INLAND REVENUE BOARD MALAYSIA

INTEREST EXPENSE AND

INTEREST RESTRICTION

PUBLIC RULING NO. 2/2011

Translation from the original Bahasa Malaysia text

DATE OF ISSUE: 7 FEBRUARY 2011

 INTEREST EXPENSE AND
INTEREST RESTRICTION

INLAND REVENUE BOARD MALAYSIA Public Ruling No. 2/2011

Date of Issue: 7 February 2011

CONTENTS Page

1. Introduction 1
2. Gains or profits in lieu of interest 1
3. Related provisions 1
4. Interpretation 1
5. Tax treatment of interest expense 1-3
6. Interest restriction under subsection 33(2) of the ITA 3-7
7. Non-application of subsection 33(2) interest restriction 7-8
8. Interest expense incurred on investments 8 - 17
9. Refinancing loan 17 - 18
10. Deferred payment credit 19
11. Treatment of interest expense attributable to dividend income 19 - 21
received by a company
12. Effective date 21

DIRECTOR GENERAL'S PUBLIC RULING

A Public Ruling as provided for under section 138A of the Income Tax Act 1967
is issued for the purpose of providing guidance for the public and officers of the
Inland Revenue Board Malaysia. It sets out the interpretation of the Director
General of Inland Revenue in respect of the particular tax law, and the policy
and procedure that are to be applied.

A Public Ruling may be withdrawn, either wholly or in part, by notice of

withdrawal or by publication of a new ruling which is inconsistent with it.

Director General of Inland Revenue,

Inland Revenue Board Malaysia.
 INTEREST EXPENSE AND
INTEREST RESTRICTION

Public Ruling No. 2/2011

INLAND REVENUE BOARD MALAYSIA Date of Issue: 7 February 2011

1. This Ruling explains:

(i) the deductibility of interest expense in computing the adjusted income of a

person from a source for the basis period for a year of assessment under
paragraph 33(1)(a) of the Income Tax Act 1967 (ITA);

(ii) restriction on the amount of interest expense deductible against gross business
income under subsection 33(2) of the ITA; and

(iii) computation of allowable interest expense according to source of income

chargeable under paragraphs 4(a), 4(c), 4(d) or 4(f) of the ITA.

2. This Ruling also applies to gains or profits received and expenses incurred in lieu of
interest in transactions conducted in accordance with the Syariah principle.

3. The provisions of the ITA related to this Ruling are paragraph 33(1)(a), subsections
33(2) and 39(1).

4. The words used in this Ruling have the following meaning:

4.1 “Interest” is the return or compensation for the use or retention by a person of a
sum of money belonging to or owed to another.

4.2 “Person" includes a company, a body of persons and a corporation sole.

4.3 "Business” includes profession, vocation and trade and every manufacture,
adventure or concern in the nature of trade, but excludes employment.

4.4 “Portfolio” means the various securities or other investments held by a person
at any given time.

5. Tax treatment of interest expense

5.1 Deductibility of interest expense under paragraph 33(1)(a)

In ascertaining the adjusted income of a person from a source for the basis
period for a year of assessment, interest incurred and payable on money
borrowed by that person and -

(i) employed in that period in the production of gross income from that source;
or

(ii) laid out on assets used or held in that period for the production of gross
income from that source

is an allowable expense.

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Public Ruling No. 2/2011

INLAND REVENUE BOARD MALAYSIA Date of Issue: 7 February 2011

Example 1:

Abadi Sdn Bhd borrowed RM1 million from CIMB Bank in January 2009 for use
as working capital in its manufacturing business. The company incurred interest
of RM100,000 in the year 2009. It has no other investments (as reflected in the
company’s balance sheet).

The interest expense of RM100,000 is allowed as a deduction from the gross

business income of the company as it was incurred in the production of that
income.

Example 2:

Ahmad bought a machine for use in his printing business by taking a loan of
RM50,000 from Bank Industri.
Interest expense which Ahmad has to pay to the bank is allowed as a
deduction from his gross business income as the loan was laid out on asset
used for the production of income.

Example 3:

Bangi Sdn Bhd which closes its account on 31 December every year borrowed
RM10 million from Maybank in March 2008 to build a new factory for its own
use in Bandar Baru Bangi. The building is expected to be completed in January
2010.

