Tax residence status of an individual

In determining the income tax rate (hence the amount of income tax payable) of an individual, it is important to first determine if he/she is a tax resident under the Malaysian Income Tax Act, 1967 (ITA).

Many people seem to have the view that if an individual stays in Malaysia for 182 days or more, he/she is a tax resident under the ITA. Anything shorter than that, then the person is a non-resident and is subject to non-resident tax rate, i.e. a flat rate of 27% (Year of Assessment 2008).

This is far from true ! Section 7 of the ITA clearly provides more than one situations when an individual taxpayer is considered a tax resident.

Section 7 of the Malaysian Income Tax Act says,

7. (1) For the purposes of this Act, an individual is resident in Malaysia for the basis year for a particular year of assessment if-

(a) he is in Malaysia in that basis year for a period or periods amounting in all to one hundred and eighty-two days or more;

(b) he is in Malaysia in that basis year for a period of less than one hundred and eighty-two days and that period is linked by or to another period of one hundred and eighty-two or more consecutive days (hereinafter referred to in this paragraph as such period) throughout which he is in Malaysia in the basis year for the year of assessment immediately preceding that particular year of assessment or in that basis year for the year of assessment immediately following that particular year of assessment: Provided that any temporary absence from Malaysia -

(i) connected with his service in Malaysia and owing to service matters or attending conferences or seminars or study abroad;

(ii) owing to ill-health involving himself or a member of his immediate family; and

(iii) in respect of social visits not exceeding fourteen days in the aggregate, shall be taken to form part of such period or that period, as the case may be, if he is in Malaysia immediately prior to and after that temporary absence;

(c) he is in Malaysia in that basis year for a period or periods amounting in all to ninety days or more, having been with respect to each of any three of the basis years for the four years of assessment immediately preceding that particular year of assessment either-

(i) resident in Malaysia within the meaning of this Act for the basis year in question; or

(ii) in Malaysia for a period or periods amounting in all to ninety days or more in the basis year in question; or

(d) he is resident in Malaysia within the meaning of this Act for the basis year for the year of assessment following that particular year of assessment, having been so resident for each of the basis years for the three years of assessment immediately preceding that particular year of assessment.

(1A) For the purposes of subsection (1), an individual shall be deemed to be in Malaysia for a day if he is present in Malaysia for part or parts of that day and in ascertaining the period for which he is in Malaysia during any year, any day (within subsection (1)(a) and (c)) for which he is in Malaysia shall be taken into account whether or not that day forms part of a continuous period of days during which he is in Malaysia.

The wordings are rather lengthy.

In layman’s terms, it simply means that an individual is considered a Malaysian Tax Resident if he/she is :-

Sec 7(a) in Malaysia for 182 days or more in a calendar year ;

Sec 7(b) in Malaysia less than 182 days and this period is linked to last year or next year of 182 days or more ;

Sec 7(c) in Malaysia for 90 days or more and 3 out of 4 years before, either
( i) is a tax resident ; or
( ii) is Malaysia for 90 days or more

Sec 7(d) 3 years before he/she was tax resident and next year also tax resident.

In order not to re-invent the wheel, I found a good write up and explanation in a website here.