Chap 2 - Business Expenses

Chapter 2
Business
Expenses
Business Expenses
• Business expenses are deductible against gross
income in arriving at adjusted income of a business
source.
• The Act provides the general deductibility test and

also the list prohibited expenses but this is not
exhaustive
• In some areas, ambiguity in treatment may arise and

previous tax cases will be referred as a guide.
S33 – Deductible Business
Expenses
• Business expenses have to fulfill the following condition
to be eligible as business deductions:
a. Each business source has to be accounted separately

b. Scope of expense refers to “outgoings and expenses” not
capital in nature
c. Expenses have to be “wholly and exclusively”
d. Incurred in the relevant basis period
e. In the production of gross income from that business source
Expenses prohibited under S39 is non deductible

a) Business source accounted
separately
• Mr Ahmad owns two separate business, one that
manufactures paper (Company A) and another that
trades paper products (Company B).
• The business income and allowable business expenses

for both companies must be maintained separately
and expenses from Company A cannot be deducted
from the business income of Company B or vice versa.
• Only at the statutory income / loss level, the net profit

profit or loss can be combined.
b) Outgoings and expenses (S33(1))
• Expenses generally refer to disbursements from the
trader.
• Outgoings have a wider scope because it can include
business losses due to theft, pilferage by employees,
bad debts, etc.
• “Expenses” generally refer to “disbursements” that come
out of the trader’s pocket.
• A loss is not a thing expensed or disbursed, however it
can qualify as business expense if it is relevant to the
main business of the company
c) Wholly and exclusively
• The word “wholly and exclusively is not defined in the Act and
no practice notes provided.
• To qualify for the deductions, the expenses must satisfy the
“wholly and exclusively” test as provided in s 33.
• As a guideline:
wholly – refers to the quantum of money expended
exclusively – refers to the motive or object in the mind of
incurrence and the purpose must be sole purpose
• The test should be treated as only a guide, different business
environments can cause the same type of expenses treated
differently.
• In Bentleys, Stokes and Lowless v Beeson 33 TC 491, a case
relating to business entertainment J Romer acknowledged
that “business entertainment” was “Wholly and exclusively” for
the business although it consists element of “hospitality”
• The element of “hospitality” was inherent in the entertaining
and did not make the cost a dual-purpose expenditure.
• The “wholly and exclusively” test in this case was accepted in
the Malaysian case TL Sdn Bhd v Ketua Pengarah Cukai
Pendapatan (1995) 2 MSTC 2310
• The determination of “wholly and exclusively” is not easy. It
must determined by reference to the business dealing and
industrial practice
The test for “wholly and exclusively” are as follows:
A.motive must be incidental to the business and not merely
connected to the business:
•Some examples of incidentals are air fare, hotel
accommodation, taxi fares of a business trip are allowable
deductions subject to evidence of payment
•However personal expenses on a business trip are strictly not
allowed, that is to say these expenses do not result from the
purpose of the business trip. For example, during a business trip,
the employee visited a tourist attraction and bought a ticket. The
ticket fee is not incidental to the business trip
B. Direct purpose for business – expenses must be incurred
directly for the business and not for the remote or indirect
result which may possibly flow from the expenditure.
Example - insurance premium

Insurance premium paid by a manufacturing company in
respect of insurance policies against fire and loss of profits
would be deductible as it was incurred for the direct purpose
of business. It is a required expenditure to ensure smooth
running of the manufacturing company.
Contrastingly, in The Union Cold Storage Company Ltd v Jones, it was
ruled that insurance premium paid on plant and machinery which was
transferred to another business failed the wholly and exclusively test.
This is because the plant and machinery was not used to further their
business or increase the sales of their commodity.
Example:
Tanam Besar Sdn Bhd, a plantation company incurred RM20,000 on a
special audit of another company, Tumbuh Lemah Sdn Bhd that it
intends to acquire.
State with reasons, whether the expense of RM20,000 is deductible
against business income of Tanam Besar Sdn Bhd.
Answer
The RM20,000 in relation to special audit was not incurred for the
direct purpose of the existing plantation business but connected to
another source. Thus, the expense is not allowable.
C. Commercial expediency – expenses made solely to
remain competitive in the business are deductible
business expenses
Example:
• Payments made to retrench senior employees to make
way for new staff with contemporary business ideas
• Relocation of business premise to a better or cheaper
location
• payment made to release from a business obligation
Example – expenses shared by others
Sejahtera Drinks Sdn Bhd (SDSB) uses a narrow road for access
to its factory. The same road is used by another company whose
vehicles were parked along the road causing obstruction to SDSB.
In order to gain exclusive use of the road, SDSB paid the following
to the other company:
(i)RM100,000 as an inducement to relocate its operations
(ii)RM80,000 per year for the lease of the premises vacated by the
other company
State with reasons, whether the above expenditures are deductible

for tax purposes.
Answer
(i)The sum of RM100,000 was aimed to secure an advantage

namely the right to occupy the leased premises and the right to
have clear access to its factory. As such, it would be a capital
payment not allowable in arriving at the adjusted income of
SDSB. It brings an enduring advantage (intangible asset) to the
company
(ii)RM80,000 is paid for the lease of the premises, which is

