On 24 March 2025, LHDN (Lembaga Hasil Dalam Negeri) released Practice Note 1/2025 to clarify the tax treatment of donations and contributions received by any “person” under the Income Tax Act 1967.

This includes companies, sole proprietors, NGOs, foundations, temples, schools, and community-based organisations.

Many assume that donations are automatically tax-free.

But under this new guideline, that is not always the case.

What has changed?

If your organisation receives donations and uses the funds to:
• Support your operating expenses
• Fund activities that charge fees (e.g. schools, training centres)
• Sustain the day-to-day running of the organisation

These donations may now be considered business income and taxed under Section 4(a) of the Income Tax Act.

Example from the Practice Note:
A special needs school collects fees and receives public donations to help subsidise students’ fees. Since the donations help sustain the business, they are treated as taxable income.

What if you’re a charity or foundation?

If your organisation is not approved under Section 44(6) of the ITA:
• Only expenses that are fully used for your stated charitable objectives (e.g. food aid, donations to flood victims) can be deducted.
• Any unused or surplus donations may be taxable.

Example given:
A foundation receives RM200,000 and spends RM165,000 on charitable work. The balance RM35,000 is taxable.

What should small charity groups do?

1. Keep proper records
   Track all donations received and how they are spent.
2. Use donations for the right purpose
   Make sure funds are fully used for the objective stated to the donors.
3. Apply for approval under Section 44(6)
   Approved institutions under Section 44(6) can enjoy tax exemption on donations received.
4. Don’t assume you’re exempt
   Without formal approval, your organisation may still be liable to tax even if you’re doing good work.

My final thoughts

Practice Note 1/2025 is a reminder that not all donations are tax-free.

Whether you run a small foundation, school, or community group, it’s important to check your tax status and ensure proper compliance.

To download the full Practice Note, visit:
https://lnkd.in/gJiWZ4gd

Speak to a licensed tax agent to clarify your position and safeguard your organisation.