Wavier of debts is taxable income?

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Overview

Today i lend you RM100,000 to you. Next week i waive the borrowing RM100,000. Will this goodies happen in real business world?

The answer is plain simple…

No one can stop you from lending money to anybody or any company!

No one can also stop you from waiving the debts you lend to anybody or any company.

This is extraordinary common in group companies which involve holding and subsidiary company ! Director lend money to own company!

Key takeaways

In this part of blog, we will explore the tax insight on the waiver of debts whether is taxable or not by reviewing past tax case law and section 30(4) of ITA.

Summary of learning

Under section 30(4)of ITA, waiver of debt is taxable if the debts relate to the taxpayers business and the taxpayer had either taken

  • a deduction under section 33 of ITA or

  • claim capital allowance under section 42 and sch 3 of ITA

We cite these two tax cases for reference :

FT Sdn. Bhd. v KPHDN – taxable under section 4(a) as business income

  • Holding company loan to the subsidiary, the subsidiary used the loan to make repayment to its creditors. Holding company waive the debt, the subsidiary will be taxed as the loan was used in its gross income.

KPHDN v Bandar Nusajaya Development – non taxable as section 22(2) the sum must be receivable or deemed to have been received.

  • Taxpayer was provided with a loan by the holding company, subsequently the interest portion was waived

  • IRB issue additional assessment on interest waived to be taxed as income under Section 22 (2) (a) since deductions were claimed under Section 33 (1) previously

  • High court dismissed the appeal, why? To apply Section 22 (2) (a) , the sum must be receivable or deemed to have been received

  • The interest payable to holding company is unable to be regarded as to have been received from taxpayer’s source of income

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