Loading...

Is Interest Income Taxable on a Director Loan From a Company? – What You Need to Know.

Does your company offer director loans from the company's internal funds? If so, we have put together [with calculation examples] 3 scenarios. You'll learn how to calculate your company tax on gains derived from interest on directors loans and know what interest income is taxable in Malaysia.
director loan application form

Question:

Hi, I’m Lee, the Managing Director of Krunch Sdn Bhd, a biscuit manufacturer in Kajang. I have been running the business together with Chan and Soon, my best buddies who are Directors of the company for the last ten years.

In the year 2019, all of us have obtained director loan from the company, Krunch Sdn Bhd’s internal funds where the details are as followed:

  • 1. Lee
    I have obtained director loan of RM 100,000 in an interest-free loan on 1 January 2019 and I have not made any repayment on the loan throughout the year.
  • 2. Chan
    Chan obtained RM 120,000 in an interest-free director loan on 1 February 2019. He repaid RM 60,000 to Krunch Sdn Bhd on 1 May 2019. But, on 1 October 2019, he obtained RM 30,000 in interest-free director loan from the company.
  • 3. Soon
    Soon obtained director loan of RM 150,000 on 1 April 2019 where the interest rate of the director loan from the company is fixed at 5% a year where it is due at the end of the month. Soon has repaid RM 60,000 to Krunch Sdn Bhd on 1 September 2019.

Thus, my question is, ‘Does Krunch Sdn Bhd need to declare interest income that was derived from the director’s loan given to Soon?’

We closed our financial year on 31 December 2019.

Is your company a non-resident company in Malaysia? If yes, read also: Withholding Tax on Interest Income Paid to a Non-Resident Company in Malaysia

Answer:

The answer is Yes.

Krunch Sdn Bhd is required to file in any nterest income taxable from the director’s loan presented to Soon. Also, Krunch Sdn Bhd has to declare interest income from Lee and Chan despite it disbursing interest-free loans to both directors from its own internal funds as stated under Section 140B of the Income Tax Act (ITA) 1967.

The interest income taxable is calculated on a monthly basis with the formula below:

Monthly Interest Income taxable= 1/12 x A x B

where:

A) refers to the outstanding director loan amount at the end of the calendar month

B) refers to Average Lending Rate (ALR) published by Bank Negara Malaysia

Here, I’ll compute the interest income taxable that Krunch Sdn Bhd needs to declare for 2019 from the director loan disbursed to Lee, Chan and Soon. For a start, let’s assume that the ALR published by Bank Negara Malaysia

Joolah makes it easy for you to get a tax expert to help you with any tax related matters. Fill out the information below and get 3 free quotes and non binding deals.
  • Input details

    Input details and requirements

  • We match

    Up to 3 experts will contact you

  • Compare & pick

    Compare & pick the best deal

Read also: 7 Things to Know about Income Tax Payments in Malaysia

1. Lee – interest free director loan from company calculation

Lee has RM 100,000 in interest-free director loan from Krunch Sdn Bhd. Hence, the total amount of interest income taxable deemed to had received by Krunch Sdn Bhd from disbursing director loans from the company’s internal fund shall be computed as follows:

Month Outstanding Loan
Balance at End of Month
ALR
(%)
Interest Income Deemed to Receive
by Krunch Sdn Bhd
Jan 2019 RM 100,000 4% RM 333 (1/12 x RM 100,000 x 4%)
Feb 2019 RM 100,000 4% RM 333 (1/12 x RM 100,000 x 4%)
Mar 2019 RM 100,000 4% RM 333 (1/12 x RM 100,000 x 4%)
Apr 2019 RM 100,000 4% RM 333 (1/12 x RM 100,000 x 4%)
May 2019 RM 100,000 4% RM 333 (1/12 x RM 100,000 x 4%)
Jun 2019 RM 100,000 4% RM 333 (1/12 x RM 100,000 x 4%)
Jul 2019 RM 100,000 4% RM 333 (1/12 x RM 100,000 x 4%)
Aug 2019 RM 100,000 4% RM 333 (1/12 x RM 100,000 x 4%)
Sep 2019 RM 100,000 4% RM 333 (1/12 x RM 100,000 x 4%)
Oct 2019 RM 100,000 4% RM 333 (1/12 x RM 100,000 x 4%)
Nov 2019 RM 100,000 4% RM 333 (1/12 x RM 100,000 x 4%)
Dec 2019 RM 100,000 4% RM 333 (1/12 x RM 100,000 x 4%)
Total Interest Income Deemed
to Receive by Krunch Sdn Bhd from Lee
RM 4,000

2. Chan – interest free director loan from company calculation

Chan’s case is a little different from Lee as Chan had:

a. Obtained RM 120,000 in director loan from the company, Krunch Sdn Bhd on 1 February 2019.

b. Repaid RM 60,000 loan back to Krunch Sdn Bhd on 1 May 2019. ( Repaid back the director loan received to Krunch Sdn Bhd, in the amount of RM 60,000 on 1 May 2019)

c. Obtained RM 30,000 in loan from Krunch Sdn Bhd on 1 October 2019.