Although the building has not yet been completed in the years 2008 and 2009,
the interest expense incurred by the company in those years are allowed a
deduction from its gross business income for the years of assessment 2008
and 2009 respectively since the loan was laid out on asset held for the
production of income.

5.2 A person would not be given any deduction on the interest expense which he
has incurred on borrowed money to construct a building or plant prior to
commencement of his business. The person would not be able to claim
industrial building or capital allowance (if applicable) as well on the amount of
interest incurred even though such interest expense may have been capitalized
as part of the cost of the building or plant. This is so because the interest
expense is not part of the cost of construction of building or provision of plant.

Example 4:

IPP Sdn Bhd was incorporated on 8.3.2006. The company was given a
concession by the state government to supply electricity to the rural areas in the
state. Before commencement of its business of power supply on 1.7.2008, the
company has incurred interest expense of RM3 million on a syndicated loan of
RM30 million used to build a power plant.

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Public Ruling No. 2/2011

INLAND REVENUE BOARD MALAYSIA Date of Issue: 7 February 2011

The company would not be able to claim RM3 million in its tax computation for
the year ending 30.6.2009 as the amount is a pre-commencement expense nor
would it be eligible to claim capital allowance on the RM3 million if the amount
has been capitalized as part of the cost of the power plant.

5.3 Borrowed money not wholly and exclusively used in business

5.3.1 Subsection 33(2) of the ITA provides that if a person has borrowed
money for purposes of business as well as for non-business purposes,
the interest expense charged to the profit and loss account may not be
allowed a full deduction. This is so, if in the opinion of the Director
General of Inland Revenue (DGIR), a part or whole of the money has
either directly or indirectly been used for non-business purposes.

5.3.2 Money used for non-business purposes includes:

(i) investments in landed properties, shares, securities and Islamic

securities, placement in fixed deposits; and

(ii) loans (including interest-free loans) given to some other persons.

5.3.3 If a person is able to prove to the satisfaction of the DGIR that

investments and loans have not been made directly or indirectly out of
the borrowed money, there will be no restriction on the interest expense
allowable in calculating the adjusted income from the business source.

5.3.4 On the other hand, if a person fails to prove that the investments and
loans have not been financed partly or wholly, directly or indirectly out of
the borrowed money, then the amount of interest expense allowable will
be restricted.

6. Interest restriction under subsection 33(2) of the ITA

6.1 The deduction of interest expense payable on borrowed money used for
purposes of business, investments and loans is determined as follows:

(i) if the total amount of investments and loans is the same with or exceeds
the amount of borrowed money, the whole amount of interest expense is
disallowed; or

(ii) if the total amount of investments and loans is less than the amount of
borrowed money, then only a portion of the interest expense is
disallowed.

6.2 The portion of interest expense to be restricted against the gross business
income is computed by using the following formula:

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Public Ruling No. 2/2011

INLAND REVENUE BOARD MALAYSIA Date of Issue: 7 February 2011

Cost of investments and loans financed

by interest-bearing borrowed money
X Average interest payable,
monthly or annually
Outstanding balance of interest-bearing
borrowed money at month or year end

6.3 Application of the formula

6.3.1 Where the total cost of investments and loans which are financed
directly or indirectly from the borrowed money does not exceed
RM500,000, subsection 33(2) interest restriction will be computed based
on the end-of-year balance.

6.3.2 Where

i. the total cost of investments and loans which are financed directly or
indirectly from the borrowed money exceeds RM500,000; or

ii. there are no investments and loans at the end of the financial year
because the investments and loans which are financed directly or
indirectly by the borrowed money have been sold, transferred or
repaid during the year.

subsection 33(2) interest restriction will be applied strictly based on

monthly balances and the relevant information should be kept by the
taxpayer for tax audit purposes.

6.3.3 The interest expense incurred is deemed to have been accrued evenly
every month if monthly balances are used in computing interest
restriction under subsection 33(2) of the ITA.

