Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on November 25, 2019 - December 1, 2019

WHILE grappling with MFRS 16, the new accounting standard that superseded MFRS 117 from Jan 1 this year, companies will also need to take into account its tax implications.

EY Asean and Malaysia Tax Leader Amarjeet Singh says companies need to be aware of the potential divergence between the accounting and tax treatments of lease arrangements.

He explains that from the accounting treatment perspective, MFRS 16 requires lessees to recognise right-of-use assets and lease liabilities for most leases (except for short-term leases and low-value assets) in the statement of financial position.

“Lessees are required to separately recognise the interest expense on the lease liabilities and the amortisation expense on the right-of-use assets to the income statement,” he tells The Edge.

As for the tax treatment of the lease arrangements, Amarjeet says the latter are still subject to the same taxation rules as before, particularly in relation to eligibility for capital allowance and deductibility of expenses.

However, says Amarjeet, the right-of-use asset will not be considered as qualifying capital expenditure for capital allowance purposes.

“The annual amortisation of the right-of-use and accretion of lease interest expense in accordance with MFRS 16 will not be tax deductible. However, taxpayers shall claim tax deduction on the actual contractual lease payments as incurred.

“Companies will need to track the accounting or tax differences in respect of such leases to ensure the correct tax position is taken, and to consider the impact on deferred taxes,” he says, adding that the latter may arise because of the change in accounting treatment and on-balance sheet recognition.

PwC Malaysia, in a note titled “How Will Your Business Be Impacted by The New Lease Accounting Standard?” says expenses relating to MFRS 16 in the financial statements are unlikely to be relevant to tax reporting, given that they will not be based on actual cash rental payments.

“Previously, operating leases typically led to no capital allowance whilst financial leases typically led to the eligibility of capital allowance. Going forward, all leases in a lessee’s balance sheet will be represented by a right-of-use asset and more work will be required to ascertain if capital allowance is available or not,” the note says.

On whether the adoption of MFRS 16 and recognition of the right-of-use asset on the balance sheet would constitute real property and impact Real Property Gains Tax calculations, Amarjeet says, “No, it will not impact RPGT calculations in determining RPGT liabilities. RPGT legislation prescribes the determination of whether a real property has been acquired and what its acquisition price and disposal price are. Such determination is not affected by MFRS 16 requirements.

“However, again, given the divergence between the accounting and tax treatments, companies should, all the more, ensure that they maintain and retain sufficient documentation for tax purposes as the financial statements may not reflect the tax treatment. For example, there was no acquisition of real property for RPGT purposes whereas a right-of-use was recognised in accordance with MFRS 16.”

 

 

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