IS INCOME FROM GOOGLE ADSENSE TAXABLE ?

I have come across many forums discussing this issue. Obviously many bloggers and website owners want to know this and turn to the internet (where else) to find the answer.

There are many opinions given in the forums and discussions. However, many opinions given are based on different individuals’ understanding (or misunderstanding) of the Income Tax Act (ITA).

Simply answering 'YES' or 'NO' is not enough, we have to understand why and justifications for our answer. However, if you are not bothered about the details, then I can tell you that in my opinion, it is 'NO'.

Why? Let's look at the ITA.

Section 3 of the ITA reads:-
“........ a tax to be known as income tax shall be charged for each year of assessment upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia.”

This implies that income from Google AdSense falls squarely under taxable income as it is clearly "income received in Malaysia from outside Malaysia".

HOWEVER, Para 28(1) of Schedule 6 of the ITA (tax exempt income) defines non-taxable income as:-
“..... income of any person other than ...company...derived from sources outside Malaysia and received in Malaysia."

Therefore, income from Google AdSense would have been taxable (as specified in Section 3), had it not been for Para 28(1) of Schedule 6 which clearly exempts it.

2009 Schedular Tax Deductions / Potongan Cukai Berjadual

There are some amendments to the Malaysian Schedular Tax Deduction (STD) or Potongan Cukai Berjadual (PCB) rules in 2009.

• New schedule of montly tax deductions Employees are now allowed to claim rebates for personal relief every month
• Changes to the STD calculation formula
• Reduced minimum monthly deductios
• Inclusion of Benefit-in-kind (BIK) and Value of Living Accommodation (NTK) as part of remuneration
• Changes in additional renumeration formula
  

What does this all mean to employees and employers in Malaysia?

For Employees

1. Higher amount of PCB deduction compared to 2008. Reasons :-
   a) In 2008, a 20% discount was given for monthly PCB. This resulted in many employees having to pay the balance when they submit their tax forms.
   b) In 2008, the PCB was calculated at the lower end of the range of salary, in 2009, it is calculated at the mid-range. For example, if your salary is between RM2,700 – RM2,750, in 2008, PCB was calculated as if your salary was RM2,700. In 2009, PCB is calculated as if your salary is RM2,725.
2. Employees can ask employers to deduct less PCB or more PCB by submitting Borang TP1 (less deduction) or TP2 (more deduction). Employees who has additional tax deductions and rebates allowed by the Income Tax Act can submit Borang TP1 to their employers. These dedcutions and rebates are listed in Additional Tax Deductions Available for Individuals.
3. Employers has final say whether to approve or reject the requests of Borang TP1 or TP2.

For Employers

1. New PCB tables to follow.
2. Old PCB tables can still be used up to Match 2009.
3. Can accept or reject Borang TP1 or TP2 requested by employees. Borang TP1 need not be accompanied by any official receipts but employers who accept to reduce the PCB deductions based on TP1 must keep the Borang TP1 for 7 years for audit purposes. The employees have to justify the reduction request themselves during an audit.
4. In the month of bonus or any additional salary payment, employers have to recalculate every employee’s PCB using the PCB calculator available in the IRB’s website to determine the amount of PCB to deduct. This is a very time consuming process and even the IRB officers have admitted that this is not practical. The only way out is to buy a software that already has this feature incorporated in (eg. UBS Payroll software). Alternatively, employers have to wait for IRB’s own in-house developed software called e-PCB to be releassed. No date has been fixed for the release as it is being tested by 30 ‘chosen’ employers to get feedback.

The reason for this change is mainly to try to have the PCB deductions as close to the final tax as possible so that it can reduce the IRB's work in refunding over-payments.

This will not work because it is nearly impossible for the PCB deductions to add up to the exact final tax of anyone. If there is over-payment, the IRB will still have to refund taxpayers. If there is under-payment, taxpayers will still have to pay uo when filing their tax returns. The amount may be smaller but the work is still the same.

Additional Tax Deductions Available for Individuals

The following is a list of tax deductions available for individuals to make a claim when filing his/her Income Tax Borang BE or B for 2008 onwards.

For employees, if you have any of these expenses, you can request your employers to reduce your PCB deductions by filing up the Borang TP1.

1. Medical expenses for own parents certified by medical practitioner (limited to RM5,000 a year);
2. Basic supporting equipment for disabled self, spouse, child or parents (limited to RM5,000 a year);
3. Disabled person (self) (RM6,000 a year);
4. Education fee (self) up to tertiary level for the purpose of acquiring law, accounting, Islamic financing, technical, vocational, industrial, scientific or technological skills or qualifications or for a Masters or Doctorate level, undertaken the purpose of acquiring any skill or qualification (limited to RM5,000 a year);
5. Medical expenses on serious diseases for self, spouse or child (limited to RM5,000 a year);
6. Complete medical examination for self, spouse or child Limited to RM500 a year (total deduction for para 4.5 and 4.6 is limited to RM5,000 a year);
7. Purchase of books / journals / magazines / similar publications for self, spouse or child (limited to RM1,000 a year);
8. Purchase of personal computer for individual. Deduction allowed once in every 3 years. (Limited to RM3,000);
9. Net deposit in Skim Simpanan Pendidikan Nasional (limited to RM3,000 a year);
10. Purchase of sports equipment for any sports activity as defined under the Sports Development Act 1997 (limited to RM300 a year). This is explained here;
11. Payment of alimony to former wife (Total deduction for wife and alimony payments shall not exceed RM3,000 a year);
12. Disabled husband / wife (RM3,500 a year);
13. Life insurance (and EPF limited to RM6,000 a year);
14. Education and medical insurance (limited to RM3,000 a year);
15. Zakat other than monthly zakat deduction from salary;
16. Fees / Levy paid by a holder of an employment pass, visit pass (temporary employment) or work pass.

