TAX 667

TOPIC 7
TRADE ASSOCIATIONS
&
CLUBS
Zalilawati Yaacob
UiTM Puncak Alam
 Define Trade Association &
01 Clubs
LEARNING 02 Determine the residence

OUTCOME status of trade association

03 Assess the gross income of

trade association and clubs

04 Explain the Income Tax

exemption for trade association
and clubs.
05 Compute the Chargeable
Income and Tax Payable of
Trade Association and Clubs.
TRADE ASSOCIATIONS
 DEFINITION
 Section 53(3) defines a “Trade Association” to
be any association of persons, of partnerships
or of persons and partnerships formed with
the main object of safeguarding or promoting
the businesses of its members.

 For the purpose of income tax, a trade

association is deemed to be a body of persons
and not a partnership.

Registered under Society Act 1966or a company

limited by Guarantee under Companies Act 2016.
 An organization would be regarded as a
Conditions: trade association , if its fulfill the following
conditions:

a) all of its members must carry on a

business; and
b) its objective must be that of
safeguarding or promoting the
businesses of its members.

Where an organization’s membership is

opened not only to those who are in
business but also to those who are under
employment, the organization will not be
regarded as a trade association.
 Resident Status

S 8 (1) (C ) by reference to the

management and control of its
affairs or business at any time
during the calendar year is
exercised in Malaysia
 ASSESSABILIY OF GROSS INCOME
Business Income • Entrance fees and
• Subscriptions – revenue in nature
Sources
Non-Business Income Specifically specified under Sec. 4
of eg. interests, dividend, rental
Income
Special Donations • Donation received for special purposes like
& Subscriptions alterations, repairs and improvements of
premises are capital receipts.
• General donation such as special subscription
from members in conjunction with festive will be
10% treated as income.
40%
20%

30% Any outgoings or expenses in connection with the sums

Expenses receivable incurred in the production of gross income
 Income Tax (Exemption) (No.19) Order 2005
1) Statutory income (SI) derived from members’ subscription fees in the basis period for a year
of assessment shall be exempted from tax.

2) The amount of SI shall consist of the amount of gross income from the trade association’s
members’ subscription fees in the basis period for a YA, reduced:-
a) first, by any amount of expenses incurred in the production
of that income; and
b)next, by any allowance falling to be made pursuant to Schedule 3 of the ITA in respect
of that income;

3) The amount of expenses and allowances referred to above shall include an amount of expenses
and allowances which are common to the income exempt and other non-exempt income
which amount shall be determined:-
i) in relation to expenses, in accordance with the following formula:
A x B
C
where, A is the amount of common expenses
B is the amount of gross income from its members’ subscription fees; and
C is the amount of gross income from its business
 Income Tax (Exemption) (No.19) Order 2005
The amount of expenses and allowances referred to above shall include an
amount of expenses and allowances which are common to the income
exempt and other non-exempt income which amount shall be
determined:-

ii) in relation to allowances, in accordance with the following formula:

D x B
C
where, D is the amount of common capital allowances;
B is the amount of gross income from its members’
subscription fees; and
C is the amount of gross income from its business
sources
 TAX RATES

As trade associations falls within the ambit of

‘body of persons’, then:

Resident Non-resident
- Scaled rates – Flat rate
EXAMPLE
The Statement of Profit or Loss Account of a trade association for the year ended 31 December 2020 is as follows:
Income: RM
Members’ subscription fees 1,000,000
Seminar fees 600,000
Trade association activities 400,000
Note:
Total Income 2,000,000
Assume Capital Allowance
Expenditure: for the year 2020 amounting
Depreciation 600,000 to RM500,000.
Employees remuneration1 150,000 1
Common Expenses
Consultant fees (incurred for the trade association’s activities) 100,000
Rental for seminar hall 150,000
Food (for seminars) 50,000
Transport1 25,000
Stationery1 25,000
Surplus of income over expenditure 900,000
 WORKINGS:
W1 - Common Expenses

Attributable to members’ subscription fees = RM200,000 x 1,000,000/2,000,000 = RM100,000

Attributable to seminar fees = RM200,000 x 600,000/2,000,000 = RM60,000

Attributable to trade assoc. activities = RM200,000 x 400,000/2,000,000 = RM40,000

W2 - Common Capital Allowance

Attributable to members’ subscription fees = RM500,000 x 1,000,000/2,000,000 = RM250,000

Attributable to seminar fees = RM500,000 x 600,000/2,000,000 = RM150,000

Attributable to trade assoc. activities = RM500,000 x 400,000/2,000,000 = RM100,000

