TAX 667

TOPIC 8
TAX PLANNING FOR COMPANY
 Learning Outcomes
• At the end of this chapter, students should be able to:
– Explain the importance of commencement of the business
– Explain the implications of pre-commencement expenses
– Explain the importance of basis periods
– Explain the effects of claiming capital allowances
– Explain the tax implications of allowable, non-allowable and double deduction
expenses.
– Explain the interest restriction on loan.
– Explain the tax treatment of current year business loss and unabsorbed business
loss brought forward.
– Group merger and acquisition.
 Learning Outcomes (cont.)
– Explain the tax effects of acquiring assets under leasing and hire-
purchase.
– Explain the tax implications on the cessation of business.
– Explain the tax implications on the disposal of fixed assets.
– Explain the conditions for controlled transfer.
– Explain the tax implications of controlled transfer provisions.
– Explain the conditions for group reliefs.
– Identify the related company under the group relief provision.
– Compute the amount of business loss surrendered and claimed by
related company.
Outline
Commencement of business
Interest restriction on loan
Business loss
Asset acquisition
Cessation of business
Disposal of plant, machinery,
industrial buildings and real
property
Controlled transfer
Group reliefs
 TAX PLANNING FOR COMPANIES
A series of measures to manage income sources with the
objective of :
• Eliminating
• Minimising Tax but within the scope of tax legislation.
• Deferring

Tax planning – minimizing the charge of taxation

- select between alternatives
COMMENCEMENT OF
BUSINESS
 Commencement of Business
• For taxation purposes, it is the commencement
of the essential activities of a business that is
relevant in determining when a business has
commenced.
– The determination of commencement date is by
reference to the activities of a company and not
the income generation.
– Sales or turnover need not be present for
ascertaining the commencement date.
Business Commencement Date

Trading
• When embark on its purchasing
activity, which is an essential
activity of trading business.
Manufacturing
• When embark on production of
manufactured goods
Services
• When open its door to the public
(soft launch)
 The Importance of Commencement Date
• It is crucial to determine the commencement date of the business because:
– Revenue expense incurred prior to business commencement is not
allowed as a deduction.
– Once business is commenced, if no income is generated from the
business, such business loss can be set off against other income in
the current year, or carried forward to the future years to set off
against all business income.
– Qualifying expenditure incurred prior to the commencement of
business is deemed incurred on the date of commencement.
 Commencement of Business
• The tax implications when commencing business are:
1. Basis period :
• The commencement date determines the basis period for taxation.
• Generally, the basis period of a financial year of 12 months will be the
basis YA for taxation.
• Eg: The financial year for 01.03.2021 – 28.02.2022 will be the YA
2022 for taxation.
• The first accounting period will be the first basis period no matter
whether the period is less than 12 months or more than 12 months
(PR8/2014)
 Commencement of Business
– Expenses:
• Once a business has commenced, the company may obtain a tax
deduction for revenue expenses incurred.
• Revenue expense that was incurred prior business commencement
is not allowed as deduction.

– Current year loss:

• If no income is generated from the business, such business loss
can be offset against other income in the current year or carry
forward to the future years for offset against all business income.
(Finance Act 2021: c/f to 10 consecutive YAs)
 Pre-Commencement Business Exp
• Training expenses
– Qualifying training expenses incurred by a company in
respect of potential employees prior to the commencement
of business is deductible at the time of commencement.
– Qualifying training expenses means expenditure incurred:
• On the training of potential employees to impart basic
skills to enable the company to commence its
business.
• Incurred within a period of one year prior to the
commencement of business.
 Implication of Deductions
Outgoings and Deductible from the
expenses, wholly and business income in
Allowable exclusively incurred arriving at the
expenses in the production of adjusted BI, resulting
gross income in lower income

Non-deductible from
Non- Capital expenditure,
the business income
allowable non-business
and will be added
expenses, not
expenses outgoings
back, resulting in
higher income

