Individual income tax in Malaysia is payable annually, typically between the months of March to April or May to June, depending on whether the taxpayer is engaged in business activities. However, relying solely on the self-assessment of individuals for tax collection can be quite unreliable, as some taxpayers may neglect to submit their tax returns.
This is where advance tax payments come into play. These payments are based on a tax estimate calculated either by LHDN (Inland Revenue Board of Malaysia) or self-estimated by taxpayers in accordance with the guidelines provided by LHDN. There are two forms of advance tax payments that apply to individuals: Monthly Tax Deduction (MTD or PCB) and Notice of Tax Instalment Payments (CP500).
This blog will focus on CP500, which is applicable to individuals earning income from sources outside of employment, such as business income, rental income, and royalties.
What is CP500?
When an individual first begins to receive income from sources other than employment, they may not immediately inform LHDN. Instead, they often choose to report this income only when completing their self-assessment for the tax year. Consequently, taxes related to this income are typically not paid through advance payments. Instead, the tax liability for such income is settled when the individual submits their annual tax return.
However, after the first year, if the income from non-employment sources becomes significant and constitutes a substantial portion of the individual's total income, LHDN will issue a CP500 notice by February of the following year. Subsequently, the taxpayer is required to make bi-monthly advance payments based on LHDN's estimated tax liability.
In the event that a taxpayer believes they should have received a CP500 notice but did not, they can take several actions. They may visit or contact the LHDN branch responsible for their tax file, check online through the MyTax portal, or contact the Hasil Care Line for assistance.
Payment of CP500 is conducted bi-monthly, with a 30-day grace period from the specified date on the CP500 notice to settle each installment. This payment schedule commences on March 1st of the year in which the CP500 notice is issued. The final installment payment falls due in January of the subsequent year. Late payments incur a 10% penalty on outstanding balances, so it's crucial to meet the deadlines.
Tax estimate revisions can be made before June 30th of the year through CP502. However, penalties apply if the CP502 estimate differs by 30% or more from the actual tax liability. In such cases, a 10% penalty is imposed on any difference exceeding 30%. For example, if the tax estimate is RM30,000, but the actual tax liability amounts to RM50,000, the 40% difference (RM20,000) would result in a 10% penalty on the portion exceeding 30% (RM5,000).
No penalty is imposed for overestimating, and the underestimation penalty does not apply if the taxpayer opts not to revise the CP500 and instead utilizes the tax estimate provided by LHDN.
Navigating CP500 is relatively straightforward, with no penalties for overestimating your tax liability. Simply make the bi-monthly installment payments, and you're on the right track. However, depending on your financial situation, revising the tax estimate might be necessary, especially if cash flow is tight, as overpayments will remain with LHDN until they issue a refund.
Therefore, it's crucial to have a solid understanding of Malaysia's tax policies to ensure accurate estimates and prevent potential penalties. Explore our other blogs on tax-related topics to further enhance your tax knowledge!
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LHDN (Tax estimate advance payment): https://www.hasil.gov.my/en/individual/individual-life-cycle/payment/tax-estimation-advance-payment/
SQL (What is CP500): https://www.sql.com.my/accounting-software/what-is-cp-500/