WHAT IS A CAPITAL STATEMENT?
A capital statement, also known as “Penyata Modal” in Bahasa Malaysia, is a tool used by the Inland Revenue Board (“IRB”) in Malaysia to detect tax under-reported by an individual. The capital statement comprises two forms:
- CP102 – Statement of personal and private expenses, income and earnings
- CP103 – Year end balances of assets and liabilities of an individual
Usually, individuals are required to prepare the above for a period of 5 years, including the “base year” – the opening balance of an individual’s assets and liabilities.
Who Is Targeted For Capital Statements?
- High net-worth individuals
- Directors, shareholders, CEO, CFO, etc. of companies being investigated
- Individuals with sudden increase of spending – purchasing expensive assets (land or properties, expensive motor vehicles, etc.) or luxury items, large sum of investments made
- Individuals who are seen to live a lavish lifestyle
- Individuals with overseas bank accounts with large funds transferring in or out of Malaysia
- Information provided to the IRB through whistle-blowers
How Does A Capital Statement Work?
The mechanism behind a capital statement is that your income or earnings should either be spent, or saved. Your reported income or other sources of income (eg: capital gains) should be able to substantiate your spending habits and support your growth in your net worth.
For example, you reported an income of RM100,000 during the year. In the same year, you:
- bought a motor vehicle in cash of RM50,000
- spent RM10,000 on food and other expenses
- placed RM20,000 in a fixed deposit account
- bought a branded bag for RM10,000
Year 1
| Details | Amount (RM), Year 1 |
Assets Motor Vehicle Fixed deposit Branded bag Savings account |
50,000 20,000 10,000 10,000 |
| Net capital | 90,000 |
| Less: Opening balance | – |
| Net increase in assets | 90,000 |
| Add: Expenses (food etc.) | 10,000 |
| Apparent income | 100,000 |
| Less: Reported income | (100,000) |
| Total discrepancies | – |
In a perfect scenario, there should be no discrepancies as shown above – all spending or savings has been appropriately disclosed and income has been fully disclosed and reported.
Your reported income of RM100,000 is enough to substantiate the net increase of assets of RM90,000 and expenses of RM10,000.
Let us have a look at another scenario.
In the following year (Year 2), your reported income remains the same at RM100,000. In Year 2, you:
- purchased a property of RM200,000, financed by loan of RM150,000 (assuming whole amount drawn down in the same year)
- spent RM15,000 on food and other expenses
- made another placement of RM30,000 to fixed deposit, assuming received fixed deposit interest of RM1,000 in the year
- assuming savings account has a balance of RM50,000 at the end of Year 2
Year 2
| Details | Amount (RM), Year 1 | Amount (RM), Year 2 |
Assets Property Motor Vehicle Fixed deposit Branded bag Savings account |
– 50,000 20,000 10,000 10,000 |
200,000 50,000 50,000 10,000 50,000 |
| Less: Liabilities (Loan) | – | (150,000) |
| Net capital | 90,000 | 210,000 |
| Less: Opening balance | – | (90,000) |
| Net increase in assets | 90,000 | 120,000 |
| Add: Expenses (food etc) | 10,000 | 15,000 |
| Apparent income | 100,000 | 135,000 |
Less: Fixed deposit income Reported income |
– (100,000) |
(1,000) (100,000) |
| Total discrepancies | – | 34,000 |
Based on this scenario, your apparent income is RM135,000 but it can only be proved by the reported income of RM100,000 and fixed deposit interest of RM1,000. There is a shortfall of RM34,000. Your total income is insufficient to prove the net increase in assets of RM120,000 and expenses of RM15,000.
How did you obtain the extra cash of RM34,000? Have all income or gains been appropriately disclosed in the capital statement?
From the illustrations above, this is an example of how the IRB estimates your income by analysing your net worth and spending, eventually determining if there is indeed an under-statement of tax reported.
How To Prepare A Capital Statement?
A capital statement is prepared based on cash basis instead of the usual accounting accruals concept. The methodology is to understand the flow of cash of an individual.
The concept of a capital statement may seem simple. However in reality, preparing a capital statement is a very tedious and complex exercise. A capital statement specialist deals with voluminous data, tracing and verifying transactions, including exercising professional judgement on the treatment of the transactions (as circumstances varies between individuals).
Due to the complexity and its specialised nature, many would engage a professional to prepare the capital statement and to represent them in negotiations with the IRB.
What To Include In A Capital Statement?
Below is a non-exhaustive summary and examples of items to be included in the capital statement.
Please note that individuals are required to include in the capital statement the assets, liabilities, income and expenses of their spouse(s) as well. Below is the list of items – of the individual and spouse(s) and its examples.
1) Businesses and partnerships
- Capital injected
- Balance of current accounts
- Profit or loss
2) Land and properties
- All properties acquired and owned by the individual under investigation, spouse(s), including properties jointly owned; or
- Any land/properties acquired, or amount paid by the individual for immediate family members, third parties etc.
3) Shares and other investments
- Quoted shares
- Unquoted shares
- Trust accounts etc.
4) Cash and bank
- Savings accounts
- Current accounts
- Investment linked accounts
- Fixed deposits
- Cash in safe deposits etc.
5) Furniture and appliances
- Furniture or appliances for long term personal use (eg: fitness machines, laptops, handphones, computers, PDA, televisions etc.)
6) Motor vehicles
- Motor vehicles acquired and registered under the name of the individual under investigation and spouse(s)’s;
- Motor vehicles purchased by the individual for immediate family members, third parties etc.
7) Jewelleries and valuables
- Branded bags
- Jewelleries
- Antiques
- Watches etc.
8) Liabilities
- Term loans
- Hire Purchase
- Personal loans
- Advances obtained from private limited companies
- Credit cards
- Amount owing to individuals etc.
9) Other assets
- Loans to other individuals
- Loans or advances to private limited companies
10) Capital gains/losses (from disposal of:)
- quoted and unquoted shares
- land/properties
- motor vehicles
11) Personal & private expenses
- As per the list of expenses in CP102
12) Income
- Employment income
- Dividends received
- Commissions received
- Contract income received
- Rental income
- Income from fixed deposits or current account
- Repatriation of funds from outside Malaysia to Malaysia
- Windfall
- Funds inherited
What Are The Issues Faced In Preparing A Capital Statement?
Most often than not, the main issue faced by many is the ability to produce supporting documents or information to support transactions transacted years ago. Unlike companies or businesses, individuals are less likely to keep proper documents on their personal transactions.
Upon issuing the CP102 and CP103, usually taxpayers are given 30 days by the IRB to prepare the capital statement. Extension of time may be applied, based on the discretion of the IRB.
Due to time constraints, many taxpayers had struggled to search for documents and recalling transactions that was made years ago. This may place the taxpayer at a disadvantage.
Without proper documents, taxpayers are unable to provide justifications or a basis to disagree with the IRB’s adjustments, if any.
Is Preparing A Capital Statement Compulsory? Do I Need To Prepare A Capital Statement?
Currently preparing a capital statement is not compulsory. However, it is a good practice to prepare the capital statement annually.
Preparing a capital statement will help you identify potential risks and eliminate them. With this practice, documents and the necessary information would have been kept properly and recorded. This would smooth and ease the process in the event of an investigation.
Asides from the above, you will be able to keep good track of your personal financial affairs as well as being able to determine an estimate of your net worth.
What Should I Do If I Receive A CP102 And CP103 From IRB/LHDN?
Contact your tax agent immediately. If your tax agent is unable to assist you, please contact us.
