FINANCE ACT 1988

LAWS OF MALAYSIA REPRINT Act 364 FINANCE ACT 1988 Incorporating all amendments up to 1 January 2006 PUBLISHED BY THE COMMISSIONER OF LAW REVISION, MALAYSIA UNDER THE AUTHORITY OF THE REVISION OF LAWS ACT 1968 IN COLLABORATION WITH PERCETAKAN NASIONAL MALAYSIA BHD 2006 2 Laws of Malaysia ACT 364 FINANCE ACT 1988 Date of Royal Assent … … … Date of publication in the Gazette … 31 December 1988 … 5 January 1989 PREVIOUS REPRINT First Reprint … … … … … 2001 Finance LAWS OF MALAYSIA Act 364 FINANCE ACT 1988 ARRANGEMENT OF SECTIONS CHAPTER I PRELIMINARY Section 1. Short title 2. Amendments and repeal of Acts CHAPTER II AMENDMENTS TO THE INCOME TAX ACT 1967 3. Commencement of amendments to the Income Tax Act 1967 4. Amendment of section 18 5. New section 38A 6. Amendment of section 39 7. Amendment of section 43 8. Amendment of section 44 9. Amendment of section 108 10. Amendment of section 110 11. Amendment of Schedule 1 12. New Schedule 4A 13. Amendment of Schedule 6 14. Amendment of Schedule 7A 3 4 Laws of Malaysia ACT 364 CHAPTER III AMENDMENTS TO THE PETROLEUM (INCOME TAX) ACT 1967 Section 15. Commencement of amendments to the Petroleum (Income Tax) Act 1967 16. Amendment of section 2 17. Amendment of section 4 18. Amendment of section 10 19. Amendment of section 16 20. Amendment of section 18 21. Amendment of Schedule 1 22. Amendment of Schedule 2 CHAPTER IV AMENDMENTS TO THE REAL PROPERTY GAINS TAX ACT 1976 23. Commencement of amendments to the Real Property Gains Tax Act 1976 24. Amendment of Schedule 2 25. Amendment of Schedule 3 CHAPTER V REPEAL AND SAVING OF THE SHARE (LAND BASED COMPANY) TRANSFER TAX ACT 1984 26. Repeal and saving of the Share (Land Based Company) Transfer Tax Act 1984 Finance 5 LAWS OF MALAYSIA Act 364 FINANCE ACT 1988 An Act to amend the Income Tax Act 1967, the Petroleum (Income Tax) Act 1967 and the Real Property Gains Tax Act 1976 and to repeal the Share (Land Based Company) Transfer Tax Act 1984. [ ] BE IT ENACTED by the Seri Paduka Baginda Yang di-Pertuan Agong with the advice and consent of the Dewan Negara and Dewan Rakyat in Parliament assembled, and by the authority of the same, as follows: CHAPTER I PRELIMINARY Short title 1. This Act may be cited as the Finance Act 1988. Amendments and repeal of Acts 2. (1) The Income Tax Act 1967 [Act 53], the Petroleum (Income Tax) Act 1967 [Act 543] and the Real Property Gains Tax Act 1976 [Act 169] are amended in the manner specified in Chapters II, III and IV respectively. (2) The Share (Land Based Company) Transfer Tax Act 1984 [Act 310] is repealed in the manner specified in Chapter V. CHAPTER II AMENDMENTS TO THE INCOME TAX ACT 1967 Commencement of amendments to the Income Tax Act 1967 3. (1) Except for paragraphs 14(b) and (e), this Chapter shall have effect for the year of assessment 1989 and subsequent years of assessment. 6 Laws of Malaysia ACT 364 (2) Paragraphs 14(b) and (e) shall have effect for the year of assessment 1990 and subsequent years of assessment. Amendment of section 18 4. Section 18 of the Income Tax Act 1967, which in this Chapter is referred to as “the principal Act”, is amended by inserting, immediately after the definition of “economic rent”, the following new definition of “entertainment”: ‘ “entertainment”includes— (a) the provision of food, drink, recreation or hospitality of any kind; or (b) the provision of accommodation or travel in connection with or for the purpose of facilitating entertainment of the kind mentioned in paragraph (a), by a person or an employee of his in connection with a trade or business carried on by that person;’. New section 38A 5. The principal Act is amended by inserting, immediately after section 38, the following new section 38A: “Limitation on deduction of entertainment expenses 38A. Where an employee’s gross income from an employment under subsection 13(1) includes for the basis period for a year of assessment any entertainment allowance, the amount of expenses deductible under subsection 33(1) in respect of entertainment by the employee, shall not exceed the amount of such entertainment allowance included in that gross income.”. Amendment of section 39 6. Subsection 39(1) of the principal Act is amended— (a) by deleting the word “or” at the end of subparagraph (e)(ii); (b) by substituting for the comma at the end of subparagraph (e)(iii) a semicolon and inserting, immediately thereafter, the word “or”; Finance 7 (c) by inserting, immediately after subparagraph (e)(iii), the following new subparagraph (iv): “(iv) qualifying farm expenditure for the purposes of Schedule 4A,”; (d) by substituting for paragraph (h) the following: “(h) any sum paid by way of a bonus to an employee in excess of— (i) two thousand ringgit; or (ii) two-twelfths of his wages or salary plus a proportionate increase, if any, of that sum which is not more than twice the percentage increase of the net profits before taxation of the business of that basis period over such net profits, if any, of the preceding basis period, whichever is the greater;”; (e) by deleting the word “or” at the end of paragraph (j); (f) by substituting for the full stop at the end of paragraph (k) a semicolon; and (g) by inserting, immediately after paragraph (k), the following new paragraphs (l) and (m): “(l) any expenses incurred in the provision of entertainment including any sums paid to an employee of that person for the purpose of defraying expenses incurred by that employee in the provision of entertainment: Provided that this paragraph shall not apply to the following expenses: (i) the provision of entertainment to his employees except where such provision is incidental to the provision of entertainment for others; 8 Laws of Malaysia ACT 364 (ii) the provision of entertainment by a person who carries on a business which consists of or includes the provision for payment of entertainment to clients or customers of that business and that entertainment is provided for payment by the clients or customers in the ordinary course of that business; (iii) the provision of promotional gifts at trade fairs or trade or industrial exhibitions held outside Malaysia for the promotion of exports from Malaysia; (iv) the provision of promotional samples of products of the business of that person; or (v) the provision of entertainment for cultural or sporting events open to members of the public, wholly to promote the business of that person; or (m) notwithstanding subparagraph (l)(i), any expenditure incurred in the provision of a benefit or amenity to an employee consisting of a leave passage within or outside Malaysia.”