Example 5:

Alamanda Sdn Bhd closes its account on 31 December every year. It had
obtained an overdraft facility of RM400,000 from Maybank for use in its
business in December 2008. It bought 1,000 units of TNB shares and 5,000
units of Telekom shares on 5 January 2009. It also purchased a terrace house
and a shophouse in January 2009. It received income from the investments in
2009 as follows:

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Public Ruling No. 2/2011

INLAND REVENUE BOARD MALAYSIA Date of Issue: 7 February 2011

Shares Units Cost (RM) Dividend (RM)

TNB 1,000 10,000 2,000

Telekom Bhd 5,000 30,000 Nil

Total 6,000 40,000 2,000

Property Cost (RM) Rental received Revenue

(RM) expenses (RM)
Terrace house 100,000 12,000 1,000
Shop house 160,000 24,000 2,500
Total 260,000 36,000 3,500

The company claimed an interest expense of RM40,000 in its profit and loss
account for the year of assessment 2009. As the company could not
substantiate the purchase of investments were not financed from the overdraft,
the amount of interest expense deductible against the gross income from its
business has to be restricted.

The interest restriction is computed using the formula in paragraph 6.2 of this
Ruling as follows:

RM300,000
Interest restricted = ---------------- x RM40,000
RM400,000

= RM30,000
RM30,000 has to be added back in the company’s tax computation (which
means only RM10,000 is deductible as a business expense). However, the
company can claim interest expense against its investment income since the
investments are deemed to have been financed by the overdraft. The
computation of interest expense for each investment source is computed as
follows:

Dividend income (RM) Rental income (RM)

40,000 x 30,000 = 4,000 260,000 x 30,000 = 26,000
300,000 300,000

Gross income 2,000 Gross income 36,000

Less: Interest allowable Less: Interest allowable 26,000
(RM4,000 restricted) 2,000 Other expenses 3,500
Statutory income NIL Statutory income 6,500

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Public Ruling No. 2/2011

INLAND REVENUE BOARD MALAYSIA Date of Issue: 7 February 2011

Example 6:
Same facts as in Example 5 except that the shares were financed by an
interest-free loan from one of the directors.
The interest restriction is computed as follows:

RM260,000
Interest restricted = --------------- x RM40,000
RM400,000
= RM26,000

The cost of shares amounting to RM40,000 is not included in the interest

restriction computation as the purchase of shares was not financed by the
overdraft facility from Maybank.

RM26,000 is added back in the income tax computation. However, the

company can claim the interest expense of RM26,000 against gross rental
income of RM36,000. There would not be any deduction of interest expense
from dividend income as the loan used to finance the purchase of shares is
interest-free.

Example 7:

Metro Bhd has obtained a loan facility from RHB Bank Bhd. Particulars of its
monthly loan balances and investments financed by the borrowed money from
RHB Bank Bhd are as follows:

Month ending Loan balances Investments Interest expense

(RM) (RM) (RM)

January 3,000,000 1,500,000 10,000

February 4,000,000 3,000,000 10,000
March 2,500,000 3,000,000 10,000
April 1,500,000 3,000,000 10,000
May 7,000,000 5,000,000 10,000
June 4,000,000 5,000,000 10,000
July 6,000,000 2,000,000 10,000
August NIL 2,000,000 NIL
September 3,500,000 2,000,000 10,000
October 1,000,000 NIL 10,000
November 7,000,000 3,000,000 10,000
December 4,000,000 3,000,000 10,000

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Public Ruling No. 2/2011

INLAND REVENUE BOARD MALAYSIA Date of Issue: 7 February 2011

The portion of interest expense that is restricted under subsection 33(2) of the
ITA is computed as follows:

Interest
Month
Computation restricted
ending
(RM)
January RM1,500,000 X RM10,000 = 5,000
RM3,000,000
February RM3,000,000 X RM10,000 = 7,500
RM4,000,000
March The whole interest is disallowed as the = 10,000
invested money exceeds the borrowed money
April The whole interest is disallowed as the = 10,000
invested money exceeds the borrowed money
May RM5,000,000 X RM10,000 = 7,143
RM7,000,000
June The whole interest is disallowed as the = 10,000
invested money exceeds the borrowed money
July RM2,000,000 X RM10,000 = 3,333
RM6,000,000
August No interest expense was incurred for the = NIL
month
September RM2,000,000 X RM10,000 = 5,714
RM3,500,000
October The whole interest is allowable as no = NIL
investment was made in the month
November RM3,000,000 X RM10,000 = 4,286
RM7,000,000
December RM3,000,000 X RM10,000 = 7,500
RM4,000,000

Total interest = 70,476

7. Non-application of subsection 33(2) interest restriction

7.1 Subsection 33(2) interest restriction is not applicable where interest on

borrowed money charged to the business accounts does not exceed RM10,000
in the case of companies and RM6,000 in the case of individuals and others.

