Tax Matters – Capital statements: investigating high net worth individuals

OUR Finance Minister has set himself an ambitious tax collection target of RM174 billion from direct and indirect taxes in budget 2021. This pales away when compared to collection expected in 2020 of RM152 billion.

In Budget 2021, there were no plans to increase the tax rate or to widen the scope of tax base. So how can the authorities achieve their tax collection target similar to the pre-pandemic level in 2019? The answer is: increased tax audits and investigation. This will not be confined to companies but will also involve high net worth individuals.

These are usually directors/shareholders in family controlled companies, directors/shareholders of medium and large companies, individuals with bank accounts/ funds located overseas, individuals who suddenly have the capacity to buy expensive/luxury assets, those with lavish lifestyles and large remittances in and out of Malaysia.

Another group of individuals who get picked up is when the companies they sit in as directors or shareholders are being investigated, the individuals also get roped in and are issued capital statements to tie up any undeclared dealings between the company and the directors/shareholders.

These individuals are now increasingly being requested to produce capital statements and justify the sources of funds to support their wealth.

What are capital statements?

A capital statement comprises two forms. Form CP 103 which requires the individual to state all their year-end balances of its assets and liabilities i.e. yearly balance sheet, and Form CP 102 which requires the taxpayer to state all his earnings and spending during the year (cash flow income and expenditure account).

Usually, taxpayers will be asked to prepare both statements for a minimum period of five years.

The general principle of capital statements is: Whether the income of the individual is able to substantiate the spending and growth in their net worth in the year. If it is insufficient, there is a possibility that there is income which was not reported to the tax authority.

From 2018, Malaysia has been exchanging bank account information with more than 100 countries including Singapore, Hong Kong, Australia, etc. With the advancement of information technology, future the exchange of information will cover even real estate and investment information. The net will widen in future years.

Headaches in preparing capital statements

The sheer amount of records needed to prepare a capital statement like bank statements, fixed deposit certificates, dividend vouchers, credit card statements, etc. Many of us do not keep these documents properly, and therefore may either take time to search for them or may omit them entirely. Without complete records, taxpayers will be at a disadvantage.

Memory loss is the biggest problem in preparing capital statements by taxpayers when recalling transactions that happened many years ago. It is important to dive into the details when going through records to identify their earnings and spending. For example, not all withdrawals from a bank account is spending. However, most taxpayers are unable to recollect such transactions and which will be detrimental as they cannot properly explain this to the tax authority.

What should you do?

Preparing annual capital statements is good discipline even though you are not being investigated. This will help you identify any potential risks and eliminate them. It is much easier to be prepared rather than being asked to explain some years down the line.

In most cases such preparation will also help you prepare the necessary defence when you have received monies that should not be taxable such capital gains, foreign source income, gifts, reimbursements, contra items etc.

This article was contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai.