Amid confusion, tax experts weigh in on new limits for religious bodies

Religious bodies currently enjoy unconditional tax-free status under Schedule 6 of the Income Tax Act as they are presumed to be non-profit organisations. ― File pic
Religious bodies currently enjoy unconditional tax-free status under Schedule 6 of the Income Tax Act as they are presumed to be non-profit organisations. ― File pic

KUALA LUMPUR, Dec 27 ― Passed without consultation, a recent revision that will force religious organisations to start paying income tax has been described by a local tax consultant as a “sneaky” move.

Veerinderjeet Singh said that religious bodies currently enjoy unconditional tax-free status under Schedule 6 of the Income Tax Act as they are presumed to be non-profit organisations but the new amendment limits their exemptions to just “contributions” ― which he said appears to include alms and similar contributions by worshippers, but requires clarification on its actual interpretation.

“What seems clear now is that the intention is to limit the income tax exemption to such contributions and that it does not apply to other types of income such as rental, interest and maybe even some income from providing religious training to children in places of worship.

“What this means is that religious bodies which have such other income are now taxable and that means these bodies have to register as a taxable person and start filing income tax returns,” the executive chairman of Axcelasia Inc told Malay Mail Online when contacted.

Veerinderjeet noted that Inland Revenue Board (IRB) officials had previously alleged “abuse” of the income tax exemption where some religious outfits become quite well-off through rental income. Coupled with the government’s need to add to its revenue, the amendment to the tax law was not surprising, he said.

However, he disagreed with the manner the amendment was passed through Parliament.

“In my view, this ‘sneaky’ amendment should not have been enacted. It is very surprising that legislation is being amended without taking alternative action and without discussion and dialogue with the relevant parties/ stakeholders.

“If there was any 'abuse' by some religious bodies, then the Inland Revenue Board should have carried out an audit or even an investigation on the relevant body and curtail whatever alleged ‘abuse’ there was,” he said in an email.

Veerinderjeet said focusing only on creating new sources of tax revenue is not the way things should be done.

“In the case of religious institutions, one cannot look at the annual net income earned. One must look at the objectives of the body and as long as religious activities/ events are being carried out and there are plans to spend the excess income, we should leave these bodies alone as far as taxation is concerned,” he said.

He said the tax authorities' bid to subject religious bodies to tax on its income except for received contributions seems like an “act of desperation”, adding, “It is like scraping the bottom of the barrel in attempting to increase tax revenue collection.”

Veerinderjeet questioned the authorities' approach to other individuals who do not seem to be paying their fair share of income tax, expressing hope that action would be taken on corruption cases as the prospect of recovering a large amount of income tax would be high in those cases.

The amendment is part of a 72-page document on the Finance Bill 2016, which had sought to amend five different laws, including the Income Tax Act 1967 with 26 changes to it alone.

The change to paragraph 13(1)(b) of Schedule 6 of the Income Tax Act added on the requirement that the “contributions” received by religious bodies be meant solely for “charitable purposes” in order to qualify for tax exemption.

S. Saravana Kumar, who specialises in tax law, said that all income of religious bodies are presently fully-exempt from tax “as long as there is no profit motive”.

He confirmed this means no tax needs to be paid for the funds received regardless of whether it was for religious purposes, charitable purposes or for income-generating purposes.

With the amendment, tax exemption on religious organisations will only be limited to “contributions” received, which the tax lawyer said is not defined but would typically cover alms and donations.

“From 2017, they will have to pay tax on their income which is not from contributions. So rentals, profits from food fair, sale of books, sale of land in a JV venture etc will be taxable,” Saravana explained.

Compliance burden

Aruljothi Kanagaretnam, president of Chartered Tax Institute of Malaysia (CTIM), said that all income received by non-profit religious bodies are exempted from tax under the existing provision under the Act’s Para 13(1), Schedule 6 prior to its amendment, but said the exemption is confined only to “contributions” after the amendment.

“The law now appear to restrict the exemption of such institutions only to contributions for charitable purposes and will proceed to tax income generated from the activities of the institution or organisation which will include rental, interest from fixed deposits, the running of religious classes, religious ceremonies, fees for religious services, seminars, children’s classes, publications, sales of religious material and books, hall and premise rentals, training and all other activities.  

“Some of these receipts are generated from the activities of religious worship or the advancement of religion from tokens or charges that may be collected to defray the expenses,” he told Malay Mail Online in an email interview yesterday.

He said “clarifications may be necessary from the authorities” on whether or not tax would be imposed when a religious body’s received funds exceeds its expenditure.

He also said thousands of religious organisations will now have to familiarise themselves with what is exempt and what isn’t as the revision applies from the assessment year 2017.

“This creates a huge burden for such institutions and organisations, irrespective of its size and denomination to comply with annual submission of tax returns, retention of documents and payment of taxes under the self-assessment system and incurring additional expenditure to obtain professional expertise in addition to paying income tax.

“In addition, not all denominations obtain Government funding and assistance in equal measure,” Aruljothi said.

Building funds: Taxable or not?

As for charitable activities such as raising funds for buildings for worship, religious bodies can apply for approval to obtain charitable status under the Act’s Section 44(6), Aruljothi said.

He added that a successful application under Section 44(6) would result in the religious body’s income from the fund-raising being tax exempt under paragraph 13(1)(a) of the law’s Schedule 6, while individuals and companies would qualify for a tax deduction for the amount of cash contribution ― which would generally be limited to 7 per cent and 10 per cent of their aggregate income respectively.

“The charitable status for school buildings and house of worship is for a limited period only, usually for the relevant period for which the funds are raised from donors,” he said.

Veerinderjeet explained that religious bodies seeking to raise funds from individuals and companies to build a building will have to apply to the IRB under Section 44(6) for tax exemption on the building fund.

If the building fund is granted tax exempt status, the donation collected by religious bodies under it will not be taxable while donors will get a tax deduction against their own earnings, he said.

“This will not change after the recent amendment to Schedule 6,” he added.

Concerns had previously been raised by Sarawak political party United People’s Party on whether funds for religious bodies’ buildings would fall under the “charitable purposes” category, as such buildings often serve the dual purpose of being for “religious purposes” as well.

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