Further, the IRB has released a list of tax-free income and perquisites available to individual taxpayers. This list is listed here.

Income which are Tax-free

The following are the list of income which are tax-free and their limits :-

1. Petrol card, petrol allowance or travel allowance between the home and work place (until Year Assessment 2010 only) (Limit RM2,400 a year)
2. Petrol card, petrol allowance or travel allowance and toll card for official duties (Limit RM6,000 a year)
3. Allowance or fees for parking (No limit)
4. Meal allowance (No limit)
5. Allowance or subsidies for childcare (Limit RM2,400 a year)
6. Medical benefits (including maternity expenses and traditional medicines such as ayurvedic and acupuncture) or dental.(No Limit). What traditional medicines are accepted by the IRD ?
7. Employers’ own goods provided free or at a discounted value (Limit RM1,000 a year)
8. Employers’ own services provided free or at a discount provided such benefits are not transferable (No Limit)
9. Telephone, mobile phone, pager and Personal Data Assistant (PDA) (No Limit)
10. Bills for telephone, mobile phone, pager and PDA registered in the name of the employee or the employer (No limit)
11. Gift of new personal computer (until Year Assessment 2010 only) (No Limit)
12. Monthly broadband subscription fee (registered in the name of the employer) from the employer (until Year Assessment 2010 only) (No Limit)
13. Perquisites (whether in money or otherwise) provided to the employee pursuant to his employment in respect of:
    (a) past achievement award;
    (b) service excellence award, innovation award or productivity award; and
    (c) long service award (provided that the employee has exercised an employment for more than 10 years with the same employer); (Limit RM2,000 a year)
14. Leave passages (only applicable to employee and immediate family)
    (i) Within Malaysia (including food and accommodation) not exceeding 3 times in a year;
    (ii) Outside Malaysia (once a year – limited to RM3,000) (Limit RM3,000 a year)
15. Compulsory insurance premium paid for foreign employees in lieu of SOCSO payment (No Limit)
16. Group insurance premium to protect the employees in the event of accident (No limit)
17. Interest subsidies for loans of up to RM300,000 in respect of housing, motor vehicle and education loans. Exemption is given on existing loans and new loans. (No limit)

Please note that those items with no limits does not mean that employers can give any amount it wishes, it must be 'reasonable'. What amount is reasonable depends on the nature of the employee's work.

For example, a reporter's travelling allowance is expected to be higher than that paid to a accounts clerk.

THE ABOVE EXEMPTIONS ARE NOT APPLICABLE TO EMPLOYEES HAVING CONTROL OVER THE COMPANY, SOLE PROPRIETORS OR PARTNERS OF PARTNERSHIP BUSINESSES.

Purchase of Sports Equipment for Tax Deductions

From the year 2008, individual taxpayers are allowed to claim tax deduction of up to RM300 a year on purchase of 'equipments for sports as defined by the Sports Development Act 1997.

The term 'equipment' is not defined and is thus open to discussion. As a general guideline, the IRB has taken the stand that 'consumables' such as shuttlecorks, golf balls, etc. are claimable whereas those long lasting items such as sports shoes, badminton rackets, tennis rackets, etc. are not.

It is doubtful if the IRB's stand is valid as the word 'equipment' tends to suggest items which are lasting in nature. In the game of tennis for example, the racket would be closer to 'equipment' rather than tennis balls.

The list of sports activities are as follows :-

Sports Development Act 1997
FlRST SCHEDULE
(section 2)
The following activities are regarded as sports for the purposes of this Act:
1. Archery
2. Athletics
3. Aquatics
4. Automobile Sports
5. Badminton
6. Basketball
7. Billiards and Snooker
8. Body Building
9. Bowling
10. Boxing
11. Cricket
12. Cycling
13. Equestrian Sports
14. Fencing
15. Foolball
16. Golf
17. Gymnastics
18. Handball
19. Hockey
20. Judo
21. Karate Do
22. Lawn Bowls
23. Netball
24. Rugby
25. Sepak Takraw
26. Shooting
27. Silat Olahraga
28.Soft Tennis
29.Softball
30.Squash
31.Table Tennis
32.Tae kwan do
33.Tennis
34.Volleyball
35.Waterski
36.Weightlifting
37.Wrestling
38.Wushu
39.Yachting

Traditional Medical Expenses For Tax Deduction

Not all Traditional medical expenses are recognised by the IRB.

The IRB only recognises medical receipts issued by traditional medical practitioners who are registered with :-

1. Persatuan Perubatan Tradisional Melayu Malaysia (PUTRAMAS)
2. Pertubuhan Perubatan Tradisional India Malaysia (PEPTIM)
3. Federation of Chinese Physicians and Chinese-Dealers Association of Malaysia (FCPMDM)
4. Federation of Chinese Physicians & Acupuncturist Association of Malaysia (FCPAAM)
5. Chinese Physicians’ Association of Malaysia (MCPA).