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Advance payments and Deposits received for service to be rendered Subject to gross income?
Understanding for gross income
Gross income includes, but is not limited to:
Under Malaysian tax principles, advance payments and deposits received for services to be rendered are generally treated as gross income in the year they are received, even if the services have not yet been performed. This follows the “receipts basis” of taxation under the Income Tax Act 1967, which deems any amount received during business as gross income once it becomes receivable or is received.
Accordingly, advance payments or deposits for future services must be recognised as income in that year, unless they can be clearly demonstrated to be refundable or held in trust, with no right of use by the business until the service is delivered. Maintaining clear documentation and proper revenue recognition policies is essential to ensure accurate tax reporting and compliance with Inland Revenue Board (IRB) requirements.
Guidelines from LHDN
Following the amendment outlined in Public Ruling No. 04/2020, significant changes were introduced to the tax treatment of prepayments and amounts received in advance. Previously, under Paragraph 24(1)(b) of the Income Tax Act 1967 (ITA), income was recognised only when a debt was owed to the taxpayer. However, with the introduction of Subsection 24(1A), any sum received while carrying on a business is now deemed gross income in the period it is received, regardless of whether a debt exists. This means that even if the obligation to provide services has not yet arisen—such as when services are scheduled for a future date—the advance payment is still taxable in the year of receipt. This change represents a clear shift from the former “debt owing” basis to a receipts-based recognition approach.
Services that are not subject to Paragraph 24(1)(b) and Subsection 24 (1A) of ITA
Business activities related to services provided under property development and construction contracts are subject to a distinct tax treatment governed by specific provisions of the Income Tax Act 1967. These activities are typically assessed under separate rules that reflect the long-term and progressive nature of such contracts. Furthermore, income derived under Section 4A of the ITA, particularly when related to services provided by non-resident persons, falls under the purview of Public Ruling No. 10/2019, which outlines the withholding tax obligations on special classes of income. In addition, when deposits are received by a service provider upon the signing of an agreement, they may be considered refundable, provided that the service is completed according to the agreed terms. However, if the service is not rendered due to a breach of the agreement’s conditions, and the deposit becomes forfeitable, such forfeited amounts are not refundable and may be treated as income to the service provider.
