Business Income

Sec. 4(a)

03/25/2023
 Type of business
• Sole trader
– Tax according to scheduler tax rate
• Partnership
– Traditional Partnership (Partnership Act 1961)
• Tax according to flat or scheduler tax rate
– LLP (LLP Act 2012)
• Tax according to company’s tax rate
• Company
– As a person chargeable to tax
– Tax on the flat tax rate 24%
03/25/2023
 Definition of business

• Sec. 2 of the act: to include profession,

vocation and trade and every manufacture,
adventure or concern in the nature of trade
but excludes employment
• Under the Act, taxpayer can have more than
one business source within a YA

03/25/2023
 Definition

• Profession
– Not defined by Act
– Normally involve the use of intellectual skill or
other skill by a person.
– The skill is control by the operator
– Eg. Singer, entertainer, doctor, painter,

03/25/2023
 Other definition
• Vocation
– Not defined by the act
– ‘the way in which a person passes his life’
– Normally involves systematical bets that give profits to
a person
• Trade
– Commercial undertaking (buying and selling activities
– Have a series of transaction, continuity and repetitively
occurred
– the intention of transaction is for making profits

03/25/2023
 Other definition
• manufacture,
– A process to transform material to finish goods
• adventure or concern in the nature of trade
– Any transaction that give rise to ‘income’
– Even an isolated transaction

03/25/2023
 THE EXISTENCE OF BUSINESS / BADGES OF
TRADE

1. Subject matter of the transaction

2. Length of Ownership
3. Formation of a company
4. The frequency of the transaction
5. Alteration of property
6. Intention of the business transaction
7. Method employed in disposing the property
8. Financing arrangements
9. Accounting evidence
03/25/2023
 Derivation of business income.
Sec 12(1)a
• Any gross income derived from a business
carried on in Malaysia
• any gross income that is not attributable to
operation of the business carried on outside
Malaysia – shall be deemed derived from
M’sia

03/25/2023
 Continue…
• Ways to determined that the business operation
is carried on in Malaysia; (at least 1 is full
filled)
– Contract concluded in M’sia
– Stocks are maintained in M’sia
– Passing of ownership and risk of trading stocks in
M’sia
– Sale proceeds received in M’sia
– Services rendered in M’sia

03/25/2023
 Sec 12(3)
Permanent Establishment (PE)
• Income is tax on territorial basis
• A place of • A building site, or a
management construction
• A branch • An installation or an
• An office assembly project
• A factory • A farm or plantation
• A workshop • A mine
• A warehouse • An oil or gas, a
quarry
 Gross income from business. (Sec 22)

• It is revenue receipts
• Received from circulating assets
• However, when the gross income result from past
expenses, it would then be treated as gross income
– Example : insurance claim (if the insurance
expense is charged against revenue.
• Compensation received for loss of income, is treated
as gross income (this loss is not permanent and the
business structure of company is not affected)

03/25/2023
 Taxable or not??
(trade or an adventure in the nature of trade)

• Income from illegal activities

• Hobbies
• Gambling
• Trading in properties
• Trading in shares ( investment or trading or
gambling)
• Grants or subsidies?
 BASIS PERIOD FOR A BUSINESS

• For individual taxpayer who carried on a business is a

calendar year
– i.e from 1 January to 31 December of each year.
– business income it should be aggregated with the owner
others income from Sec. 4(b) to 4(f).
• For company, unit trust and club,
– with effect from year assessment 2004, either calendar year
or the financial year end of a business.

03/25/2023
 Commencement of business

• Important due to:

– Pre- commencement expense is not deductible
(permanent loss)
– Capital allowance is given once the business
commence
– Selection of basis period (year end of business or
calendar year)

03/25/2023
 Single or separate business??