necessary for the smooth running of the business. It is a
commercial expedient expenditure, revenue in nature and
deductible in arriving at the adjusted income of SDSB.
D. Benefit to third party
• expenses are deductible if it is incurred to increase the
efficiency of the business even though it may benefit a
third party.
• repairing a public potholed road leading to business
premise to ease and encourage business customers.
The repair may benefit other business premises around
the area. However it is still allowed as revenue reduction.
E. Classification of accounts
•how the expense is classified in the accounts do not
dictate if the expense is deductible or not. It would be
allowed if it fulfills s 33 conditions.
•For example, a company may capitalize an expenditure
and amortised it. But as long as it fulfills the conditions
under the tax laws, it can be fully deductible in the year it
was incurred.
•Vice versa, a company may expense off an expenditure
but if it fulfills the capital expenditure criteria, it becomes
unallowable expenses.
Issue of apportionment
• Where an expense is incurred for both business and private
benefit, a question of whether apportionment of the expense
(used for business purposes) would be allowed as a deductible
expense has mixed rulings.
• 2 contrasting cases on apportionment of expenses:
Copeman v William Flood & sons – excess remuneration
paid to an employee who is a family member was allowed
apportionment and the excess as non-deductible
Rendell v Went – apportionment was rejected
• In Malaysia, a pragmatic approach is to allow apportionment of
the expense used for business purposes as a revenue expense
provided the tax payer can prove as such.
• If it can be shown that the portion of the expenditure was in fact
used wholly and exclusively for business purposes, it should be
allowed.
Apportionment of expenses
Example:
•Company A is renting a three storey building as a
business premise whereby the third floor is occupied by
one of the owners of the company.
•The 1st and 2nd floors are fully used as business premises.
•In cases like this, apportionment should be allowed as
business expenses for the rental portion paid for the 1st and
2nd floor (provided the tax payer can show proof that these
two floors are in fact used for the generating income for the
business).
•However the rental for the third floor is considered as
unallowable business expenses.
d) Incurred
• Expenses must have a legal liability before it can be tax
deductible. And it must be incurred in the relevant basis
period.
• Incurred does not mean paid. An accrual is accepted when
the liability becomes payable. (Lo & Lo v CIR)
• Provisional expenses are not deductible.
• Eg: Co A expensed off forex losses. This is tax deductible.
If Co A only provide for forex losses because the actual loss
cannot be determined yet, this provision is not tax deductible.
• Likewise provisions for general doubtful debts cannot be
deducted but bad debts written off are deductible because it is
no longer a provisional expense.
d) Incurred
Example - provisions
Loong Sdn Bhd makes a provision for warranty claims
amounting to RM15,000 for the year ended 30.6.2016. The
amount is charged to profit and loss accounts. This provision of
RM15,000 would not be deductible in arriving at the adjusted
income. The provision is merely contingent or an estimate of
expense. The provision does not satisfy the “incurred” test.
•In Exxon Chemical (Malaysia) Sdn Bhd vs Ketua Pengarah

LHDN, the court of appeal decided that monies set aside to meet
retirement sum when the staff retire or resign were accrued
liabilities and allowed as a deduction in the year of accrual not
the year of payment.
d) Incurred
Example - provisions
The principal activity of Polyboxes Sdn Bhd is in the manufacturing of
carton boxes. For the year ended 31.8.2019, a provision of RM120,000
for stock obsolescence was charged to profit and loss account
The balance for the provision for stock obsolescence would be:
RM
1.9.2018 100,000
31.8.2019 200,000
The amount not deductible for tax purposes is computed as follows:
RM
Balance 1.9.2018 100,000
Add: provision 120,000 Add 120,000
Less: provn written off (20,000) Less (20,000) incurred
Balance 31.8.2019 200,000
Accrual
• Accrued expenses are tax deductible provided it has fulfilled the
other conditions.
• Tax deductions would still be given even if there are no
disbursements made.
• Eg: Monies set aside to meet retirement sum for staff retirement are
accrued liabilities and be allowed tax deduction in the year of
accrual and not in the year of payment.
Example - accrual
Liang Sdn Bhd manufactures car spare parts. The financial year is
31.12.2020. The company has consumed electricity and water for
the month of December 2020 but the bill is expected to be received
sometime on 10.1.2021. The company made an accrual for
electricity of RM5,000 and water of RM6,000 based on past
experience from previous billing. Such accrued liability is allowable
as revenue expenses for YA2020 (financial y/e 31.12.2020)
In the production of gross income
• Before any expenditure ranks for deduction, it is not
necessary to produce income in the year it is
incurred.
• It is sufficient for the tax payer to show that the
outlay was for the purpose of earning income.
• Expenses incurred after commencement of business
is said to be in production of income.
• Pre-commencement expenses are merely incurred
“in order” to produce income unless it is in the form
of special tax incentive
• .
• The expense need not produce income before eligible
for deduction, it is sufficient to show that the outlay was
for the purpose of earning in must be a good connection
come in the year in the year under review or future
years.
• There must be a good connection between the
expenditure incurred and the earning of the income of
the trade.
• In Ward & Co Ltd v CIT (1923) AC 145 it was held that
the expenditure “must have been incurred for the direct
purpose of producing profits” in order to qualify as
business deduction.
• In Port Elizabeth Electric Tramway co Ltd xv CIR (8 SATC 13)
it can be summed as:
- All expense attached to the performance of a business
operation either by chance or bona fide incurred for more
efficient performance of such operation provided they are so
closely connected with it that they may regarded as part of the
cost of performing it
- The Court disallowed the legal costs in resisting the claim for
compensation, but the claim for compensation was allowed as
being closely connected with the income earning act from
which the expenditure arose, as to form part of the cost of
performing it.
Example
ABC news publishes a monthly magazine. The magazines features business
activities and other interest of a leading businessman in its personality column.
The company was sued by the businessman for publishing defamatory matters
in that article. Through the lawyers an out of court negotiation was agreed upon
where the legal fees and compensation was RM15,750 and RM92,000
respectively.
State if the above can be deducted as revenue expenses.
Answer
In Herald & Weekly Times vs the FC of Tax, it was decided that compensation
paid to persons claiming damage for alleged libel and the cost of contesting
claims or of obtaining advice are deductible regardless the person is successful
or not.
As such in this case, both compensation and legal fees are fully allowable
under S33 of the Act. Since the act of publishing articles on businessmen is in
the normal course of business, it was incurred in the production of income of
this company.
Capital expense
• Capital expenses is not deductible expense even though
it has fulfilled other conditions under S33
• Expenses which relate to fixed capital is usually treated
as capital expenditure while expenses which relate to
circulating capital is usually treated as revenue
expenditure.
• Expenditure incurred to acquire fixed assets whether
tangible or not is considered capital expense (eg: patent)
• Capital expenses are incurred to obtain assets that in
turn will produce income. Eg: machineries
• Deduction for capital expenditure is prohibited under
S39.
Expenses of a capital nature
Some examples of capital expenditure:
1) cost of acquiring plant and machinery for use in business
2) cost of acquiring trade marks and patents in order to have the
right to produce certain types of goods (however, these
expenses are deductible for SMI companies)
3) money spent to acquire stocks and shares (company
structure)
4) expenditure on alterations, improvements and additions to
business assets or residential premises
5) consideration paid for acquiring possession of property
6) costs incurred on the acquisition of a professional practice
7) premiums paid for leases
8) monthly payments made to a director whose principal duties
were concerned with acquisition of capital assets
• No specific categories rather depends on the facts in
each case
• The following test can be applied in differentiating capital