 The calculation of tax payable for YA 2020 of trade
associations is as follows:
Income: RM
Subscription fees 1,000,000
Less: Expenses (100,000)
Adjusted Income 900,000
Less: Common Capital Allowance2 (250,000)
(W2)

Statutory Income from members’ 650,000 exempted

subscription fees
Income: RM
Seminar fees 600,000
Less: Expenses
Rental of seminar hall (150,000)
Food (50,000)
Common Expenses (60,000)
Adjusted Income 340,000
Less: Common Capital Allowance2 (W2) (150,000)
Statutory Income from seminar fees 190,000
Income: RM
Trade association activities 400,000 Chargeable Income: RM
Stat Inc frm seminar fees 190,000
Less: Expenses Stat Inc frm trade assn. activ. 160,000
Consultant Fees (100,000) 350,000

Common Expenses (40,000)

Adjusted Income 260,000
Less: Common Capital Allowance2 (100,000)
(W2)

Statutory Income from trade 160,000

association activities
 16
Advanced Taxation, TAX 667
CLUBS
  Club is defined in the case of
DEFINITION
Kowloon Stock Exchange Vs CIR to
mean an association formed for
other than business purposes.

 Registered under the Society Act

1996

 The IRB has issued PR 1/2015 on 12.1.2015 to

govern the tax treatment on club, association or
similar institution.
 A club, association or similar institution is formed not for
commercial purposes but for social, recreational, sports, arts,
science, literature or other leisure pursuits for the interest and
benefit of their members.
Examples of such club, association or similar institution include
an athletic club, antique car collectors club and a historical
society.
However, the activities of some clubs, associations or similar
institutions are trade dealings which are conducted for a profit
that is subject to tax as business profits such as a fitness centre
or a professional football club.
 Resident Status
Residence status of a club, association or similar
institution is
determined in accordance with paragraphs 8(1)(b)
and 8(1)(c) of the ITA
if at any
time during the basis year the management and control of
its business or of any one of its businesses are exercised
in Malaysia [Paragraph 8(1)(b)]

if at any time during the basis year the management and

control of its affairs are exercised in Malaysia by its directors
or other controlling authority, e.g. board of management
[Paragraph 8(1)(c)]
 TAX RATES

As trade associations falls within the ambit of

‘body of persons’, then:

Resident Non-resident
- Scaled rates – Flat rate
 Tax Treatment
A club is normally set up to service its members and as such
may rely on the principle of mutuality for tax exemption that
states a man cannot make a profit by trading with himself.
Principle of Mutuality: Any contributions or subscriptions
by
Its members are exempted from tax in the hands of the club.
Any surplus of contributions over expenditure is not income.

Dealing with non-member : When trading with non-members

occurs, the principle of mutuality no longer applies and exposure to
tax can arise on any surplus that may occur.
 Assessability of Receipts (s 53A)
Income from members

With effect from YA2009, any income arises from transactions with members shall
NOT BE TAXABLE under the Act.
This would include:
(i) Entrance fees and subscriptions received from members;
(ii) Provision of services to members for a fee and
(iii) Sale of goods to members.

Likewise, any expenses or capital allowances attributable to such income shall be

disregarded. A separate account in respect of income derived from its members
and non-members must be maintained. Any loss was be disregarded.

Income generated from the provision of trading facilities to members is deemed to

have carry on a business. It would be deemed as trading receipts and assessed
under Sec 4(a) Advanced Taxation, TAX 667 23
 Mutual receipts - Exempted
Income from i) entrance fees and members’ subscription fees;
Members (ii) drinks and food sold at the club, association or similar institution bar and restaurant to its
- Not taxable members;
(iii) amounts paid by members to attend dinners or social functions organised by the club,
- BUT Not all association or similar institution; and
(iv) amounts paid by members to attend a talk, presentation or workshop organised by the club,
are exempted association or similar institution.

Not Mutual Receipts – Not Exempted

Example 1
A recreation club in Malaysia whose members comprise of tax agents enters into an agreement with
an independent gymnasium operator to operate on the club’s premises. The club receives rental
from the gymnasium operator. The gymnasium operator imposes a fee for the use of its facilities in
the gymnasium. Income received by the club from the rental of the gymnasium is taxable, even
though patrons of the gymnasium are club members.

Example 2
An association whose members comprise of expatriates and their wives, rents out part of its
premise to one of its members to operate a café, being a profit making business activity. A monthly
rental income of RM1,000 is received by the association and the income from the cafe is received
by the member who operates the cafe. The rental income received by the association from its
member who operates the business of a cafe is not considered a mutual receipt as the member
operates a business activity within the association’s premise. The association will be taxed on the
rental income derived from the letting out of part of its premise and the member will also be taxed
on the income derived from operating a cafe.
 Assessability of Receipts (s 53A)

Income from non-members

With effect from YA2009, club would have two sources of income, namely:

(a) Income from members; and

(b) Income from non-members.

