Chapter 1:Business

Income
TAXATION 2
Learning outcome
• 1.0 Introduction
• 1.1Badges of trade
• 1.2Gross income from a business
• 1.3 Rental income or business income
• 1.4 Commencement of Business
• 1.5 Capital or Revenue Receipt
• 1.0 Introduction

• Gains or profits from a business are chargeable to tax under Section 4(a) of the Income Tax Act (ITA), 1967.

• Business
‘__________________” is defined in Section 2 of the Act to include profession, vocation and trade and every
manufacture, adventure or concern in the nature of trade, but excludes employment.

• Profession
‘_________________’ refers to a person using intellectual skill to earn income. Profession can be carried out
either by a company or an individual. Examples would include individuals carrying on engineering, auditing,
legal or medical practice as a profession
• Vocation
‘______________’ means the way of passing life. A person who attends races, and
do business, its like gambling
makes systematically bets, is liable in respect of the profits he derives from the ‘vocation
of betting. The gains derived were chargeable to tax even if the vocation was unlawful.

• ‘_____________________’
Trade usually consists of a series of transactions where there is
continuity and repetition of buying and selling with the intention to make profit. In
general, trade involves the following characteristics:

buying and selling

• o Activities of commerce – _________________________;
• o May consist of a series of transactions with continuity and repetition; and
• o May also include isolated transactions.
• ‘_____________________’
Manufacture is defined as a process where the original material must
undergo a transformation so that a new and different article of product emerges. The
new substance or article must have a distinct name, character or use. The new
commodity must be a commercially separate and distinct commodity has its own
character and use.

• If the transaction fell into trade or ‘_________________________________’

adventure or concern in nature of trade would be
taxed as business income even though the transaction is an isolated transaction.
• 1.1 Badges of trade
• The badges of trade can be applied as a guide to establish the
existence of ‘trade’ or ‘an adventure or concern in the nature of
trade’ in a particular case
 Investment

modified

sell
 PROFITSWIN

• P= _____________________________
purpose= motive
• R=Repetition
• O=Organisation
• F=Financing
Investment
• I=___________________________
• T-Timing
• S=Surrounding
• W=Ways of Disposal
• I=Interest in similar field
Nature
• N=___________________________
 1.2 Gross income from a business
• Gross income from business (revenue receipt) includes the following:
• 1. Advance received may be included as gross business income depending on the nature
of receipt. Advance received which is subject to refund need not be included as gross
business income.
allowable
• 2. Market value of goods exported in the course of carrying on a business. business income, nil
not business income, put figure
• 3. Market value of inventory at the time of withdrawal for personal use of owner.
• 4. Dividend income of share dealing business. business income, nil
• 5. Interest income of investment dealing business or money lending business (e.g. bank
and finance company) business income, nil
• 6. Release of debts in respect of any outgoing or expenses which are tax deductible shall be treated
as gross business income. Where the release of debts is in respect of any expenditure where
capital allowances were claimed by a person, the whole or part of a debt in respect of expenditure
so released will be treated as gross business income. business income, nil
• 7. Recovery of bad debt which has previously been allowed as business deduction, that amount
recovered shall form the gross income of a business. Business income, nil

• 8. Insurance recovery where insurance expense has been claimed as business deduction (e.g. for
loss of trading inventory). business income, nil
• 9. Compensation for loss of income (e.g. upon cancellation of ordinary trade agreement which is
normal incident in business). business income, nil

• 10.Where the loss of cash has been allowed as tax deduction, recoveries by way of insurance,
agreement of payment from staff concerned, legal action; and other recovery actions should be
taxed as income of the business where such recoveries are received. business income, nil

• 11. Realized foreign exchange gain arising from revenue transaction which forms part of normal
business activities business income, nil
 1.3 Rental income or business income

