Understanding capital statements: An overview and importance in recent times

Tax Investigation

With such complex and intricating routes, one of the crucial tools in ensuring tax compliance is tax investigation. A tax investigation is a thorough examination conducted by the IRBM to ensure that individuals accurately report their income and comply with tax laws and regulations. The primary objective is to detect and prevent tax evasion and fraud. This investigation can be triggered by various factors, including discrepancies in tax returns, random selections, industry-based investigations or information received from third parties.

One primary set off is inconsistency of income with assets owned. This includes inconsistencies with lifestyle, spending patterns and unexplainable surprise wealth. The IRBM with its special powers conferred under Section 78, 79, 80 and 81 of the Income Tax Act 1967 allows full access to any individual’s properties and personal records at any point of time and being able to obtain information from businesses and financial institutions that individuals transacted with, regardless of the level of confidentiality. Such accessibility allows the IRBM to assess the individual’s assets and identify the income capacity required to maintain such lifestyle. Such assessment could correspondently uncover discrepancies which then leads to the identification of taxes evaded by an individual.

Capital Statement

This is where a capital statement emerges in investigating high-net-worth individuals. This approach provides a detailed and comprehensive overview of an individual's financial position over a specific period. It demonstrates a transparent record of assets, liabilities, income and expenditures. This statement typically includes detailed information about capital gains and other transactions that affect the capital aspect of taxation. This meticulous document covers all aspects of financial activities which the IRBM eagerly examines to reveal any underreported or hidden assets that may not be apparent through the individual’s standard tax filing.

A capital statement comprises of two (2) forms:

The detailed components of the capital statement is as follows:

1. Assets: Includes cash in hand, bank balances, investments, properties, vehicles, jewelleries, and other valuable possessions.
2. Liabilities: Covers property loans, hire purchase loans, credit card debts and other financial obligations.
3. Income: Ranges from employment, director’s fees, businesses, rentals, dividends, interests and other sources of income.
4. Expenditures: Comprises lifestyle, children education, travelling and significant purchases.

Therefore, a capital statement allows the IRBM to trace the flow of capital assets, identify the legitimacy of financial activities and recognize any discrepancies that may require further investigation. Hence, maintaining a detailed and accurate capital statement is essential for individuals to support their tax filings and demonstrate transparency in their financial dealings. In the event of a tax investigation, having well-documented capital statements (thorough records of capital transactions, investments and other financial activities) can help streamline the process of providing evidence of compliance, navigate the tax investigation effectively and mitigate potential risks or penalties associated with inaccuracies or inconsistencies in tax reporting.

Conclusion

Our constantly evolving world with the outreach of Artificial intelligence (AI) into the day-to-day operations and lives of individuals are increasing significantly. Earlier this year, we hear the IRBM exploring implementation of AI-assisted asset tracking and identifying technology to enhance the process of examining assets declaration to promptly probe individuals with undeclared, hidden or camouflaged assets and wealth or potentially those intentionally evading taxes. This brings the IRBM direct access to real-time data. With the already-in-use big data analytics and sophisticated information exchange mechanisms by the IRBM, the move to AI in tax administration will lead to the most transparent level of information being available. On that account, maintaining detailed and accurate financial records and diligence in tax affairs is not only a legal obligation but also a safeguard against potential disputes with the IRBM. As future professionals and informed citizens, understanding these processes empowers us to contribute to a transparent and equitable economic system.

This article was originally published on 24 July 2024.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Pugaleshwaran Rajakumaran is a tax consultant and licensed tax agent who has a wide range of experience in Malaysian taxation. He is a passionate writer who actively writes on the development of Malaysian taxation scene.