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Partnership Business in Malaysia | 3 Steps to Declare Income Tax if You’re Non-Profitable

Are you the owner of a Partnership Business that is not making any profits? You might be wondering what or how you should declare your Income Tax? Let's have a look at the 3 common steps that can help you understand the nuances of a Partnership Business in Malaysia.
hands with text: Do I need to Pay Income Tax on My Loss-Making Partnership Business? , partnership

Question:

My name is Ben. I am running a partnership business in Malaysia with my partner, Jerry. It is a fitness studio known as Fitstar. Here are the details:

1. Fitstar is registered as a partnership entity in Malaysia.

2. Our initial capital is RM 200,000 where my contribution is 60% and the remainder of 40% is contributed by Jerry. We had agreed to receive 5% in fixed interest per annum from our capital contribution.

3. We have also agreed to share our profits and losses based on the ratio of 3:2 where my share is 3 and Ben has 2.

4. Jerry is an amazing fitness instructor and hence, is working full-time in Fitstar as its head instructor. He is now drawing a fixed monthly salary of RM 5,000 and has received a bonus of RM 5,000 from the partnership business in Malaysia for the last year.

5. I am the finance guy at Fitstar and is responsible to handle its accounts.
I work at Fitstar on weekends as I personally have a full-time job where I earn a fixed monthly salary of RM 10,000. At Fitstar, I received a fixed salary of RM 1,500 and received a bonus of RM 1,500 for the last year
Last year, the partnership business had incurred a net loss of RM 10,000, inclusive of depreciation charges of RM 20,000. Here is my question: ‘Do I need to declare income tax to the Inland Revenue Board (IRB) for our partnership business in Malaysia as it incurred a net loss?’

Are you also incurring losses with your investment property? Read also:How to Offset Losses From Your Property Investment

Answer:

First and foremost, Fitstar is not recognised by law as a separate legal entity for income tax purposes. Thus, its tax treatment would differ from a private limited company. To be registered as a partnership business in Malaysia, income derived from it would be assessed individually according to the share of each partner.

Do you want more information on income tax payments? Read also: 7 things to know about income tax payments in Malaysia.

It means, Fitstar itself does not need to declare income tax regardless, whether or not, it is a profitable or non-profitable partnership. However, both Ben and Jerry are required to declare and pay income tax individually for their share of income derived from Fitstar. Here, we will illustrate how much income is to be declared by both Ben and Jerry to the IRB. They are as follows:

Step 1: Provisional Adjusted Income

Ben and Jerry are required to first calculate the provisional adjusted income for partnership business . It is computed by adding Fitstar’s expenses incurred on monthly salaries and bonus paid to its partners, interests payable to partners, and its charges on depreciation to Fitstar’s net profits or losses for the year.

No. Item Amount (RM) Amount (RM)
1 Net Profits/(Losses) (10 000)
Add Expenses:
2 Annual Partner’s Salaries
Ben: (RM 1 500 x 12 months)
Jerry: (RM 5 000 x 12 months)
78 000
3 Partner’s Bonuses
(RM 5 000 + RM 1 500)
6 500
4 Anual Interest Payable to Partners
Ben: (RM 200 000 x 60% x 5% a year)
Jerry: (RM 200 000 x 40% x 5% a year)
10 000
5 Depreciation Charges 20 000 114 500
6 Provisional Adjusted Income 104 500

From above, it doesn’t look like Fitstar is a non-profitable Partnership Business in Malaysia after all as it is in fact a very profitable venture as opposed to a net loss of RM 10,000.

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Step 2: Divisible Income

Second, we would calculate divisible income for Ben and Jerry from Fitstar. It is computed by subtracting their wages, bonuses and interest payments from the provisional adjusted income calculated above.

No. Item Amount (RM) Amount (RM)
1 Provisional Adjusted Income 104 500
Subtract Expenses:
2 Annual Partner’s Salaries 78 000
3 Partner’s Bonuses 6 500
4 Anual Interest Payable to Partners 10 000 94 500
5 Divisible income 10 000

As Ben and Jerry have agreed to split their partnership business’s profits based on 3:2 ratio, hence, Ben’s share of divisible income is RM 6,000 while Jerry’s share is RM 4,000.

Step 3: Statutory Income Declarable by Each Partner

Each partner is responsible to declare their salaries, bonuses, interest incomes, and share of profits (divisible income) to the IRB. Thus, Ben and Jerry would be declaring the following amounts of statutory income from the partnership business they own in Malaysia to the IRB:

Items Ben Jerry Total
Salary RM 18 000 RM 60 000 RM 66 000
Bonus RM 1 500 RM 5 000 RM 5 500
Interest Income RM 6 000 RM 4 000 RM 10 000
Divisible Income RM 6 000 RM 4 000 RM 10 000
Statutory Income RM 31 500 RM 73 000 RM 104 500

You may also want to read: 10 Things a Tax Payer Should Know About The Basics Income Tax Filing in Malaysia.

Conclusion:

From Ben’s point of view, he needs to declare statutory income from Fitstar and his full-time job totalling RM 151,500 based on the information given:

Ben’s Statutory Income Declarable:
= Full-Time Job + Fitstar
= (RM 10,000 x 12 months) + RM 31,500
= RM 120,000 + RM 31,500
= RM 151,500

It is erroneous for Ben to believe that he does not need to declare income from Fitstar as it has incurred a net loss last year and will be heavily penalised by the IRB if he fails to make income tax payments on Fitstar.

However, from the discussion above, Ben now has a new concern because a big portion of his income would be subjected to a maximum tax bracket of 24%. As such, it would erode Ben’s effective Return on Investment (ROI) from his capital into Fitstar. In Ben’s case, it would be helpful to seek advice and strategies from relevant tax professionals to save on tax payments.

If you now run or invest in a partnership business in Malaysia, your situation may be unique, and hence, needing the services of qualified local tax accountants. If that is you, you may use Joolah.my a free search tool that connects you to some of the best auditors, tax agents and accounting providers in Malaysia.