• Important due to;

– Utilization of capital allowance
– Capital allowance from one business cannot be set-
off against income from other business
• Is the new activity relating to the existing
business or new business depends on the
nature and interdependence of such activities

03/25/2023
 ADJUSTED INCOME AND
STATUTORY INCOME OF BUSINESS

• Adjusted income
– Adjusted income of a business is arrived by deducting the
allowable expenses from gross business income or by
adding the non-allowable deduction from net income of a
business.
• Statutory Income
– Statutory income of a business is arrived by deducting
capital allowance, unabsorbed capital allowance and
balancing allowance from adjusted business income adding
the balancing chares (if any) to the adjusted business
income.
03/25/2023
 Sec. 4(a)- Business income

Format A
Gross income from business XXXX
Less: Revenue expenses Xxxx (xxx)
Bad debt Xxxx
Others allowable expenses Xxxx
Double deduction Xxxx
Special deduction Xxxx
Adjusted income from business Xxxxx
Add: balancing charge Xxxx (xxxx)
Less: Capital allowance (Xxxx)
Unabsorbed capital allowance (xxxx)
Balancing Allowance
Statutory income

03/25/2023
 Format B
Net income from business XXXX
Add: Non- allowable expenses: Xxxx
Depreciation Xxxx
Domestic or private expenses Xxxx
Leave passage for employee Xxxx
Contribution to unapproved scheme Xxxx
Others prohibited expenses (sec. 39(1)) xxxx Xxxxx
Less: double deduction (xxxx)
Non-business income: Se. 4(c) and 4(d)
Adjusted income from business Xxxxx
Add: balancing charge (Xxxx) Xxxx
Less: Capital allowance (xxxxx
Unabsorbed capital allowance )
Balancing Allowance
(xxxx)
Statutory income
03/25/2023
 Cessation of business
• Temporary Cessation
– Revenue expenses is deductible in arriving to adjusted
income
– Any current year loss can be off set against aggregate
income
– Excess of the current year loss can be brought forward to
future year to be off set against any business income
– Capital allowance would continue to be claimed
– Unabsorbed capital allowance can be carried forward to be
off set against the particular business source of income

03/25/2023
 Cessation of business

• Permanent Cessation
– Revenue expenses would NOT be deductible-
permanent loss.
– Unabsorbed capital allowance would be permanent
loss
– Distribution of assets are capital receipts.

03/25/2023
BUSINESS
EXPENSES
 Business Expenses

General deduction – Sec. 33

Specific deduction – Sec. 34(2), 34(4) ,
34(5) and 34(6)
Prohibited deduction – Sec 39(1) (a)-(m)

03/25/2023
 Business Expenses
• Has to fulfill ALL the following condition:
– Each business source has to be accounted separately;
– The scope of expense refers to ‘outgoings and revenue
expenses’;
– The expenses have to be ‘wholly and exclusively’;
– The expenses have incurred (paid, payable or becoming
payable)
– in the production of gross income from that business
source.

03/25/2023
 Capital expenditure and revenue
expenditure
• Only revenue expenditure is allowed to be
deducted
• Capital expenditure which although satisfies S.
33 “wholly and exclusively’ test, is not
allowed to be deducted.
• It is prohibited by sec. 39 of the Act

03/25/2023
 Test:
• Enduring benefit asset – bringing assets into
existence (capital exp.)
• Fixed capital and circulating capital
– transaction relate to capital asset- capital expenditure
• Identifiable asset – cost to acquire asset (capital exp.)
• Business structure vs. process
– transaction relate to business structure- capital expenditure
• Initial expenditure – (capital exp.)

03/25/2023
General deduction –
Sec 33
 General deduction – Sec 33

• 33(1)(a)- Interest expense on money borrowed

• 33(1)(b)- Rental expenses for occupying and
using the properties and incurred for the
purposes of producing gross income
• 33(1)(c)- Repair and renewals
– Repair on acquisition is not deductible
– Replacement of an entire asset is not repair-not
deductible
– Renewal expenses
03/25/2023
Specific deduction
sec 34 (2)
 Bad debt and doubtful debts – sec 34 (2)
• Bad debt and doubtful debts from trading activities
– Bad debt written off
– Specific provision for bad debt if;
• Specific debtors are identified
• The debts are partly/wholly irrecoverable
• Has been reasonably estimated to be bad.
– General provision - non allowable
• P/R 1/2002
– Shows an evaluation of each debt separately
– Extensive evaluation has been carried on
– Person who evaluates the date and date of such evaluation
– Specific information used in arriving at that evaluation

03/25/2023
 Specific deduction – sec 34(4), 34(5)

• 34(4)-Employer contribution to approved

schemes
– Deductible ( the lower of the contribution and 19%
from employee remuneration)
• 34(5)- Initial contribution is not allowable
• Legal and professional expenses
– Damage due to business fault – not deductible
– Violation of law –not deductible

