Income Tax

Definition :

Annual charge levied on both earned income (wages, salaries, commission) and unearned income (dividends, interest, rents). If there is no income, there is no income tax. In Malaysia, income tax is imposed, assessed and collected under the Income Tax Act (ITA) 1967.

Two Basic Types :

• Personal income tax, levied on incomes of individuals, households, partnerships and sole proprietorship.
• Corporation income tax, levied on profits (net earnings) of incorporated firms.

Basis Period & Year of Assessment :

• Usually income tax is assessed upon one-year period.

Computing Chargeable Income

Appeal Against Tax Assessment

Taxation In Malaysia

All the citizens in Malaysia should not be ignorance about what's going on within the country. Good tax payers will asked and inquiry where did their money financed to. The definition of tax is 'a sum of money paid by the citizens to the government on the income or value of purchases of certain specific goods and services'. In Malaysia, the citizens paid their tax to the In-Land Revenue Board (IRD).

The purpose of the government collecting tax from the citizens is to funding the development projects within the country such as upgrading and maintaining the public facilities, highway and transportation facilities and to control some of the product such as imposed a higher tax on cigarettes and foreign cars.

Tax is the biggest source of income for Federal Government's Revenue, where they contributed to almost 70% of country's total revenue. The federal government revenue in 2008 is expected to register a strong growth of 15.5% to 16,558 million ringgit or 22.6% of GDP in 2008.To boost participation of investors in Malaysia, government is loosening taxes on some products.

There are two types of taxes applicable in Malaysia :

• Direct taxes : must pay individually and directly to the authority or administration (ie : petroleum income tax, stamp duties and real property gains tax)
• Indirect taxes : government's collect taxes indirectly through imposition of tax on certain items and services (ie : import duties, export duties, sales tax and service tax (foods in restaurant, hotel rooms service, airfare, foreign cars))
  

Taxation in Malaysia (the articles below is taken from here)

Income of any person including a company, accruing in or derived from Malaysia or received in Malaysia from outside Malaysia is subject to income tax.

However, with effect from the year of assessment 2004, income received in Malaysia by any person other than a resident company carrying on business of banking, insurance or sea or air transport for a year of assessment derived from sources outside Malaysia is exempted from tax.

To modernize and streamline the tax administration system, the assessment of income tax was changed to a current year basis of assessment from the year 2000. The self-assessment system was implemented for companies in the year of assessment 2001 and for sole proprietors, partnerships, cooperatives and salaried groups, in the year of assessment 2004.

To learn more about the Malaysia tax structure, click here.

Insurance

Types of insurances :

• Accident insurance
• Education insurance
• Marine insurance
• Aviation insurance
• Life insurance
• Fire insurance

Definition :

• A contract of insurance is a contract whereby the insurer agrees to indemnify the insured against a loss which may arise upon the occurrence of some event or to pay a certain definite sum of money on the occurrence of the particular event.
• The loss which is being insured against is called the risk.
• The policy means the insurer and the insured enter into a contract of insurance, and the document containing the terms of the contract.
• A premium - consideration paid by the insured either in the form of lump sum or periodical amount.

Differences between Ordinary Contract and Insurance Contract :

Ordinary Contract

• the doctrine of utmost good faith is not applicable.
• insurable interest is not needed.

Insurance Contract

• doctrine of utmost good faith is very important.
• the insured must have insurable interest in the subject matter.

Contracts of Indemnity
In a case of a loss against which the policy has been made, the insured is entitled to be indemnified which means to be compensated for his loss, but he cannot recover more tahn the actual loss.

Insurable Interest :

• means an interest (financial or otherwise) in the subject matter of a contract of insurance, which provides the insured with the right to enforce the contract.
  
• said to have an insurable interest if he will suffer loss in the event of property being destroyed.

Doctrine of Utmost Good Faith

• Insurance contract require the contracting parties to disclose to each other all information which would influence either party's decision to enter into the contract, regardless of whether such information was requested or not.
• Failure to disclose material information gives the other party the right to avoid the contract
  

Judicial Veil Lifting

As we observed with the Salomon, Lee and Macaura cases, the consequences of treating the company as a separate legal entity or not can be extreme. Over time the judiciary have swung from strictly applying the Salomon principle in these difficult situations to taking a more interventionist approach to try to achieve justice in a particular situation. The following cases should give some flavour of the types of situations that have arisen and the approach taken by the judiciary at the time.

In Gilford Motor Company Ltd v Horne [1933] Ch 935 a former employee who was bound by a covenant not to solicit customers from his former employers set up a company to do so.
He argued that while he was bound by the covenant the company was not. The court found
that the company was merely a front for Mr Horne and issued an injunction against him.

