In March 2025, the Inland Revenue Board of Malaysia (IRBM) released Practice Note No. 1/2025 to provide detailed guidance on how donations or contributions received by individuals, companies, organizations, and other entities are treated under the Income Tax Act 1967 (ITA). The note addresses a commonly misunderstood area: are donations taxable?

Who Does This Apply To?

According to Section 2 of the ITA, the term “person” includes not only individuals, but also companies, partnerships, sole proprietors, and organizations. This means that any person or entity receiving donations or contributions may be affected by this clarification.

General Tax Position

There is no special provision in the ITA that automatically exempts donations or contributions from tax. As a result, the general tax rule applies: if a donation has the characteristics of income, it is taxable.

The IRBM considers a donation or contribution to be income if any of the following conditions (known as “badges of trade”) exist:

The donations are received repeatedly or regularly.
The donations support or flow from an income-generating activity.
The donations are part of the normal course of business.

When Donations Are Taxable: Real-Life Scenarios

Example 1: Donations Supporting a Business

Sekolah Setia Bakti (SSB) is a private school that charges fees to students and also receives public donations to help underprivileged children. Although the donations are used to help students, the funds essentially support the school’s ongoing operations.

Since the donations are used to sustain a business activity (education for a fee) and SSB is not an approved institution under Section 44(6) of the ITA, the donations are taxable business income under paragraph 4(a) of the ITA.

Example 2: Non-Profit Foundation with Surplus

Yayasan Jayadiri (YJ) is a charitable foundation that collects public donations to assist vulnerable communities. In 2024, it received RM200,000 in donations and spent RM165,000 on charitable events, flood aid, food distribution, and operating expenses.

Although these expenses are fully deductible under Section 33(1) of the ITA, the remaining RM35,000 in surplus is taxable, because YJ is also not an approved organization under Section 44(6).

How to Avoid Taxation on Donations

Entities like IOFs (Institutions, Organizations, or Funds) can apply for tax-exempt status under Section 44(6) of the ITA. Once approved, any income—including donations—will be exempt from tax under Schedule 6, paragraph 13(1)(a) of the ITA.

To qualify, the organization must:

Be set up for public benefit or charitable purposes.
Not be profit-oriented.
Submit a formal application to the Tax Policy Department, IRBM, with supporting documents.

Approved IOFs can receive tax-deductible donations from donors and enjoy tax exemption on their income, including surplus or unutilized funds.

What This Means for Organizations

Organizations, especially non-profits, must understand that receiving donations does not automatically mean the funds are tax-free. Without approval under Section 44(6), even charitable funds may be subject to tax, especially if:

They are used to support a revenue-generating activity.
They result in a surplus not immediately spent on charitable work.

This makes proper tax planning and record-keeping crucial for organizations that rely on public or corporate contributions. It’s also important to keep detailed breakdowns of how donations are spent, to ensure that deductible expenses are correctly claimed and any taxable surplus is reported.

Key Takeaways

Donations are not automatically tax-free.
If donations support or relate to business activities, they are taxable.
Only approved institutions under Section 44(6) enjoy tax exemption on donations.
Expenses for charitable purposes are deductible, but any unspent surplus is taxable.
Organizations should apply for approval under Section 44(6) to receive tax-exempt donations.

Final Thoughts

The release of Practice Note No. 1/2025 reinforces the importance of understanding the tax treatment of donations or contributions in Malaysia. While many assume that charitable funds are automatically exempt from tax, the reality is more complex — especially for organizations not formally approved under Section 44(6) of the Income Tax Act 1967.

If your organization receives donations or contributions, it's crucial to assess whether your current status provides sufficient tax protection or whether further action, such as applying for approval under Section 44(6) to enjoy full tax benefits.

Need Help Securing Tax Exemption on Donations? Let SALIHIN Handle It.

Let SALIHIN guide you through the process of securing tax-exempt status under Section 44(6) of the Income Tax Act 1967, handling all compliance details so you can stay focused on your mission.

What SALIHIN Can Do for You

Assess your organization’s eligibility and constitution
Prepare and organize all required documents and supporting materials
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Advise on statutory compliance and exemption criteria
Liaise directly with IRBM officers and manage follow-ups until approval

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Norzila Othman, Luqman Hakim Hashim, Aminuddin Awaluddin & Hartini Md Isa