Why LHDN Audits Companies: 8 Warning Signs Every Malaysian Business Must Know

 

Receiving a tax audit notice from LHDN (Lembaga Hasil Dalam Negeri Malaysia) is one of the most stressful events a business owner can face. An audit means months of gathering documents, answering detailed questions, and potentially facing extra tax assessments and penalties.

But here is what most business owners miss: LHDN does not select companies for audit by chance. They look for specific patterns. There are clear risk indicators that consistently draw their attention. Understanding these signs is your first line of defence.

Based on insights from recent tax audit and investigation guidelines, this guide sets out the eight red flags LHDN uses to identify audit candidates. This includes a major development for 2025 and 2026: real-time transaction monitoring through e-Invoice.

Red Flag 1: Unusual Expense Claims

The statutory test for a deductible business expense under Section 33 of the Income Tax Act 1967 is that it must be 'wholly and exclusively incurred in the production of income.' LHDN scrutinises claims that fail this test. Inflated deductions, personal expenses routed through the company, or directors' entertainment costs without clear business justification will trigger questions. If a private element exists, LHDN may disallow the claim and treat the amount as undeclared income.

Red Flag 2: Abnormal Margins or Persistent Losses

LHDN compares your company against industry data. Margins significantly below sector norms, or year-on-year losses without a credible explanation, will attract attention. If related parties are involved, this may point to a transfer pricing issue where profits are shifted to a related entity at non-arm's length prices. Companies with cross-border related-party transactions must maintain contemporaneous transfer pricing documentation under s.140A ITA 1967 and the Transfer Pricing Rules 2012.

Red Flag 3: Significant Related Party Transactions

Management fees, royalty arrangements, and intercompany loans are assessed for commercial substance and arm's length compliance. LHDN will question whether management fees paid to a holding company have genuine substance, whether royalty amounts are commercially justified, and whether intercompany loans carry market-rate interest.

Red Flag 4: Data Inconsistency Across Government Agencies

LHDN cross-references data from SSM (company filings), RMCD (SST returns), and from YA 2025 onwards, MITRS financial statement submissions. The revenue you declare in your SST return to Customs must reconcile to your Form C submitted to LHDN. Any discrepancy — even a legitimate one — will trigger a query. You should reconcile SST output figures to audited revenue before filing Form C, and document any legitimate differences.

Red Flag 4A: e-Invoice — Real-Time Monitoring (The Game Changer)

This is the most significant shift in LHDN's audit capability. Under the MyInvois framework, e-Invoices issued and received are validated and stored on LHDN's platform in real time. LHDN can track your monthly revenue as it happens, cross-match supplier and buyer records automatically, and compare your declared figures against transaction-level data it already holds.

The era of year-end adjustments is effectively over. Your annual return must reconcile to e-Invoice data. The mandatory timeline is rolling out in phases:

• August 2024: Turnover > RM100 million

• January 2025: Turnover > RM25M to RM100M

• July 2025: Turnover > RM5M to RM25M

• January 2026: Turnover up to RM5M

 

Note: Businesses with turnover below RM1,000,000 are exempted from e-Invoice implementation.

Red Flag 5: Director and Shareholder Transactions

Shareholder loans, excessive directors' remuneration, and personal expenses claimed through the company are examined closely. Asset transfers between directors and the company may also trigger RPGT or stamp duty questions. You must verify that directors' remuneration disclosed in the audited accounts is consistent with Form EA and Form C.

Red Flag 6: Significant Revenue or Profit Fluctuations

Sharp changes in revenue or profit that do not match the economic environment draw LHDN's scrutiny. A 40% revenue drop in a stable year, or a sudden profit surge when input costs rose, will raise questions. Maintain contemporaneous records like board minutes, management accounts, and key correspondence. The explanation must exist before the audit, not be constructed after.

