41

PLANNING FOR
COMPANIES
TAX

Introduction

planning
series
1s aa series of measures taken
by a taxpayer
l a xp to manage
his income sources witn
the objective
of eliminating, minimising or
deferring
tax, but within the ambit of
the
legislations.cSuch transactio
Such transactions have to be tax
ocation of anti avoidance section by IRB.
commercially justified in order to avoid the

hort. tax planning is the organisation of one's affairs to minimise the charge to taxation. To
e this, companies had to select between competing alternatives and avoid pitfalls basea
knowledge of the tax legislation and lRB's practices.
Commencement of business
1.0

1.1 Importance
The determination for commencement date of a business is difficult and is based on a question
of facts. It is crucial tor such determination because revenue expense that was incurred prior
to commencement of business is not allowed as a deduction.

Once business has commenced, the company may obtain a tax deduction for revenue expenses
incurred. If no income is generated from the business, such business loss can be set off against
other income in the current year or carry forward to the future years for set off against all
business income.

of business is
However, qualifying expenditure incurred prior to the commencement
deemed incurred on the date of commencement [para 55, Sch 3. Initial and annual
allowances would be computed for the first YA and annual allowances for the subsequent
years of assessment.

1.2 The test

essential activities of a business that is
ror taxation purposes, it is the commencement of the
has commenced (existence of business source). As
Televant in determining when a business deternmination ot commencement, one thus has to
there is no Malaysian case on the issue of
Seek the guidance from foreign judicial cases.

Chemical lIndustries Ltd (91 ITR 170), the

Tax Saurashtra Cement and
n Commissioner of lncome v
when an essential activity of that business has started.
uage held that business is comnmenced
The judge commented:
ot activities and all the activities which go to
continuous course
"TheDusiness is nothing more than a in order that the
business may commence.
nak up the business need not be started simultaneously in point of time and which must
E which is first
The Dusiness would c o m m e n c e when the activity
activities is started.
ESSarly precede the other
commencement date
is by reference to the
determination of
be noted that the need not be present
Ad a income generation.
Sales or t u r n o v e r
of a company and not the
for s date.
Scertaining the ommencement

465
 466 ADVANCED MALAYSIAN TANATION

1.3 Trading company

In general, trading have commenced business when it
a
company is said to
embarke
purchasing activity which is an essential activity of trading business. There need not b"
on ts
sales in order to commence business. need not be
any

1.4
Manufacturing company
Manutacturing company is said to have commenced business when it embarks on prod.
of manufactured goods. duction

1.5 Hotel

A hotel is said to have commenced business when it its door to the

opens public (soft launchi

2.0 Financing arrangement

The financing arrangement for the asset
cash flow of the
acquisition is important because this would affect the
as well as the tax
company payable tor a particular YA. In general, the
following financing methods are used:
(a) wholly in cash;
(b) through term loan/overdraft;
(c) hire purchase; or
(d) leasing.

2.1 Claim of capital allowances

The acquisition of assets would be given capital allowances if the assets fall into the ambit of
plant, machinery or industrial building as stipulated under Sch 3 of the Act.
The allowances are given to the in
company respect of a business source if the has
incurred, owned and used such company
qualifying assets in that business.
The qualifying asset would be
given an initial allowances of 10% for industrial building,
for others and annual allowances 20
ranging from 10% to 20%, in accordance to the Income lax
(Qualifying plant annual allowances) Rules 2000 [PU(A) 52/2000].
2.2 Accelerated capital allowance (ACA)
The following qualifying capital expenditure has been
given ACA:
No
Qualifying capital Specified Initial Annual PU(A)
YA to be
expenditure
company allowance | allowance effective
industry
(a) ICT equipment
156/2018
20% 20% 2017
(b) Automation equipment
- for the first RM4 Manufacturing 207% 80% 2015-2023
252/2017;
company in 173/2020
million labour
intensive
 41. IAX PI ANNING FOR COMPANIES 4677

Qualifying capital Specified Initial Annual YA to be PU(A)

expenditure
company/ allowance | allowance effective
industry
industry
(rubber, plastic,
wood, textile
products)
lcd Automation e q u i p m e t
RM2
Manufacturing 20% 80% 2015-2023 252/2017;
for the first Company in
173/2020
million other industries

Plant
used for carrying
d) 25% 15% 2010-2024 119/2013
out petroleum operation
amended
in a marginal
field
by58/2014
(e) Pre-cast concrete moulds Manufacturing 40% 20% 2006 249/2006
used in the production of and construction
industrialised building Companyy
system component

