28 May LHDN Means Test 2026: What Company Directors in Malaysia Must Know About Dividend Income
LHDN Means Test: How RM750,000 in Tax and Penalty Was Raised Without a Field Visit
By Kent Chia, Chartered Accountant (Malaysia), Managing Proprietor, KS Chia & Associates (AF001828)
Published: 28/05/2026 | Last updated: 24/09/2026
A Special Commissioners of Income Tax (SCIT) ruling dated 13 May 2026 confirmed that LHDN can raise a best judgment assessment — and a 60% penalty — against a company director using nothing more than a desk audit. No field visit. The case, DGEK v. Ketua Pengarah Hasil Dalam Negeri (MOF.PKCP.700-7/1/1759–1762), shows how the LHDN means test (ujian kemampuan) works in practice in Malaysia — and why dividend income from your own company is not automatically a safe answer.
What Is the LHDN Means Test?
The means test is a desk-level enforcement tool. LHDN compares what you declare as income against what you visibly own and spend — properties, vehicles, company shareholdings, liabilities, and capital movements. Where the numbers do not add up, LHDN treats the gap as unreported income and raises an additional assessment under s.91(1) of the Income Tax Act 1967 (ITA 1967) using its best judgment.
The notices used in this process are CP 101A and CP 102, issued under Sections 78, 79, and 81 of ITA 1967. These are requests for information — but they are also the point at which the direction of an audit is set. How you respond at this stage determines whether an assessment follows.
DGEK v. KPHDN: Case at a Glance
| Forum | Special Commissioners of Income Tax (SCIT) |
|---|---|
| Reference | MOF.PKCP.700-7/1/1759–1762 (LHDN RevNews case summary) |
| Special Commissioner | Puan Fajrul Shihar binti Abu Samah |
| Decision date | 13/05/2026 |
| Years of assessment | YA 2015 to YA 2018 |
| Income shortfall found | RM1,721,642 |
| Assessment | Additional assessment under s.91(1) ITA 1967, raised 24/11/2020 after Notices CP 101A and CP 102 under ss.78, 79 and 81 |
| Penalty | 60% under s.113(2) ITA 1967 |
| Total tax and penalty | RM750,635.94 |
| Taxpayer’s defence | RM4,500,000 dividend from own company, supported by dividend voucher (23/03/2015), journal entries, audited accounts and company resolutions |
| Appeal timeline | Form Q filed 21/12/2020; registered before SCIT 22/12/2021 |
| Outcome | Appeal dismissed; assessments and penalty upheld in full |
What Happened in This Case
The taxpayer was a director and shareholder in several companies. He owned land, a residential property, and luxury vehicles. LHDN’s means test identified an income shortfall of RM1,721,642 across Year of Assessment (YA) 2015, 2016, 2017, and 2018. LHDN issued Notices CP 101A and CP 102 to obtain further information, then raised an additional assessment on 24/11/2020, together with a 60% penalty under s.113(2) ITA 1967 — bringing the total tax and penalty to RM750,635.94.
The taxpayer filed a Form Q appeal on 21/12/2020, arguing that dividend income of RM4,500,000 received from one of his own companies had not been taken into account in the means test. He submitted a dividend voucher dated 23/03/2015, journal entries from the paying company, audited accounts and company resolutions as supporting evidence. SCIT dismissed the appeal. The additional assessments and penalty were upheld in full.
Why the Appeal Was Dismissed: LHDN’s Three Arguments
SCIT held that the taxpayer had not discharged the burden of proof under Paragraph 13, Schedule 5 of ITA 1967, and that LHDN had a legal and factual basis to raise the additional assessment and impose the penalty. LHDN’s case rested on three points.
1. The Dividend Was Not Proven to Have Been Actually Received
LHDN argued that the taxpayer had not proven the RM4,500,000 dividend was actually received by him (“accrued and received”). The dividend voucher, journal entries, audited accounts and company resolutions showed that a dividend was declared. LHDN’s position was that they did not prove the funds reached the taxpayer.
2. The Paying Company Lacked Financial Capacity
LHDN reviewed the financial position of the company said to have paid the RM4,500,000 dividend and found it did not have the capacity to make a payment of that size. Documents produced by a company the taxpayer also controls carry limited weight when the company’s own financial position tells a different story.
