Shareholders dividend under the single tier tax system (STS)

Malaysia has introduced single tier tax system (STS) in Budget 2008 to replace the existing imputation tax system with effect from year of assessment 2008. This has brought major impact to the treatment of dividend paid to the shareholders.

You might have noticed that some of the companies already giving out dividends under the new STS, although they have a 6 year transitional grace period until 31 December 2013 to fully convert from imputation to STS.

Under this STS, corporate income is taxed at corporate level and is a final tax. No tax is being deducted from dividend paid, credited or distributed to shareholders. As a result, there will be no Section 110 tax credits deduction for any dividend paid under STS to individual tax payers.

While this has negative impact to lower income individual shareholders whose top income tax bracket is less than the statutory company tax rate, as they no longer eligible to claim for a Section 110 tax credits refund under the new STS, there are several benefits of moving forward from imputation tax system to single tier tax system:

• The company is able to reduce administration cost as there is no need to maintain Section 108 balances anymore.
• Individual tax payer no need to bother about dividend income and Section 110 declaration for dividends received under STS.
• High income bracket individuals need not pay tax on the differential between his marginal tax rate and the company tax rate.
• Companies with capital gains and non taxable accounting profits are able to declare dividends without any constraint. This might bring higher dividend yields to shareholders.
• Companies with huge Section 108 balances may pay special dividends during the transitional period.

Meanwhile, if you still receive dividend warrant that shows a gross dividend amount, tax deducted from the dividend and net dividend paid out, it means that the company has opted to continue using its section 108 tax credits balance to pay franked dividends to shareholders under the transitional period before 2014. And the normal procedure of declaring gross dividend income and deducting back the Section 110 tax credits in your income tax assessment BE/B Form still applicable.