(0Machinery& equipment Agriculture 20% 40% 2005 188/2005

used in agriculture Sector
|business
(g) Power quality equipment 20%% 40% 2005 87/2005
(h) Plant & machinery used 40% 20% 2001 506/2000
for qualifying project
() Plant &z machinery used
Manufacturing 40% 20% 2001 505/2000
for Company
) recycling waste
i) further processing
waste into finished
products
) Pollution control 40% 20% 1996 295/1998
equipment
(K)Plant& machinery Building & 30% 20%/14%
construction

industry 1998 294/1998

0)Plant && machinery Mining & 60% 20%/14%
timberindustry
m) Imported heavy i) Building& 10% 10% 17.10.1997 474/1997
machinery ConstruC
tion
industry
(ii) Mining
industry
(ii) Plantation
industry
(iv) Timber
industry
n)Buses using natural 8as Public
transportation
company 40% 20% 1.1.1997 265/1997
9)
Natural gas refuelling Natural gas
equipment refuelling outlet
 TANATION
AMALAYSIAN
ADVANCED
68

Specified Initial Annual

Qualitying capital YA to be
No
expenditure
company allowance| allowance
industry effective PUA
100%
(p)Smallvalue asset 2020
RM2,000
-each asset s

-total asset s RM20,000 Para

20% 20%
98
(q) Development cost on 2018
customised computer
software

Machinery and 20% 40%

(r)
equipment (including ICT 1.3.2020-
equipment, office 31.12.2021 268/PULA20
equipment, furniture and

fittings)
Licensed tour 20% 40%
(s) Excursion bus
operator 2020-2024 291/2021
amended
by 92022
(t) Renovation costs incurred Tun Razak 20% 40% 1.1.2014
on building or part Exchange 29/2013
building located in TRX Marquee status 31.12.2025| amended
company by
474/2021
2.3 YA 2000 (current year) and subsequent YAs

The rate of capital allowance is to be re-categorised into 3 pools as follows:

Type of asset Initial allowance Annual allowance
(a) Office equipment, 20% 10%
furniture and fittings
(b) Plant and machinery 20% 14%
(c) Heavy machinery and 20% 20%
motor vehicles

2.4 Manner of set off

The capital allowances are set off against the adjusted income of a business to arrive at stau
income. Any unabsorbed capital allowances can be carried forward to future years, to Des
nanently
against the same business income, provided the business source has not ceased permal

2.5 Alternatives for acquisition of assets

2.5.1 Acquisition by cash
o nt h e
tul

In the case of
outright acquisition by cash, capital allowances claim w1 RM100,00

cost of
qualifying asset (except passenger vehicles are restricted to Niv 000 t h ef i s

The company would be entitled to claim initial allowance and

allowance on
and a n n u a l reliefis
year, and thereafter annual allowance for the full
for the each subsequent years u til
qualifying capital expenditure.
 C(MPAIIS 469
41 1AX PIANNINE, 1OR

through tlerm loan/over

. 2 A c q u i s i t i o n

2.5.2 rm loan/overdraft, capital allowances laim wilI bee based on the full cot of
of
vehicles.are restricted to RM50,000
c a s e

the
ualifying
In asset ((except
asset pas5engers or RM19O,O9D).
q u a l

ould be
would
be entitled to claim initial allowance and annual allovIance on the fu
entitled

company

The lifyingexpenditurei
ure in the first year, thereafter annual allowance for each subsequent years
qualit

relief is given to the qualifying capital expenditure

full
the
ntil
or the
the overdraft interest will be allowed as a revenue deduction by virtue ot
loan
The
s 33(1)(a).

5.3 Acguisition
through hire purchase

.he case of hire purchase, capital allowances claim will be based on the instalrnents paid
the qualifying expenditure of the asset.
and not
l allowance is given for each new instalment paid (based on capital portion) during the
instalment (capital
veat while annual allowancee will be computed based on the accumulated
portion) paid.
is much lesser compared to the oufright
The quantum of capital allowance claim each year
acquisition by cash/loan/overdraft. It would take a longer time to fully claim the capital
allowances on the qualitying expenditure (Tax written down value = 0).

interest is a revenue expense and is given a deduction to arrive at the adjusted

Hire purchase
income of the business.

2.5.4 Acguisition through leasing

The company is not entitled to claim capital allowances on the leased assets as the company
is not the owner of the asset.

to the passengers vehicle

The company is entitled to claim the full leasing charges (subject
which is restricted to RM50,000 or RM100,000) as a revenue expense if it is incurred wholly
and exclusively in the production of income of the company.