7.2 Where interest on borrowed money charged to the business accounts exceeds
RM10,000 in the case of companies and RM6,000 in the case of individuals
and others, subsection 33(2) interest restriction should be applied. However,

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Public Ruling No. 2/2011

INLAND REVENUE BOARD MALAYSIA Date of Issue: 7 February 2011

the interest disallowed for business purposes as a result of applying subsection

33(2) can be set-off against income from investments or loans, whichever is
applicable.

8. Interest expense incurred on investments

8.1 For purposes of deducting interest expense against dividends, interest or rental
income, all investments in porfolio shares, loans or properties of the respective
sources should be aggregated regardless of whether they are income
producing or non-income producing. However, this tax treatment does not
apply to investments which produce income that is exempted from tax and
interest-free loans to related parties, which are financed by the borrowed
money.
Example 8:
Badrul Sdn Bhd obtained a loan facility from Ambank for use in its sundry shop
business. The company invested in unit trusts and purchased some shares
using part of the proceeds from the loan facility. Interest restriction computed by
using the formula in paragraph 6.2 of this Ruling is RM8,000.

Badrul Sdn Bhd received the following investment income:

Unit trust Units Cost (RM) Distribution of

income (RM)
SBS Growth Fund 20,000 20,000 2,000
Makmur Fund 10,000 10,000 1,000
Total 30,000 30,000 3,000

Portfolio shares Units Cost (RM) Dividend income (RM)

MAS Bhd 2,000 10,000 Nil
XYZ Bhd (pioneer co.) 10,000 50,000 (tax-exempt) 5,000
ABC Ltd (foreign co.) 5,000 20,000 (tax-exempt) 2,000
Malakof Bhd 10,000 40,000 10,000
Total 27,000 120,000 17,000

Tax treatment
(a) Interest expense applicable to the investments in unit trusts:

RM30,000 x RM8,000 = RM1,600

RM150,000

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INLAND REVENUE BOARD MALAYSIA Date of Issue: 7 February 2011

(b) Interest expense applicable to the portfolio shares:

RM50,000 x RM8,000 = RM2,667

RM150,000

Computation of statutory income

(i) Distribution of income RM3,000

Less : Interest expense RM1,600
Statutory income RM1,400

(ii) Gross dividend income RM10,000

Less : Interest expense RM 2,667
Statutory income RM7,333

Example 9:

Hanim , the sole proprietor of Hanim Halal Food, had borrowed from Ambank to
finance the following investments and loans:

Loans to third Units Amount (RM) Interest income

parties (RM)
Loan 1 - 30,000 4,000
Loan 2 - 70,000 8,000
Total 100,000 12,000

Quoted shares Units Cost (RM) Dividend income

(RM)
Amway Bhd 12,000 100,000 10,000
TNB Bhd 15,000 120,000 10,000
Insas Bhd 30,000 80,000 Nil
Maybank Bhd 10,000 110,000 12,000
Takaful Bhd 20,000 90,000 Nil
Total 87,000 500,000 32,000

Shareholdings in Amway Bhd were purchased with a loan taken separately

from Affin Bank. Interest claimed in respect of the Amway Bhd shares is
RM10,000. The sole proprietor also has 1.2 million unquoted shares (with face
value of RM1.00) in two related companies.

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Public Ruling No. 2/2011

INLAND REVENUE BOARD MALAYSIA Date of Issue: 7 February 2011

Unquoted shares Units Cost (RM) Dividend income

(RM)

Haz Sdn Bhd 800,000 800,000 30,000

Ezy Sdn Bhd 400,000 400,000 20,000
Total 1,200,000 1,200,000 50,000

The following properties are registered under Hanim’s name:

Revenue expenses
Cost Rental income
Properties (excluding interest)
(RM) (RM)
(RM)
House No. 1 250,000 10,000 2,000
House No. 2 300,000 12,000 3,000
House No. 3 150,000 11,000 10,000
Total 700,000 33,000 15,000

House No.1 is an inherited property. House No. 3 was acquired with a separate
loan from Public Bank and the interest claimed in respect of this property is
RM6,000. Interest disallowed under subsection 33(2) and computed by using
the formula in paragraph 6.2 of this Ruling is RM216,000 (RM200,000 from
interest restricted on loan from Ambank, RM10,000 from interest on loan from
Affin Bank and RM6,000 from interest on loan from Public Bank).

