Half-year tax return filing for self-employed income earners

Tax paid in accordance with the half-year tax return is taken as a credit in the calculation of the personal income tax payable at the end of the year.

The types of self-employment income that are liable include income from rent, from the liberal professions, from contracts of work, and income from other business or commerce, as stipulated in Sections 40(5)-(8) of the Thai Revenue Code (TRC).

Assessable income, which must be reported for the half-year personal income tax purposes, is defined as the actual income earned from January 1 to June 30, 2014. Personal income tax must be paid on the income earner’s net assessable income after the deduction of expenses and 50 per cent of their annual personal allowances.

In claiming expenses as a tax deduction, the self-employed income earner who earned said income may choose between itemising the expenses incurred during the first six months or taking the standard deduction.

The rates for the standard deductions vary depending on the type of assessable income. For example, the income earner can deduct the standard deduction at a rate of 10 per cent to 30 per cent of rental income, again depending on the type of property leased, under Section 40(5) of the TRC; 60 per cent of income from the practice of medicine; 30 per cent of income from the practice of other professions, under Section 40(6) of the TRC; 70 per cent of income from contracting, under Section 40(7) of the TRC; and 40-85 per cent of income from other activities, under Section 40( 8) of the TRC.

The types of assessable income have corresponding optional standard deductions. The taxpayer may choose to itemise the deductions, the details of which can be found in Royal Decree (No 11), BE 2502.

There is no limit on the amount of itemised deduction and, therefore the taxpayer would pay less tax if their itemised deductions were larger than the standard deduction. However, if the itemised deduction method is chosen, the taxpayer must ensure that said expenses actually comply with the rules for personal income tax deductible expenses.

Unlike corporate income tax, there are no specific rules or conditions for computing the net taxable income for personal income tax purposes. However, the TRC clearly states that the rules and conditions for the computation of net taxable profits for corporate income tax purposes shall apply in determining the deductible expenses of a self-employed taxpayer choosing the itemised deductions for paying personal income tax.

In this regard, a taxpayer who chooses to itemise his or her expenses must follow the rules and conditions stipulated in Section 65 bis of the TRC, which provides the conditions for computation of net taxable profits for corporate taxpayers, and Section 65 ter of the TRC, which provides the list of disallowed items in computing net taxable profits, again for corporate taxpayers.

If the itemised deduction method is chosen for paying personal income tax, the tax authorities may request that the taxpayer provide supporting evidence which demonstrates that the itemised deductions are in accordance with Sections 65 bis and 65 ter of TRC.

The provisions that are often used to disallow deductions are an “expense which is not for the purpose of making profits or for the business”, and an “expense which a payer cannot identify the recipient”. Therefore, providing evidence supporting the actual payment, such as tax receipts, and evidence proving that the expenses were paid or incurred for business purposes where income was generated, is very important.

A taxpayer with earned income from self-employment, who uses the itemised deduction method to pay personal income tax, cannot change the expense deduction method once the tax return is under a tax audit. If certain expenses are disallowed as a result of the tax audit resulting in a conclusion of underpaid tax, the taxpayer is assessed the additional tax plus a 1.5 per cent per month surcharge on the amount of tax due and a penalty of up to 100 per cent of tax due, regardless of whether the taxpayer could take additional deductions under the standard deduction method.

In this regard, we recommend that a taxpayer with self-employed income should perform a self-review of his or her expenses to determine whether solid evidence exists for the itemised expenses, which are larger than the standard deduction.

In addition, proper records and supporting documents must be maintained and available for a possible tax audit.

Lastly, the choice of deduction method is on a yearly basis, so the taxpayer may choose one method this year and change to another method the next year, without prior approval.

This information is intended as a general guide only. Tax law is complex and professional advice should be taken before acting on the information provided.

Benjamas Kullakattimas is tax partner in charge at KPMG Phoomchai Tax.