2. •
TO DETERMINE THE GROSS INCOME
OF A COMPANY (BUSINESS AND NON
BUSINESS)
TO IDENTIFY DEDUCTIBLE
EXPENDITURE
TO COMPUTE THE CHARGEBLE
INCOME OF A COMPANY
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4. 1.
2.
3.
4.
5.
6.
SUBJECT MATTER
PERIOD OF OWNERSHIP
FREQUENCY OF TRANSACTIONS
SUPPLEMENTARY WORKS DONE PRIOR
TO SALE
ORGANIZATION SET UP TO DISPOSE THE
GOODS
MOTIVE FOR THE TRANSACTIONS
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5. 1. SUBJECT MATTER (nature of asset)
- Commodities could be bought as personal
use of enjoyment - purchase of a bottle of
Pepsi/coke
- BUT if buying and selling Pepsi/coke – even
a single bottle – will increase the trading
stock clearly a trading transaction
- Rutledge v IRC (1929) – purchase 1m rolls
of toilet paper, gained 10K profit – The
courts held the sum to be taxable although
they claimed it was an isolated transaction
- Example: painting/jewellery – once bought
for pleasure but sold when its value had
appreciated – difficult to prove
(adventure/concern in nature of trade)
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6. 2. PERIOD OF OWNERSHIP
- Wisdom v Chamberlain (1968) – an actor
purchased some ingots of silver as a hedge
against an anticipated devaluation. He sold
within a year and made profits. The courts held
the sum to be taxable – adventure in the
nature of trade.
- Mount Elizabeth v The Comptroller of Income
Tax (1987) – developed a block of high-rise
apartment and disposed them with the
exception of a few units. These units were
retained for seven years and then disposed –
Profit arising still treated as trading profits
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7. 3. FREQUENCY OF TRANSACTIONS
- Transaction in one series – evidence of a
systematic and methodical activity – general
pattern will constitute an adventure in the
nature of trade.
- Pickford v Quirke (13 TC 251) – a member of a
syndicate which purchased the shares of a millowning company, then liquidate the comp. and
sold the asset to another comp. The syndicate
was specially formed for the purpose of buying
asset (substantial profit). Taxpayer had engaged
in 4 other transaction & made profit. The courts
held that all the transactions constituted the
carrying on a trade.
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8. 4. SUPPLEMENTARY WORKS DONE PRIOR TO SALE
- Cape Brandy Syndicate v IRC (12 TC 358) – 3
individuals form syndicate and purcahsed a
quantity of Cape Brandy. This was shipped to
England and blended with some French brandy,
re-casked and sold to various buyer. The
entire lot was sold over a period of 18 months
and not involved in any other transaction. The
courts held the profits were taxable (adventure
in the nature of trade) although they claimed it
was an isolated transaction.
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9. 5. ORGANIZATION SET UP TO DISPOSE THE GOODS
- Martin v Lowry (11 TC 297) – Taxpayer (an
agriculture merchant) acquired about 45 m
yards of war surplus linen. He set up an
organization and advertised the sale of linen
and over a period of few moths the entire linen
were sold. The courts held he was carrying on
a trade - the profits were correctly assessed
as arising from a business.
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10. 6. MOTIVE FOR THE TRANSACTIONS
-
Motive – never an issue (the nature of
transaction is clearly evident as one of trade)
The courts will have to resort the indicators
which point to the transaction as constituting a
trading/business transaction)
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11. Business activities (income) have to be
distinguished from investment transactions
(capital)
Capital natured business receipt are not
taxable (i.e. gains from disposal of fixed
assets).
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12.
Section 22(1) and (2):
◦ Applies to revenue receipt
◦ If the gross income resulted from past expenses
and outgoings of revenue nature, it would then be
treated as income
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13. Sum
receivable by way of insurance,
indemnity, recovery and reimbursement
constitute gross business income.