Summary of investments/loans and interest restricted:

Investments Ambank Affin Bank Public Others
Bhd (RM) (RM) Bank (RM) (RM)
Loans to third parties 100,000
Quoted shares 400,000 100,000
Unquoted shares 1,200,000
Properties 300,000 150,000 250,000
Total 2,000,000 100,000 150,000 250,000
Interest restricted 200,000 10,000 6,000 Nil

Tax treatment

(a) RM200,000 is apportioned among the three categories of investments

financed by loans taken from Ambank.

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Public Ruling No. 2/2011

INLAND REVENUE BOARD MALAYSIA Date of Issue: 7 February 2011

(i) Interest expense applicable to loans given to third parties:

RM200,000 X RM100,000 = RM10,000
RM2,000,000

(ii) Interest expense applicable to quoted and unquoted shares:

RM200,000 X RM1,600,000 = RM160,000
RM2,000,000

(iii) Interest expense applicable to landed properties:

RM200,000 X RM300,000 = RM30,000
RM2,000,000

(b) The interest expense of RM10,000 claimed in respect of the investment

in Amway Bhd should be aggregated with the portion of interest
RM160,000 applicable to investments in shares financed by loans from
Ambank. The total amount of RM170,000 will be allowed as a deduction
against gross dividend income from quoted and unquoted shares.

(c) The interest expense of RM6,000 claimed in respect of House No. 3

should similarly be aggregated with the interest expense of RM30,000
that is applicable to the landed properties financed by loan from
Ambank. The total amount of RM36,000 will be allowed as a deduction
against gross rental income from the 3 properties which is assessed as a
single source of income under paragraph 4(d) of the ITA.
Computation of statutory income

(i) Interest income:

Gross interest income RM12,000

Less: Interest expense RM10,000
Statutory income RM 2,000

(ii) Dividend income:

Gross dividend income RM82,000

Less : Interest expense RM170,000 (restricted to) RM82,000
Statutory income Nil

(iii) Rental income:

Gross rental income RM33,000

Less : Expenses RM15,000
Interest RM36,000
RM51,000 (restricted to) RM33,000
Statutory income Nil

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Public Ruling No. 2/2011

INLAND REVENUE BOARD MALAYSIA Date of Issue: 7 February 2011

The excess of interest expense over income from dividend or rental is

not to be deducted against other sources of income or be carried
forward to subsequent years of assessment.

Example 10:
Same facts as in Example 9 except that there is nil income from investment in
Amway Bhd. In this case, the gross dividend income from quoted and unquoted
shares would be RM72,000.

Computation of statutory income

(ii) Dividend income:

Gross dividend income RM72,000

Less : Interest expense RM170,000 (restricted to) RM72,000
Statutory income Nil

The excess of interest expense over income from dividend or rental is not to
be deducted against other sources of income or be carried forward to
subsequent years of assessment.

Example 11:

Same facts as in Example 9 except that there is nil income from investment in
quoted and unquoted shares. In this case, the gross dividend income is nil.

Computation of statutory income

(ii) Dividend income:

Gross dividend income NIL

Less : Interest expense RM170,000 -
Statutory income Nil

The interest expense of RM170,000 that cannot be deducted against

dividend income is not to be deducted against other sources of income or
be carried forward to subsequent years of assessment.

8.2 Interest expenses incurred on money borrowed which is given as interest-free

loans to related parties are not allowable under paragraph 33(1)(a) of the ITA.

Example 12:
Kim Seng obtained a loan facility of RM400,000 from BDB Bank for use in his
business. Kim Seng gave loans to related persons by using part of the
proceeds from the loan facility. The first loan was given interest-free. The

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INLAND REVENUE BOARD MALAYSIA Date of Issue: 7 February 2011

second loan that was given was charged at market rate. Kim Seng claimed an
interest expense of RM40,000 in his profit and loss account.

