Impact on Advance to Directors

🚩Issue

ABC Sdn Bhd is a dormant company (not yet commence since incorporation) with a share capital of RM100,000. There is a balance of advance to directors at the financial year ended 31.10.2022 where:

(i) Mr A holds 60% - RM60,000.

(ii) Mr B holds 10% - RM10,000.

What is the audit and tax impact on advance to directors?

🚩Opinion

Audit Impact

ABC company shall not make a loan to directors unless the loan or advances is made in the ordinary course of the company’s business according to section 224 of CA 2016.

Tax impact

Only the advances with internal funds made to Mr A whose shareholding > 20% is subjected to deemed interest which by referring to Paragraph 5.3 of Public Ruling No.8/2015 & Subsection 75A(2) of ITA 1967. Thus, Mr A’s outstanding balance will subject to deemed interest but Mr B will not.

Refer to Paragraph 6 of Public Ruling No. 8/2015, with the advances made to Director Mr A & B, the company is deemed to have commenced operation in accordance with subsection 21A (8) of the ITA 1967.

🚩Reasoning

Audit Impact

Section 224 of the Companies Act 2016 – Loan to director

• A company shall not enter any guarantee or provide any security in connection with a loan made to such a director by any other person, unless the loan is made:

(i) To meet the expenditure incurred or to be incurred by the director for the purpose of the company;

(ii) To a full-time director in purchasing or acquiring a home; or

(iii) Where the company has passed a resolution to approve a scheme for the making of loans to employees of the company and the loan is in accordance with that scheme.

• Penalty:

(i) An imprisonment of not > 5 years; or

(ii) A fine of not > RM3 million; or

(iii) Both.

Tax Impact

Subsection 75A(2) of the Income Tax Act 1967 – Meaning of a director

• A person who involved in the management of the company’s business; and

• Holds at least 20% of company’s ordinary share; or

• Directly or indirectly through other companies holds at least 20% of company’s ordinary share.

Public Ruling No. 8/2015

(a) Paragraph 5.3 – Determination and the amount of interest income deemed to be received by the company

• Internal funds: The amount of interest will be computed or determined based on the prescribed formula with ALR published by BNM in the basis year in which the loans or advances are given.

(b) Paragraph 6 - Loan or Advances by a dormant company to directors of the company

• A dormant company is deemed to have commenced operation if a loans or advances made to the directors in accordance with subsection 21A (😎 of the ITA 1967.

🚩Example/Sources

(i) Section 224 – Loans to director (Act 777, Companies Act 2016)

https://www.ssm.com.my/.../aktabi_20160915...

(ii) Definition of director

- Section 75A – Director’s Liability (Act 53, Income Tax Act 1967)

https://phl.hasil.gov.my/pdf/pdfam/Act_53_01032021_2.pdf

- Public Ruling No. 2/2019 – Director’s Liability

http://lampiran1.hasil.gov.my/pdf/pdfam/PR_02_2019.pdf

(iii) Public Ruling No. 8/2015 – Loan or advances to director by a company

https://phl.hasil.gov.my/.../LOAN_OR_ADVANCES_TO_DIRECTOR...

🚩Authored by Ong Xin Ying (Christine), Audit/Tax Junior of the Firm in her personal LinkedIn.

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