Red Flag 7: Cash-Intensive Businesses

Restaurants, retailers, and construction companies handling large cash volumes face higher inherent risk. LHDN applies indirect income estimation methods, comparing declared revenue against electricity consumption, premises size, headcount, or lifestyle indicators. With e-Invoice now rolling out, LHDN will also compare declared cash revenue against e-Invoice-verified purchase volumes. Implement a POS system, maintain complete cash records, and ensure all sub-contractor payments in construction are supported by agreements and receipts.

Your Tax Audit Risk Checklist — Ask Yourself Right Now

1. Are all expense claims supported by invoices and a clear business purpose?
2. Can I explain why margins are low or why the company reported a loss?
3. Is transfer pricing documentation in place for cross-border related-party transactions?
4. Do SST output figures reconcile to audited revenue?
5. Are directors' remuneration disclosures consistent with Form EA and Form C?
6. Is there documentation explaining significant revenue or profit changes?
7. Are cash transaction records complete and systematic?
8. Does the business comply with the e-Invoice mandate, and do accounts reconcile to MyInvois data?

Need Help with Your Tax Audit Risk?

KS Chia & Associates provides tax compliance review, transfer pricing documentation assistance, e-Invoice compliance review, and annual tax compliance for Malaysian businesses.

WhatsApp us: 011-2366 5233

This article is prepared for general information purposes. It does not constitute legal or tax advice for specific circumstances. Readers are encouraged to seek professional advice for their individual situations.

Form B YA 2025: What Changed and How It Affects Malaysian Taxpayers

 

The Inland Revenue Board of Malaysia (LHDN) has introduced significant changes to Form B for Year of Assessment 2025. These are not minor tweaks — they change how your tax is computed, what reliefs you can claim, and how the form itself is structured.

We've gone through the YA 2025 form, compared it against YA 2024, and reviewed the Explanatory Notes. Here's a clear breakdown of what changed and what it means for you.

1. New 2% Dividend Tax (Item B8 — New)

This is the biggest change. Malaysia now taxes dividend income for individual taxpayers.

How it works:

📢 New 2% Dividend Tax in Malaysia: What You Need to Know!

Starting from the Year of Assessment 2025, a new 2% tax will apply to individual dividend income exceeding RM100,000 per year. This applies to both listed and unlisted Malaysian shares. 📈

The key facts:

✅ Only the portion of dividends exceeding RM100,000 is subject to this tax.

✅ It is calculated based on a specific formula relative to your total taxable income.

✅ Exemptions: Good news! Dividends from EPF (KWSP), ASNB, LTAT, and foreign sources are

NOT included in this tax. 💰

• A new item B8 has been added specifically for statutory dividend income.

Who is affected:

• Business owners holding shares in private companies

• Directors receiving dividend payments

• Shareholders of listed companies

• Joint assessment cases where a spouse earns dividend income

For joint assessment, there are two new items — B22a (spouse's statutory dividend income) and B22b (spouse's aggregate income). These must be filled in correctly.

What you should do:

If your dividend income in 2025 may exceed RM100,000, let us know early. We'll help you plan the computation and avoid errors.

2. New First Home Tax Relief (Item H22 — New)

YA 2025 introduces a new tax relief for individuals buying their first residential property.

Conditions:

•The Sale & Purchase Agreement must be signed between 1 January 2025 and 31 December 2027.

•The property must be your first residential property.

•It must be owner-occupied — you cannot rent it out.

•Limited to one unit only.

Relief amounts:

Property Price	Annual Relief Limit	Max Over 3 Years
≤ RM500,000	RM7,000 per year	RM21,000
RM500,001 – RM750,000	RM5,000 per year	RM15,000

The relief applies for 3 consecutive years starting from the year you first pay interest on the loan. You cannot choose which years to claim — it starts automatically from the first year of interest payment.

What you should do:

If you're buying your first home in 2025–2027, keep all loan documents and interest statements. Tell us about the purchase so we can include this relief in your filing.