In Jones v Lipman [1962] 1 WLR 832 Mr Lipman had entered into a contract with Mr Jones for the sale of land. Mr Lipman then changed his mind and did not want to complete the sale.
He formed a company in order to avoid the transaction and conveyed the land to it instead.
He then claimed he no longer owned the land and could not comply with the contract. The
judge found the company was but a façade or front for Mr Lipman and granted an order for
specific performance.

In Lee Willian Leitch Bros. Ltd. the directors of the company carried on business even after the insolvency and purchased dome goods on credit. During the transactions the creditors knew that they would not be able to pay. The company was carrying on business with intent to defraud the creditors. Thus, the directors of the company would be personally liable for the debts.

Further reading click here.

Classifications of Company

UNLIMITED & LIMITED CO.

Unlimited

• the liability of the members or shareholders is not limited - that is, they are liable to contribute whatever sums are required to pay the outstanding debts (if any) of the company should it ever go into formal liquidation and its assets are insufficient to pay its debts and liabilities and the expenses of liquidation.
  
• The members or shareholders are liable for the shortfall.

Limited

• company limited by shares or by guarantee
  
• members or shareholders have no direct liability to the creditors of an unlimited company.
• Limited by shares - liability is limited by shares in the memorandum; member cannot be asked to pay more than the amount unpaid on his shares when the company is wound up; If he has paid in full for his shares, he cannot be asked for further contribution.
• Limited by guarantee - member needs only to contribute the amount he agreed to guarantee.

PUBLIC & PRIVATE CO.

Public

• has permission to offer its registered securities (stocks, bonds, etc) for sale to the general public, typically through a stock exchange, or occasionally a company whose stock is traded over the counter (OTC) via market makers who use non-exchange quotation services.
• raise capital by selling shares
• Run by a board of directors elected by shareholders.
• show status using the abbreviation "Bhd." or the word "Berhad" after their company name.
  

Private

• Business company owned either by non-governmental organizations or by a relatively small number of holders who do not trade the stock publicly on the stock market. Less ambiguous terms for a privately held company are unquoted company and unlisted company.
• The name of private limited company ends with the word "Sendirian Berhad" or abbreviation "Sdn. Bhd".

Relative Advantages of Different Form of Business

SOLE PROPRIETORSHIP

• Lower taxes since taxed on individual basis.
• Impossible to transfer ownership.
• Unlimited liability.
• Appropriate for small or family business.

PARTNERSHIP

• Lower taxes since taxed on individual basis.
• Difficult to transfer ownership.
• Liability - some will be limited, others unlimited.
• Appropriate for professionals.

COMPANY

• Flat tax rate.
• Easier to transfer ownership.
• Limited liability.
• Appropriate for larger business.
  

The Differences of Business Entity

SOLE PROPRIETORSHIP

• Owned by a single individual.
  
• Business is dissolved when owner dies. No transfer of ownership is possible.
• Does not need to submit any financial reports.
• Unlimited liability - owner is obliged to pay for all business debts from his personal assets if need to.
• All profits and losses are borne by owner unlimited

PARTNERSHIP

• An association of two or more individuals.
• Ownership can be transferred through transfer of shares by either sale or inheritance.
• Submit financial reports to the Companies Commission of Malaysia (CCM)
• Risk and profit share is determined by partnership agreement.
• Profits are divided according to the partnership agreement.

COMPANY

• It is a legal entity and is owned through ownership of shares.
• Ownership can be transferred through transfer of sales by either sale or inheritance.
• Must submit financial reports to the CCM and if listed Securities Commission (SC)
• All shares are limited liability - risk is limited to amount of money invested in the shares.
• Owner profits from dividends or sale of shares
  

Nemo Dat Quod Non Habet

The above phrase means where goods are sold by a person who is not the owner and without the consent of the original owner, the buyer acquires no better title than the seller had. However, there are exceptions to the rules.

• Estoppel - A rule of law that when person A, by act or words, gives person B reason to believe a certain set of facts upon which person B takes action, person A cannot later, to his (or her) benefit, deny those facts or say that his (or her) earlier act was improper.
• Sale by mercantile agent in the ordinary course of business, the buyer will obtain good title.
• Sale by joint owner.
• Sale under a voidable title - the buyer will obtain good title if he buys in good faith and without notice of seller's defect of the title.
• Sale by seller in possession after sale.
• Sale by buyer in possession.
  

Sale of Goods

SALE OF GOODS

1. What is Sale of Goods contract?
Elements that necessary must exist in Sale of Goods contract are the transfers of goods as well as title or ownership and should only involve physical properties and intangible properties.

