This article first appeared in Personal Wealth, The Edge Malaysia Weekly on September 11, 2017 - September 17, 2017
Some of our readers hold directorships in companies by virtue of their shareholding, some sit on the board of directors to represent their employers’ interests while others may have been offered directorships because of their experience and perceived influence.
It is pertinent to be aware of one’s responsibilities and liabilities under the Income Tax Act and Real Property Gains Tax Act (RPGTA) when accepting a directorship. This article does not discuss the implications of being a director from the perspective of the Companies Act or the Goods and Services Tax Act.
Before going any further, let us determine who is a director under the Income Tax Act. A director includes:
- any person occupying the position of director (by whatever name it is called);
- any person in accordance to whose directions or instructions the directors are accustomed to act; and
- any person who is a manager or otherwise concerned in the management of the company’s business, who is remunerated out of the funds of that business and holds — either on his own or with one or more associates (spouse, parent or remoter forebear, child or remoter issue, siblings, partner and so on) directly or indirectly — 20% or more of the ordinary share capital of the company.
What the definition above means is that:
- If a person has been given the nomenclature of director, he is a director for the purposes of income tax, regardless of whether he actually performs any of the functions of a director.
- If a person has not been given the title of director, but has the powers of a director, he is to be treated as a director for income tax purposes.
- If a person is not called a director, but is concerned with the management of the company’s business, is remunerated by the company and — either on his own or with an associate(s) — holds at least 20% of the ordinary share capital of the company, he is to be treated as a director. In other words, he is the de facto director and is to be treated as one for income tax purposes.
It is important to realise that under both the Income Tax Act and the RPGTA, there is no distinction between ordinary directors, service directors or independent directors.
Chargeable person
Although a company is a separate legal entity on its own, capable of suing or being sued, it is still an artificial or created person with no tangible physical presence, whereas an individual is a natural tangible person. So, while the company is the entity subject to tax, natural individual/s are held responsible for the necessary compliance requirements.
Example
ABC Sdn Bhd is held by three directors: Mr A (51%), Mr B (40%) and Mr C (9%). The company failed to furnish the annual tax return for the year of assessment 2014. In instituting legal action against the company for the failure to lodge the tax return, the tax authorities may cite any of the three directors as the defendant on behalf of the company. This is because all three are jointly and severally responsible. Mr C is not any less exposed just because he holds the least number of shares.
Responsible for all acts in complying with the law
Section 75 provides that:
“The responsibility for doing all acts and things required to be done by or on behalf of a company ... for the purposes of this Act shall lie jointly and severally ... with:
- the manager or other principal officer in Malaysia;
- the directors;
- the secretary; and
any person (however styled) exercising the functions of any of the persons mentioned above.”
What are the “things and acts” that a director may be required to do for tax purposes? They are:
- Furnish tax estimates one month ahead of the financial year;
- Effect monthly tax deductions from remunerations paid to employees;
- Furnish tax returns;
- Furnish information as required by the Inland Revenue Board;
- Withhold tax from certain payment(s) to non-residents; and Various notifications.
Independent directors
What is the position of independent directors then? Are they excused because they are normally not directly involved in the management of the company?
It is worth noting that the definition of a “director” and provisions elsewhere in the Income Tax Act do not exclude an independent director from the above responsibilities. An independent director falls squarely as a director because he is a person “occupying the position of director (by whatever name it is called)”.
It appears that an independent director is just as vulnerable and responsible for the “acts and things” related to the company.
Liability to pay tax
An even more onerous liability is that the director who controls 20% of more of the shareholding of a company is held personally liable for the company’s taxes and tax-related debts. This is provided in section 75A of the Income Tax Act, which states that where:
- any tax is due and payable by a company; or
- any debt is due and payable by the company as an employer; or
- a director (who holds at least 20% of the shareholding of that company during the period in which the tax is liable to be paid by the company) is jointly and severally liable for such tax or debt.
In determining whether a director controls at least 20% of the paid-up ordinary schedule, it is important to note that the 20% is held either on his own or with one or more associates directly or indirectly.
Example
Mr A holds 5% of the shares in a company held by his wife (46%) and a third party (49%). Mr A is said to be a director who can be held personally responsible for the company’s tax debts because he holds with his associate (in this case, his wife) more than the requisite 20% of the share capital of the company.
Implications
Section 75A apparently goes against the fundamental corporate principle that the company is a separate entity from the shareholders and has been said to be somewhat draconian because of its severity. Nevertheless, it has been law since Jan 1, 2006, and has the force of law.
Apart from the obvious liability for the debts, it also means that a director can be stopped from leaving Malaysia if a certificate under Section 104 has been issued in his name in his capacity as a director if the company owes taxes or tax-related debts.
How does this pan out for an independent director? If the person does not directly or indirectly hold any shares or does not hold shares above the 20% threshold, which is usually the case, then he may not be at risk with regards to personal liability for the company’s taxes and tax-related debts. However, the independent director does have to be sure that his associates do not have 20% or more shareholding in the company.
The RPGTA
The RPGTA generally mirrors the Income Tax Act in respect of provisions governing the responsibilities and liabilities of a director in relation to compliance requirements. Hence, all the above-mentioned issues under the Income Tax Act similarly applies to directors in respect of disposals or acquisitions of real property in Malaysia or shares in a real property company.
Yong Siew Chuen has wide experience in Malaysian taxation. She now focuses on tax training and coaching. Comments: [email protected].
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