Easy Payment Plan | Tax Treatment for Businesses

If you’re a business owner and wondering how to treat your easy payment plan on your corporate income tax filing - then you have come to the right place. This article gives you an example that is easy applicable to your own business.
A personal computer and a hand holding a card and point of sale terminal with a text Easy Payment Plan | Tax Treatment for Businesses

Question:
Hi, my name is Andrew. I have been selling motorcycles under the ‘Bebas’ brand for 10+ years through Bebas Sdn Bhd. As an initiative to boost motorcycle sales, I intend to offer an easy payment plan enables our customers to purchase Bebas motorcycles more affordable. The details of the easy instalment plan for Bebas 100, one of Bebas’s motorcycle model is proposed as follow:

No. Details Amount
1 Sale Price of Bebas 100 RM 10,000
2 Nominal Interest Rate 4% per annum
3 Duration of Hire Purchase Scheme 60 Months
4 Hire Purchase Instalment RM 200 per month

Below is the sample calculation to the monthly easy payment plan for motorcycle under “Bebas”:

Easy Payment Plan
= ((Sale Price + (Sale Price x Annual Interest Rate x No of Years)) / No of Months
= ((RM 10,000 + (RM 10,000 x 4% x 5 years)) / 60 months
= (RM 10,000 + RM 2,000) / 60 months
= RM 12,000 / 60 months
= RM 200 / month

The cost price for each Bebas 100 motorcycles is RM 5,000.

My question is, ‘What is the tax treatment for the sale of Bebas 100 and as well as the potential interest income derived from the easy payment plan?’

Read also: Personal Income Tax | Interest Income Tax Treatment – How to File It Correctly to LHDN

Answer:
Before we start calculating the potential interest income and tax treatment for “Bebas Sdn Bhd, I will explain about; “What is an Easy Payment Plan and How it Works”

What Is an Easy Payment Plan?

Easy Payment Plan is an agreement for the purchasing of pricey products, where an initial down payment is made by the purchaser and the remainder is stretched over a period of time plus interest or sometimes with zero interest.

Easy Payment Plan has different names, such as Hire Purchase, Instalment Payment Plan and Instalment Scheme, essentially they are the same but may vary slightly. A normal instalment plan the customer obtains the ownership rights as soon as the deal is concluded.

How Does Easy Payment Plan Work?

Easy payment plan agreements the ownership of the goods are not passed until the completion of the arrangement, hire purchase instalment gives you as the seller greater insurance for unsecured goods than most sales or leasing approaches.

With an easy payment plan, the possession of the merchandise is not legally transferred to the buyer before the buyer has paid all the instalments and the issuing bank takes on the risk.

Example, should the customer be unable to keep up with the repayments, the bank will repossess the goods, therefore, this is a good service to offer to your customers with little risk for you as the seller, because the bank will take full responsibility until the instalment has been fully paid by the customer.

You may also want to read: 7 Things to Know about Income Tax Payments in Malaysia

If you wish to make a hire purchase agreement with your customers in Malaysia you can partner with banks in Malaysia that have an instalment plan that matches your store’s operational standards. Major banks in Malaysia currently have this system although the terms and conditions can vary.

Instalment times range given to the customers from bank to bank, and up to 36 months or more can be as short as three months.

Tax Treatment and Interest Income Calculation of Bebas SDN BHD

First, profits derived from a sale of a Bebas 100 motorcycle under Easy Payment Plan shall be taxed under Section 4(a) Business Income. Let us say, Bill, a customer purchases a Bebas 100 under this agreement of hire purchase in Malaysia where his first instalment plan starts on 1 July 2020 and his last instalment is fixed on 1 June 2025. Thus, Bebas Sdn Bhd will declare the sale for motorcycle purchased with the easy payment plan in its corporate tax filing as follows:

Year Assessment 2020
No. Items Amount (RM)
1 Sale Price of Bebas 100 10,000
2 Less: Cost Price of Bebas 100 (5,000)
3 Less: Other Related Business Cost (x)
4 Profits y
Joolah makes it easy for you to get in touch with 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

Second, interest income earned from offering easy payment plan shall then be taxed under Section 4(c) Interest Income. From above, Bebas Sdn Bhd would make RM 2,000 from the easy payment plan in total interest income over the duration of 60 months. Hence, Bebas Sdn Bhd will declare its interest income derived from the easy payment plan from on a monthly prorated basis for each year assessment from 2020 to 2025 as follow:

Year Assessment Formula Amount (RM)
2020 RM 2,000 x (6 months / 60 months) RM 200
2021 RM 2,000 x (12 months / 60 months) RM 400
2022 RM 2,000 x (12 months / 60 months) RM 400
2023 RM 2,000 x (12 months / 60 months) RM 400
2024 RM 2,000 x (12 months / 60 months) RM 400
2025 RM 2,000 x (6 months / 60 months) RM 200

Are you thinking of buying a commercial vehicle for your company? If yes, read this: Should You Buy a Commercial Vehicle for Your Company? [Tax Savings Calculation]

Conclusion

It is common for merchants to offer easy payment plans or hire purchase in Malaysia for their products in the marketplace to increase their sales volume for prices of their products have been made more affordable. In addition, the interest charged onto their customers would serve as an additional source of income to merchants, which in turn, will boost the overall profit margin from selling each item of the same product.

If you are a business owner who intends to offer a hire purchase schemes or easy payment plan in Malaysia to attract customers, you may need professional assistance from a qualified tax professional. For more details, you may check out Joolah.my