2. What is goods according to Sale of Goods Act?
It should be every kind of movable property other than actionable claims and money. Money and land are excluded from this act. Stock and shares, growing crops, grass, things attached but severable to land are included in this act.

TERMS OF CONTRACT

1. What is warranty? What is condition? Define.
Warranty is defined as a stipulation which is collateral to the main purpose of the contract and its breach only leads to claim for damages. While condition is defined as a stipulation which is essential to the main purpose of the contract and its breach leads to repudiation of contract.

2. What is meant by 'time is of essence in the contract'?
The general rule is that time is not of the essence unless the contract mentioned or otherwise the contract can be revoke. When time is not of the essence, courts generally permit parties to perform their obligations within a reasonable time.

IMPLIED TERMS UNDER SALE OF GOODS ACT

1. Sale of Goods Act imposes certain implied terms in a sale of goods contract, what is the purpose of doing so?
By doing this, the Act actually protecting the innocent buyers from any form of crime.

2. What is meant by merchantable quality?
An item is deemed merchantable if it is reasonably fit for the ordinary purposes for which such products are manufactured and sold. For example, soap is merchantable if it cleans. In general, a seller or manufacturer is required by law to make products of merchantable quality. In the event that the items do not meet with the proper standards, a suit can be brought against the seller or manufacturer by anyone who is injured as a result.

Definition

Property
That to which a person has a legal title, whether in his possession or not; thing owned; an estate, whether in lands, goods, or money; as, a man of large property, or small property. Property is divided into real property, and personal property. Property is also divided, when it consists of goods and chattels, into absolute and qualified.

Possession
A person has possession of something if the person knows of its presence and has physical control of it, or has the power and intention to control it.

Unascertained Goods
The property passes to the buyer only after the goods are ascertained.
Example : when A buys the latest Honda car to be consigned from Japan from B, only when B has set aside the car for A, the property passes to A.

Ascertained/Specific Goods
The property in goods passes to the buyer at such time as the parties to the contract intend to be transferred.

Prima Facie
Prima facie, from Latin prīmā faciē) is a Latin expression meaning on its first appearance, or at first sight. The literal translation would be "at first face", prima first, facie face. It is used in modern legal English to signify that on first examination, a matter appears to be self-evident from the facts.In common law jurisdictions, prima facie denotes evidence which – unless rebutted – would be sufficient to prove a particular proposition or fact.

Nemo dat quod non habet
Nemo dat quod non habet, literally meaning "no one [can] give what he does not have" is a legal rule, sometimes called the nemo dat rule, that states that the purchase of a possession from someone who has no ownership right to it also denies the purchaser any ownership title. This rule usually stays valid even if the purchaser does not know that the seller has no right to claim ownership of the object of the transaction.

Bona fide
In law, it is the mental and moral state of honesty, conviction of the truth or falsehood of a proposition or body of opinion, or as to the rectitude or depravity of a line of conduct. This concept is important in law, especially equitable matters.

Macaura V Northern Assurance Ltd

MACAURA V NORTHERN ASSURANCE LTD (1925)

(for illustration purpose)

Macaura own land on which stood timber. Macaura had insured the timber against loss of by fire in his own name. He then sold the whole of the timber thereon to a timber company in consideration of fully paid up shares in the company. But he had not transferred the insurance policy to the company name. The company carried the business of felling and milling timber. A fire destroyed all timber which had been felled and he sued the insurance companies to recover the loss, but the actions were stayed and the matter was referred to arbitration in pursuance of the conditions contained in the policies. The claimant was the sole shareholder in the company and was also a creditor of the company to a large extent.

ARGUE :

• The insurance company does not want to pay the insurers' claimed, insurers' is not liable.
  
• that the claimant had not either as shareholder or creditor any insurable interest in the goods
• Only the company, and not Macaura, could insure its property against loss or damage. Shareholders have no legal or equitable interest in their company’s property. Such property belongs to the company which had a legal personality.

VERDICT :

• Northern Assurance Ltd won. The property named should be transferred to the company's name instead of Macaura's name.

References :

• http://www.vanuatu.usp.ac.fj/Courses/LA313_Commercial_Law/Cases/Macaura_v_NAC.html
• Business Law class, Lectured by Mr Sonny Zulhuda
  

Abdul Aziz B Atan & Others V Ladang Rengo Malay Estate

ABDUL AZIZ B ATAN & OTHERS V LADANG RENGO MALAY ESTATE (1985)

• Ladang Rengo Malay Estate deals with the palm oil industry. Abdul Aziz b Atan was one of the employees of the company at that time.
• After a few years, there had been a change of structure in the means of shareholders in the company; Ladang Rengo Malay Estate. All the shareholders transferred shares to other people and thus this create a confusion among the employees.
• Abdul Aziz b Atan considered the employers had been changed and hence, there were changed in Employment Agreement ; where he thought their (the employees) agreement has ended (the end of employment). They claimed they have the pension benefit.