Loans given to related persons and interest income received are as follows:

Loans to related persons Amount Interest income

(RM) (RM)
Loan 1 20,000 Nil
Loan 2 60,000 7,000
Total 80,000 7,000

The interest restriction is computed using the formula in paragraph 6.2 of this
Ruling as follows:

RM80,000
Interest restricted = ---------------- x RM40,000
RM400,000

= RM8,000

RM8,000 is to be added back in Kim Seng’s tax computation (which means only
RM32,000 is deductible from his business income).

The computation of interest expense allowable from interest income and the
computation of statutory income from interest are as follows:

(i) Interest expense in respect of loans given:

RM8,000 X ¹RM60,000 = RM6,000

RM80,000

¹Interest expense in respect of Loan 1 (which was given interest-free) is

not allowed a deduction under paragraph 33(1)(a) of the ITA.

(ii) Computation of statutory income from interest:

Gross interest income RM7,000

Less: interest expense RM6,000
Statutory income RM1,000

Example 13:

Same facts as in Example 12 except that the first loan given was not financed
by the loan facility from BDB Bank but from Kim Seng’s own savings.

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The interest restriction is computed using the formula in paragraph 6.2 of this
Ruling as follows:

²RM60,000
Interest restricted = ---------------- x RM40,000
RM400,000

= RM6,000

²Loan 1 amounting to RM20,000 is not included in the interest restriction

computation as that loan was not financed by the loan facility from BDB Bank.

RM6,000 is to be added back in Kim Seng’s tax computation (which means only
RM34,000 is deductible from his business income).

The computation of interest expense allowable from interest income and the
computation of statutory income from interest are as follows:

(i) Interest expense in respect of loans given:

RM6,000 X ³RM60,000 = RM6,000

³RM60,000

³There was no interest expense payable in respect of Loan 1.

(ii) Computation of statutory income from interest:

Gross interest income RM7,000

Less: interest expense RM6,000
Statutory income RM1,000

8.3 Rental income from letting of real property received by a person may be
assessed as a business source under paragraph 4(a) of the ITA or as a non-
business source under paragraph 4(d) of the ITA. A person who receives
rental income is carrying on a business if he provides maintenance services or
support services in relation to the real property.

Example 14:

Sedap Restaurant Sdn Bhd with year ending 31 December has three properties
- a bungalow costing RM2 million, a shophouse costing RM500,000 and a
terrace house costing RM300,000. The bungalow is situated in an exclusive
area in town and is rented out to an expatriate family. In the rental agreement,
the company is to provide cleaning and maintenance services to the swimming
pool and the landscaped garden. The bungalow is fully furnished with air-
conditioners, water heaters and furniture. The shophouse is for own use and
the terrace house is rented out without any services provided. In its accounts
for the year ending 31.12.2009, the company has an overdraft facility of RM3

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million. The company has no other investments besides the three properties.
The company has provided information that the bungalow and the shophouse
were purchased by using part of the overdraft obtained from Scotia Bank. The
terrace house was purchased by a term loan from Maybank. The terrace house
was temporarily vacant from January to August 2009.

The company’s profit and loss account for the year is as follows:

Gross income - Business RM800,000

Rental income - Bungalow 180,000
- Terrace house 6,000 186,000
986,000
Less : Expenditure
Depreciation 100,000
Quit rent & assessment
- Shophouse 10,000
- Bungalow 14,000
- Terrace house 7,200 31,200
Fire insurance
- Shophouse 5,000
- Bungalow 1,000
- Terrace house 300 6,300
Overdraft interest 300,000
Term loan interest 5,000
Cleaning & maintenance
- Shophouse 15,000
- Bungalow 6,000 21,000
Other revenue expenses 463,500 927,000
Net profit 59,000

Capital allowances (CA) for the restaurant business assets are RM110,000 and
bungalow assets are RM5,000.

Interest restriction computed by using the formula in paragraph 6.2 of this

Ruling is RM155,000 (RM150,000 from interest restricted on overdraft from
Scotia Bank and RM5,000 from interest on loan from Maybank).

Rental income from letting of the bungalow will be assessed under paragraph
4(a) of the ITA whereas that of the terrace house will be assessed under
paragraph 4(d) of the ITA.

