Capital/net worth statements - a bane to directors and wealthy individuals

THE Inland Revenue Board (IRB) authorities are requesting for capital statements/net worth statements from directors of particularly family owned private companies, public listed companies controlled by families/small group of individuals, and those who have assets that far exceed the income declared or overseas assets which cannot be reconciled with the income generated in Malaysia.

Due to the historical nature of the capital statements/net worth statements, there will be difficulty in recollecting the movements of assets and liabilities and the sources of income and outflow of expenditure. In majority of the cases, the IRB will collect additional taxes.

This results in annoyance and anger amongst the diligent taxpayers who have been paying significant taxes end up having to pay additional taxes and penalties simply due to the fact that they do not have complete records going back for five years or more, or are unable to recollect past memories in detail.

Dealing with the issues

The starting point is to look at the macro picture of the taxpayer's lifestyle, spending habits, family background and inheritances, and the nature of the businesses associated with the taxpayer which will reveal how the wealth was generated.

The taxpayers must reconstruct the history of the movements of the assets and liabilities bearing in mind his income and expenditure flows. There will be many gaps in the initial stages of the taxpayer's defence.

Bank statements

Combing through the entries in the bank statements will reveal most of the income and expenditure, and movements of assets and liabilities. Unfortunately, the bank statement only provides you figures and do not give you sufficient description to understand the underlying nature of the transactions.

An example would be small gifts received in cash and deposited on a cumulative basis into the bank account will not reveal the name of the donor. Such gifts received over time can amount to significant amounts and if the taxpayer is unable to identify the donors, the IRB tends to bring it to income. Technically this is incorrect but due to lack of evidence, the IRB position can prevail.

Another problem: Any outflows or debits in the bank account can be misunderstood to be private expenditure where the monies withdrawn was reinvested in an asset. This can arise where there is a lack in the link between the bank account and the way in which the money flowed into the investments.

Director's accounts

This relates to monies owing from or to the company. Director's accounts are sometimes used to clear up unreconcilable balances, suspense accounts or unexplained inter-company accounts in the course of cleaning up the company's accounts.

Any increases or decreases in the director's account will have an impact on the capital statement as it increases or decreases your net worth. Unexplained movements in the director's accounts are always a problem that needs to be resolved through scrutinising records, questioning and recollecting the memory of the directors or the company officials who initiated the entries.

A word of caution to directors: Watch what goes into the director's account.

Fixed deposits

Fixed deposits create headaches because they're frequently reinvested in order to maximise the returns. The difficulty is identifying the interest and principal components and tracking the fixed deposit movements into other investments. Usually the banks will not be able to provide the full movements of your fixed deposits over the years, which will lead to gaps.

Other issues

There are other areas which will give rise to difficulties and they include the movement of mutual funds, properties, loans (hire purchase, conventional and Islamic loans have different treatments), reimbursements, inheritances, capital gains, windfall gains, etc. Each one needs to be scrutinised and the capital statement/net worth statement should reconnect the different components to show the full picture of the individual's growth in wealth over the years.


Capital statements/net worth statements need not give rise to additional taxes, if they are prepared properly.

SM Thanneermalai is managing director of Thannees Tax Consulting Services Sdn Bhd and chairman of Malaysian Tax Research Foundation.