expenditure and revenue expenditure:
1) asset is enduring in nature

2) referable to fixed or circulating capital
3) identifiable asset
4) business structure versus process
5) initial expenditure
1) Enduring benefit asset
• Expenditure incurred to bring into existence an asset or
advantage for enduring benefit is capital expenditure
• In Atherton v British Insulated & Helsby Cables Ltd (10 TC
155) it was held that an initial lump sum contribution to staff
pension fund was capital in nature.
• In this case it was stated that the payment was not merely a
gift or bonus to the older employees but it was needed to
create the pension fund, failing which the fund might not exist
at all.
• However subsequent contributions to an existing fund or
memberships are usually allowed business deductions
Example - gratuity
Mr Mandela is the general manager of Quick Action S/B and is involved in
the company since its incorporation. Recently, the business suffers from
serious setbacks. As part of its re-organization, it was decided that Mr
Mandela should retire. Mr Mandela was paid a gratuity of RM200,000 and
and annual pension of RM12,000 for ten years. Mr Mandela was required
not to work with any competitors and disclose any information.
Answer:
In Mitchell v B W Noble Ltd, payments made to get rid of unsatisfactory
director were allowable.
•Gratuity of RM200,000 would then be deductible.
•But the annual pension comes with restrictive covenant that renders it to
be an asset ie restriction against competition and non-disclosure of
information is non allowable.
•However, if the pension is not attached to any restrictive covenant it will be
allowable.
2) Fixed capital and circulating
capital
• An expense which relates to the fixed capital is generally
treated as capital expenditure while expenditure relating to
circulating capital (stock in trade) would be treated as revenue
expenditure
• In John Smith and Son v Moore (12 TC 266) it was stated that
“fixed capital is what the owner turns to profit by keeping it in
his own possession, circulating capital is what he makes profit
by parting with t and letting it change masters”
• The distinction between fixed capital and circulating capital
would depend on the nature of the trade.
• Example: a motor vehicle would be a fixed capital to a shoe
manufacturing company but a circulating capital to a car
dealer
3) Identifiable asset
• Any expenditure incurred to buy tangible or intangible asset
are regarded as capital expenditure
• In Tucker v Granada Motorway Services Ltd (1979) 1 WLR
683, it was noted that:
- Off balance sheet lease is considered as capital asset as it is
valuable for the trade
- A lump sum which reduces a burden on revenue is an
business deduction if the reduction is the direct and only
consequence of the payment
- A lump sum paid to acquire, dispose improve or modify a
fixed capital asset is a capital asset even though this results in
future business expenses reduction
3) Identifiable asset
Example
Tanah Mining S/B had some leases over iron-ore deposits in the state
of Perak. These leases had a remaining term ranging from 8 to 15
years. The company decided that it would be unprofitable to continue
working some of these leases and thus decided to surrender the leases
to the lessor. It paid a sum of RM88,000 for an early termination of the
leases.
State with reasons whether the lump sum paid is a deductible expense
for income tax purposes.
Answer
Each of the leases is a capital asset of the company. The leases are
used generate its stocks which are iron-ore deposits. Even though
these leases failed to generate income, nevertheless they are
considered as capital expenditure and therefore early termination
payment cannot be considered as business expenses.
4) Expenditure relating to business
structure
• In general, expenditure relating to business structure are non-
allowable expenses.
 Example; fees relating to issuance of new shares, re-structuring
company
• Pay offs made to competitors to have exclusive rights to

certain trading areas are considered as capital expenditure
4) Business structure versus
process
• Business structure is also known as “profit making
apparatus”
• Expenditure is incurred in relation to business structure
is regarded as capital expenditure
• Expenditure in relation to business process i.e. the
income earning activity, it would be a revenue
expenditure
• In Sun Newspapers Ltd v The Federal Commissioner of
Taxation (1938) 61 CLR 337, this case concerns
restrictive covenant, a payment made to competitor is
held to be capital expenditure
4) Expenditure relating to business
structure
Example – restriction on place of business
Mr Arnold Tan has been operating the only cinema in a small town for
the last 5 years which is very profitable. On 3 occasions during the last
5 years, other persons attempted to open cinema theatres in the same
town. Mr Tan made lump sum payments to each of them to not open
new theatres there. Mr Tan claimed these lump sum payments as tax
deductible expenses against his business income.
State with reasons, whether the lump sum payments are deductible
expenses in arriving at the adjusted business income
Answer:
The lump sum payments gave a business advantage of being the sole
operator and is capital in nature. The expenses were not incurred in the
production of income but to create a monopoly. Although it was
incurred more than once it is still considered to be capital expenditure.
5) Initial expenditure
• Initial expenditure is normally regarded as capital
expenditure because it is not incurred in the business
process but is merely for setting up the income earning
asset in motion
• In The CIR v The Granite City Steamship Co Ltd (13 TC
1) it was stated that “ Broadly speaking, outlay is
deemed to be capital when it is made for the initiation of
a business, for extension of a business, or for a
substantial replacement of equipment”
Interest expense
• Section 33(1)(a) provides that interest expense on
money borrowed would be allowed under two
circumstances:
1) Loan is employed in the production of gross income
2) Loan is laid out on asset used or held in the production of
income
• Interest expenditure incurred on loan made out to purchase capital
assets used in the production of income would qualify for
deductions.
• However amount that can be deducted will be restricted if the asset
is partly used for non business purposes,
• If the loan or money were borrowed for the purpose of paying
dividends, the interest would not qualify for deduction for tax
purposes
Interest expense
• With effect from YA 2014, a new S33(4) was added
whereby interest expense on money borrowed is
deducted in calculating adjusted income when it is due
for payment.
• The interest may be paid in later year but the deduction is

available in the year the interest is “due to be paid” which
reference to the time where the lender is able to obtain
on demand the receipt of such interest.
• Interest may be paid later but the deduction is available in

