Prior to the year of assessment (YA) 2016, paragraph 24(1)(b) of the ITA 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 was treated as gross income from a business when the service is rendered.
With effect from YA 2016, paragraph 24(1)(b) has been revised and a new subsection 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.
Briefly, the changes are as below.
Public Ruling 4/2020
The IRBM has issued PR 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.
Application of paragraph 24(1)(b) of the ITA and subsection 24(1A) of the ITA
Galaxy Sdn Bhd (GSB) provides office cleaning services. On 1.10.2018, an agreement was signed with a regular client, Lavender Sdn Bhd (LSB). The summary of the agreement between GSB and LSB is as below:
Same facts as in Example A except that on 13.12.2018, LSB made an advance payment of RM90,000 which was supposed to be due and payable on 1.1.2019.
Tax Treatment in Respect of a Refund of an Advanced Payment
Pursuant to subsection 34(7A) of the ITA, if a person refunds any sum of money received in respect of services that have yet to be rendered, a tax deduction can be claimed in the YA when the refund is made.
Services that are Not Subject to Paragraph 24(1)(b) and Subsection 24(1A) of the ITA
The following are services not subject to the above tax treatment:
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