For taxation purposes, the claim of lease rental would be most advantageous because:

(a) Timing
r e v e n u e deduction in the year of incurred while
full amount of lease rental is given a
The claim
the of capital allowances need to be spread to various years in accordance with the

specific rate.
(b) Set off
business loss, the leasing charges would increase the
the business has a current year would be allowed to shelter other income in
austed loss. The current year business loss
hat current year at the aggregate income level.

restricted to respective that only business source

claim of capital allowances is only the claim ot capital allowance is to be
business loss,
he business suffers current year amount of unabsorbed capital allowance is only
e d forward to future years. The
OWed to set off against that particular business source in future years of assessment.

c) Utilisation
that particular year at aggregate
be utilised in
C Current year business loss cannotlosses can only be carried forward for a continuos
unabsorbed business
to set offthe
e level, against any business income in future years (at the statutory income leveln
 TANATION
70 ADVANCED M4LAYSIAN
flexible
The claim of
revenue expense
w o u l d clearly
result in a dot
duction as compared
claim of capital allowance

Example 41.1
Plant and machinery
Acquisition of
assets:
RM30,000
Outright purchase cost

RM
Hire purchase (HP)
30,000
Cost (10,000)
Deposit 20,000
Amount financedd
10,000 (10% flat for 5 years)
HP interest
30,000
HP amount

Instalment annum RM6,000 RM4,000 capital portion

per
- RM2,000 interest portion

RM
Leasing 30,000
Outright cost
Leasing interest
18,000 (12% flat for 5 years)

Total repayment 48,000

Lease rental per annum 9,600
Initial allowance rate 20%
Annual allowance rate 20%
Capital allowance computation:
Year 1 2 3 4 5 6 Total
RM RM RM RM RM RM RM
(G) Outright purchase
20% x 30,000 6,000
20% x 30,000 6,000 6,000 6,000 6,000

12,000 6,000 6,000 6,000 30,000

Year 1 2 3 4 5 7 8
RM RM RM RM RM RM RM RM
(ii) Hire purchase
Interest 2,000 2,000 2,000 2,000 2,000
Capital allowance
20% x 14,000 2,800
20% x 14,000 2,800
20% x 4,000 800 800
800 800
20% x 18,000
3,600
20% x 22,000
4,400
20% x 26,000
5,200
20% x 16,000 (26 + 4-14) 3,200
20% x 12,000 (16-4) 2,400
20% x 8,000 (12- 4) 1,600

800
20% x 4,000 (8- 4)
1,600
5,600 4,400 4,000 2,400
5,200 6,000
(ii) Leasing 4 8 , 0 0 0

Lease rental
9,600 9,600 9,600 9,600 9,600
(revenue expense)
 41. TAX PLANNING FOR COMPANIES 471
Disposal o f assets

3.0 isnosal of assets Within 2 years of acquisition (Para 71, Sch 3)

3.1
thority 1s empowered to claw
cl back the
capital allowance claimed in previous years
The tat as balancing charge in the year of
disposal. Thus, the sale price is ignored in
n o balancing charge. As such the timing of sale is important (minimum two years of
ership is required) to avoid the claw back of capital allowances.
c o m p u l i n

Disposal of assets
3.2
Assetsots that generate balancing allowance should be disposed of at year end instead of
(a)
following year in order to obtain balancing allowance to shelter adjusted income.
Assets that generate balancing charge should be postponed to the following year instead
(b)
of disposal at year end in order to defer tax liability.

4.0 Controlled transfer

The transfer of qualifying expenditure between group of companies is generally subject to the
controlled sale provisions of the Act. Under these provisions, the assets would be deemed to
have been transferred at the tax written down values of the transferor and hence no balancing
charge or balancing allowance would arise on the transferor.

However, the transferee would only be entitled to claim annual allowance based on the
original acquisition cost of the assets but restricted to the tax written down value of the assets
transferred.

In short, controlled sales would normally benefit the disposer but not the acquirer.

lt should be noted that in a SCIT's decision SEO Drilling Co SA v Ketua Pengarah Hasil Dalam
Negeri (1996) MSTC 2,782, it was held that corntrolled transfer would apply to assets transfer
to outside Malaysian related company.

Example 41.2
En. Nik and his wife Puan Norra between them own all the shares in a small group of companies as
follows:
En. Nik Puan Norra

50% 100%
50%
A Sdn Bhd B Sdn Bhd

50% 50%

C Sdn Bhd
45% 55 %

D Sdn Bhd
Theconstitution of C Sdn Bhd give Puan Norra, as chairman, a casting vote in the event of a tie in
voting.
 TANATION
472 ADVANCED MALAYSIAN

whether the following

transactions are required to
ated . as
be treatod
State
allowances purposes,
and why or why not:
trolled saleses tor
old lorTy to B after all ho
annual allowances had
been claim
D sold a ten-year it for almost two vears.
machine to D after owning
B sold a fax
(i)
(ii) B sold to C a factory,
used
which 5 had to retail as an industrial buildin.
the building use;
allowances. C will convert