the year interest is due.
Interest expense
• Under related parties loan transactions, interest expense
is synchronized with interest income assessment to
avoid loss of income to Government. Related parties
could be as follows:
 between persons one of whom has control over another
 between individuals related to each other (parent, child,
brother, sister, uncle, aunt, nephew, niece, cousin,
ancestor
 between persons both of whom are controlled by the
same person
Interest expense –
Tax Administration
• A borrower is obliged to inform the IRB in writing within 12
months from the end of the basis period for the YA when the
interest expense is due to be paid.
• This serves as a cross check by IRB on tax enforcement to
ensure the lender is simultaneously reporting the sum as
interest income
• Failure to notify IRB would result in an additional assessment
to the borrower on the interest expense claimed
• Interest expense on debt is not governed under s 33(1)(a) of
the Act. As such deductibility would depend on the “wholly
and exclusively” test as provided in s 33(1) and such interest
expense must also not prohibited by s 39 of the Act
Interest expense
Example
Notimas Bhd has entered into an agreement for the assignment
of a timber concession. The consideration payable by Notimas
for the assignment has been by instalment and Notimas 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 tax payer argued
that the interest has been paid for being allowed credit and not
for use of license. However, DG had contended that the interest
is part of the selling price. Advise Notimas Bhd.
Answer
The payments of interest has been the consideration for the
credit given to the taxpayer for the outstanding debt and it could
be deducted under S33. This is based on case DGIR v RB Sdn
BHd (1984) 1 MLJ 248
Rental expense
• Rent would be deductible if:
a. payable for occupying land/buildings (immovable)
b. used in relation to the period
c. incurred for producing gross income of that source
• Rent is deductible on an accrual basis

Advance rental
• Advance rental despite being paid to the landlord, is considered
as capital payment not deductible as revenue expenses
• In Syarikat Pukin Ladang Kelapa Sawit Sdn Bhd v Ketua
Pengarah HDN (2012) AMTC 193, the company leased 17
pieces of land for a period of 60 years. RM1.4 million was for the
current year and RM16.6 million for advance rental. The whole
amount RM18 million was claimed as business deduction under
S 33(1)(b)
• The court ruled only the current year rental is allowable and the
advance rental is not
• Advance rental cannot be taken as wholly and exclusively
incurred for a basis year and must be treated as future expenses
not current
Rental Expense
Example -
Juta Emas Seafood Berhad (JESB) export frozen seafood to
Japan and Singapore. JESB also distributes its own products
overseas through various distribution centres. The Tan family
holds 65% of the shares in JESB. For its business purposes,
JESB leased refrigeration equipments, cold rooms and
containers from the Tan family at the market rate of RM2 million
per year. The lease agreement provides that if the annual profits
of JESB is above RM2 million (before charging the lease rental),
the lease rental will be increased accordingly.
State with reasons, whether the lease rental would be deductible

for tax purposes.
Rental Expense
Answer to
•The lease rental is a deductible expenditure as it
represents an expense wholly and exclusively incurred in
the production of gross income. It is a payment for the use
of machinery / equipment and is thus an ordinary business
expense.
•The fact that lease rental would increase depending on the
profits earned does not alter the fact that the lease rental is
an allowable expense. Nevertheless, whatever rental
charged must be reasonable and commercially viable.
Rental expense
Example – expenses from other income
Chen rented a shop house in order to sub let it for rental income. Chen
also derives manufacturing income.
Rental expenses incurred on shop house used to produce rental income
under S4(d) cannot be deducted from gross income of the manufacturing
source under S4(a). In order to get deduction, the source of rental must
exist ie only deductible against rental income of shop house.
Example – rental expenses

Ahmad Berger S/B is a manufacturing company occupying a factory in
Sungai Buluh. Rental expenses were paid on 1.1.2016 until 31.12.2016.
The company however commenced the manufacturing business on
15.4.2016. Thus, only rental expenses from 15.4.2016 until 31.12.2016 is
deductible against gross income from the manufacturing business.
Repairs and renewals
General rule for deduction on repairs and renewals under s 33(1)(c):
1)Expenses incurred during that period for repair of premises, plant,

machinery or fixtures employed in the production of gross income
2)Expenses incurred for the renewal, repair or alteration of any
implement, utensil or article so employed, other than expenses on such
items which would qualify for capital allowance under Sch 3.
•The cost of reconstructing or rebuilding any premises, building,