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INLAND REVENUE BOARD MALAYSIA Date of Issue: 7 February 2011

Tax Treatment

Business I - Restaurant RM

Net profit as per P&L account 59,000

Less: Rental income 186,000
-127,000
Add: Depreciation 100,000
Quit rent & assessment 21,200
Fire insurance 1,300
Cleaning & maintenance 6,000
Interest restriction 155,000 283,500
Adjusted income 156,500
Less: Capital allowances 110,000
Statutory income 46,500

Business II - Letting of bungalow RM

Gross income 180,000

Less: Quit rent & assessment 14,000
Fire insurance 1,000
Cleaning & maintenance 6,000
Interest expense 150,000 171,000
Adjusted income 9,000
Less: Capital allowances 5,000
Statutory income 4,000

Rental income - Terrace house RM

Gross income 6,000

Less: Quit rent & assessment 7,200
Fire insurance 300
Interest expense 5,000 12,500
Adjusted loss -6,500

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Public Ruling No. 2/2011

INLAND REVENUE BOARD MALAYSIA Date of Issue: 7 February 2011

Tax Computation

Statutory income - Business I 46,500

- Business II 4,000
Statutory income from terrace house NIL
Chargeable income 50,500

Rental income from the letting of terrace house is assessed under paragraph
4(d) of the ITA and is of non-business source. Therefore, the loss of RM6,500
cannot be deducted against any other sources of income or be carried forward
to subsequent years of assessment.

9. Refinancing loan

Any interest incurred on a second loan taken to refinance an existing loan would be
deductible for tax purposes if the earlier loan was taken for the purpose of producing
the business income. However, if the second loan is taken to finance the earlier loan
which was used for business as well as non-business purposes, then interest
restriction under subsection 33(2) of the ITA applies.

Example 15:

Company A was involved in timber-logging activity. In early 2005, the company

obtained a loan of RM100 million (first loan) from Maybank to pay outstanding timber
royalty payments. The company was allowed a deduction of interest payment on the
first loan. In the year 2009, the company took another loan of RM70 million (second
loan) from Public Bank to refinance the outstanding first loan because of lower
interest rates offered by the bank. The company claimed interest expense incurred
in respect of the second loan as an allowable deduction.

In order to qualify as an allowable deduction under subparagraph 33(1)(a)(i) of the

ITA, the purpose of the borrowing needs to be ascertained, that is whether it was
incurred in the production of income. The purpose of the second loan is to refinance
the first loan so that the company can enjoy savings provided by the second loan.
Since the interest expense from the first loan had been allowed, the interest
expense arising from the second loan qualifies as an allowable deduction under
subparagraph 33(1)(a)(i) of the ITA because it is a mere replacement of the first
loan.

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Public Ruling No. 2/2011

INLAND REVENUE BOARD MALAYSIA Date of Issue: 7 February 2011

Example 16:

Madam Leong purchased a luxury condominium by taking a loan of RM1.3 million in

the year 2005 from Maybank Bhd. The condominium is rented out since the
purchase. In the year 2009, Madam Leong transferred the financing of the property
to Nova Scotia Bank because of lower interest rates that the bank could offer. The
balance of the loan at the end of the year 2008 was RM1 million. Nova Scotia Bank
approved a non-revolving loan of RM1.35 million for the refinancing of the property
(RM1 million) and the balance of the loan was used for her personal requirements.
Interest paid on the loan of RM1.35 million is RM42,000.

The interest expense deductible against rental income is as follows:

Balance of Interest
Refinancing Interest
Month previous loan Allowed
loan (RM) Claimed (RM)
(RM) (RM)

January 1,000,000 1,350,000 3,500 2,593

February 1,000,000 1,350,000 3,500 2,593
March 1,000,000 1,350,000 3,500 2,593
April 1,000,000 1,350,000 3,500 2,593
May 1,000,000 1,350,000 3,500 2,593
June 1,000,000 1,350,000 3,500 2,593
July 1,000,000 1,350,000 3,500 2,593
August 1,000,000 1,350,000 3,500 2,593
September 1,000,000 1,350,000 3,500 2,593
October 1,000,000 1,350,000 3,500 2,593
November 1,000,000 1,350,000 3,500 2,593
December 1,000,000 1,350,000 3,500 2,593

Total 42,000 31,116

Note: Computation of allowable interest expense:

RM1,000,000 x RM3,500 = RM2,593

RM1,350,000

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Public Ruling No. 2/2011

INLAND REVENUE BOARD MALAYSIA Date of Issue: 7 February 2011

10. Deferred payment credit

An asset may be purchased and full payment is made after a period of long term
credit, either by instalments or in one lump sum payment. If the credit facility is
used, the price to be paid (deferred payment) is higher than the cash price. The
difference between the deferred payment and the cash price is deferred interest that
is deductible under paragraph 33(1)(a) of the ITA.

