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  • Writer's pictureGSK & Associates

Waiver of debts - taxable or not?

Updated: Oct 13, 2023

It's absolutely crucial to understand the potential tax implications of having your debts waived. While it may seem like a tremendous relief, the Inland Revenue Board of Malaysia (IRB) might still consider it as taxable income.

waiver of debts

Companies often write off bad debts for various reasons. Some common reasons include when the debtor;


- has gone bankrupt or

- is under liquidation or

- when the effort required to recover the money owed is disproportionate.


But what does a write off mean for the debtor (waiver of debts)? Let's explore the tax implications.


A write off of debt can either be taxable or non-taxable for the debtor. The key factor that determines whether the write off is taxable is whether the debt is;


- revenue-in-nature or

- trade-related


According to Section 30(4) of the Income Tax Act 1967, if a taxpayer had previously claimed a tax deduction or capital allowance for the debt that is later released, it would be considered part of the debtor's gross income. Hence, it becomes taxable in the year of assessment in which the debt was forgiven.


On the other hand, if the debtor had not claimed a tax deduction or capital allowance for the debt before its release, there would be no tax implications. In such cases, the released debt is not brought to tax.


Here are some of the related tax cases:


- FT Sdn Bhd vs IRB

- IRB vs Bandar Nusajaya Development Sdn Bhd


To get a clearer understanding of your specific situation, it's essential to consult with a tax professional who can provide personalised guidance.

 

Please note that tax laws can change, and it's essential to verify the latest updates with the IRB of Malaysia (Lembaga Hasil Dalam Negeri Malaysia or LHDN) or consult a tax professional to ensure that you're submitting your tax returns based on the most recent regulations.


For further clarification, please feel free to reach out to us at gunalan@gskassociates.net or contact the manager with whom you typically engage or who oversees your organisation's tax matters.



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