(iv) En. Nik had an antique

desk which he used in the office of his med cany
rior design business
D as a gift;
gave it to which she had run as a sole
down her fashion business, ole tro. trader,
Norra tranetandte
On closing
(v) her Mercedes-Benz car to B. This was done in exchange for shares in B,Puan
uan
claiming capital
allowances on the car;
machine for RM10,000 and,
without ever using it, to Bfor
sold it tn.
Norra had aneser ed
be
(vi) D bought a RM8,0
Answer to Example 41.2

Controlled Reasons
sale or not
B controls D and the asset is one on which capital allowances hao
) Yes
een claimed
Yes
B controls D. The fact that capital allowances are due to be clawed h
Gi) the asset was owned for less than two years is not relevant. The all becau
been or were eligible to be claimed. nces have
B is deemed to control C, even though it owns only 50% of the sharas
(iii) No
because Puan Norra (who can be presumed to represent B as 100%
in that company) can exercise a casting vote. B claimed capital allowar
riss
allowances on the
asset but Cwill not eligible to do
so.

A disposal by way of gift is treated as a controlled sale.

iv) Yes
Puan Norra controls B and she has previously claimed capital allowanceson
(v) Yes
car. The provisions apply on the disposal as well as the sale of an assetand an
exchange is a disposal.
B controls D but D was never eligible to claim capital allowances on the assets
No
(vi)
investment income
5.0 Distinction between business income and

The Act provides more incentives for business income as compared to investment income.

Business income would enjoy the following advantages:

even tnoug
business income can utilise the unabsorbed business loss of the company
(a)
there may be different sources of inconme;
(b) availability of capital allowance;
(c) availability of current year loss;
(d) carry forward of unabsorbed loss;
(e) flexible deduction of expense.

5.1 Capital allowance t that

Siness suggest h e l d

Section 4(a) charges tax on income in respect of gains or profits from aeTC 64, it was Sines

each business is a separate source. In River Estates Sdn Bhd v DGIR (1983) M ofa busS
by the Privy Council that a company can have more than one sourCe co
Is 5(2) and s 43]. Urceconsistingo
e x i s

e r e

Capital allowance is available to reduce adjusted income arising r 4 2 ] . If

thal

trom

a t source

business. However capital allowance is limited to income from that s

unabsorbed capital allowance, they are available against subseq

 COMPANIES 473
41. TAX PLANNING FOR

ce but there is no provision permitting their use for reducing taxable inco
businesS SOu
hsiness sources. On cessation of business permanently, unabsorbed caplt
t r o m o t h e r

be a permanent loss.
a l l o w a n c e

nce
would
w o u l d

1 MLJ 1 is was held that rental1 income which is a

tnALB Co
(PC)
Sdn Bhd|1979]
v DGIR
ALB COe cannotbe set off against the unabsorbed capital allowance from manufacturing
1siness source c a n n o

the
busin

facturing source can set off the unabsorbed allowances from

manufacturing

capital
the same
Only
anu facturing business.

Tax planning
5.2 to
fully
to
utilise the capital allowance within the company, it is always tax efficient
fully util
order to two
In usiness activity to be one source of business income rather than
structure various bu.
sources of business.

San
source or two sources of business income is examined in River Estates
The question of one inter-connection, interlacing,
ludv DGIR (PC)|1984] MLJ 1. The test is whether there exists any
Bhd would be one
all embracing those businesses. If there is, then there
interdependence, or unity
business.

said to be
The ability of
the new venture to supplement closely the existing business would
main trade.
incidental to the
whether the business or new venture is using:
The factors of determination depend on new

(a) existing plant and machinery;

(b) existing workers;
(c) existing facility; or

(d) closely connected inseparable from each other.

Ifit did, the businesses is said to be the same source as the existing business. The profitability
of the new business would be able to utilise:

(a) unabsorbed capital allowances of the existing business;

(b) unabsorbed business loss from any business.

5.2.1 Management services

he provision of management services is a separate buSiness source on its own. To establish
the business intent, such provision of management services need to be supported by:

a() athemanagement service agreement entered between parties

basis of charging need to be stated in (a) in detail by reference to the nature of servicess

provided; and
t h e agreement need to be stamped under the Stamp Act 1949.

Example 41.3
l a n t a t i o n Sdn Bhd (Java), a company set up since 1963 carries out oil palm plantations in
O u s townships of Sabah. The fresh fruits of oil palm are sold to third party oil palm refineries at
O n 1.3.2022, the company plans to set up a mill to further prOcess the fresh fruits to crude palm
S t e a d of selling such oil palm to third parties. This manutacturing activity is estimated to
a t e income of RM20 million a year beginning trom the third year. 1he first two years are

Pected to incur business loss of RM6 million.