Example 17:

Sunshine Sdn Bhd (SSB) purchased office furnitures from Kedai Perabot Aman on
1.5.2008 to be used in its business. SSB used the 24-month credit facility offered by
the furniture shop and paid RM30,000 (deferred payment) on 1.5.2010. The cash
price of the furniture was RM24,000. SSB closes its account on 31 December every
year.

The deferred interest amounting to RM6,000 is deductible under paragraph 33(1)(a)

of the ITA in the year of assessment 2010.

Example 18:

Same facts as in Example 17 except that the deferred payment was paid in 24 equal
monthly instalments commencing from 1.5.2008.

The deferred interest amounting to RM250 monthly (RM6,000 ÷ 24) is deductible

under paragraph 33(1)(a) of the ITA in the year of assessment in which the expense
is incurred. As such the deferred interest claimed for the following years of
assessment are:

Year of assessment Deferred interest (RM)

2008 2,000
2009 3,000
2010 1,000

NOTE: If the instalment is paid according to some other basis (for example on a
decreasing amount basis), the company has to compute accordingly to
ascertain the amount that can be claimed as a deduction under paragraph
33(1)(a) of the ITA.

11. Treatment of interest expense attributable to dividend income received by a

company

The single-tier tax system has been implemented with effect from the year of
assessment 2008. Under this system, tax paid by a company is a final tax. The
company may declare single-tier exempt dividends to its shareholders who will not

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Public Ruling No. 2/2011

INLAND REVENUE BOARD MALAYSIA Date of Issue: 7 February 2011

be taxed on the dividend income. However, a company with balance in its section
108 account is allowed to continue to frank dividends from that account during the
transitional period from 1.1.2008 until 31.12.2013 or until such time when the 108
balance is reduced to nil, whichever is earlier. The statutory income from dividend
(assessed under paragraph 4(c) of the ITA) received by a company is deemed to be
total income or part of total income of the company with effect from the year of
assessment 2008.

Example 19:

Mutiara Sdn Bhd has the following income for the year ending 30.9.2009. Mutiara
Sdn Bhd makes a contribution of RM4,000 to an approved institution in that year.

Business I (RM) Business II (RM)

Adjusted profit / loss 90,000 -40,000

Capital allowance (CA) 35,000 33,000
Statutory income 55,000 Nil

Interest
Gross expense Statutory income
Non-business income
income (RM) (RM) (RM)

Rental 50,000 15,000 35,000

Dividends: *5,000
Single-tier 14,000 6,000
Franked 6,000 1,000
Tax-exempt 10,000 3,000

*Under paragraph 12B, Schedule 6 of the ITA, single-tier dividend income is

exempted from tax and any expenses related to the derivation of the dividends are
to be disregarded. Tax-exempt dividend income of RM10,000 cannot be
aggregated with franked dividend income as one source of income. Therefore the
computation of statutory income from franked dividend is as follows:

Gross income RM6,000

Less: Interest expense RM1,000
Statutory income RM5,000

Issue: A Page 20 of 21
 INTEREST EXPENSE AND
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Public Ruling No. 2/2011

INLAND REVENUE BOARD MALAYSIA Date of Issue: 7 February 2011

Tax Computation

Statutory income - Business I 55,000

- Business II (CA c/f RM33,000) Nil
- Rental 35,000
Aggregate income 90,000
Less: current year loss 40,000
50,000
Less: approved donation 4,000
46,000
Add: Statutory income - Dividend 5,000
(deemed as part of the total income)
Total income/Chargeable income 51,000
Income tax @ 25% 12,750
Less: section 110 set-off 1,500
Tax payable 11,250

12. Effective date

This Ruling is effective for the year of assessment 2011 and subsequent years of
assessment.

Director General of Inland Revenue,

Inland Revenue Board Malaysia.

Issue: A Page 21 of 21