Deductible twice
Expenses specifically
from the business
given double
Double deduction such as
income in arriving at
deductions the adjusted BI,
remuneration for
resulting in much
disable employees
 Capital Allowance
• The acquisition of assets would be given capital allowances if
the assets fall into the ambit of plant, machinery or
industrial buildings as stipulated under Sch 3 ITA 1967.
• The allowances are given to the company in respect of a
business source, if the company has incurred, owned and
used such qualifying assets in the business.
Types of assets IA AA
Office equipment, furniture and fittings 20% 10%
Plant and machinery 20% 14%
Heavy machinery and motor vehicle 20% 20%
 Capital Allowance
• The CA are set off against the adjusted income of a
business to arrive at statutory income.
• Any unabsorbed CA can be carried forward to future years,
to be set off against the same business income, provided
that the business source has not ceased permanently.
• CA on Business 1 cannot be utilized against adjusted
income of Business 2 or vice versa.
• On cessation of business permanently, unabsorbed CA
would be a permanent loss.
 QE for Motor Vehicle

New Second hand

Commercial
passenger passenger
vehicle
vehicle vehicle
Cost < RM
150,000
QE RM 100,000
No restriction
on the amount QE = RM
of QE 50,000
Cost > RM
150,000
QE RM 50,000
 Capital Allowance
• Tax Planning:
– In order to fully utilize the CA within the company, it is always tax
efficient to structure various business activity to be one source of
business income rather than two sources of business.
– In order to maximize the CA that the business can claim, business
should acquire
• commercial vehicle because there is no restriction on the QE
• new passenger vehicle that costs less than RM 150,000
because the QE for this type of vehicles is up to RM 100,000 as
compared to new passenger vehicle that costs more than RM
150,000.
INTEREST RESTRICTION
ON LOAN
 Interest Restriction
• Section 33(2) specifically provides that where a taxpayer has borrowed for the purpose of
producing business income, and has also lent or invested money other than for the purpose of
producing business income the deductibility of the interest paid on borrowed money would be
restricted based on the formula:
AMOUNT OF
INTEREST = INVESTMENT X INTEREST EXPENSE
BORROWING
RESTRICTED

If INVESTMENT The whole amount of interest is

=/> BORROWING NON-DEDUCTIBLE

If INVESTMENT < Only a portion of interest is

BORROWING DEDUCTIBLE
 Interest Restriction
– The amount of interest restricted would be added back to arrive at
business-adjusted income.
– The amount of interest restricted would be allocated to individual
investment sources.
– If the restricted interest cannot be offset against the income of the
related investment, the excess interest expense cannot be carried
forward and it would be a permanent loss.
 Tax Planning on Interest Restriction
The following 1. Identification of investments / advances funded from
are some of existing borrowings and direct allocation of the cost of
the measures borrowings to the investments / advances
that should
2. Review interest charges annually, source for cheaper financing
be considered
to overcome 3. Arrange for the subsidiary / associate company to
the interest borrow directly from the bank
restriction
problem: 4. Establish separate bank accounts to hold specific loan
monies exclusively for business use
5. Create sufficient non-business income to absorb interest
applicable to investment

6. Disposal of investment that are not profitable to pay off

the borrowings with high cost of fund
7. Withdrawal of fixed deposits to settle the borrowings.
BUSINESS
LOSS
 Business Loss
• Adjusted loss (current year business loss)
– Adjusted loss is only allowed with regard to the business source
( s 4(a)).
– Tax implication:
• The adjusted loss is deducted against aggregate
income.
• If the company had more than one business source
which suffers losses in the current year, the aggregate
of adjusted loss is deducted against aggregate income.
 Business Loss
• Unabsorbed business loss (business loss c/f)
– Tax implication:

• The current year business loss which cannot be fully

deducted in the current year to be carried forward to
future years of assessment.
• Such unabsorbed business loss is accumulated as one
balance.
• However, unabsorbed business loss is only allowed to be
deducted from aggregate statutory business income.
 Business Loss
• Group relief for loss (PR6/2016)
– With effect from YA 2009, 70% of the current year business loss of a
surrendering company can be surrendered to its related companies
(claimant company) within the group.
– Tax implication:

• Tax losses of a company may be utilized to set

off the aggregate income of another company
within the same group
GROUP Group relief is available for all Malaysian incorporated tax RESIDENT
COMPANY (both claimant & surrendering co must be resident)
RELIEF
LOSS - Claimant and surrendering companies, each has a PAID-UP ordinary share
Conditions CAPITAL > RM 2.5 MILLION at the beginning of basis period
for eligibility Both claimant and surrendering companies must have SAME (12
MONTHS) ACCOUNTING PERIOD
Claimant and surrendering companies are RELATED PARTIES.
Both claimant and surrendering companies are NOT CURRENTLY
ENJOYING CERTAIN INCENTIVES such as pioneer status, ITA, RA etc
The claimant MUST HAVE AGGREGATE INCOME in that YA

Both companies must be SUBJECT TO TAX AT FULL (24%). Make

an irrevocable election to surrender or claim the business loss in their
tax return Form C.
ACQUISITION
OF
ASSETS
 Hire
Term loan
purchase

Outright
Leasing
cash
Asset
Acquisition
 Acquisition of Assets

Acquisition by cash
• In the case of outright acquisition by cash, CA claim will
be based on the full cost of qualifying assets (except
passenger vehicle are restricted to RM 50,000 or RM
100,000).
• The company would be entitled to claim
• IA and AA on the first year
• AA for each subsequent years until the full relief is
given for the qualifying capital expenditure.
 Acquisition of Assets
Acquisition through term loan / overdraft
• In the case of a term loan/overdraft, the CA claim will be based on the
full cost of the qualifying asset (except passenger vehicles are
restricted to RM 50,000 or RM 100,000).
• The company would be entitled to claim
• IA and AA in the first year
• AA for each subsequent year until full relief is given for the
qualifying capital expenditure.
• The loan or overdraft interest will be allowed as a revenue expense
deduction.
 Acquisition of Assets
Acquisition through hire purchase
• In the case of hire purchase, the CA claim will be based on
the installments paid and not the qualifying expenditure of the
assets.
• IA is given for each new installment paid (based on the capital
portion) during the year
• AA will be computed based on the accumulated installment
(capital portion) paid.
• The quantum of CA claims each year is much lesser
compared to outright acquisition by cash or loan. It would take
a longer time to fully claim the CA on the qualifying
expenditure.
 Acquisition of Assets
Acquisition through leasing
• The company is not entitled to claim CA on the leased
assets as the company is not the owner of the asset.
• The company is entitled to claim the full leasing
charges (subject to the passenger’s vehicle which is
restricted to RM 50,000 and RM 100,000) as a
revenue expense if it is incurred wholly and
exclusively in the production of income of the
company.
 Acquisition of Assets
Tax planning:
– The claim of leases rental would be the most
advantageous because:
• Timing: The full amount of lease rental is given
revenue deduction in the year of incurred while
the claim of CA need to be spread to various
years in accordance with the specific rate.
 Acquisition of Assets
– Set off: If the business has a current year business loss, the
leasing charges would increase the adjusted losses. The current
year’s business loss would be allowed to shelter other income in
that current year at the aggregate income level.
– Utilization: If the current year’s business loss cannot be utilized
in that particular year at the aggregate income level, the
unabsorbed business losses can be carried forward to set off
against any business income in the future years at the statutory
income level.
CESSATION
OF
BUSINESS
 Cessation of Business
• When the operator disposes of plant and machinery, factory,
office equipment, etc, the business is said to have ceased.
• Tax implication:
– Revenue expenses incurred in the process of cessation of
business are not tax deductible.
– Once the cessation date is established, any expense
incurred after this date is also not tax deductible.
– Any unabsorbed CA available at the time of cessation will
be a permanent loss.
DISPOSAL OF ASSETS
 Disposal of Assets
Residual Expenditure vs Sales Proceeds

RE > SALES PROCEEDS RE < SALES PROCEEDS

BALANCING BALANCING
ALLOWANCE CHARGE
Should be dispose of at the
Should be postponed to the
year end instead of
following year instead of
following year in order to
disposal at year end in order
obtain BA to shelter
to defer tax liability
adjusted income
 Disposal of Assets
• Disposal of assets within 2 years of acquisition
– The tax authority is empowered to claw back
the capital allowance claimed in previous years
and treat it as balancing charge in the year of
disposal.
– Tax planning:
• The timing of sale is important (minimum
two years of ownership is required) to avoid
the claw back of CA.
CONTROLLED TRANSFER
 Controlled Transfer
In order to prevent related party to claiming excessive CA through non-
arm’s length sales, the Government has laid down special provision in the
Act, known as CONTROLLED TRANSFER PROVISION.