 474 ADVANCED MALAYSIAN TAXATION

The capital expenditure to set up the mill, plant and machinery is estimated to

(a) Explain the significance of having one business or two separate business
be RM60 million.
(b) Explain whether oil palm plantation and the retinery can be treated as sinoCes
2 separate and distinct business sources.
usiness Source or
Answer to Example 41.3
(a) If the mill is treated as an extension of oil palm plantation, it is a
sinele
adjusted loss will be treated as part of gross income from oil palm plantat usine S SOure
capital allowance of the mill, plant arnd machirnery will be set off against the adialkewise source. Th
oil palm plantation. wise, the
If the mill operation is treated as separate business source; then the unabsorbed c. e of
from the mill operation would be carried forward to be set oft in the
operation.
next YA allowanes
st the
The revenue loss recorded for the mill is, however,
a current
mill
year loss and is to h , .
aggregate income of the company (oil palm business + investment income).
(b) The plantation and mill activity is an integral part of the business, a
palm oil. Thus it is a single business source.
same
business producing
busin

Example 41.4
F House Sdn Bhd (FHSB), a
property developer, acquired 1,000 acres of oil palm plantation
Shah Alam for a mixed housing development project. The land is to be developed in stages owelana
nd in
years. During the course of the development, FHSB intends to over 15
engage contractor to harvest the
a
palm fruits for sale to third parties before the land is cleared for oil
sale of the oil palm fruits will be set off
development. The proceeds from the
against the cost of development of the housing project
FHSB's accounts. in
State your arguments for AND against the treatment of the income from the sale of oil palm fruits as
a source of incomeseparate from the housing project.
Answer to Example 41.4

Arguments for separate source of business income

Due to the duration of development of the land over 15 years, the harvesting of oil palm fruits
was carried out on a frequent and regular basis and is therefore an activity in the ordinary course
of a new business.
Profit seeking motive would be an indication of a trade or business source.

Arguments against separale so1urce of business income

Proceeds from the sale of oil paim fruits were set off against the development cost of the hous
This indicates that it represents a reduction of the cost of construction of the houses.
FHSB is principally a property developer, and the harvesting of oil palm fruits is incidentalto
tor
and is antointegral
the land part of the principal activity. The oil palm trees need to be felled in order
be cleared and
developed.
HiSB engaged a contractor to harvest the fruits and sold it outright to a third party. drd m
carry out any systematic activity to harvest the fruits as would be the case or a

plantation company.

5.3 Business loss

5.3.1 Adjusted loss (current year business loss) u s t e d loss 1S

Adjusted loss is only allowed with regard to business source [s 4(a))

deducted against
aggregate income.
 475
41. TAX PIANNING FOR COMPANIIS

th.
nad
more than
more
one business source which suffers losses in the current year, the
C o m p a n y
4i1sted loss is deducted against aggregate income. The Act only distinguish
fa gate of ad
ehetween
tal allowance be business I or 2 but not for losses |ss 40, 44(1)).

loss Is 44A
Group
relief for
2
5.32

th effect f r o m
YA 2009, 70%% of the current year business loss of a company (surrendering
b
beesurrendered
: to its related companies (claimant company) within the group.
can

mpany)
omp

following are the conditions to be fulfilled by both companies:

The t
ust be tax residents and be within the group for the past 12 months; and
(a) theymust
each company's paid up capital is more than RM2.5 million at the beginning of the YA.
(b
ror the company must not enjoy the following incentives:
However,

status or investment tax lowance;

(i) pioneer

() Malaysian ship exemption;

tax exemption;
(ii) income
(iv) reinvestment allowance;
owned
l revenue deduction
on
approved food production, cost of acquisition of foreign
company, proprietary rights.

5.3.3 Unabsorbed business loss

Section 44(5) the current year business loss which cannot be fully deducted in the
permits that
current year to be carried forward to future years of assessment. Such unabsorbed businesS
is only allowed to be
loss is accumulated as one balance. However, unabsorbed business loss
deducted from aggregate statutory income from business.
In American Leaf Blending Co Sdn Bhd v DGIR [1979] 1 MLJ 1, the Privy Council held that if
rental income is a business source, then the rental income can be set off against the unabsorbed
business loss from tobacco manufacturing business but not the unabsorbed capital allowance.

As a tax planning measure, consideration should be given to utilise the unabsorbed tax losses
by the injection of profitable activities (business source) into such company.

