I started this blog during my working life, after July, 2009 you may find my blog posts at http:lbms2u.blogspot.com

6/27/2009

Tax filing for sole proprietorship 01

ACCORDING to the Companies Commission of Malaysia, the majority of the 810,150 registered companies in Malaysia are owned by sole proprietors or business enterprises.

These entrepreneurs are probably paying too much in taxes, since professional tax advice would be too costly for sole proprietors with a typical annual turnover of RM300,000 to RM500,000.

Here is how you can optimise taxes and avoid penalties by implementing permitted accounting standards, segregating trading stock from items for personal use and applying stock write-down and obsolescence policies.

·Sales/Revenue: Revenue is recognised once trading goods are sold to customers. In practice, the issuance of sales invoices are demarcation points for sales to be recorded in the accounts. For service industries, revenue is recognised at the point when services are rendered and completed.

Sales revenue at all times must be recorded at market price, which is the arm’s length or actual sales price between the trader and his customer.

·Sales recorded on accrual basis: Accounting standards in Malaysia require revenue to be recorded on an accrual basis. This means sales must be recorded notwithstanding whether it takes place on credit or cash terms; whether cash is received or not is irrelevant.

·Cash accounting: This is not a permitted accounting standard in Malaysia. Under the cash accounting basis, revenue is recognised solely based on cash received and there is no reference to the sale of goods or completion of services.

Sole proprietors computing income tax on this basis are considered as submitting an incorrect return and will be liable to a tax penalty of 100% and/or a fine up to RM10,000.

·Deemed sales for use of own stocks: Traders who wish to use their trading items (stocks) for donation, personal use or as gifts must record these items at market value, since Section 24(2) of the Act deems these as sales revenue. These transactions are treated as sales and the “profit” which was never earned is subject to income tax.

To avoid this situation, the sole proprietor has to request that the supplier invoice him separately on his personal account for the item that he intends to give away or keep for his own use. Do not bill the item to the business enterprise.

·Cost of sales: Trading stocks are assets to the sole proprietor and reflected in the balance sheet. The cost of trading stock is only allowed as a deduction against sales revenue when the stock is sold.

Excess unsold stock is an asset and not deductible. Sales quantity and the cost of sales must be identical.

The sole proprietor should develop a stock write-down policy to evaluate the quantity or quality of unsold stocks as the Act allows tax deductions for stock written down or stock write-offs due to obsolescence.

The stock policy has to be applied consistently for at least three years. Tax authorities may review such a stock policy during the tax audit.

The write-offs of the stocks or write down in the value of trading stock must reflect actual market conditions. Sole proprietors must record the details of such stocks and provide the specific reason why certain stocks are written off or written down as part of the documentary evidence for tax audit inspection.

Details: Revenue recognition and cost of sales

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