This Technical Guideline aims to explain the tax treatment on interest/profit expenses payable to banks or financial institutions during the moratorium period.
A moratorium is a temporary suspension of loan/financing repayments (principal and interest/profit) without late payment charges, introduced under the PRIHATIN economic stimulus package to help borrowers facing financial difficulties due to the Covid-19 pandemic.
The moratorium is automatically implemented for individual borrowers and small and medium-sized enterprises (SMEs), while corporate customers can apply for deferment from their respective banks or financial institutions.
The moratorium period given by banks or financial institutions is from April 1, 2020, to September 30, 2020.
In summary, the Technical Guideline explains the tax treatment of interest/profit expenses payable to banks or financial institutions during the moratorium period, which was introduced as a temporary suspension of loan/financing repayments to help borrowers facing financial difficulties due to the Covid-19 pandemic.
The guideline states that during the moratorium period, the deferred interest/profit expenses for a basis period of a tax assessment year can be allowed as a deduction in determining the taxable income of an individual or entity when the expenses become due and payable.
This is in line with the provision under subsection 33(4) of the Income Tax Act (ITA) and paragraph 4.3 of Public Ruling No. 9/2015 issued to the public.
Example 1, the guideline provides a scenario where Ismi bought a house in Bandar Baru Bangi and rented it to Iman.
A bank loan with monthly instalments due on the 30th of each month financed the house purchase.
During the moratorium period from April to September 2020, the monthly instalment payments, including the interest charged by the bank, were not required to be paid on the due date because of the deferment granted by the bank.
However, Ismi can still claim the deferred interest as an expense in determining the rental income for the tax assessment year when the payment of the interest becomes due and payable, which is allowed under the provision of subsection 33(4) of the ITA.
Example 2: Corporate customers apply for a moratorium extending the financing payment period, and the accounting period ends on 31 December.
Ilham Fresh Sdn Bhd (IFSB) has been retailing since 2017.
In 2019, IFSB made financing RM120,000 with Bank Juta Ria Berhad (BJRB) in Islamic manner for a period of 10 years to increase the company’s business capital.
The company’s accounts are prepared and closed on 31 December each year.
IFSB applied for a loan repayment deferment (moratorium), and BJRB approved the deferment period from 1 April 2020 until 30 September 2020.
An additional repayment period of 6 months was given to IFSB to settle the entire financing, where the monthly instalment remained unchanged.
IFSB did not change the financing agreement with the bank regarding the due date and the amount payable after the moratorium period.
The bank statement for the year 2020 for IFSB is as follows:
The tax treatment for IFSB’s profit expenses for the 2020 assessment year are as follows:
- The allocation under subsection 33(4) ITA is fulfilled. The accrued profit rate (during the moratorium period) is an expense that must be paid in the 2020 assessment year.
- The total profit rate (“kadar keuntungan“) for the 2020 assessment year amounts to RM3,625.52 (including during the moratorium period).
It can be allowed as a deduction under paragraph 33(1)(a) ACP in the 2020 assessment year.
The responsibility of taxpayers is to keep records and support documents related to income and expenses for an audit by the Inland Revenue Board of Malaysia.
The records and supporting documents must be kept for seven (7) years starting from the end of the year the tax return was submitted to the Director General of Inland Revenue.
If you would like more information, we highly recommend downloading the Technical Guideline on Tax Treatment of Interest/Profit Expense Payable to Banks or Financial Institutions during the Moratorium Period and reading the full context. Also, we would like to suggest that you seek advice from a professional tax agent.
Reference:
32.1-Technical-Guideline-on-Tax-Treatment-of-Interest_Profit-Expense-Payable-to-Banks-or-Financial-Institutions-during-the-Moratorium-PeriodDownload32.2-Public-Ruling-No.4_2020-–-Tax-treatment-of-any-sum-received-and-a-debt-owing-that-arises-in-respect-of-services-to-be-renderedDownload
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