structures or works of a permanent nature, plant or machinery or
fixtures are excluded. Capital allowance would be allowed in these
cases provided the assets are used for business purposes
•Public ruling PR 6/2019 on 26.11.2019 gives the latest explanation on
tax treatment for repairs and renewals of assets
Differentiating between repair and
improvement
• No specific definition in the Act. The general test is:
 repair involves the replacement of subsidiary part of an
entirety
 renewal means replacement of substantial part of an entirety
which is substantially the whole
• Important to distinguish between repair and improvement as
expenditure on improvement is deemed to capital expenditure
and therefore not deductible in calculating adjusted income
• In practice, improvements to include situations where
improved materials or construction techniques are used.
• It would be repairs if the new assets are essentially the same
as previous, for example replace single glazed glass windows
with tinted double glazed glass windows.
• Repair refer to recurring revenue expenses incurred to
maintain the efficient use of an asset in the business and is
deductible.
Tax planning
• In Conn v Robins Bros Ltd (1966) 43 TC 266 (HC),
construction of a ladies’ toilet is considered as improvement
but the insertion of steel joist was a repair.
• The company used the phrase “gutted and modernised” and
had entered into an “agreement of capital improvements”
which led the Revenue to disallow business deductions
• However, the company presented evidence that certain
structural alterations were made as it was an old building and
building techniques have changed over the years
• Therefore the Court accepted that these costs are revenue
expenditure
• This case also demonstrates the importance of accurate and
adequate documentation for persuading the authorities to
accept expenditures as revenue in nature
Repairs on acquisition
• If a new asset is acquired and the asset is in need of repairs,
these repairs will not be considered as revenue expenses.
(deductible expenses).
• In The Law Shipping Co Ltd vs The CIR, the company spent
almost £100,000 on a ship.
• On acquisition, the ship was capable of sailing and carrying
freight. Within 6 months, the company had to spend over
£50,000 on repairs to enable the ship to pass its four yearly
Lloyd’s survey. Most of the expenditure was not allowed as
business deductions
• In passing out the judgement, the judge commented that
repairs had been allowed to accumulate, hence it becomes
less valuable and had the sellers repaired the vessel, they
would have received a higher price. It was also noted that the
vessel needs immediate repairs shortly after the sale
• In a later case Odeon Associated Theatres Ltd v Jones (1971)
48 TC 257, the taxpayer sought and achieved tax relief for
repairs carried out on newly acquired cinemas. Evidence was
given that the purchase price of the cinemas was not affected
by their state of disrepair. The case was distinguished from
the Law Shipping case on the following grounds:
1) The purchase price of the ship was substantially less than if it
had been in a fit state of repair;
2) The ship could not continue as a profit earning asset without
being repaired shortly after acquisition
3) The absence in the Law Shipping case of any evidence that,
on established sound accountancy principles, the deferred
repairs could properly be charged as revenue expenditure
• In conclusion, the four conditions that cause acquisition
repairs considered as capital are in The Law Shipping Co Ltd v
The CIR:
a) the purchase price was materially affected by the property’s
dilapidated state
b) the acquisition was not in a fit state for use in the trade until it
was repaired
c) the acquisition cannot continue to be used in the trade without
being repaired shortly after the acquisition
d) the terms of the lease (if relevant) require the new tenant
reinstate the property to a good state of repair
 Thus deduction will generally be available for expenditure on
repairs incurred after a change of ownership if none of the
above four conditions exist
Example – repair expenses
Pall Mall Bhd owns a chain of retail outlets in Malaysia. In 2020, it
acquired two dilapidated shop lots to expand its chain. Repair work
was carried out in the same year on four Pall Mall’s outlets including
initial repairs on the newly acquired shop lots.
State with reasons whether the repairs on the four outlets are tax
deductible
Answer
Expenditure incurred on repairs is tax deductible if it is incurred
wholly and exclusively in the production of gross income. Repairs
which are of an initial nature ie incurred to enable the shop lots to be
used for the purposes of the business would not be deductible based
on the principle established in the Law Shipping case. However,
normal repairs carried out on the other two existing outlets are
deductible as long as they are of revenue nature.
Example – repair expenses for newly acquired property
K S/B bought a second hand factory for RM300,000 which was vacant
for many years and in need of repairs. Soon after it was acquired, the
company incurred RM100,000 on extensive repairs which included
RM10,000 on repainting of the factory walls and RM20,000 on
replacement of the roof tiles with new tiles of similar quality. The
balance of the repair costs were mainly incurred on the new wiring of
the electrical system, improving the drainage system surrounding the
factory, renovations and alterations to the factory.
Answer:
•Quoting Law Shipping Co Ltd v CIR, all the expenses are non
allowable since the repair was carried out right after acquisition.
•Even though repainting of walls and replacement of roof tiles would
have been allowable under normal circumstances, in this case it is
disallowed
Asset replacement – ”entirety” or “part
of entirety”
• Repair to “part of an asset” and the replacement of an “entire
asset” must be distinguished to determine deductions allowed
• In Lurcott v Wakely and Wheeler (1911) 1 KB 905 it was
stated that “repair is restoration by renewal or replacement of
subsidiary parts of a whole”. Renewal as distinguished from
repair is reconstruction of the entirety, not necessarily the
whole but substantial…”
• In Bullcroft Main Collieries Ltd v O’Grady (17 TC 93) (HC) it
was stated that “every repair is a replacement, you repair a
roof by putting on new slates instead of the old one, which
you throw away. But …the slate is not the entirety in the
roof…if you replace the roof in entirety, it is having a new one
and it is not repairing an old one”
Asset replacement –”entirety” or “part
of entirety”
• In Samuel Jones & Co (Devondale) Ltd v CIR (1951) 32 TC
513, the costs of replacing an unsafe chimney at a factory
were held to be deductible as the chimney was a low value
part of the factory.
• This case shows that the size and importance of the work is
crucial in determining business are deductible or not.
• One big job may be capital, whereas a combination of small
jobs may be revenue
Differentiating between repair and
improvement
Example – replacement expenses
Good Rubber S/B is the owner of a rubber estate located in a low lying area
in Perak. The drainage system is controlled by ten Watergates. As a result of
a leakage in one of the Watergates, a new gate was installed at a cost of
RM15,000.
Consider the deductibility of the sum expended in installing the new
watergate.
Answer:
On the authority of the Comptroller of Income Tax vs Rubber Co Ltd, the
sum incurred is a revenue expenditure. The installation of the new watergate
is to be regarded as a repair to part of an entirety ie the drainage system as
a whole. The construction of the single Watergate taken by itself was not an
independent entity which could be said to create any new asset. As it
amounted to a repair as opposed to a reconstruction, the expenditure is
deductible under S33(1)(c) of the Act.
Renewal
• Renewal is allowed as revenue expenditure and such
expenditure does not qualify for capital allowance.
• Renewal must not be something extra, new or
improvement to the existing assets.
• Correct accounting treatment for repairs and renewal is
obviously important.
• Documentary evidence must be retained in case of a
dispute.
Malaysian experience – spare parts
written off
North Borneo Timbers Bhd v KPHDN
Tax payer is in timber logging activity stored machinery and mobile
equipment spare parts. Upon purchase, these spare parts are debited
to “stocks and spares” account. When utilized, the amount was
charged to “repairs and maintenance” account.
When machinery and heavy equipment were rendered in-operative or
obsolete, the related spares had to be written off.
-The Sp Comm held that the amount written off cannot fall under
S33(1)(c) as it was not used to repair the machine for production of
income
-Lordship Charles Ho J accepted this decision but since the written off
amount is not significant, he opined that such amount can be
considered as expense under the general provision of s33(1) and
therefore can be given a deduction.
Bad and doubtful debts
• Trade debts are debts that arise in the course of
business through the sale of goods or provision of
services.
• It forms as gross income of the business
• Sect 34(2) state that specific provision for bad debts
would be given a deduction if:
(a). specific debtors are identified
(b). the debts are partly/wholly irrecoverable
(c). such debts had been reasonably estimated to be bad
• Whether a debt is wholly or partly and to what extend
bad or irrecoverable is in every case depends on the
facts
• Public Ruling 4/2019 deals with the following:
(a)Specific provision for bad debts
(b)General provision for bad debts; and
(c)Bad debts written off
• The tax authorities require the taxpayer to adhere to the
following before a specific provision for bad debts is granted a
tax deduction:
1) debts must assessed separately ( outstanding period, credit
record of the debtor)
2) extensiveness of the doubtfulness (history of bad debts, age-
analysis of the debts)
3) person valuing the debt and date of evaluations
4) any specific information used in arriving at the evaluation
• Tax authorities expressly state that general provision of bad