• 1.3.1 Letting of real property as a business source Letting of real property is deemed as a
business source and the income received from it is charged to tax under section 4(a) of the
ITA if maintenance services or support services are provided in relation to the real property.
• Maintenance services or support services should be comprehensively and actively
provided.
• 1.3.2 Letting of real property as a non-business source
• The letting of real property is treated as a non-business source and income received from it
is charged to tax under section 4(d) of the ITA if a person lets out the real property without
providing maintenance services or support services comprehensively and actively.
• 1.3.3 Commencement date of letting of real property
• The date of commencement of letting of real property treated as a source of rental
income under section 4(d) of the ITA is on the date the real property is rented out for the
first time.
• The date of commencement of letting of real property treated as a business source
under section 4(a) of the ITA is on the date the real property is made available for letting.
 1.3.4 All real properties grouped as a single source

• Several real properties which are let out can be grouped as one source whether as a
business source under section 4(a) of the ITA or a non-business source under section 4(d) of
the ITA. If a person lets out several real properties in a year of assessment and the letting of –
(a) all real properties are business sources; all the real properties can be grouped as one
business source under section 4(a) of the ITA.
(b) all real properties are non-business sources; all the real properties can be grouped as one
non-business source under section 4(d) of the ITA.
• (c) some of the real properties is a business source and some is a non-business source,
income from both sources shall be assessed separately. The income from the business source
and the non-business source is assessed under sections 4(a) and 4(d) of the ITA respectively.
 1.3.5 Expense relating to income of letting of real
property

• An expense wholly and exclusively incurred in the production of income under

subsection 33(1) of the ITA and which does not fall under subsection 39(1) of the ITA is
allowed as a deduction from income of business of letting of real property charged to
tax under section 4(a) of the ITA.
• Expense which is allowed a deduction from income of letting of real property charged
to tax under section 4(d) of the ITA is the direct expense that is wholly and exclusively
incurred in the production of income under subsection 33(1) of the ITA.
 Examples of direct expenses which are deductible from gross
income of letting of real property are as follows:

cukai pintu cukai tanah

• (a) Assessment and quit rent Annual assessment paid to the local authority and quit rent paid to the land
office. allowable, nil
allowable, nil
• (b) Interest on loan Interest paid on loan taken to finance the purchase of real property which is rented out.
• (c) Fire insurance premium Fire insurance premium paid in relation to fire insurance policy taken on the real
property which is rented out. allowable, nil
• (d) Expense on rent collection Rent collection fee and legal expense incurred to enforce rent collection. allowable, nil
• (e) Expense on rent renewal Expense incurred to renew tenancy or to change tenant. allowable, nil
• (f) Expense on repair allowable, nil
• (g) Expense on ordinary repair to maintain the real property in its existing state. allowable, nil
maintainence
 Rental income received in advance from more than one real property
advance rental is allowable

• In the case where there is more than one real property and rental income from one or several real
properties is received in advance, expenses related to that source is deductible from other rental income in
the basis period in which the expenses are incurred. This
• treatment is only applicable to rental income from real properties which are assessed as one source.
• Effective from YA 2016, the letting of property is a business source under section 4(a) of the ITA, the
rental income received in advance in respect of the future use or enjoyment of any property in the relevant
period or in any following basis period is to be taxed in the basis period it is received, notwithstanding that
the use or enjoyment of the property has yet to be dealt with.
• Where advance rental income in a particular YA has been taxed, any expense incurred after that YA,
which is in relation to the advance rental income, would be allowable in accordance with section 33 of the
ITA in the basis period of the YA the expense was incurred
 1.4 Commencement of Business: Determine:

• i) The basis period of a business source of Income.

• ii) Pre-commencement of expenditure which DO NOT qualify for tax deduction
• iii) Set- off the capital allowance against adjusted income
 1.5 Capital or Revenue Expenditure
- figure
• Receipt CAPITAL in nature are NOT taxable under ITA 1967.
• a) Consideration for the sale or for the destruction of the profit making apparatus in
capital in nature.
• b) Consideration in lieu of trading profit or loss of income is revenue in nature.
• c) Consideration for the sale of fixed assets is capital in nature.
• d) Consideration for sterilization of capital asset or loss of source of income)is capital in
nature.
• e) Consideration of restrictive covenant is capital receipt.
Lecture Question Example 1

nil, taxable
Lecture Question Example 2