The recent Inland Revenue Board of Malaysia (IRB) audit has caused concern not only with the medical doctors, it involves also the private hospital as well as professionals such as auditors and tax agents. Does it mean no more Sdn Bhd or what?
This article attempts to provide a map on when and how to use Sdn Bhd if needed.
Medical practice is a business source
The Income Tax Act 1967 provides preferential tax treatment to business income as well as lower corporate tax rate for business to be carrying out using Sdn Bhd. Sole proprietor is exposed to a higher tax rate as followed.
At chargeable income of RM600,000, sole proprietor is paying tax RM134,650 while Sdn Bhd RM119,000. At RM1,000,000, sole proprietor is paying tax RM238,650 while Sdn Bhd RM215,000.
The factual matrix above clearly reveal the Sdn Bhd is the tax efficient vehicle to carrying on business which includes medical practice. This has been practised for more than 30 years and accepted in totality by the auditor industry.
The dispute between IRB, doctors and the MMA
The Inland Revenue Board (IRB) currently only contents that medical practitioners that provide medical consultancy in the private hospital are not allowed to carry on that business source using Sdn Bhd but instead should be reported using sole proprietorship.
However, this would not apply to doctors carrying on medical practice using private clinics, provide medical practice or consultancy outside the private hospital regime. This category as of right has to use Sdn Bhd to report such business income. This is not disputed by IRB.
In short, only the income received from private hospital by the doctor is to be reported under the doctor sole proprietor name and not in the Sdn Bhd. The recent directive or guideline issued by the IRB to the Malaysian Medical Association (MMA) would mean that despite there being a contract entered into between the private hospital and the Sdn Bhd owned by the doctors, they have to revert back to sole proprietorship now.
This would take effect from the year of assessment (YA) 2016.
For the doctor who enters a contract with the hospital but requests the hospital to pay directly to the Sdn Bhd owned by him, a major tax audit by IRB is the concern in most cases. This category would also need to revert back to sole proprietorship. This would take effect also YA 2016.
How far-fetched is this directive?
MMA is a non-profit organisation prima facie representing the members of the doctors. This would mean that income derived from private hospital has to be reported under sole proprietorship.
The IRB does have merit and strong grounds to request the income from private hospital to be reported using sole proprietorship. Based on the tax audit findings, it is the effort of the private doctor alone that earns such income. It is not earned by the Sdn Bhd and the Sdn Bhd is used merely for tax purposes.
In order for the Sdn Bhd to report business income received form private hospitals, the Sdn Bhd needs to demonstrate actively in fact in helping the doctor to earn such income. This very much depend on the facts and circumstances.
Other doctors may have a wishful thinking in holding strongly to or on feel-good ground that the Sdn Bhd should be able to report such private hospital income using Sdn Bhd. This needs to go through an appeal to the Special Commissioners of Income Tax, then to the High Court and Court of Appeal. It is the decision by the Court.
In summary, a test case from the doctor is essential and required. The practical implication is where to get the test case? Every doctor, and other professionals such as auditors and tax agents, agree that the crux of the issue, whether private hospital income can be reported under Sdn Bhd, has to be adjudicated by the Court.
The reality is that no doctor wishes to allow their case to be the test case. History would record the name of this doctor if they do happen to be such a test case.
Medical doctors who are working in private hospital are really in dilemma. At one moment they are saving lives for the well-being of the society, and at another, they are burdened by this tax mess.
The pragmatic business solution is to report private hospital income under sole proprietorship to avoid being charged on incorrect return under Section 113(2) of the Income Tax Act 1967. This applies to YA 2016 and not before.
To continue using Sdn Bhd despite this directive would attract a penalty of 45 percent being submission of incorrect return [Section 113(2)]. Using the sole proprietorship with effect from YA 2016 to report the private hospital income is solely based on the directive by the IRB for compliance with the IRB. It has no relation to the previous years and is an irrelevant point in previous year method.
CHOONG HUI YAN is a tax specialist. She can be contacted via [email protected]