sum Received and a Debt Owing that Arises in Respect of Services to be Rendered dated 16 June 2020 to explain the tax treatment relating to the above changes.

Do You Know the Answers Now?

After reading up on the background information related to debts owing and advance payments. Have you managed to figure out the answers to the above two situations?

For Situation A 

Even though the services will only be provided in the following year, the liability to pay arises in YA 2022 as the payment due date is 14 December 2022. Pursuant to s. 24(1)(b), a debt arising from services that are to be rendered will be brought to tax in the year when the debt arises. Hence, the RM 90,000 debt is taxable.

For Situation B 

If we look at what was stated in s.24(1A), the advance payment received is treated as gross income from the business for YA 2022 when the sum is received on 1 October 2022 even though there is no contractual obligation to pay or debt owed in YA 2022. Therefore, the RM 90,000 advance payment is once again taxable for YA 2022.

In the event of a refund of advanced payment, what would the tax treatment be? There are some services and categories of payment not subject to s.24(1)(b) and s.24(1A) of the ITA 1967. Could yours perhaps be one of them?