Approved Tax Exempt Organisations and Malaysian Tax

Give and you shall receive! While the primary reason for most individuals or companies when making a donation is to give back to the society that has provided them with ample fortune, it is worthy to note that the giver may enjoy tax benefits if the donations were made to tax exempt organisations in Malaysia. Currently, taxable individuals and companies that contribute to tax exempt organisations are entitled to a tax relief of 7% and 10% respectively on the aggregate income.  It is therefore beneficial for an organisation to understand the criteria for qualifying as a tax exempt organisation under the provisions of the Income Tax Act, 1967 so that the organisation receives tax free income (except dividend income) and the giver in turn enjoys tax relief on the donation, ie, a win-win situation for both the organisation and the giver.

Generally, organisations that qualify as tax exempt bodies must benefit the public at large and this include organisations that are set for relief of poverty, medical/ educational advancement, protection of animals, promotion of unity etc.

Organisations must demonstrate that it is not set up primarily for profits.  The organisations may carry on business activities with a view of using the proceeds for the intended purpose it was set up.  However, the tax exempt organisation must ensure that at least 50% or 70% (as agreed by the Inland Revenue Board) of its preceding year income is used for the approved cause.  In such a case, business income and contributions received will be tax free.

Once an organization is approved as a tax exempt body under Section 44(6) of the Income Tax Act, 1967, the organization will need to comply with certain tax administration procedures.  But the little additional administrative responsibility definitely is worthwhile in terms of the tax benefits that are derived and of course, the primary purpose of the noble intentions of setting up the charitable organisation in the first place!