Updated: Aug 6, 2022
The Universal Rule
As a general rule, the law does not acknowledge a motive as being charitable unless it is of a public nature.
In other words, to be considered charitable, it must be directed toward the betterment of the community as a whole or a part of the community and not toward improving a specific individual or group of individuals.
For the income tax, a charitable institution must be created in Malaysia and regulated by the laws in force here.
The income of:
an institution or organisation that has been approved for Section 44(6) for as long as the approval continues to be in force.; or
a religious institution or organisation that is not operated or conducted primarily for profit and which is established in Malaysia exclusively for religious worship or the advancement of religion; or
will not be subject to taxation.
The Income Tax (Exemption) Order 2017 [P.U.(A) 52/2017] exempts a religious institution or organisation registered with the Registrar of Societies Malaysia or under any written law governing such a religious institution or organisation from the payment of income tax in respect of its gross income from all sources with effect from the year of assessment 2017 (YA 2017).
This exemption applies to a religious institution or organisation registered with the Registrar of Societies Malaysia or under any written law governing such religious institution or organisation.
The religious organisation or institution doesn't need to submit a request for an exemption from the DGIR under P.U. (A) 52/2017.
Income Tax (Exemption) Order 2020 [P.U (A) 139/2020]
On 4 May 2020, the Minister, in the exercise of the powers conferred by paragraph 127(3)(b) of the Income Tax Act 1967 [Act 53], gazetted the Income Tax (Exemption) Order 2020 [P.U (A) 139/2020].
The Minister exempts a religious institution or organisation in the basis period for a year of assessment from the payment of tax in respect of gross income derived from all sources for a period determined and subject to all the conditions imposed by the Minister.
This Order shall have effect from the year of assessment 2020.
Under this Order:
The exemption will be extended to religious institutions or organisations registered as Companies Limited by Guarantee with the SSM.
Application for exemption shall be made to the Director General on or after 1 January 2020.
The religious institution or organisation must comply with any requirement to submit any return or statement of accounts or to furnish any other information under the Act.
Following the above, the Inland Revenue Board (IRB) has published on its website technical guidelines dated 25 March 2021, in Bahasa Malaysia, titled “Garis Panduan Berhubung Permohonan Pengecualian Cukai Pendapatan Kepada Institusi Atau Organisasi Keagamaan Yang Layak Di Bawah Perintah Cukai Pendapatan (Pengecualian) 2020 [P.U.(A) 139/2020]”.
The guidelines were published to explain the meaning of a religious institution or organisation within the Exemption Order context and the application procedure for the income tax exemption that was previously specified. The following paragraphs are included in the guideline:
Eligible religious institutions or organisations
The criteria and conditions to be eligible
The application procedure
Consequences of a breach of conditions
The approval period and application for extension
Conditions to be adhered to during the approval period
If a charitable organisation also operates a for-profit business, the money made from these endeavours will only be exempt from taxation if:
The for-profit business is merely ancillary to the organisation's primary mission of providing charitable services; or
The work in connection with the trade or business is mainly carried on by persons for whose benefit such an institution is established.
An excellent illustration of this may be seen in the many different types of handicraft activities that members of the Malaysian Association for the Blind participate.