Key business concept for aspiring practising architects including compliance with income tax and GST

1. Business accountability for architects
Nik Mohd Hasyudeen Yusoff
7 November 2017

2. Types of business structures
• Sole-proprietorship or
partnership
• Limited liability partnership
• Private limited company

3. Managing a business
• Strategy
• Marketing
• Operations
• People
• Finance
• Compliance

4. Critical operations
Designs and drawingsSecuring contracts
Project management
and certification
BillingsCollection
• All activities and transactions must be properly recorded
• Some of the contractual obligations and activities could exceed one
accounting period
• Record keeping is very critical

5. Basic financial reports
• Income statement
• Statement of financial position
• Cash flow statement
• For companies, must comply with
Malaysian Private Entity Reporting
Standards and must be audited
• Will be relied upon by the Inland
Revenue Board for tax assessment
purposes
• Accounting and income tax treatments
are not necessarily the same
• Need to invest in accounting system

6. Income statement
Cost of professional
staff
Overhead:
Support staff
Rental
Utilities
Depreciation
Others
Other project cost
Billings
Gross profit
-
-
=
-
=
Profit/Loss
• Income statement reports the profitability of
the practice in an accounting period
• Revenue is recognised based on accrual
basis (how much is entitled based on stage of
work), NOT how much is collected
• Cost is recognised based on incurred basis,
event when payment has not been made
• Capital expenditures such as IT equipment
and system are capitalised and depreciated
over their useful lives

7. Statement of financial position
Accumulated profits
Assets:
Properties and
equipments
Motor vehicles
Deposits
Cash
Capital
=
• Statement of financial position provides the
information on the financial position of the
practice on a specific date
• Essentially it is based on the principle that
assets are financed through capital and
liabilities+
Liabilities:
Long term loan
Accruals
Bank overdraft

8. Cash flow statement
Cash from investing
activities
Cash from financing
activities
Cash from operations
Net cash flow for the
period
=
=
Closing cash balance
• Cash flow statement captures the movement
of cash:
• Operations: Collection of fees and payment
of expenditures
• Investing: Investment made and proceeds
from sales of investment
• Financing: Raising of capital or loan and
payment of dividend and loan repayments
• The amount of profit for the period normally is
NOT the same as the net cash flow
+
+
+
Opening cash balance

9. Planning
Cost of professional
staff
Overhead:
Support staff
Rental
Utilities
Depreciation
Others
Other project cost
Billings
Gross profit
-
-
=
-
=
Profit/Loss
Q1 Q2 Q3 Q4
Estimates
Revenue is estimated based on the expected
completion of professional obligations as
contracted
Expenditure could be fixed (e.g. staff cost) and can
be variable such as materials and utilities
Advisable to prepare budget based on projects
This should be your prospective income statement
?

10. Project execution and control
Cost of professional
staff
Overhead:
Support staff
Rental
Utilities
Depreciation
Others
Other project cost
Billings
Gross profit
-
-
=
-
=
Profit/Loss
Q1 Q2 Q3 Q4
Performance of professional obligations must be
tracked against projected completion and
contractual obligations
Cost incurred should be compared with budgets,
and variance, positive or negative must be
understood
Proper process of cost control such as authority
limits, approval and documentation must be strictly
observed
Revenue and cost must be allocated to the relevant
projects so that their profitability could be properly
assessed
Project reports must be discussed on a monthly
basis so that at variances or cost overruns could be
managed or mitigated promptly

11. Pricing and collection
• What is the cost to extract the stone
which is attached to the diamond?
• Pricing is determined by the value
perceived by clients, not cost to produce
• Market forces and competition would
drive price downwards
• Could also be influenced by nature of
contracts: direct negotiations, fast-track
or turnkey
• Billings must be properly tracked and
clear collection process must be put in
place

12. Taxation obligations
• There are two key tax obligations:
• Income tax
• Goods and Services tax (GST)
• Must registration when threshold is met,
don’t wait for authorities to “visit” you
• Continuing compliance
• Filing of returns and remittence of payments
on time to avoid penalties
• Record keeping
• Company’s tax would be the personal
liability of directors

13. Taxation obligations
• Income tax
• For companies, must submit tax
estimate 30 days before new basis
period
• Start to pay tax in the second month
until the first month of the subsequent
year
• Estimate could be revised on the sixth
and ninth month
• If actual tax exceed the estimate by
30%, fines would be imposed

14. Taxation obligations
• Income tax - employer
• Must deduct taxation from employees
salary, if they have reached threshold,
and remit to Income Tax Department
• Submit annual employer return
• Need to withhold tax if employee
resigns until cleared by Inland
Revenue

15. Taxation obligations
• Goods and Services tax
• Registration is required if billings
reached RM 500,000 on a rolling
12 months basis
• Cannot claim input tax if not
registered
• Must submit returns and remit
collected tax to Customs
Department

16. Professional obligations
• Professionals are defined by their
specific body of knowledge and skills
and the adherence of professional
standards
• Clients may not be able to assess the
quality of work performed, hence,
commitment to ethics and standards is
critical
• Better to say NO rather than accepting
jobs which could not be delivered as
required