Sections 29(3) and (4) of the MITA were put in place to deem that the lender is able to obtain payment on demand when the interest is due to be paid and the interest expense is deductible only when the expense is due to be paid. The introduction of this anti-avoidance provision is to tighten the provision in order to bring the interest income to tax at the same time as the interest would be claimed as a deduction by the borrower. With effect from YA 2014, pursuant to Section 29(3) of the MITA, interest on loan transactions between related parties is deemed obtainable on demand when the interest is due to be paid. This means that the interest income is taxable even though the interest has not been received yet. Interest must be treated as being received by a person at the time when the person is entitled to the interest income accruing in or derived from Malaysia and is able to obtain the receipt thereof on demand. When the interest income is derived from Malaysia, how will it be recognised as a taxable income? Section 27(1) of the MITA lays out that where interest first becomes receivable in the relevant period, it shall, when it has been received, be treated as gross income of the relevant person for the relevant period.

Any foreign sourced interest income is exempted from tax. The derivation of interest income is governed under Section 15 of the MITA. Generally, only interest derived from Malaysia is subject to tax in Malaysia. With the introduction of Section 4B of the MITA, the question arises as to whether the fundamental tax principle of any income receivable incidental to and in the course of carrying out a business activity should be treated as part of that business income is still in place? This new Section 4B of the MITA which came into effect from the year of assessment (YA) 2013, effectively means that any interest, other than interest received by financial institutions (banks and so on), shall not be treated as business income.įurther to the introduction of Section 4B, the Inland Revenue Board of Malaysia (IRBM) has issued Public Ruling (PR) 3/2016 on “Tax Treatment on Interest Income Received by a Person Carrying on a Business”, which provided explanation on the tax treatment in respect of interest income received by a person carrying on a business. Among the examples of interest income mentioned in PR 3/2016 that cannot be treated as business income from YA 2013 are interest charged due to delay in payment of trade debt, interest from an easy payment plan, interest from fixed deposit placed as security and interest received by a person from loan given to employees. Following this, a new Section 4B was introduced in the MITA which provides that interest income shall be treated as business income only if the debenture, mortgage or other source to which the interest relates forms part of the stockin- trade of a business of a person or the interest is receivable by a person from the business of lending money and that business is one which is licensed under any written law. Among the notable cases are Ketua Pengarah Hasil Dalam Negeri v Pan Century Edible Oils Sdn Bhd (2002) MSTC3967 and I(M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (2005) MSTC 3,609. Several cases went to the courts in Malaysia to debate the fact of whether interest income should be treated as part of the business income or taken to be passive investment income. Generally, interest income is chargeable to tax under Section 4(c) of the MITA. However, certain types of income are also taxed as business income under Section 4(a) of the MITA. Interest Income – Business Or Non-business Source This article was first published in the Tax Guardian (April 2021), a publication by the Chartered Tax Institute of Malaysia. In the Malaysian tax landscape, there is no statutory definition of interest given in the Malaysian Income Tax Act 1967 (MITA). This article seeks to examine on the type of interest income which is chargeable to tax in Malaysia and, on the flip side, on whether interest expense incurred is deductible against the gross income. It may be regarded either as representing the profit he might have made if he had had the use of the money, or conversely the loss he suffered because he had not that use”.

In Riches v Westminster Bank Ltd (1947) AC 390, Lord Wright observed that “interest is payment which becomes due because the creditor has not had his money at the due date. “Interest” is defined as the return or compensation for the use or attention by one person of a sum of money belonging to or owed to another in Halsbury’s Laws of England.

Interest expense