The Inland Revenue Board of Malaysia ("LHDN") issued Public Ruling No. 2/2019 on 14 March 2019, clarifying the personal liabilities of company directors under the Income Tax Act ("ITA") law of 1967, as amended. It is crucial that a director understands their responsibilities under the ITA and the Real Property Gains Tax Act ("RPGTA").
Who is deemed to be a liable director?
Under the ITA, the following persons can be defined as a director:
- if a person has the title of director, then he is a director under the ITA, notwithstanding whether he performs any of the functions of a director;
- if a person has the powers of a director, whether he is titled as a director or not, then he will be treated as a director for income tax purposes;
- if a person does not hold the title of director, but is involved in the management of the company's business, is paid by the company and, either on his own or in concert with an associate(s) or through holdings in a related company, holds at least 20% of the ordinary share capital of the company, then he will be treated as a director under the ITA.
Indirect shareholdings would include shares held by family members, any living forebears and descendants plus siblings, unmarried partners, shares held through a trust, an inheritance or through another company that holds shares in the business would contribute to be included as a part of the director's holdings. It is important for any person holding shares in a company and having a position that influences the management of that company to be fully aware of other associated holdings that could make them a director under the ITA and therefore liable for the company's debts under the ITA and RPGTA. Care should be exercised over holdings in a trust where the individual may be unaware of the investments made by that trust. There is no distinction between ordinary directors, service directors or independent directors under the ITA and RPGT Act.
Relevant dates of directorship
For a director to be liable for unpaid corporation tax, they must have been a director at the time that the tax was due and payable OR a notice of assessment is served or is deemed to have been served. However, simply resigning before the assessment date and being reappointed afterwards would not be allowed as a means of avoiding liability.
As monthly tax deduction (MTD) is taken from employees and paid monthly, a director is liable for any MTD debts that fall due throughout the period of their directorship, normally from when the deductions are made until the date they are legally required to be paid to the LHDN.
What liabilities does a director have under the ITA?
Directors under the ITA are liable for any unpaid payments due from the company relating to income tax or monies deducted from employees under the MTD, including pensions. The LHDN may issue demands for payment both to the company and its directors. Amounts overdue are considered to be joint and several between the company and the directors, so the LHDN may pursue the entire amount due from only one of the directors if neither the company or the other directors are able to pay, so a director is not just liable for a percentage of the amount overdue based on their shareholding but potentially for the whole amount.
What happens if a director fails to pay the amounts due?
Failure by the company and the directors to settle outstanding debts under section 75A of the ITA by the due date, can result in the LHDN taking recovery actions. This can include preventing the director from leaving Malaysia through the issuance of a Certificate of Stoppage Order, which will claim full payment of outstanding debts plus a penalty for late payment. The director can only have the Stoppage Order rescinded by settling the full amounts of the debt due.
The LHDN may also issue a civil suit against the company and its directors, which will involve the directors in further legal costs and could lead to fines or imprisonment as the court may decide.
Directors liability is a serious issue and exposes them to significant risk if they do not monitor how tax issues and payments are handled by the company. In addition to the personal financial risk, their reputation and personal liberty is at risk, so proper management and scrutiny is vital.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.