The Top Accounting & Tax Problems That Can Be Avoided

Malaysia’s tax system has adopted the Self-Assessment System (SAS) for almost two decades. Under the SAS, tax returns submitted are deemed assessments where the Inland Revenue Board of Malaysia (IRB) would not inspect and issue any official assessment upon the taxpayers submitting the tax returns. However, IRB would be carrying out tax audit once in a few years as their routine enforcement to check that the tax returns submitted are in accordance with the requirements of the tax legislation.

In this system, taxpayers bear greater responsibility under the tax legislation ensuring all information and records be made be available when tax audit is conducted. Nevertheless, many SMEs still have problems when facing tax audits even though the SAS has been in place for more than a decade.

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  Records and documents incomplete

Tax audits would be conducted a few years later after the tax returns are submitted. The taxpayers are required, under the Income Tax Act 1967, to keep all relevant documents and information for seven years. However, many SMEs always overlook this and usually leave it to the accounting staff to manage. It is always the case that if the accounting staff leaves the company and a new one takes over, the documents can’t be located. If tax audits raise any enquiries on expenses with IRB officers requiring supporting documents and the taxpayer fails to provide them, the risk is that IRB may adjust the tax assessment by disallowing as deduction while imposing penalties. Moreover, failing to keep documents is an offence under the Act and the company directors are liable for punishment. It is advisable to have proper company policies and procedures in place for post yearly tax submissions for the arrangements of document keeping, procedures for staff leaving and the new one taking over. To ensure proper hand-over is in order, it’s better to have scanned copies together with the physical ones.

• Cash transactions not reported

Many taxpayers think that income received in cash, if not reported as such in the books, the IRB will not find out. This may create some implications, for e.g. if the unreported cash income is used to pay some expenses, in the accounts it must contain the source of the cash for the payment, usually if the source is unknown it is common that it will be entered into the accounts as “advanced from director”. When this accounts’ amount keeps on accumulating year by year, it will reach a huge amount that directors are not able to explain from where they got the money to advance to the company. If the explanation is unsatisfactory for IRB, they will treat it as unreported income.

Other than that, IRB may use the method of “mean test” to find out the unreported cash income. Mean test is using the total net assets’ value plus the living expenses to be assessed against the income and capital gain of a taxpayer. If the discrepancy is huge and lacks supporting documents with explanation, the discrepancy will be treated as unreported income.

• Bank accounts are not separate for business transactions

This has happened to many sole-proprietors and self-employed where they use their personal bank accounts to do business, mixing it up with private transactions in their bank accounts. If the recordings are not done, it is difficult for the tax agent or accountant to segregate the transactions to prepare accounts for the business. It may result in some incomes being missed out in reporting.

• Do not have book keeping practices

For tax purposes, genuine business expenses fulfilling the requirement of the Act are allowable for deduction. But there are certain kinds expense where not only having the expense invoices are good enough, the purposes of these expenses incurred for tax deduction purposes has to be made clear. For example, entertainment expenses, other than obtaining the invoice from the restaurant, it must be clear that the entertainment is provided to customers or staff etc. which has tax implication. For commissions paid out, the recipient’s particulars and the commissions paid for any project or purposes must be related wholly to the business. All these need additional recordings. Only then the accountants can have full information to prepare the accounts, and the tax computed will more accurately reflect the actual position.

• Mentality not changed

There are quite a number of attitudes many taxpayers never changed.

-Last minute attitude. Many taxpayers only rush to their tax agent to do their tax when the submission due date is close. When time is limited they may have problems such as the tax agent needing to clarify some queries with taxpayers. There may not be enough time to wait for answers. Moreover, work done in a hurry and under stressful circumstances, results in human errors.

-Another common mentality is that many taxpayers are prone to listening to friends or relatives’ and be easily influenced by them rather than listening to their tax agents. Their friends may simply say that they have never declared tax and they are not having any problems, or they just simply declare some income here and there instead of the actual amount and just pay little tax as a result IRB will not come to audit, etc. All these kinds of advice results in none cooperation with tax agents.

• Wrong conception of business expenses vs private expenses and revenue expenses vs capital expenditures

It is not all accounting expenses that are tax deductible, to qualify for tax deduction. The expenses must be wholly and exclusively incurred in producing the income and that expenses are not specifically disallowed for tax deduction under the Act.

Other than that, the expenses must not be capital in nature which is incurred bringing long term benefits to the business. Only then it can be tax deductible.

All these involve technical understanding which creates arguments and disagreements among taxpayers when the tax agent presenting the computation and explanation during tax submission.

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