With effect from YA 2019, unabsorbed business loss is only available to c/f for 10 consecutive
YAs. Is 44(5F)]

6.0 Investment income

A company would derived investment income in the form of interest, dividend or rental. Each
uese sources constitute a separate and distinct source of income.

ne
tollowing are the common characteristic:
(a) Vestment income cannot have current year loss. Investment loss from one source is not
W e d to be set-off against other income in the same year. Investment loss is a permanent
loss.
(b) deductibility
Th of expenses is subject to wholly and exclusively test. Should the

exceed income in any year, the

would be a permanent loss.
excess
c) Fac to usage (for rental)
u r c e of income would not be further divided according
ine (for interest) |P Securities Sdn Bhd v
KDL Producing or n o n income producing source
995) 2 MSTC 2,256, Ketua Pengarah HDN v Multi Purpose Holdings Bhd
(2001
(2001) MSTC 3,880).
 476 ADVANCED MALAYSIAN TAXATION

7.0 Interest restriction

Section 33(2) specifically provides that where a laxpayer has borrowed rrca
of producing business income, and has also lent or invested
noney c
purpose of producing business income, the deductibility of the interert 4 tha
money would be restricted based on the formula: interest paid on
t
Investment
x Interest expense
Borrowing
(a) The amount of interest restricted would be added back to arriye at
arrive t busine
incomC
(b) The amount of interest restricted would be allocated to individual inyetr

If the restricted interest cannot be offset against the income of the

related invee
excess interest expense cannot be carried forward and it wouid be a
permansrt ,

7.1 Tax planning

The following are some of the measures that should be considered to overcome
restriction problem:
the i

(a) Identification of investments/advances funded trom

e1sting borrowings and dinn ire
allocation of the cost of borrowings to the investrnent / ad vances,
(b) Review interest charges annually; source for cheaper financing.
(c) Arrange for the subsidiary/associate company to borrow
directly from the bark
(d) Establish separate bank accounts to hold specific loan monies
exclusively for business ye
(specific loan will not be allocated to form the general borrowings).
(e) Disposal of investment that are not profitable to pay off the
fund.
borrowings with high c
(f) Withdrawal of fixed deposits to settle the borrowings.

8.0 Investment in a
company -

equity or debt financing

When a
company is incorporated, the investment can be either in the form of share cap
loan to the company (debt
(equity)
noted:
or
financing). The foliowing tax implications should be

8.1 Profit extraction

(a) Share capital

The return of investment from share capítal is in the form of dividend. Maa
ter
companies would be able to pay exempt dividend from the exempt account a gle
a
dividend. Withthateffect from 1.1.2014, the single tier dividend system is in full opes
which means all dividends received
exernpt dividends.
are

(b) Debt financing

The return of investment fron debt
the full amount of interest
fínancing is interest income. Tne o fi n t e r e s t

income from the investee company. The qua

income received is
normally higher than dívidend. the

on
There is no restriction of the amount of interest to be under the Act
ceived
rece APproval

Companies Act, subject to "arm's length" negotiated rates and Bank e s

foreign loans.
 41. TAX PLANNING FOR COMPANIES 477

erest restricti tax planning

12 xation is based on source by source
M a l ay
ys i a n t a x a t

form ot shares, the basis. an investorr borrows externally and

If
then
invests, interest expense is only
nd income from the investee company. available to be set off against
the
dividen

c received isis nnow exempt under single tier dividend

received

dividends

would be a permanent loss to the investor.

interes e x p e n s e w o u l svstem, then the unabsorbea
As

relating to dividend income to be deducted

enue expenses relat.
Para 12B, Sch 6 expressly excluaes
against other sources.
nt is in the form of loan, then the
h ei n v e s t m e n t

investor company would charge the

income to offset the interest regu
expense suffered. This would ensure the
d
ame

e d
ctibility
u c
of
t
interest expense.
i
rul
The investee
efee Company on the other hand would qualify for a tax deduction in its accounts so

it has
astilised the loan in the production of income of that source.
utilised

Jong
ong
in the form of debt would ensure minimum
Investment

interest restriction loss.

Withdrawal of investment
8.3
capital, once the amount is invested in the company, it is not allowed to be taken out
Forshare
ss the company carries out capital reduction scheme. Unlike UK, Malaysia Companies
unless
At does not permit the company to acquire its owned shares. However, in 1997, Malaysian
Covernment begins to allow listed company to buy back its shares under certain circumstances.

Nevertheless, if the investment is in the form of loan, the amount can be withdrawn from the
company at any time without any legal constraint,

Section 115 read with s 117 of the CA 2016 allows company to reduce the share capital on its
Own accord without the need to apply to the court for sanction. This tremendously reduces
the cost of compliance.

A TAX REBATE OF RM20,000 [S 6D]

1.0 Small and medium size enterprises (SME)

SME companies are able to enjoy numerous preferential tax treatments. A SME company has
to be incorporated in Malaysia under the Companies Act 2016, with management and control
exercised in Malaysia in order to qualify as a tax resident. [s 8(1)]

SME refers to:

a manufacturing with turnovers RM50 m or employees s 200.
0others with turnover s 20 m or employees s 75.