For
instance, such sum include insurance
recoveries which are in respect of trading
stock, defalcation by employees, repairs of
assets as well as life and accidents
insurance.
Insurance
recoveries for replacement of
assets are capital receipt, thus not taxable.
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14. CARE Car Seat is an enterprise selling leather car
seats. It obtained its leather from various
suppliers in Europe. In 2012, several customers
complained that their leather seats which had
been supplied by CARE Car Seat had started to
peel after only four months of use. The company
traced the leather shipment which had been used
for the defective car seats and replaced all the
car seats made from the said shipment. It then
made a claim against the leather supplier. After a
period of lengthy negotiations and to maintain
goodwill, the supplier paid CARE Car Seat a sum
of RM45,000.
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16. Compensation
for loss of income from a
source is a revenue receipt and is taxable.
This receipt exhibit one or more of the
following attributes:
The receipts must be filling a hole in profits.
The receipt must not be in respect of physical
damage or disposal of capital assets.
The receipt must not relate to the restructuring
of company.
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17. The
recovery of trading debt is taxable
subject to key condition being satisfied.
The debt previously written off as being bad
and were allowed as deductions in arriving at
the adjusted income from business.
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18. The waiver of amounts owing to creditors (i.e.
suppliers) is taxable.
Example:
Samad, is an owner of a provision shop. As at 3112-2011, he had an amount of RM2,500 owing to
one of his confectionary suppliers. In the middle
of 2012, the supplier agreed to waiver the
amount owed to him on the basis of the longterm relationship between him and Samad. Samad
consequently debited the “supplier account” in his
monthly accounts and credited “the income
statement account”.
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19. Issue: Advise Samad whether the waiver of
RM2,500 is taxable.
Discussion:
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21.
Revenue versus capital expenditure
Expenditure incurred by the taxpayers
carrying on a business
Qualifying deduction under the ITA
Timing of the expenditure
Expenditure wholly and exclusively
incurred in production of gross income
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22.
Deductibility under Section 33 of ITA:
◦
◦
◦
◦
◦
Outgoings and expenses
Wholly and exclusively
Incurred
During that period; and
In the production of gross income
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23. Example 1(WHOLLY & EXCLUSIVELY)
Dhia Emas SB exports frozen prawn and fish to
Japan and Singapore and also distributes its own
products overseas through various distribution
centers. Raffi Family holds 65% shares in DESB. For
its business DESB leased refrigeration equipment,
cold rooms and container from Raffi Family at the
market rate RM2m per annum. The lease agreement
provides that if the annual profits of DESB, above
RM2m (before charging the lease rental), the lease
rental would be increased accordingly. State with
reason, whether the lease rental would be
deductible for tax purposes.
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25. Example 2(DIRECT PURPOSE FOR BUSINESS)
Muazam Sawit Bhd, a plantation company incurred
RM12,000 on a special audit of another company,
Shah Rubber Bhd that it tends to acquire. State with
reason, whether the expenses is deductible against
business income of Muazam Sawit Bhd.
Answer:
The amount in relation to special audit was not incurred for
the direct purpose of the existing plantation business but
connected to another source. Thus, the expenses is NOT
deductible.