debts which is based on certain percentages is non-
allowable deductions even though the tax payer is required
by law or accounting convention to do so.
• Before writing off bad debts the following action must be
taken (one or more):
• issuing reminder notices
• debt restructuring scheme
• rescheduling for debt settlement
• negotiation or arbitration of a disputed debt
• legal action (filing of civil suit, obtaining judgement from
the court etc)
• Bad debts written off unrelated to trade (debts given to
staff) are non allowable expenses
A trading debt can be considered as bad debt if any one
the following occurs:
1.debtor has died without leaving any assets from which
the debt can be recovered
2.debtor is a bankcrupt or in liquidation without any assets
from which the debt can be recovered
3.debt is statute barred
4.debtor cannot be traced
5.attempts for arbitration or negotiation have failed and the
cost of litigation prohibitive
6.any circumstances that render the debt irrecoverable
• In Sastep Sdn Bhd v Ketua Pengarah HDN (HC) (2017)
AMR 392, the company attempted to claim bad debts
deduction amounting to RM3.3 million for YA2001 and
2002 under s 34(2). Both companies are related parties.
The High Court held that bad debt deduction was not
available as the company:
(a)Failed to take any prudent action to recover the
outstanding sum from the debtor
(b)The written off of the bad debt was not based on prudent
commercial consideration and not in the interest of the
company
• The company’s only action to recover the said debt was
by sending a series of notices of demand to the debtor
over a period of 13 years and there was prolong periods
between the demands.
• Sending notices does not establish debt is irrecoverable.
• The legal action only commenced against the debtor
knowing that the debt was already time barred and it was
only filed for tax appeal purposes
Trade debts taken over
• Reynolds & Gibson vs Crompton (33 TC 288), one of the assets of a
partnership firm of cotton brokers was a debt owing by a customer. In
1938, a change took place in the constitution of the firm, and the new
firm which was then formed carried on the business, purchased the
assets, and took over the liabilities of the previously existing firm, but
treated for tax purposes as having set up a new trade.
• The new business owners acquired the debt at a written down figure
but later collected in full, a profit of £50,000 was made by the new firm.
It was found that the new firm did not trade in book debts.
• The House of Lords held that although the debt was a trade debt in the
hands of the old frim, its acquisition by the new firm and its subsequent
collection was not a transaction within the scope of the cotton broking
business carried on by that new firm, but produced an accretion of
value analogous to the profit made by the sale of a fixed asset, and
therefore, the profit which accrued was not assessable to tax
Advances
Reid’s Brewery Co Ltd vs Male
•The company is in brewers business and owned “public houses”
where liquor is sold and consumed by the public, let under
restrictive covenants to tenants. Advances were made on loan to
these tenants and customers. Loans are usually temporary.
•Evidence showed that in addition to brewing business, the

company also carried a major business as a financial concern.
Therefore losses arising from advances are allowable against
business income.
Advances
English Crown Spelter Co Ltd vs Baker
•This company is in the business of zinc smelting made advances to an
allied (mining) company to supply raw materials. Some advances were
against materials to be delivered though not specific.
The allied company was liquidated and unable to pay its
liabilities. English Crown Spelter claimed to deduct loss as a bad debt
arising in ordinary course of business.
•The Court ruled the loss as capital loss because the advances were
actually loans made to obtain raw materials and considered as capital
investment.
•Ultimately in deciding whether loss arising from an advance is
considered as deductible or not depends on whether the advance is
given as a normal course of business
•Advances made in order to secure contracts or secure raw
materials is not considered deductible
Example – loan unpaid
• En Ronnie is a building contractor lent money to Mr See, a family
friend. Mr See became a bankcrupt and En Ronnie considered the
sum lent to be a total loss and sought to deduct from his profit.
• He contended that the loan had been a bad debt incurred in the
ordinary course of business and deductible. The tax authorities
disallowed the deduction. Advise En Ronnie.
• Would your advice differ if Mr See is a major supplier to En
Ronnie’s business?
Answer:
• The bad debt is not deductible because the loan to Mr See is not
an outgoing or expenses exclusively incurred in the production of
income.
• Even if Mr See is a major supplier to En Ronnie, the loss would
still not be allowable as a deduction. The reason being a building
contractor is not in the business of lending to the supplier
Related companies’ bad debts
• Companies are formed to make profits. Companies
within the same group of companies or related with the
same shareholders deals with one another with profit
orientation.
• The arm’s length principle must be adhered to.
• Long delays to recover any debts outstanding which
results in bad debts is non eligible for tax deductions
Related companies’ bad debts
• In Sastep Sdn Bhd v Ketua Pengarah HDN (2017) AMTC 543,
the company attempted to write off a bad debts amounting to
RM3.3 million in YAs 2001 and 2002, after a duration of 4
years.
• There were no efforts taken to recover the debts nor records
to justify the continue supply of services without payment.
• The High Court held that both companies are substantially
owned by the same shareholders, therefore there was conflict
of interest in the financial statements of both companies. The
delay together with no action on debt recovery demonstrates
that the debt written off was not based on prudent commercial
business consideration. The bad debts written off is not
deductible.
Debts waiver
• The company or business owners who waive payment of
trade debtors due to inability of trade debtors to settle
the amount owing is not deductible if the trade debtors
have not turned bad and the recovery actions of the
trade debtors have not been exhausted
Debts waiver - example
• Gerbang Sdn Bhd sells movers closes its accounts to 31 July
each year. For the year ended 31.7.2020, the company
accepted furniture of an amount of RM40,000 as full
settlement of a trade debts of RM60,000. The RM20,000
trade debts were waived. Advise the company on the
deduction of debts waiver of RM20,000.
• The trade debtors have not turned bad, thus the waiver of
RM20,000 would not have been said to be “bad debts”.
Therefore, it is not within the ambit of s 34(2) as “bad debts”
Non-trade debts
• Non-trade debts generally accrued due to advances to
employees, sales of assets or deposits paid as
securities.
• The specific provision of bad debts, bad debts written off
of these non-trade debts are not deductible in arriving at
adjusted income of the business
• This is because such non-trade debts have never been