1.1 Paid up capital

ne paid up capital of ordinary shares of the company at the beginning of any YA must not
e d RM2.5 million and such company must not be part of a group of companies that has
Pad
up capital of more than RM2.5 milion.
2.0
Business source
To enjg E ncentives announced by the Government n its short-term economic recoveru
plan (Penjar
ana), a SME has to carry on at least one business sOurce, with the busines operation
n g any time between 1.7.2020 and 31.12.2022.
 8 ADANCD MALAYSIAN TAATON

The gross business inconme of the company for a YA must not exceed Rar
RM50 million,
3.0 Preferential tax treatment

An SME company would be able to enjoy the following preferential tax raf

Chargeable income RM
First RM600,000 @ 17% XX

Excess 24% Xx

XX
Taxrebate (20,000)
Net income tax payable XX

3.1 Tax rebate

A company is able to
enjoy a tax rebate of RM20,000 per year tor 3 consecutive YAs Thi.
etfect from YA 2021.

The rebate is deduction against

a
payable and the threshold amount per year is RM20 00
tax
subject to the company purchasing new plant and machinery and undergoing vari
operating expenses. us

The rebate of up to RM20,000 is deducted from the tax

payable. This would
chargeable income of at least RM120,000 per YA is required for the company to mean that a
tax rebate of RM20,000. fully utilise the

RM
Chargeable income
120,000
Income tax payable @ 17%
20,400
tax rebate
Additional tax (20,000)
400
A
company would not be able to claim
refund or forward any unutilised
next YA. In carry tax
reoa
short, any unutilised rebate would be
disregarded.
4.0 Single person company
The tax rebate of
RM20,000 is a tax incentive available
set up Sdn Bhds with to each SME set up. It is tax etn
director, carrying on
one

(a) different types of business, such as

(b) at
separate business addresses spreadtrading, services;
out over several
states within
Malay
so that more
companies would be able to reap the tax
r 3 YAs.

However, commercial rebate of RM20,000

for the tax rebate. justification and business efficiency must be shown per
n
y to qualt
o
5.0 Limited Liability Partnership (LLP)
The tax rebate of
RM20,000
c a p i t a l

is also
of not more
than RM2.5 million and
available to new LLPs
1.7.202t
0o

31 12.2022. registere w
commencing business d uring 1/
any tin
 COMPANIES
479
PIANNINI, I1OR
41 TAX

Compliance conditions

New capilal expenditure

ot tax
to RM20,000 would be taken into account in the granting
New capital
al expenditure
ex
ujP

e b a t e

the company are excluded.

Plant equipment
ment and
facility
and disposed by related parties to new

New employee
.2 must
of the business. The employee
needs to De employed in the carrying on
employee
employed
and not sourced from the related parties.
ewly
be

Distinct business activity

b.
carried out:
business activity
The that has
parties, sole proprietor or partnership
be different from its related
(a) has to
converted to the new entity;
business entities.
not result from the merger
or acquisition of two or more
(b) must

Different business premises

6.4
be carried out in different premises from its related parties.
The business shall
commonly owned with at least
Related parties mean directly owned, indirectly controlled, or

between companies or LLP.

50% holding
This takes effect from YA 2021.
6D(4)) Order 2021, PU(A) 504/2021]
|Income Tax (Conditions for the Grant of Rebate under s

Example 41.5
sales o n
Suria Makmur Sdn Bhd (Suria) incorporated on 1.8.2021. Suria commenced retail
was

network and other online channels on 11.10.2021 and closes its

cosmetic products using social media
accounts to 31.12.2022.
Suria is a single person company, wholly owned by Adani who is also the director of the company.
Prior to incorporation of Suria, Adani is a commission agent as a sole proprietor for cosmetic
products of various brands.
Suria incurred RM36,000 on operating expenses for the period ended 31.12.2022.

Required:
Explain to Adani whether Suria is eligible for the tax rebate of RM20,000.

Answer to Example 41.5

Adani carrying on the business of commission agernt on a variety of brands as a sole proprietor prior
to the incorporation of Suria. The business of Suria although relates to cosmetic products but it is now
on retail sales through online channel. It is no longer on commission basis
from the sole proprietor business of commission based.
Anew business of a retail sales is distinct
the operating expenditure meets the annual threshold of RM20,000, Suria is eligible for the tax
rebate of RM20,000 for YA 2022.
 TANATION
480 ADVANCED MALAYSIAN

BRENOVATION AND REFURBISHMENT

Introduction
businesses to carry out renovatian
encourages
The Malaysian
of
Government

its business premises in

order to spearhead
economic grov owth and refurbishma
providin
sustainability during
the COVID 19 pandemic. bust
1.0 Tax incentives

to RM300,000
would be available on non a . . . .