One point for directors of single-tier companies: for the years in this case (YA 2015 to 2018), a single-tier dividend was exempt in the shareholder’s hands. From YA 2025, the 2% dividend tax applies to resident individuals on annual dividend income above RM100,000. Neither position exempts the dividend from scrutiny on whether the paying company had sufficient distributable reserves, or whether the shareholder actually received it. LHDN’s capacity challenge in this case applied regardless of the dividend’s tax classification. For more, read our article on how dividend income above RM100,000 is now taxed from YA 2025.
3. The Argument Was Raised Too Late
LHDN highlighted that the dividend argument was raised only after the additional assessment had been issued, through Form Q filed on 21/12/2020. The appeal was dismissed. The better stage to raise this argument was during the CP 101A and CP 102 response window, before the assessment was formalised.
The Broader Risk for Company Directors
LHDN does not rely solely on what you declare. The means test cross-checks whether your financial transactions are commercially consistent with your declared position. Declaring a dividend is one thing. Being able to defend it under LHDN scrutiny is another.
If your declared income does not explain your asset accumulation — properties, vehicles, investments — expect questions. The means test runs at desk level. A field audit is not a prerequisite for an assessment to be raised. From YA 2025 onwards, LHDN also has an additional detection layer — read our article on how LHDN uses e-Invoice data to build a means test case for what has changed.
Who Should Be Paying Attention
- Company directors whose visible assets and lifestyle exceed what their declared income can explain
- Business owners who draw dividend income from companies they control, including single-tier dividend arrangements
- Individuals who have received a CP 101A or CP 102 notice from LHDN
- Directors with shareholdings across multiple companies where the overall income picture is complex
What You Should Do
Do not wait for a notice before organising your records. By the time CP 101A arrives, the assessment window is already open. The means test has already run.
Dividend income from your own company must be defensible end-to-end. Not just declared in board resolutions, but supported by the company’s financial position and consistent when cross-checked independently. The question LHDN asks is not whether a dividend was declared — it is whether the company could have paid it, and whether you received it.
Respond to CP 101A and CP 102 notices thoroughly and on time. This is your best opportunity to address the gap before an assessment is raised. Incomplete or delayed responses accelerate the assessment process.
Do not hold back arguments until after the assessment. Arguments raised for the first time through Form Q — after the assessment — carry a credibility burden that is difficult to overcome. The time to present your case is before the assessment, not after.
LHDN Means Test: Frequently Asked Questions
What is the LHDN means test (ujian kemampuan)?
It is a desk-level check where LHDN compares a taxpayer’s declared income with the assets they own and the money they spend. If declared income cannot explain the assets, LHDN may treat the gap as unreported income and raise an additional assessment under s.91(1) of the Income Tax Act 1967.
Can LHDN raise a tax assessment without a field audit?
Yes. In DGEK v. Ketua Pengarah Hasil Dalam Negeri (SCIT, 13/05/2026), an additional assessment and a 60% penalty totalling RM750,635.94 were raised from a desk-level means test and upheld on appeal. A field visit is not a precondition for a best judgment assessment.
Is a dividend from my own company enough to explain my assets?
Only if you can prove the funds reached you and the company could afford to pay. In the DGEK case, a dividend voucher, journal entries, audited accounts and company resolutions for a RM4.5 million dividend did not displace the assessment. LHDN argued that receipt was not proven and the paying company lacked the capacity to pay.
When should I present my explanation to LHDN?
When responding to LHDN’s information notices, such as CP 101A and CP 102 issued under ss.78, 79 and 81 of the Income Tax Act 1967, before the assessment is raised. In the DGEK case, LHDN pointed out that the dividend argument was first raised in the Form Q appeal, and the appeal was dismissed.
Who carries the burden of proof in a tax appeal?
The taxpayer. Under paragraph 13 of Schedule 5 of the Income Tax Act 1967, the taxpayer must show that the assessment is excessive or wrong. Internal documents from a company the taxpayer controls carry limited weight without independent evidence.
Need Help?
If you have received a CP 101A, CP 102, or any LHDN audit notice — or if you are unsure whether your dividend documentation is sufficient to withstand scrutiny — contact us before responding. See our tax consultancy services for how we can help.
KS Chia & Associates Chartered Accountants (AF001828)
WhatsApp or call:
011-2366 5233
This article is prepared for general information only and does not constitute professional advice tailored to your specific circumstances. Please consult a qualified tax adviser before taking action.