. Amendment of section 43 7. Section 43 of the principal Act is amended by inserting, immediately after the words “Schedule 4” in paragraph (1)(c), the words “or 4A”. Amendment of section 44 8. Section 44 of the principal Act is amended by inserting, immediately after the words “Schedule 4” in paragraph (1)(b), the words “or 4A”. Amendment of section 108 9. Section 108 of the principal Act is amended— (a) by inserting, immediately after subsection (2), the following new subsection (2A): “(2A) Notwithstanding any other provision of this Act, where a dividend is paid, credited or distributed with or without deduction of tax during the basis year Finance 9 for the year of assessment 1989, the amount of the dividend received by the shareholder shall be deemed to be a dividend of such a gross amount as after deduction of tax at the rate of thirty-five per cent would be equal to— (a) the amount in fact paid or credited; or (b) where the dividend consists of property other than money, the amount of the market value of that property at the time of the dividend’s distribution, and a sum equal to the difference between that gross amount and the amount mentioned in paragraph (a) or (b), as the case may be, shall be deemed to have been deducted from the dividend as tax.”; (b) by inserting, immediately after subsection (4), the following new subsection (4A): “(4A) In any case where tax has been deducted at the rate of forty per cent on any dividend paid, credited or distributed during the basis year for the year of assessment 1989 to which subsection (2A) applies, the difference between the amount of tax deducted at forty per cent from such dividend and the amount deemed to have been so deducted under that subsection shall be carried forward as a balance in accordance with subsection (6).”. Amendment of section 110 10. Section 110 of the principal Act is amended by inserting, immediately after subsection (1), the following new subsection (1A): “(1A) Notwithstanding subsection (1), where tax on any dividend paid, credited or distributed during the basis year for the year of assessment 1989 has been deducted at the rate of forty per cent, the tax to be set off under subsection (1) shall be the sum deemed to be the tax deducted from such dividend under subsection 108(2A).”. 10 Laws of Malaysia ACT 364 Amendment of Schedule 1 11. Schedule 1 to the principal Act is amended by substituting for the figure “40” in paragraph (2) of Part I the figure “35”. New Schedule 4A 12. The principal Act is amended by inserting, immediately after Schedule 4, the following new Schedule 4A: “ SCHEDULE 4A [Sections 43 and 44] CAPITAL EXPENDITURE ON APPROVED AGRICULTURAL PROJECTS 1. Subject to this Schedule, qualifying farm expenditure for the purposes of this Schedule is capital expenditure within the meaning of paragraph 2, incurred by a person for the purposes of a business of that person consisting of the carrying on of an approved agricultural project, within the period stipulated by the Minister for the purposes of this Schedule, in respect of which expenditure that person would have been entitled to an allowance under Schedule 3 but for an election under this Schedule. 2. Subject to paragraph 1, qualifying farm expenditure is capital expenditure incurred for the purposes of an approved agricultural project on— (a) the clearing and preparation of land; (b) the planting (but not replanting) of a crop relating to an approved agricultural project; (c) the construction on a farm of a road or bridge; (d) the construction on a farm of a building used for the purposes of an approved agricultural project which is carried out on that farm or the construction on that farm of a building provided for the welfare and accommodation of persons employed in that project and which, if that project ceased to be carried out, is likely to be of little or no value to any person except in connection with the working of another farm; or (e) the construction of a pond or the installation of an irrigation or drainage system which is used for the purposes of an approved agricultural project. 3. A person who has incurred qualifying farm expenditure may elect to claim within three months after the beginning of the year of assesment in the basis period in which that business commenced or within such further period as the Director General may allow, a deduction to be made under this Schedule: Finance 11 Provided that— (a) this paragraph shall not apply where the total area of the land utilised for the approved agricultural project is below the hectarage stipulated by the Minister for the purposes of this Schedule; (b) where a person has made an election for a deduction under this Schedule in respect of an approved agricultural project he shall not be entitled to make a further election in respect of another project relating to the same crop or product. 4. Subject to this Schedule, there shall be deducted for a year of assessment under subsection 44(1) an amount equal to so much of the qualifying farm expenditure as was incurred in the basis period for the year of assessment (in this Schedule that year of assessment being referred to as “the relevant year”). 5. A person entitled to a deduction in respect of any expenditure relating to