A specific
expenditure
deduction
incurred on a
amounting
business premises in carrying
on a business. It is a sto itying capi
to
domestic expenditure to boost up the multiplier etfect tor economic growth.
encourg
2.0 Scope
The ambit of the deduction is limited to capital expenditure incurred on the businese
comprising the following:

(a) general electrical installation;

(b) lighting;
(c)gassystem;
(d) water system;
(e) kitchen fittings;
(sanitary fittings;
g) door, gate, window, grill and roller shutter;
(h) fixed partitions;
G) flooring (including carpets)
G) wall covering (including paint work
(k) false ceiling and cornices;
(1) ornamental features or decorations excluding fine art;
m) canopy or awning;
(n) fitting room or changing room;
(o) recreational room for employee;
(p) air-conditioning system;
(q) children play area;
(r) reception area;
(s) surau.

2.1 Exclusion

The following expenses are excluded from the deduction:

) designer fee;
(ii) professional fee;
(11)purchase of antique (purchase of an object or work of art which
in human
society, is a collectable item due to its age, rarity, representher un othe

features and appreciates in value over craftmansnup

time). 2 2 2

Income Tax (Costs of Renovation and Susiness Premise) Rule

(Amendment) Rules 2021; PU(A) 381/2020, Refurbishment of Business Pre

481/2021]
 PIANNING,
1OR
COMPANIES 48
41, TAX

T h e d e d u c t i o n m e c h a n i s m

refurbIshment of business premises as specified in 2.0 above

tenovatio and anount
vation
i n c o m e of business. The
deduction in arriving at the adjusted The
to 31.12.2022.
Of
ecific
of RM300,000 for the period from 1.3.2020
c o s t

a spe threshold or
The
allowed as
ted to a
can be in
current YA
n o u l db
t erestricted

used for the purposes of its business which

must be
b u s i n e s sp r e m

the renovation
follow i n g YAS.

to 31.12.2022
refers to the period of the commencement of
1.3.2020
The
periodo
of the renovation of the business premises.
period
of of the ending
to the
from YA 2020 till 2022
effect
takes

This

certificate
Audit
0 deduction in arriving at the business
incurred would be allowed as a specific confirmation by the
aunt
incurred, a certificate and
For any YA of the
The am amount
income. is required.
the deduction
adjusted

auditor to support

Manner of renovation

businessS
5.0
external contractors or within in house of the
be carried out by of part
The renovation may the purchase of construction materials and engagement
themselves through is incurred for
tities
entities
the renovation activity. As long
as the renovation
workers in carrying out available.
time
the deduction would be
of (a) to (s) in 2.0 above,
the jtems

Efficiency utilisation
6.0 allowance,
renovation costs incurred are available for capital
In the event
the various allowance, such capital
allowance, agriculture allowance, mining and 3.
industrial building allowance regime of Sch 2
within the respective capital
must be claimed
expenditure
the specific deduction of RM300,000.
It is not available for claiming
construction, refurbishment,
meant for renovation,
The amount of RM300,000 is restrictively on business premises,
such as
of non-qualifying capital expenditure
used in carrying on the
extension and alteration
and home office which is
office shoplots, rented premises,
building,
businesS.

7.0 Investment property

investment property in
extension and alteration on
Kenovation, construction, refurbishment, deduction of RM300,000.
for the specific
aeriving rental income of s 4(d) is not eligible
 TANATION
482 ADVANCED MALAYSIAN
income
of chargeable
Computation
Chart 41.1: BusinessI
Business II
Gross Income Gross Income
Non
Business Income , Less 1ess
(Determined source
Wholly and
Wholly and
by source) Exchusively Expenses
Exclusively Expenses
say
LessAllowable Expenses
= Adjusted Income
Adjusted Loss
(wholly & exclusively test)
Add
Balancing Charge Adjusted Income =NIL
Adjusted Income/
Less
(StatutoryIncome)
Capital Allowance Balancing Charge
(inclusive of balancing Less Capital Allowance
and unabsorbed
capital allowances b/f

Statulory Income
StatutoryIncome
Aggregate of
Statutory Incone
from Businesses

Less business losses

b/f-s43(2)

Add
Recoveries of abortive
prospecting expenditure (Sch 4)

A88regate Income

Less Adjusted loss from business

in basis period
s 44(2) *******************************
**********-********************

Less Prospecting expenditure

Less Pre-operational business

expenditure Sch 4B
Less
Approved donations
s 44(6)- 44(11D) restricted to 10% of
aggregate income

Define Aggregate Income

Less
Group relief business loss
surrendered by subsidiaries

Total Income

Chargeable Income