This provision will also apply where a person has more than one business
source and transfers a qualifying assets from one business source to
another business source.

CONTROL
A person is said to have control in general when he owns more than 50% shares
of a company or exercises significant influence on the conduct of the company
Control The acquirer of the asset is a person over whom the
disposer of the asset has control
transfer
situation The disposer of the asset is a person over whom the
acquirer of the asset has control
Some other person has control over the acquirer and
the disposer of the asset
The acquisition is affected in consequence of a
scheme of reconstruction or amalgamation of
companies
The disposal is effected by way of a settlement or gift
or by devolution of the property in the asset on death
 Control Transfer (Illustration)
• Sayang Bhd has an authorized capital of RM 25,000 and issued
capital of RM 20,000 ordinary share, each carrying one vote. The
owners are: Ali RM 12,000 60%
Ahmad RM 5,000 25%
Kamil RM 3,000 15%

• Dian Sdn Bhd has an issued capital of RM 20,000, each carrying

one vote, and are subscribed by:
Sayang Bhd RM 5,000 25%
Ali RM 8,000 40%
Kamil RM 3,000 15%
Chong RM 4,000 20%
Control transfer
situation:
i.The acquirer of the
Control Transfer (Illustration)
asset is a person over Sayang Dian
whom the disposer of Bhd Bhd
the asset has control
ii. The disposer of the
asset is a person over ALI AHMAD KAMIL CHONG
Ali 60% 40% (direct
whom the acquirer of
Control control)+*15%
the asset has control
S&D (indirect
iii. Some other person 60% 25% 15% 20% control)
has control over the = 55%
acquirer and the (TOTAL
disposer of the asset CONTROL)
iv. The acquisition is
affected in SAYANG BHD Ahmad 25% 25% x 25%
consequence of a = 6.25%
scheme of
Kamil 15% 15% + *3.75%
reconstruction or
amalgamation of 25% 15% =18.75%
companies Chong NIL 20%
v.The disposal is
effected by way of a
settlement or gift or by
devolution of the
40%
property in the asset DIAN BHD
on death Ali: 60% x 25% = *15%
Kamil: 15% x 25% = *3.75%
 Controlled Transfer
• Tax implication:
– The assets would be deemed to have been transferred at the tax
written down value (residual expenditure) of the transferor.
– Hence, no balancing charge or balancing allowance would arise on the
transferor.
– The transferee is entitled to claim an annual allowance based on the
original acquisition price but restricted to the residual value of the
assets transferred.
• Tax planning:
– Controlled sales/transfer would normally benefit the disposer, but not
the acquirer.
MERGER & ACQUSITION

AMT CKF Chpt 42

REORGANISATION, RECONSTRUCTION,
AND AMALGAMATION OF COMPANIES
 Introduction
• It is crucial for companies to reorganize their business within the group
to achieve tax efficiency and maintain their competitiveness.
• With effect from YA 2006, the Malaysian tax system allows limited group
tax relief for a group of companies in relation to current-year business
loss.
• One should always ensure that the reorganization scheme is carried
out at arm’s length with adequate documentation to prevent tax
authorities from invoking anti-avoidance provisions under s140 (power
to disregard certain transactions)of the Act.
 Payment of dividends
• WEF 1/1/2008, Malaysian dividend system is on a single tier.
• The income tax paid by the company is the final tax and the dividend paid out is a tax-
exempt dividend to shareholders.
• Co Act 2016 takes effect on 31/1/2017. A company paying dividends to its shareholder are
now required to fulfill the following conditions for accounting requirements:
• A) the company has retained earnings;
• B) the solvency test showing that the company is able to pay its debt as and when the debts
become due within 12 months immediately after the distribution is made.
• Company having a deficit in retained earnings would no longer be able to pay dividends to
its shareholder.
• Sec 131 of the CA2016 provides that any distribution to its shareholders can only be out of
profit.
• Refer Eg 42.1
 Management fees
• A holding company may want to impose management fees on services provided to its
subsidiary within the group.
• This is a direct method of extracting profit from the subsidiaries as compared to the
dividend payment method.
• The management fees charged should be by reference to the quantity or quality of services
rendered.
• The basis must be reasonable ( compatible with commercial rate) and properly documented
and applied consistently.
• This is to avoid the invocation of 140.
• The management income derived by the holding company would be most tax efficient (no
tax exposure) if the holding company has accumulated unabsorbed business loss.
• Refer Eg 42.2 & 42.3
 Reorganization of business within a group / Merger &
Acquisition