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26. Deductions Prohibited
Section 39(1)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
Domestic & private expenses
Expenditure not wholly incurred
Capital withdrawn and any sums employed as capital
Contribution to a non-approved scheme
Qualifying mining, prospecting and agricultural
Interest or royalties paid to a non-resident person
Payment for timber license or permit
Bonus payment (now deleted)
Failure to remit deduction from contract payment
Failure to remit deduction from special classes of income
Lease rental
Entertainment
Leave passage cost
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27. Example 3(LEASE RENTAL)
MyMee SB produces instant noodles, for the
YE 31/5/2011 the company has made lease
rental in respect of the following vehicles:
Lease rental paid
during the year
Wira 1.5
Accumulated
leased rental
1/6/2010
Cost of car
RM25,000
15,000
85,000
Van
15,000
50,000
12,000
BMW
45,000
35,000
210,000
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29. Example 4(ENTERTAINMENT)
Azura Salleh SB incurred RM100,000 on entertainment for the YE
31/7/2012. Details are as follows, compute the allowable
entertainment;
Entertainment allowance
Entertainment to supplier
Sponsorship – cultural show at a sporting event
open to members of the public
Gifts to customer for purchase above RM100
Launching a new product
Malaysian Taxation 2
RM10,000
5,000
50,000
15,000
20,000
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31. Deductible & Non-deductible
expenses
Section 33(1)(a): interest
2. Section 33(1)(b): rent
3. Section 33(1)(c): repairs & renewal
4. Section 33(1)(d): other deductions
Empower Minister of Finance to prescribe
relevant deductions from time to time
The deduction sometimes not allowable
under ordinary rules but in view of
particular economic necessity
1.
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32. Section
33(1) (a)
Interest
Interest expenses on money borrowed would
be allowed as deduction under the following
2 circumstances:
1. The loan employed in production of gross
income
2. The loan is laid out on asset used/held in
that period for the production if business
income.
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33. Example (INTEREST)
Azneel Sdn Bhd (ASB) entered into an agreement for the
assignment of a timber concession. The consideration
payable by ASB for the assignment has been by installment
and ASB is also required to pay interest on the total
consideration or such part outstanding. In computing the
adjusted income, the DG did not allow deduction for the
interest paid but the taxpayer argued that the interest has
been paid for being allowed credit not for the use of license;
However DG had contended that the interest is part of the
selling price. Advise NSB.
Answer:
The payment of interest has been consideration for
the credit given to the taxpayer for the outstanding
debt and it could be deducted under s 33. (DGIR v RB
Sdn Bhd (1984)
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34. Section
33(1) (b)
Rent
Would be accorded a deduction if it was:
1. Payable for occupying the land/building
(immovable properties)
2. Used in relation to the period
3. Incurred for the purposes of producing
gross income of that source (i.e business
must have commenced)
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35. Example (RENT)
a) Chen rented a shophouse in order to sub let for rental
income. He also derives manufacturing income. Can
rental be deducted from gross income of the
manufacturing?
Answer:
Rental expenses incurred on shophouse used to produce
rental income under s 4(d) cannot be deducted from
gross income of the manufacturing source under s 4 (a).
In order to get a deduction for the rental the source of
rental must first exist, i.e. only deductible against rental
income of shophouse.
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36. b) Ahmad SB is manufacturing company occupying a
factory in Sg Buluh. Rental expenses were paid on
1/1/2012 to 31/12/2012. However the company
commenced the manufacturing business on 15/4/2012.
Can the company claim the entire rental to be
deductible?
Answer:
Only rental expenses form 15/4/2012 –
31/12/2012 is deductible against gross income
for the manufacturing business.
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37. Section 33(1)(c) - repairs & renewal
REPAIR - Principle in case laws:
– Capital in nature (NOT deductible)
(a)Improvement on a an asset
(b)Acquisition repair
(c)Replacement on whole of the asset (entirety)
– Revenue in nature (deductible)
a. repair of premises, plant, machinery or fixtures
employed in the production of gross income;
b. Replacement of part of asset
c. Renewal
d. Maintaining the commercial viability of an assets
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38. Example (REPAIR and RENEWALS)
A) Rubber SB is the owner of rubber estate. The drainage system
is controlled by 10 Watergates. As a result of a leak in one of the
Watergates, new gates was installed at the coast of RM15,000.
Consider the deductibility of the sum expended installing the
new Watergates.
Answer:
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39. B) Mall Bhd owns a chain of retail outlet in Malaysia. In 2009, it
acquired 2 dilapidated shop lots to expand its chain. Repair work
was carried out in the same year in the 4 outlets including initial
repairs on the newly acquired shop lots. State with reason,
whether the repairs on the 4 outlets are tax deductible.