03/25/2023
 Specific deduction – sec 34
• Loss / advances to employees - allowable
• Loss from defalcation by employees or directors – allowable
• Keyman insurance
– Life insurance on important person (crucial to the profitability
of a company)
• Allowable if; the policies has no element of investment
• The beneficiaries go to the employer/company
• Not insured on director of controlled company, partners in
partnership or sole proprietor
– Proceed received on such policies will be assessed as part of
business income

03/25/2023
 Specific deduction – Sec. 34(6) (c)-(o)
• Mining expenditure
• Replanting expenditure
• Equipment for disable person
• Expenditure in respect of translation/publication of books
• In kind or cash Contribution to public libraries (max
RM100,000 for each YA)
• Child care center for the benefits of employee
• Social responsibility payment
• Establishing musical and cultural group- approved by the
minister
• Sponsoring any arts and cultural activities
i. Local max RM500K
ii. Foreign Max RM200K
– Maximum (i) and (ii) is RM500k
03/25/2023
 Specific deduction – Sec. 34(6)

• Scholarship expenses – only to company

• Expenses on Halal Certification- only to
company
• Practical training to resident non- employee
• International standardization activities

03/25/2023
 Specific deduction – Gazette order
• Expenditure relates to IT (wef from YA 2000-CYA)
• Cost of developing website (wef fromYA 2002)
• Statutory audit fees
• Incorporation expenses for company with authorized capital
<RM2.5mill
• Cost to recruit employees prior to commencement of business
• Secretarial fees – max RM5000
• Tax filing fees (wef from YA 2016) – max RM10,000

03/25/2023
 Specific deduction – Gazette order
• Employment of graduates ( double deduction) (YA2004-2005)
– Condition:
• Employee is unemployed graduates registered with the EPU,
PM department.
• Employed on or after 13/9/2003
• Retrenchment payment – not deductible
• AGM meeting expenses – not deductible
• Compensation to employee for dismissal of employment –
deductible
• Bank commission fees paid by investment holding company-
allowable

03/25/2023
 Double deduction: Pg 277-282)
• Interest on loans to small business
• Remuneration of disable employees
• Revenue expenditure on R&D
• Employees training cost on GST – double deduction
• Scholarship to university students
• Approved internship program (YA2012-2016)- max
RM5000/student per YA
– A programme approve by Talent Corp (M) Bhd with MOE
– Monthly Allowance not less than RM500
– Fees paid to trainer
– Meal, travelling and accommodation to students

03/25/2023
Disallowed Expenses – Sec 39
 Disallowed Expenses – Sec 39
• Domestic or private expenses
• Excessive remuneration paid to family members
and directors of the company
• Capital withdrawn / sum employed as capital
• Payment to any pension, provident saving or to
any fund which is not approved scheme
• Qualifying mining, agriculture, forest, prospecting
and farm expenditure (capital expenditure)

03/25/2023
 Disallowed Expenses – Sec 39
• Expenses to non-resident, where withholdings tax
were not deducted by the payer
• Sum payable for the used of a license or permit to
extract timber from a forest.
• Lease rental in respect of passenger vehicles used
in business
– Cost of vehicle above RM150,000 ..max allowed is RM50,000
– Cost of vehicle below RM150,000.. Max is RM100,000
– The restriction is only for non commercial vehicle only.

03/25/2023
 Disallowed Expenses – Sec 39
Entertainment is defined to includes:
• Provision of food, drink, recreation or hospitality of
any kind; or
• The provision of accommodation or travel
Suppliers,
Business debtors,
Entertainment expenses employees
Entertainment
Employees
allowances

• 50% from entertainment expenses incurred on clients

by company or employee; another 50% deductible.
• .
03/25/2023
 Disallowed Expenses – Sec 39
• Except:( 100% deductible for entertainment expenses)
– Entertainment incurred on employee only such as
annual dinner and other event which involve only the
employees.
– Entertainment business- eg. Hotel and restaurant,
– Expenses that related to the product promotion activity
– Expenses relates on entertainment for cultural event to
promote the business
– Entertainment relates ‘wholly to sales’
• Means entertainment directly related to sales
provided to customer, dealers, distributor except
supplier.

03/25/2023
 Disallowed Expenses – Sec 39
• Leave passage (the cost of fares) provided to
employee - not deductible
• However, cost of meal and accommodation during the
vacation/trip is tax deductible: staff amenities
• W.e.f YA 2007 cost for yearly event within Malaysia
will be deductible

03/25/2023
Class exercise