Non-members are those persons who are not entitled to vote at general
meeting of the clubs and societies, at where affective control is exercised
over its affairs.

Trading activities from members and non-members within the club

premises are profit in nature and subjected to tax.

Advanced Taxation, TAX 667 25

Any dealings with non-members with regard to the following are
treated as business income:
(i) fund raising activities/events open to the public
(ii) rental received for hiring out the club’s hall/facilities/equipment

to the public,
(iii) amounts paid by non-members to attend
- dinners/social functions
- talk/presentations/workshops
(iv) proceeds from non-member on charitable event.

Advanced Taxation, TAX 667 26

 (i) proceeds from fundraising drives to the public, e.g.
sale of
homemade cakes, cookies or handicraft;
(ii) drinks sold to non-members visiting the club;
(iii) fees received for hiring out of the club’s hall,
Income facilities or equipment to the public;
from (iv) amounts paid by non-members to attend dinners
Non-members or social functions organised by the club;
Is Taxable = business (v) amounts paid by non-members to attend a talk,
presentation or workshop organised by the club;
income
(vi) non-member proceeds from a raffle or lucky draw;
and
(vii) selling souveniers to non-members; and
(b) the spouse, parents and children of members of a
club, association
or similar institution are considered non-members.
Therefore, income derived from transactions with the
spouse, parents and children of members are subject
to tax.
 Example 3
An association of retired armed forces officers built 100 units of link
houses and 10 units of shop houses. The association offered the link
houses for sale to its members and the immediate family of these
members only whereas the shop houses were open to the public for
sale. The immediate family comprising of the members’ spouse,
parents, siblings and children were extended the same purchase
price that was offered to the members for the property.
The profits from the sale of the houses to the members’ immediate
families are taxable as the receipts are from transactions with non-
members. Immediate families of members of the association are not
considered members of the association
 Cash Cash donation received from members or non-members is capital receipts,
Donation free from tax

(a) income from investments such as interest, rent, dividend being

nonmutual receipts is taxable;
(b) there may be a club, association or similar institution that enters into
arrangements with external parties under which the external party conducts
or provides particular operations on the premises of the club, association or
Income from similar institution. These arrangements with the external parties may include
installation of vending machines for drinks, catering, restaurant, bar,
investment gymnasium and entertainment; and
and external (c) if the club, association or similar institution enters into such an
sources: arrangement with the external party, the income derived by the external party
from the patrons of the above mentioned facilities is in accordance with the
contractual arrangements. The amounts paid to the club, association or
similar institution by the external party for operating on their premises is
income derived by the club, association or similar institution from external
sources and not from members / non-members. Therefore, such income is
fully taxable to the club, association or similar institution
 Example 4
A golf club made arrangements with external parties to:
(i) operate a restaurant;
(ii) operate a gymnasium; and
(iii) install vending machines for drinks on the club’s premises.
The income received by the club from the restaurant,
gymnasium and vending machine operator is derived from an
external source and is taxable;
ADJUSTED INCOME FROM NON-MEMBERS
RM
Section 4(a)
Gross Income from non-members xx
Less: Revenue Expenses
(Outgoings or expenses incurred) A: Common revenue expenses
Ax B (x) D: Common Capital Allowance
C B: Gross income from transactions
ADJUSTED INCOME XX with non-members
C: Gross income from transactions
Less : Capital Allowances with members + non-members
DxB (x)
C
STATUTORY INCOME XX
 TAX COMPUTATION
Business Source
Members Non-members
S4(a) Gross Inc xx S4(a) Gross Inc xx
(x) (a) Dir. rev exp (x)
(x) (b) Common rev exp (x)
(apportion on gross inc. basis)
Adjusted Income xx Adjusted Income xx
(x) Common plant exp (x)
(c) Capital allowance
(apportion on gross inc. basis)
Statutory Income xx Statutory Income xx
No Tax Investment Income x
Expenses, capital allowance, Aggregate Income x
losses, donations are all (d) Approved donation (x)
disregarded
(apportion on aggregate income
basis)
Chargeable Income xx
 Approved Donations
Cash donation to an approved institution or organization are entitled a deduction
up to 10% in YA 2020 of the aggregate income of the club and society.

