This article is most relevant to duty payers, property buyers, investors, and businesses that enter into any types of written instruments, contracts and agreements in the ordinary course of business which attract stamp duty. It provides an overview of the newly published Stamp Duty Audit Framework (“audit framework”) by the Inland Revenue Board of Malaysia (LHDN), effective 1 January 2025.
Introduction
Stamp duty is a tax imposed on written instruments, which refers to any legal, commercial, or financial document. A common practice adopted by many was for parties to only stamp certain instruments or documents when mandated by regulatory authorities, such as the Companies Commission of Malaysia for share transfers or the respective land offices for property transactions. As a result, stamping was often only applied when it was necessary for the transaction to be legally recognized, and enforcement was generally more lenient due to a lack of enforcement.
However, with the shift toward a more robust regulatory framework, mandatory stamping is going to be the norm for all written instruments (unless explicitly exempted by statute). It signals a change from a more passive approach to one where almost all written instruments are now subject to scrutiny, aiming to foster greater adherence to stamp duty obligations.
The new audit framework issued by LHDN aims to enhance voluntary compliance with the Stamp Act 1949 under the new “Self-Assessment System for Stamp Duty” through structured case selection and audit procedures.
Case Selection
Audit cases are selected either via (i) a computerized risk assessment system, or (ii) information sources received by LHDN. The selection criteria may include the following:
- Selection based on risk assessment criteria;
- Selection based on Industry-specific case;
- Selection based on specific issues concerning certain groups of duty payers; or
- Information received from third parties.
Types of Audits
The LHDN conducts two types of audits:
| General Review | Comprehensive Review | |
| Location | Conducted at LHDN offices. In certain cases, general review cases may be referred for comprehensive review. | Conducted at the duty payers’ premises, LHDN offices, document storage location, or any location agreed upon by both the duty payers and LHDN. |
| Inspection of Documents | Documents submitted through STAMPS during the stamping submission process. | All executed documents in the duty payers’ possession. |
| Process |
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| Interview | Duty payers may be required to attend an interview at LHDN offices for further clarification. | Duty payers may be interviewed during the audit process. |
| Audit Coverage Period | Up to three (3) calendar years. Cases involving fraud, duty evasion, or negligence (under Sections 63, 64, and 74 of the Stamp Act 1949) are not subject to this limitation. | |
| Findings |
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Implications on Businesses
- Non-Compliance: Failure to provide the required information during audit constitutes an offense under Section 3A(5) of the Stamp Act 1949. The Measures for the Collection, Administration, and Enforcement of Tax Act 2024 increases the maximum fine from RM250 to RM10,000 effective 1 January 2026.
- Greater accountability for duty payers: The framework and the Self-Assessment System for Stamp Duty shifts the burden of proper duty assessment from LHDN to the duty payers. Duty payers, agents, and representatives must now ensure that all information provided is accurate and correct for proper duty assessment. In practice, compliance requires a high level of knowledge of tax laws and practices.
- Higher Risk of Penalties: A comprehensive review involves inspection of all executed documents in the duty payers’ possession. If unstamped instruments are discovered, duty payers may potentially face additional penalties for failing to submit documents for duty assessment.
- Administrative and Compliance Costs: Businesses may encounter increased administrative costs and resource allocation challenges in complying with the audit framework. Maintaining accurate and complete records is essential to facilitate smoother audits and minimize disruptions.
Conclusion
The framework strengthens compliance obligations for duty payers. To avoid penalties such as late payment stamping penalties, which go up to as high as 20% of the deficient duty it is crucial to adhere to the stamp duty requirements. If the unpaid duty amounts to millions, a 20% penalty can be substantial, in addition to fines for non-compliance with the audit process, which can include a maximum penalty of RM10,000. To mitigate these risks, it is essential to understand the audit process, maintain proper documentation, and ensure accurate assessments of stamp duty obligations.
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This article was written by Low Rui Thong (Associate) from Donovan & Ho’s corporate practice.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.