3. Higher Personal Tax Reliefs

Several existing reliefs have been increased for YA 2025:

Relief Item	YA 2024	YA 2025	Increase
Disabled individual (H4)	RM6,000	RM7,000	+RM1,000
Disabled spouse (H15)	RM5,000	RM6,000	+RM1,000
Disabled child max (H16c)	RM14,000	RM16,000	+RM2,000
Education & medical insurance (H19)	RM3,000	RM4,000	+RM1,000

These are straightforward increases. If you or your family members qualify, you get a bigger deduction this year.

[Insert Image 3: Relief Changes Table]

4. Expanded Medical and Lifestyle Reliefs

YA 2025 broadens the scope of several reliefs:

Parents' and grandparents' expenses (H2): Previously limited to parents only. Now covers grandparents too — medical treatment, dental treatment, special needs, and carer expenses up to RM8,000.

Medical examination (H7): Previously covered medical exams only. Now includes fees for disease detection tests such as blood tests, ultrasound, mammogram, and pap smear — including screening for COVID-19 and influenza.

Self-testing devices (H7ii): Previously limited to COVID-19 test kits. Now covers any self-testing medical device registered under the Medical Device Act 2012 — pulse oximeters, blood pressure monitors, thermometers, and more. Cannot be used for business purposes.

Lifestyle additional relief (H10): Previously for self, spouse, and child. Now includes parents (must be resident in Malaysia). Covers sports equipment, gym membership, sports facility rental, and competition fees.

Food waste composting machine (H21ii — New): A new relief for purchasing a food waste composting machine for household use. Allowed once every 3 years, within the RM2,500 combined limit with EV charging facility relief.

5. Form B Structure Has Changed

This is a compliance risk area. The form has been reorganised:

Section	YA 2024	YA 2025
Chargeable income	Part B (single flow)	Part BA (split computation)
Tax computation	One computation	Part BB (dual: 2% dividend + normal rates)
Tax payable	In Part B	Part BC (separate section)

The new structure means dividend income goes through a separate tax computation path. If you get the mapping wrong between B25, B26, B27, and B28, your tax will be misstated.

If you are preparing your computations using spreadsheets before e-Filing, you face higher risk of errors. Double-check the flow carefully.

6. Who Is Most Affected?

High impact:

• Individuals with dividend income above RM100,000

• Business owners holding private company shares

• Joint assessments involving a dividend-earning spouse

• First-time home buyers (2025–2027)

Medium impact:

• Taxpayers claiming multiple lifestyle or medical reliefs

• Families supporting parents or grandparents

• Disabled taxpayers or families with disabled children

7. Common Errors to Watch Out For

Based on the changes, we expect these common filing errors in YA 2025:

1. Omitting B22a / B22b in joint assessment cases

2. Treating dividend income as normal income instead of using the separate computation

3. Claiming H22 (first home relief) when the property is rented out or is not the first property

4. Claiming self-testing devices that are used for business purposes

5. Over-claiming H7 beyond the RM1,000 cap

6. Misunderstanding the EPF / insurance relief split after the restructuring

What Should You Do Now?

1.Check your dividend income. If it may exceed RM100,000, plan for the 2% tax.

2.Buying your first home? Keep all S&P documents and loan interest statements.

3.Update your relief claims. Take advantage of the higher limits and expanded scope.

4.Prepare documents early. All records must be kept for 7 years.

5.Talk to us. The new form structure is more complex. Let us handle the computation so you don't make costly mistakes.

Filing deadline:

• Statutory deadline: 30 June 2026

• e-Filing (e-B) deadline: 15 July 2026 (includes 15 days grace period)

(Note: Manual filing is no longer permitted for Form B from YA 2024 onwards. All submissions must be done via e-Filing.)

Late filing: Penalty under subsection 112(3) of the Income Tax Act 1967.

Late payment: 10% increase under subsection 103(3).

Need Help?

We're here to assist. Whether you need clarification on the new dividend tax, want to check if you qualify for the first home relief, or just want us to review your YA 2025 tax position — reach out.

KS Chia & Associates (AF 001828)

Chartered Accountants

WhatsApp us: 011 2366 5233