• A holding company with several subsidiaries where

some subsidiaries are profitable while other
subsidiaries have tax losses brought forward is said to
be tax-inefficient as such tax losses are not able to be
utilized within the group.
• Therefore a merger is called for.
• Eg 42.4
 Stocks
• Sec 35 (5) of the Act provides that where a company permanently ceases to
carry on its business and at or about the time of cessation, the stock in trade of
the business is sold or transferred for valuable consideration to another company
which intends to use the stock in its business, the transfer value shall be taken to
be an amount equal to the consideration, which may not necessarily be the
market value.
• If the disposer company has unabsorbed capital allowances or tax losses, stocks
could be transferred at an increased value (restricted to market value) and
achieve tax efficiency.
• The subsequent disposal of the stock by the transferee company would have no
income tax exposures.
 Trade Debtors
• Trade debtor transferred constitute capital assets to the acquirer company.
• Subsequent bad debt arising from the irrecoverable of debts transferred
would not be tax deductible to the acquirer.
• It is essential to ensure that reasonable specific provisions are made in the
transferor’s account for all trade debts which are doubtful of recovery in
order to obtain a tax deduction in the transferor’s book (s34(2) deduction).
• Since the amount of trade debts transferred is at lower value, thus any
excess amount of debts which may recover later by transferee company
would be a capital gain.
• Eg 42.5
 Plant & Machinery and Factory
• The disposal of plant, machinery and factory in a
restructuring exercise is deemed disposed at market value.
Balancing adjustments would be computed accordingly.
• Where a disposal of plant, machinery and factory constituted
controlled sales (sale of assets with a group of companies),
no balancing adjustment would be as such disposal would be
deemed disposal at residual expenditure.
• The acquirer would claim annual allowances reference to the
QE subject to the remaining RE.
• Refer Eg 42.6
 Customer Database
• Market share is an important intangible asset in any business.
It is represented by trade debtors, which is documented in the
customer database.
• It is a capital asset and the disposal of the customer database
would attract no income tax.
• To the acquirer, the acquisition of the capital asset is a capital
expenditure, prohibited for deduction by s39(1)©.
• Customer database is not within the ambit of the plant, no
capital allowance is available.
 Retirement benefits
• The amount set aside to meet retirement benefits of retired employees is
a fund provision. When it is transferred to the acquirer, it would not rank
for deduction as the amount transferred cannot be said to be incurred in
the production of income.
• The nature of such expense at best is a contingent liability.
• The payment of the retirement sum is capital nature, any subsequent
payment by the acquirer is a payment of capital expenditure, and thus
not tax deductible as prohibited by s39(1)(c ).
• Refer Eg 42.7
 Corporate Restructuring
• Every company within a group of companies constitutes a separate and distinct
legal entity.
• The group tax efficiency is achieved by:
1) Merging of companies with a synergy effect for efficiency in operation and cost-
effectiveness;
2) Venture into a new division of the existing business such as online sales to
have complete utilization of unabsorbed capital allowances within the company.
3) Consolidate management operations or centralise senior management within a
company to fully utilize the unabsorbed business loss;
4) Consolidate business to slim size the number companies within group.
• Refer Eg 42.8 (2021 edition) or 42.9 (2022 edition)
 MERGER & ACQUISITION

SHARES OR ASSETS ACQUISITION?