Answer:
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40. Specific Business deduction
(section 34 & 35)
- Bad debts
- Employer’s contribution to an approved fund
- Equipment for the disabled employees
- Translation and National Language Publication
- Library facilities (not exceeding RM100,000)
- Community welfare
- Child care centre
- Managing musical or cultural groups
-Sponsorship of arts and cultural activity (max:
RM300,000)
- Scholarships (wef YA2001)
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41. Specific Business deduction
(section 34 & 35)
- Halal certification expenditure (wef YA2005:
double deduction)
-Practical training (wef YA 2002)
- International standardization activities
- Scientific research
- Special deduction for scientific research
expenditure (double deduction)
- Contributions and payment to an approved
research institute or an approved research
company
- Stock in trade
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42. Example (bad debt)
Runny is a building contractor. He has lent a sum without any
security to Lee a family friend. Lee subsequently became
bankrupt and Runny considered the sum lent to be a total loss
and has sought to deduct it from his profit. He considered that
the loan had been a bad debt incurred in the ordinary course of
business and deductible under s 34(2). Advise Runny. Would
your advice differ if Lee is a major supplier to the business?
Answer:
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43. Example (Approved scheme)
ZSB decided to improve the benefits offered to its employee. As a
result, it set aside RM150k out its reserve for a pension fund. This
is the initial contribution necessary to set up the fund. State with
reasons, whether the expenditure is a tax deductible.
Answer:
Would be capital expenditure – not deductible. The
initial contribution is capital because it is made, not only
once and for all, but with a view to bringing into
existence an asset. However s 34(5) – may allow the
deduction for a such special contribution in respect of
an approved scheme.
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44. Deduction of outgoings &
expenses [section 33(1)]
Accountancy fees
Advances & loans
Advertising costs – allowable
Books & periodicals
Business acquisition costs
Acquisition of trading stock on
takeover: deductible
Travelling expenses: non allowable
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45. Deduction of outgoings &
expenses [section 33(1)]
Trade & club subscription
Income taxes: non allowable
Clothing & tools: non allowable
Company general meeting: non allowable
Trade exhibition and travelling expenses
Consumable aids: allowable
crop re-planting: allowable
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46. Deduction of outgoings &
expenses [section 33(1)]
Damages
Defending capital assets: allowable
Devaluation losses: allowable
Fines & penalties: non allowable
Terminating redundant employee: allowable
Legal expenses in restructuring exercise:
allowable
Audit fees: allowable
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47. Double Deduction
Interest on loan to small business
Employment of disabled employees
Insurance premium for import of cargo
Training of an handicapped persons
Export credit insurance premium
Freight charges (from Sabah & Sarawak)
Research expenditure
Contribution to approved research institute
Overseas expenses for promotion of tourism
Expenditure for approved training
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48. Double Deduction
Expenses incurred in international trade fair
Fees incurred in packaging design (wef YA2001)
Advertising Malaysian brand product
Promoting brand names
Promote export of services
Halal certification
Promotion of higher education
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50. Add
Net profit/(net losses)
xx
+) Any item/expenses not allowable for
deduction
Less
xx
-) Items allowed for double deduction
-) Non business income / Non taxable
income
Sec 4(c) : dividend, interest and
discount
Sec 4(d): rent, royalty and premium
(xx)
(xx)
Adjusted income/loss
XX
+) Balancing charges
xx
-) Capital allowance/ balancing allowance
Statutory Income
(xx)
XX
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51. Statutory Income
XX
(-) Loss b/f
(xx)
(+) Other income
xx
Aggregate income
XX
(-) Approved donation*
Total Donation vs
10% from Aggregate income
(Which is lower)
(xx)
XX
Chargeable Income
Paid up share capital (<=RM2million)
Tax on the 1st 500,000 @ 20%
Tax on the balance _____@ 25%
XX
Tax Payable
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