However, the amount of deduction must be apportioned as follows:

G x H/I

G - Cash donation under Sec. 44(6)

H - Aggregate income from transactions with non members
I - Aggregate income from transactions with members and non members

Advanced Taxation, TAX 667 33

 RM RM
Example Income
Members
- entrance fees 60,000
Ahoxi Mind Club has -subscription 120,000 180,000
the following income Non -members
and expenditure for - fund-raising activities 80,000
the year ended - seminar fees 40,000 120,000
31.12.2020. Gross income from members & non-members 300,000
Rental from shophouses 200,000
500,000
Less: Expenditures
Capital Allowance for YA 2020 Hotel hall for seminar 28,000
is RM 15,000 Salaries and wages 100,000
Repairs and maintenance on shophouses 24,000
Administrative charges 60,000
Postage, stationery and printing 20,000 (232,000)
Compute the income tax
Aggregate Income 268,000
payable for YA 2020
Cash donation to WWF (appoved institution) (10,000)
Excess income over expenditure 258,000
 RM RM
Ahoxi Mind Club Non-members
Computation of Sec 4(a) Business
income tax payable
Fund raising activties 80,000
for YA 2020
Seminar fees 40,000

120,000
Common expenses:
Salaries & Wages Less: Wholly and exclusively expenses:
Administrative exp. Hotel hall rental 28,000
Postage, stationery &
Common expenses (180,000 x 120,000/300,000) 72,000 (100,000)
printing
Adjusted income 20,000

Approved Donations Less: Capital Allowance (15,000 x 120,000/300,000) (6,000)

Restrict up to 10% YA 2020 of Statutory Income 14,000

AI Sec 4(d) rental income 200,000
Donation: G x H/I Less: Allowable expenses (24,000) 176,000

G - Cash donation under Sec. 44(6) Aggregate Income 190,000

H - Aggregate income from Approved donation s 44(6) [(10,000 x 190,000/253,000 (7,510)
transactions with non members (190,000 + 63,000 ….[Members Agg. Inc=180,000 -
I - Aggregate income from 108,000-9,000 ]
transactions with members and non Chargeable Income 182,490
members
Income tax payable: First 150,000 = 22,900 30,698
 Exemption
State clubs that are affiliated to the Olympic Council of Malaysia may apply for
exemption provided under para. 26 Sch. 6.

 Record Keeping - Income derived from transactions with members and

non-members are required to be separately accounted for record keeping
has to be kept for 7 years

 Tax Filing - The tax return is to be furnished on or before 30 June in the

following a YA.

Advanced Taxation, TAX 667 36

Advanced Taxation, TAX 667 37
 Example 5
A senior citizens club in Kuala Lumpur has the following income
and expenditure account for the year ended 31.12.2020:
Computation of the tax payable for year of assessment
2020
RM
Sale of tickets for annual dinner to non- 8,000
members
Less: Annual dinner expenses of non- 4,000
members
4,000
Interest 8,000

Rental 21,000
Chargeable income 33,000
Tax on the first RM20,000 150
Tax on the next RM13,000 @ 3% 390
Tax payable 540
 Example 7
A sports club has the following income and expenditure account for the year
ended 31.12.2020:
The sports club’s expenditure records related to transactions with members and
non-members during the year ended 31.12.2020 are:
Computation of tax payable for the year of assessment 2020
 RM

Tax on first RM150,000 22,900.00

Tax on next RM60,000 @ 24% 14,400.00
Tax Payable 37,300.00

1Apportionment of common expenses

60,000
---------------------------------- = 70,000
280,000 X 240,000 (180,000 + 60,000)
 Example 8
The facts are the same as in Example 7 except that the transactions with non-members
amounted to RM100,000 and the capital allowance claimed by the club for the year
ended 31.12.2019 is RM12,000. The club also made a gift of money of RM10,000 to an
institution approved under subsection 44(6) of the ITA.
Computation of tax payable for the year of assessment 2020
Tax on first RM150,000 RM22,900
Tax on next RM89,614 @ 24% RM21,507.36
Tax Payable RM44,407.36
6 Computation of aggregate income from members and non-members
transactions for year of assessment 2020
 Example 9
A club’s income and expenditure account for the year ended 31.12.2020 shows that the
expenses exceeded the receipts from mutual transactions with members resulting in
members’ loss of RM5,000. On the other hand, the receipts exceeded expenses from
non-mutual transactions with non- members resulting in a surplus of RM3,000. The club
actually has a net loss of RM2,000.
The club is taxable on the income from transactions with non-members amounting to
RM3,000 for the year of assessment 2019. Losses from transactions with members
cannot be offset against income from transactions with non-members. Such losses are to
be disregarded for the
purpose of the ITA.
Example 10
The facts are the same as in Example 9 except that the expenses exceeded receipts from
transactions with non-members resulting in a loss of RM1,000.
The loss of RM1,000 arising from transactions with non-members in the year of
assessment 2019 is carried forward to the subsequent year(s) of assessment to be offset
against income from the same source (transactions with non-members).