Interest Restriction Are all interest expenses tax deductible

Interest Restriction: Are all interest expenses tax deductible?

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Taxation

Understanding Interest Restriction in Malaysian Taxation

The notion of interest restriction within Malaysian taxation is vital in describing the allowable deductibility of interest-based expenditure from corporate and individual taxation. According to Public Ruling No. 2/2011, represent the remuneration for borrowed funds used or kept.

Interest Deductibility and Non-Deductible Interest

The expenditure of such interest is allowable as per Section 33(1) of the Income Tax Act (ITA) 1967, where the amount is wholly and exclusively incurred for the purpose of gross income. In the case where a loan is secured for business reasons and the monies received put into earning gross income of the business, interest expenditure in relation to such a credit facility is tax deductive.

Nevertheless, interest expenses for non-business purposes are impacted by a thin cap rule embodied in the Section 33(2) of the ITA 1967. Non-business purposes include; investment in properties, shares and securities, Islamic securities; fixed deposit placement; and lends (inclusive of interest free lends) to others.

Calculating Interest Restriction

The portion of interest expense subject to restriction against gross business income is determined using the following formula:

Calculating Interest Restriction

Interest Restriction = (Interest Expense * Cost of Investments and Loans) / RM500,000

This formula calculates the maximum deductible interest expense based on the ratio of investment and loan costs financed by borrowed money to a threshold of RM500,000.

Balance Considerations

End-of-year balance: If the total cost of investments and loans at year-end doesn’t exceed RM500,000, the restriction applies only to that year-end balance.

Monthly balances: If the year-end balance exceeds RM500,000 or there are no investments/loans on the last day due to disposals/transfers/payments, the restriction applies to the monthly balances throughout the year.

Recordkeeping

Taxpayers must maintain relevant records of investments, loans, and monthly balances for tax audit purposes.

Exceptions to Interest Restriction

If businesses, companies and individuals charge interest on borrowed money to their respective accounts not exceeding RM10,000 and RM6,000 respectively, the interest restriction is also disallowed under Section 33(2). However, if the interest is above these limits, there is enforcement. But the Section 33(2) business purpose interest disallowed for can be offset against income generated from investments and loans.

Exemption

  • The restriction does not apply if the interest on borrowed money charged to business accounts does not exceed:
    • RM10,000 for companies
    • RM6,000 for individuals and others

Application

  • If the interest exceeds these thresholds, the restriction is applied based on the formula you mentioned earlier:
    • Interest Restriction = (Interest Expense * Cost of Investments and Loans) / RM500,000

Offsetting

  • Interest disallowed for business purposes due to the application of Section 33(2) can be offset against income from investments or loans. This helps mitigate the impact of the restriction by allowing taxpayers to utilize the disallowed interest in other areas.

Conclusion

It is necessary for businesses and individuals to comprehend the subtleties of interest restriction in Malaysian taxation when finding their true taxable income. Taxpayers can use the relevant provisions and compute the limitation correctly and be competent. Still confused about taxation? Contact FastLane Group audit and tax compliances service.

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