Crowe Chat Vol.3/2025

Tax Edition

Welcome to our Crowe Chat Vol.3/2025. In this issue, we will cover the following topics:

Tax Audit Framework on Income Tax and Employer
Practice Note 1/2025 - Tax Treatment on the Acceptance of Donations or Contributions
Amended Gazette Order - Income Tax (Exemption) Order 2009 (Amendment) Order 2005

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Tax Audit Framework

Income Tax and Employer

Introduction

Tax audit framework is issued by the Inland Revenue Board of Malaysia (IRBM) to ensure that tax audits are carried out in a fair, transparent and impartial manner. The framework outlines the rights and responsibilities of audit officers, taxpayers and tax agents in respect of a tax audit.

Previous Tax Audit Frameworks

Tax Audit Framework dated 1 May 2022
Tax Audit Framework on Finance and Insurance dated 1 May 2022
Tax Audit Framework for Petroleum dated 1 May 2022
Audit Framework for Employer dated 1 October 2021
Tax Audit Framework on Withholding Tax dated 1 August 2015

New Tax Audit Framework

The IRBM issued the Tax Audit Framework for Income Tax and Employer (only available in the Malay version) on 15 March 2025 to replace and consolidate all previous tax audit frameworks as one streamlined document.

Details of the New Tax Audit Framework

The notable changes and updates to the Framework are as follows:

Tax audits now include those related to capital gains tax review on disposal of unlisted shares and expenses claimed in computation of capital gains.
The audit review on Labuan business activities is focused on substance over form to ensure compliance with the minimum substance requirements on whether the Labuan entities are eligible to remain being taxed under the Labuan Business Activity Tax Act 1990.

Audit coverage period:

TYPE OF AUDIT	COVERAGE PERIOD	STATUTE OF LIMITATION
Labuan business	3 years of assessment (YAs)	5 YAs
Employer	2 years	12 years

The scope of audit will now also include a review of capital allowances calculations and compliance with conditions and eligibility for approved tax incentive claims.

Timeframe for completing the tax audits:

TYPE OF AUDIT	BUSINESS ACTIVITY	COMPLETION TIMEFRAME
Employer audit	-	90 calendar days
Withholding tax audit	Payor	90 calendar days
Withholding tax audit	Payee	180 calendar days

The basis for audit case selection includes significant controlled transactions by related companies.
Taxpayers are responsible to obtain and submit all required documents regarding business transactions in Malaysia even though the documents are kept in overseas.
The following documents and information are required for voluntary disclosure submission:
1. Copy of Income Tax Return Form;
2. Audited financial statements;
3. Information on incentives and their conditions;
4. Tax computation (original and fully amended);
5. Complete information on issues related to the voluntary disclosure including ledgers or any related documents; and
6. Other relevant information.
Penalties for audits on Labuan entities are now included. The fine is between RM20,000 to not more than RM1 million or imprisonment of not more than two (2) or three (3) years or both a fine and imprisonment. The offence may be compounded to an amount up to 50% of the maximum fine.

Practice Note 1/2025

Tax Treatment on the Acceptance of Donations or Contributions

Introduction

Normally, donations or contributions are made to raise funds for specific goals. Some institutions, organisations, or funds (IOFs) are set up not for profit but to carry out activities that serve public interest. These IOFs often collect donations from the Government, companies, associations and the public. The funds are used to achieve their public service or charitable purposes. There are no specific tax rules for donations received under the Malaysian Income Tax Act (MITA), so the existing scope of charge of income tax applies to these IOF.

New Practice Note

The IRBM has issued the Practice Note 1/2025 – Tax Treatment on the Acceptance of Donations or Contributions on 24 March 2025. This Practice Note was issued to provide clarification regarding the tax treatment of donations or contributions received by any "person". According to Section 2 of the MITA, "person" includes a company, body of persons, a limited liability partnership and a sole proprietorship.

Details of the Practice Note

Donations or contributions may be subject to income tax if:
1. the recipient of the donations or contributions is engaged in business; or
2. the donations or contributions received are used to increase revenue and to sustain its business activities.
The tax treatment of an IOF which is set up not for profit but to carry out activities that serve public interest include:
- The donations or contributions received are subject to tax under Paragraph 4(a) of the MITA.
- Any expenses incurred specifically for implementing the IOF’s objectives (including donations or contributions made for charitable activities) are allowed as deduction under Subsection 33(1) of the MITA.
- The balance or excess of the unutilised sum of the donations or contributions will be taxable as income under Paragraph 4(a) of the MITA.
However, income received by an IOF which is approved under Subsection 44(6) of the MITA is exempted from tax.

Amended Gazette Order

Income Tax (Exemption) Order 2009 (Amendment) Order 2005

An individual income tax exemption of up to RM2,400 per year is given for childcare allowance received by employees or paid directly by employers to childcare centres for children aged 12 years and below. Effective from YA 2024, this limit has been increased to RM3,000.

Previous Gazette Order

The previous Income Tax (Exemption) Order 2009 was gazetted on 6 April 2009.

Amended Gazette Order

The Income Tax (Exemption) Order 2009 (Amendment) Order 2005 was gazetted on 10 April 2025.

Details of the Amended Gazette Order

In Budget 2025, it was proposed that the individual income tax exemption of up to RM3,000 per year be expanded to include elderly care for parents, adoptive parents or grandparents.
This Order is effective from YA 2025.