What is the Deemed Interest Income Taxable on a Director Loan From a Company? – What You Need to Know.
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
-
Input details and requirements
-
Up to 3 experts will contact you
-
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.