ARGUE :

• Ladang Rengo Malay Estate rejected their wished and thus they did not want to pay the pension
• Abdul Aziz B Atan still claimed that they have the pension benefit.
• Any changes in structures or shareholders does not change or affect in any way of the company identity including the employment agreement.
• Perpetual concession - stay on no matter who's the shareholders, taken into account that the company is not liquidated.

VERDICT :

• Courts rejected Abdul Aziz b Atan & others claimed
• Appoints that Ladang Rengo Malay Estate won.

References :
Business Law class; Lecture by Mr Sonny Zulhuda :D

Lee V. Lee's Air Farming Ltd

LEE V LEE'S AIR FARMING LTD (1960)

(for illustration purpose)

This case is concerning about the veil of incorporation and separate legal personality. Mr Lee is the owner and sole working director of a company engaged in the business of aerial crop spraying. Mr Lee held 2999 of 3000 shares, was the sole director and employed as the chief pilot. He also took an insurance for his employees. While he was performing his job, he was killed in an accident while piloting the aircraft in the course of employment. His widow, the plaintiff, attempted to collect what was rightfully due to a widow of a man killed on the job. The actual defendant was the insurance company. The company was insured (as required) for worker compensation.

ARGUMENT :

• The insurance company does not want to pay the employer since the employer is the employee.
• Nevertheless, Mrs. Less sticks with the application of Doctrine of Separate Legal Entity.

VERDICT :

• The Lee's Air Farming case confirmed the Salomon principle. Lee's Air Farming Ltd. was not a mere sham. It was a legitimate corporation, established for legitimate purposes, and had carried on a legitimate business. His employment by the corporation was well-documented, through government records of tax deductions, workmens' compensation contributions, etc., and was not something his widow had attempted to piece together after the fact of his death. There was no reason in law why a person could not perform corporate functions and employee functions within the same corporation.
• Mrs. Lee won the case and the compensation was paid.
  

References :

• http://wiki.answers.com/Q/What_was_Lee_v_Lee%27s_Air_Farming_Ltd_case
• General Principles of Malaysian Law, 5th Edition, Oxford Fajar, Lee Mei Pheng
  

Salomon V Salomon Co. Ltd

SALOMON V SALOMON CO. LTD (1897)


Salomon v Salomon Co Ltd is a landmark UK company law case. It was basically the first case to uphold the concept of doctrine of corporate legal entity. Aaron Salomon was a Jewish leather merchant in Victorian England. He set up a company with the required seven shareholders (his wife and kids). Mr Salomon took 20,001 of the company's 20,007 shares. The remaining shares goes to his wife and kids. Purchase money for the business was paid, totalling £20,000, to Mr Salomon. £10,000 was paid in bill of exchange or debentures (debenture is a document that either creates a debt or acknowledges it) to Mr Salomon as well.

But soon after that, a series of strikes in the shoe industry led the government, Salomon's main customer, to split its contracts between more firms. His warehouse was full of unsold stock. He and his wife lent the company money. But the business still failed, and they could not keep up with the interest payments. That was the end. The company was put into liquidation. But the company is in insolvent state; assets is less than liability, liability is overwhelming. All the assets is confiscated to paid the creditors.

The question of law was who should be paid first, unsecured creditors (like employees and utility bills) or Salomon himself as a secured creditor. The liquidator asked Mr. Salomon to pay all the creditors since Mr. Salomon was the owner of the company. Salomon did not agree with that because he (Salomon) was supposed to pay for his debentures. But the liquidator asked him to pay to other creditors.

The UK Court of Appeal felt Salomon was a fraud and his company was a "sham". But the House of Lords court stated that the company was properly set up, there was no fraud nor Mr. Salomon formed the company for fraudulent purpose and thus Mr Salomon was a distinct entity from his company, his directorship, his shareholding and his rights as a secured creditor. In the end, Mr Salomon won the case and he did not have to pay all the creditors even though he is a owner of the company because Mr Salomon and the company is two SEPARATE legal entity.

References :

• General Principles of Malaysian Law, 5th Edition, Oxford Fajar, Lee Mei Pheng
• http://en.wikipedia.org/wiki/Salomon_v_A_Salomon_&_Co_Ltd