reflected as gross income of the business
Employers’ contribution to approved
scheme
• Contribution to approved scheme for employees engaged in
production of income is allowed. Eg: EPF and approved
private retirement scheme (eff YA2012)
The allowable deduction is calculated as follows:
• The lower of contribution or 19% of employee’s remuneration
• Where only part of the remuneration is allowable, the allowable
EPF deduction is restricted to the allowable remuneration;
• Contribution x allowable remuneration/total remuneration
• Remuneration is limited to monthly wages, allowances,
commissions and bonus. Does not include service charge,
overtime payment, gratuity, retirement benefit, retrenchment
benefit and travelling allowance.
Employers’ contribution to approved
scheme
Zara manufactures ladies’ garment since 2000. The
company has awarded its senior management staff the
following perks for YA 2019:
a.Remuneration RM2,700,000
b.Contribution to EPF 13% of remuneration
c.Additional contribution to Yuen Zara pension fund
scheme, an approved scheme by IRB under s150 of the
Act
Amount allowed as contribution in YA 2019:

((13% + 8%) – 19%) x RM2,700,000 = RM54,000
Initial contribution
• Any special contribution in the form of initial sum to a
scheme or fund approved by the Director General is tax
deductible if an application is made to the Director
General to allow it as special contribution (s 34(5)). He
may allow the whole contribution or part of it for any YA
as he thinks fit.
• This special contribution refers to the funding at the

inception of a scheme
Initial contribution - example
Zeus Sdn Bhd decided to improve the benefits offered to its
employees. As a result, it set aside RM150,000 out of its reserves for a
pension fund. This is the initial contribution necessary to set up the
fund. State with reasons, whether the expenditure is tax deductible
Answer
Based on decision in Atherton v British Insulated & Helsby Cables Ltd
(10 TC155), such a contribution would be capital expenditure and
therefore 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 or an
advantage for the enduring benefit of the trade.
However, s 34(5) of the allows The Director General give a deduction
for such special contribution in respect of an approved scheme.
However, in this case the pension fund is not an approved scheme,
therefore no deduction allowed
Legal and professional expenses
• Damages – Mask & Co v CIT court held that damages
paid by the trader because he sold goods at a lower
price than stated under an agreement he entered into
was not deductible in computing his taxable profits.
• Cost of tax appeal – Smith’s Potato Estates Ltd v

Bolland court held that cost of tax appeal in non
allowable. It is not a trading expense but is an
expenditure to ascertain amount of tax to be paid and
not to earn profit in his trade.
Violation of law – expenses incurred in a
capacity other than that of trading
• Violation of law – expense incurred for breaking the law
such as fines and penalties are non deductible. It is an
expense incurred in a capacity other than that of a trader
• In CIR v Alexander von Glehn & Co Ltd (12 TC232), the
company incurred fines and legal costs as a result of
certain sales of stock which infringed the Customs Act.
• The Court held that such expenses is not deductible.
Similarly, in CIR v EC Warnes & Co Ltd (12 TC227), oil
merchants shipped some oil to Norway during wartime
and was sued for breach of wartime regulations. Penalty
incurred was also held not deductible
Violation of law – expenses incurred in a
capacity other than that of trading
• Express Bus Service Sdn Bhd is in the business of transporting
passengers by modern coaches from Kuala Lumpur to other
towns in Malaysia. The drivers are paid a basic salary and a
commission based on the number of trips made.
• In some of the long distance trips, the drivers were issued
summonses by traffic police for overloading and for exceeding
the speed limit along the highways. Any fines for such offences
would be borne by the company
• The fines imposed by the authorities for infringement of the law
are not deductible for tax purposes because breaking the law of
the country is not considered to be a trading transaction. (CIR v
Alexander von Glehn & Co Ltd and CIR v EC Warnes & Co Ltd)
Advances made to employees
• In Ralph S Harris (Insurance) Ltd v CIT (Rhodesian
case), the firm under terms of contract with its insurance
agent.
• Gave advances against expected commissions payable.
• The agent went bankcrupt and the firm lost the advance.
• The court ruled advances form part and parcel of the
general term of employment and the loss is allowable
Example:
A manufacturing company made an advance of RM3,500
to one of its salesman to set off against future
commissions. The salesman absconded without settling the
advance. No commission was earned by the salesman and
as a result the advance had to written off by the company
The making of loans or advances made to employees are

generally non allowable.
In this case the advance was made as part and parcel of
employment and directly related to the business, such
deductions would be deductible.
In Bookers Central Services Ltd v CIT the court held loss

resulting from employee defaulting on loan given to him is
non deductible.
Personal loans to employees are not directly related to
trade and therefore non allowable.
Example
One of the directors of the company was dismissed during
the year for bringing the company into disrepute. An
amount of RM30,000 was paid to him as compensation.
Answer
•This payment made to a dismissed employee or director
as compensation would be deductible expense.
•Such payment would be a payment made to get rid of
unsatisfactory employee and considered as normal
expense incurred in the production of income.
•The payment was simply one of non enduring effect made
to get of a servant in the course of business
Defalcation by employees/directors
• In Lords Diary Farm v CIT (27 ITR 700), the cashier
whose duty is to draw money from bank on behalf of
company retained Rs53,000 for his own purposes.
• The court held that it is necessary for a company to

employ cashier and assign him the duty of withdrawing
money from bank, any loss would therefore constitutes a
trading loss and allowable
Defalcation by employees/directors
• However in Curtis v J&G Oldfield Ltd (9 TC 319) (HC), an
investigation was carried out after the death of the
managing director, and it was found that he had passed
certain private transactions of his own through the
company’s books. An amount of £14,000 was due from his
estate to the company. The debt was valueless and was
written-off by the company.
• The High Court held that since the director was in a