Hence, the interest income deemed to have received from Chan is calculated as follows:

Month Outstanding Loan
Balance at End of Month
ALR
(%)
Interest Income Deemed to Receive
by Krunch Sdn Bhd
Jan 2019
Feb 2019 RM 120,000 4% RM 400 (1/12 x RM 120,000 x 4%)
Mar 2019 RM 120,000 4% RM 400 (1/12 x RM 120,000 x 4%)
Apr 2019 RM 120,000 4% RM 400 (1/12 x RM 120,000 x 4%)
May 2019 RM 60,000 4% RM 200 (1/12 x RM 60,000 x 4%)
Jun 2019 RM 60,000 4% RM 200 (1/12 x RM 60,000 x 4%)
Jul 2019 RM 60,000 4% RM 200 (1/12 x RM 60,000 x 4%)
Aug 2019 RM 60,000 4% RM 200 (1/12 x RM 60,000 x 4%)
Sep 2019 RM 60,000 4% RM 200 (1/12 x RM 60,000 x 4%)
Oct 2019 RM 90,000 4% RM 300 (1/12 x RM 90,000 x 4%)
Nov 2019 RM 90,000 4% RM 300 (1/12 x RM 90,000 x 4%)
Dec 2019 RM 90,000 4% RM 300 (1/12 x RM 90,000 x 4%)
Total Interest Income Taxable Deemed
to Receive by Krunch Sdn Bhd from Chan
RM 3,100

3. Soon – director loan from the company with 5% interest

Unlike Lee and Chan, Soon incurs interest cost for his director loan from the company, Krunch Sdn Bhd where its interest rate is 5% a year, which is higher than the ALR of 4% a year. In this case, we shall disregard the ALR as the interest rate charged by Krunch Sdn Bhd is higher than the ALR. Once again, his loan details are as follow:

a. Obtained RM 150,000 in loan from Krunch Sdn Bhd on 1 April 2019.

b. Repaid RM 60,000 in loan back to Krunch Sdn Bhd on 1 September 2019.

Do you receive company car benefits? Read also:: Company Car Benefit | Should I declare it on my income tax filing in Malaysia?

Hence, the interest income taxable deemed to have received from Soon is calculated as follows:

Month Outstanding Loan
Balance at End of Month
ALR
(%)
Interest Income Deemed to Receive
by Krunch Sdn Bhd
Jan 2019
Feb 2019
Mar 2019
Apr 2019 RM 150,000 5% RM 625 (1/12 x RM 150,000 x 5%)
May 2019 RM 150,000 5% RM 625 (1/12 x RM 150,000 x 5%)
Jun 2019 RM 150,000 5% RM 625 (1/12 x RM 150,000 x 5%)
Jul 2019 RM 150,000 5% RM 625 (1/12 x RM 150,000 x 5%)
Aug 2019 RM 150,000 5% RM 625 (1/12 x RM 150,000 x 5%)
Sep 2019 RM 90,000 5% RM 375 (1/12 x RM 90,000 x 5%)
Oct 2019 RM 90,000 5% RM 375 (1/12 x RM 90,000 x 5%)
Nov 2019 RM 90,000 5% RM 375 (1/12 x RM 90,000 x 5%)
Dec 2019 RM 90,000 5% RM 375 (1/12 x RM 90,000 x 5%)
Total Interest Income Taxable Deemed
to Receive by Krunch Sdn Bhd from Soon
RM 4,625

Conclusion

The total amount of interest income taxable is RM 11.725, Krunch Sdn Bhd is required to declare the amount to LHDN (Inland Revenue Board) for disbursing director loans from the company’s internal funds to Lee, Chan and Soon.

Directors Total Interest Income
Lee RM 4,000
Chan RM 3,100
Soon RM 4,625
Total Interest Income Deemed
to Receive by Krunch Sdn Bhd
RM 11,725

If Krunch Sdn Bhd has a paid-up capital of below RM 2.5 million, the company is required to pay out 17% or 24% of the interest income taxable deemed to had received if its chargeable income for 2019 is below RM 500,000 and above RM 500,000.

Chargeable Income
Of Krunch Sdn Bhd
Total Interest Income Taxable Deemed to have Received by
Krunch Sdn Bhd
Corporate Tax
Rate (%)
Additional
Corporate Tax
Payments
Below RM 500,000 RM 11,725 17% RM 1,993
Above RM 500,000 RM 11,725 24% RM 2,814

Hence, before disbursing loans to directors from the company’s internal funds, I reckoned that all directors should consider the additional corporate income tax payments that arise from it. If that is you, please feel free to use Joolah.my , a platform that quickly refers you to the very best tax experts in Malaysia so that you can make better financial decisions for yourself and your corporation.