 MERGER AND ACQUISITION

• The benefits and drawbacks of either shares or asset acquisition

would depend on various factors, including the tax attributes of the
Target Company, the acquiring company, the business fit of the
Target Company with the buyer, and most importantly, the
commercial considerations.
• In a share acquisition, the buyer may be exposed to liabilities and
exposure in the Target Company. As such, the buyer would need
to carry out a due diligence exercise on the Target Company’s
business in a stock acquisition compared to an asset acquisition.
 MERGER AND ACQUISITION: ACQUISITION OF SHARES

•The main advantage of acquisition by shares is that the tax attributes such as unabsorbed
tax losses or tax incentives remain with the Target Company.
•Generally, companies are allowed to carry forward their accumulated tax losses ( 7 years w.e.f
from YA19) (Finance Act 2021: c/f to 10 consecutive YAs) and unutilized capital allowances to
be set off against their future business income.
•Furthermore, companies that ceased operations for several years may still utilize
accumulated losses and unabsorbed capital allowances to be set off against new business
income.
•However, with effect from the Year of Assessment 2006, accumulated tax losses and
unabsorbed capital allowances of a Target Company which is dormant shall be disregarded in
the event there is a change of more than 50% of the shareholding in the Target Company.
 MERGER AND ACQUISITION : ACQUISITION OF SHARES

• TRANSFERS OF SHARES ARE CAPITAL IN NATURE HENCE, NOT TAXABLE UNLESS IT IS

RPC SHARES WHICH WILL BE SUBJECT TO RPGT.

• COMPANIES MAY APPLY FOR EXEMPTIONS UNDER PARA 17(1) OF THE RPGT ACT 1976
AND SECTION 15 OR 15A OF THE STAMPT DUTY ACT 1949:
– if the acquisition of shares or assets is in connection with a scheme of amalgamation or
reconstruction and the consideration comprises substantially of shares in the transferee
company; or
– if the shares or assets are transferred between associated companies (i.e. there must be a
90% direct or indirect relationship between the transferee and the transferor).
 MERGER AND ACQUISITION: ACQUISITION OF BUSINESS
ASSETS
• In an asset acquisition, any tax attributes such as unabsorbed tax losses and tax
incentives remain with the Target Company and may not be transferred to the
buyer.
• Generally, unabsorbed tax losses and capital allowances of a Target Company may
not be transferred to the acquiring company in an asset acquisition.
• Any tax incentives or exemptions currently enjoyed by the Target Company will
unlikely be transferred to the acquiring company. Generally, the buyer will have to
submit a new application for tax incentives or exemptions upon acquiring the
business, if it is eligible.
 MERGER AND ACQUISITION: ACQUISITION OF BUSINESS ASSETS
• In an asset acquisition, the buyer has the choice of determining the assets / liabilities to be acquired.
However, the buyer should still carry out a limited due diligence exercise on the assets to be acquired.

• For income tax purposes, the transfer of fixed assets between RELATED parties may be affected at the tax
written-down value of the assets. This means that the seller will not have any taxable balancing charge or
deductible balancing allowance arising from the sale. The buyer will also be deemed to have acquired the
assets at its tax written-down value. The transfer value of the fixed assets will be disregarded and the
buyer would be entitled to claim annual allowances based on the original acquisition cost of the fixed
assets but restricted to the tax written-down values of the assets acquired. No initial allowance may be
claimed on these fixed assets.

• TRANSFER OF REAL PROPERTIES SUBJECT TO RPGT AS WELL AS STAMP DUTY. HOWEVER, MAY
APPLY FOR EXEMPTION UNDER PARA 17(1) OF RPGT Act 1976 AND SECTION 15/15A OF THE
STAMP DUTY ACT 1949.
 Financing of Acquisitions

• ACQUISITION OF SHARES
– INTEREST EXPENSE IS SUBJECT TO INTEREST RESTRICTION AS LOAN IS USED
FOR INVESTMENT PURPOSE ( i.e ACQUIRING SHARES OF TARGET COMPANY)

• ACQUISITION OF BUSINESS ASSETS

– Interest incurred on funds used to acquire a business under an asset deal
should be fully tax-deductible as the loan is used for business purposes ( e.g
buying the machinery of the target company instead of buying shares).