CP500 has been in place for many years and it is not a new initiative by the Inland Revenue Board (IRB). In the past, individual taxpayers with income other than from employment – such as rental, royalty and interest – have been issued with the CP500.
Effectively, the CP500 is equivalent to the Monthly Tax Deduction (MTD) that is applied to individuals with employment income. The CP500 mechanism and the monthly deduction mechanism are intended to collect the relevant tax in advance during the year in which you earn the income.
The money collected under MTD and CP500 is an advance tax which will automatically set off the actual tax payable upon the filing of the tax return in the following year. For example, an employee’s income for the year ended Dec 31, 2025 will be filed by May 15, 2026 and the tax collected during 2025 under MTD or CP500 will be set off against the final tax liability. The benefit of both mechanisms is to lessen the burden on taxpayers when they finally file their tax return in the following year.
Why are individual taxpayers raising concerns now?
In the past, taxpayers who received the CP500 were generally individuals who did not earn employment income. CP500 received recently came as a surprise to many individuals taxpayers who were earning both employment income and other income such as rental, interest, etc. This group did not receive the CP500 previously.
The other reason for employees receiving CP500 was due to incorrect reporting of their income in their tax return. The error would have arisen, for example, if allowances, bonuses and other payments received by the employees were not included under the employment category when filling the Form BE in the previous year. Since the declaration was incorrect, it is likely that the computer system would have picked up all the income from the previous year as other income and automatically produced a CP500.
Corrective action
In the event employment income such as bonus payment has been incorrectly declared, the taxpayer should take immediate action to rectify by either completing Form CP502 or writing in to the IRB to inform it of the error and request the IRB to amend the CP500.
The IRB has also quickly responded and made it clear in its media statement that it will proactively contact the taxpayers to clarify the reporting errors and correct the situation.
The penalty waiver and the one-year grace period
The government has announced a one-year penalty waiver for taxpayers to ease the transition of taxpayers into the CP500 regime. Effectively, if the individual taxpayer is unable to settle the bimonthly obligation under the CP500 regime, there will be no penalty, and the taxpayer must pay the outstanding tax liability when submitting the tax return in the subsequent year.
There is a false rumour that this information was obtained from the information received for e-invoicing purposes. The source of the information for the CP500 is solely obtained from the individual’s previous year’s tax return.
Be prepared to pay your taxes in advance
Now that you have been given a one-year grace period, it is advisable to organise your cash flow for future years to settle the CP500 payment. Paying taxes in advance by individuals or corporate is not unique to Malaysia. Most countries in the world collect their taxes on a current year basis as the income is earned.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