position to do exactly as he likes, the loss was held not
deductible. The loss was not a trading loss
Keyman Insurance
• Keyman insurance is the insurance taken for the life of an
employee or a director who is crucial to the profitability or
viability of a company. The objective of the keyman insurance
is to cover loss of business income due to sudden death,
injury or accident of key employees
The insurance premium will be allowable provided:
a. The policy has no element of investment eg term life or
personal accident policies (endowment policy and whole life
policy are excluded)
b. The right to the insurance proceeds remains with an
employer/company
c. It is not insured on director of a controlled company, partner in
a partnership or sole proprietor
The insurance proceeds will be assessed as business income.
Keyman Insurance
Example – keyman insurance
A company purchased a “key-man” endowment policy on the life of
the managing director with the company as the beneficiary. The
annual premium payable is RM20,000 and the sum assured is
RM500,000. Under the direction of the managing director, the
company’s profits have increased 20% each year for the last five
years.
Answer
Although the company is the beneficiary of the insurance policy and
the managing director is a “key-person” in the company, the annual
premium payable is not allowable as the company has acquired an
asset. Life insurance with residual value and endowment policy
have elements of investment. On maturity of policy, the company
will receive RM500,000 plus bonuses declared by the insurance
company.
Keyman Insurance
Example:
A company acquired a “key-man” term life policy on the life of the
managing director with an annual premium payable of RM30,000. It
also acquired a “key-man” whole life policy on the life of the sales
manager with an annual premium of RM20,000. The premium of
RM30,000 had been allowed and the premium of RM20,000 had been
disallowed in the tax computation. Both the managing director and the
sales manager were killed in an accident and the company received
cash payments of RM2,000,000 and RM500,000 in respect of the term
life and the whole life policies.
Answer:
The sum of RM2,000,000 received by the company is taxable on the
company as it is received in respect of a policy where the premium had
been allowed previously while the sum of RM500,000 will not be
taxable as the premium had not been allowed previously
Losses through theft, embezzlement or
misappropriation
• Deductible as long as it is non-capital nature and incidental to the
business.
 Example: Inventories, trading goods
• When an employee is responsible for the loss it is deductible.

 Example: person in charge or working in the warehouse
• Subsequent recoveries are taxable. Recoveries are to be added

back as part of gross income.
• When the managerial staff is responsible for the loss, it becomes

non deductible as it is considered not in the usual course of
business, that is managers do not hold the custody to inventories.
Losses through theft, embezzlement or
misappropriation
In Lords Dairy Farm v CIT,
the cashier whose duty is to draw money from bank on behalf of the
bank kept Rs53,000 for his own purposes. The court held that it was
necessary for the company to employ vashir and assign the duty of
money withdrawals.
Therefore loss considered as a trading loss and allowable.
In Curtis v J&G Oildfield,

it was found the managing director had passed certain private
transactions of his own through the company’s books. An amount of
14,000 pounds was due from his estate to the company. The debt was
valueless and was written off by the company.
The court held that since the director was in a position to do exactly
as he likes, the loss was not deductible. It is not trading loss
Professional indemnity insurance
• IRB issued PR 1/2019 on 18.2.2019 governing professional
indemnity insurance.
• Professionals such as lawyers, auditors, engineers and medical
practitioners are required mandatorily to incur professional
indemnity insurance in carrying out the practice of the professions.
• The objective of professional indemnity insurance is to provide
compensation to the claimant in the event such professional is held
negligence or failed to exercise reasonable care in discharging the
duties as required in that profession.
• The insurance premium is revenue expenses deductible in
calculating adjusted income of the business
• Insurance proceeds received in connection with the professional
indemnity insurance would be taxed under s 22(2)(a)(ii) as gross
business income
Prohibited Expenses
Expenses specifically disallowed by the
Act (s39)
• Although an expense fulfills the s 33 “wholly and
exclusively” test, the same expense must not be
prohibited by s39 in order to rank for deduction
• With effect YA2014, the tax authorities are empowered
under s39 (1A) to deny any deduction claimed by the tax
payer in the event such tax payer failed to furnish
information requested by the tax authorities within the
time specified (or such extended period) which is stated
in the notice issued pursuant to s 81.
• PR 3/2015 was issued on 29 July 2015 governing the
administrative aspects on 39(1A)
Domestic or private expenses
• The question of duality of purpose is essential. If the sole
purpose of the expenditure is to secure a business
result, then it is allowable.
• However, where the expenditure has a dual purpose

(partly for business or partly for non-business), then the
full amount may be disallowed as a deduction (TL Sdn
Bhd v Ketua Pengarah Cukai Pendapatan (1995) 2 MST
2310 (Sp Comm)
• In Newsom v Robertson (33 TC 452) which concerned a

barrister who claimed cost of travelling between his
residence and his chambers on the grounds that he
exercised part of his profession at home as he took work
home on weekends.
• The Court of Appeal held that the expenditure was
incurred primarily for private and domestic reasons and
is there was any profession purposes, it was a subsidiary
one
• In Mallalieu v Drummond (1983) 2 All ER 1095, Ms
Mallalieu was a practicing barrister in London. In
accordance with the Bar Council’s guidelines for
dressing in court, Ms Mallalieu spent around £564 on
clothes for court wear and claimed a deduction against
her professional income in respect of the replacement,
laundering and cleaning of the clothes.
• The House of Lords held that while the tax payer may
have professional purpose in her conscious mind, it was
noted that provision of the clothes was needed as a
human being. As such the expense were not deductible
Domestic or private expenses –
Yap Pak Leong
• In Datuk Yap Pak Leong v Ketua Pengarah HDN (2014)
10 MLJ 255, the appellant was in the business of
plantation in Sandakan. Business deductions were
claimed on salaries of two housemaids and other staff
quarter expenses provided to its general manager. The
staff quarter is a luxury home in Kota Kinabalu and is
owned by the appellant, and the general manager is the
son of the appellant
• The high court make inference that a general manager
would not be housed in a luxurious home which requires
expensive upkeep if he were not the son of the
employer. It is domestic in nature.
Domestic or private expenses – Yap
Pak Leong
• Furthermore the said “quarter” is 5-6 hours drive from
the plantation and the “quarter” was luxurious
• Appellant and wife are also living in the same staff
quarter, the maid expenses cannot be said wholly and
exclusively incurred in the production of income
• The High Court held these expenses are prohibited by s
39(1), deductions from gross income for domestic or
private expenses
Prohibited expenses
• Disbursements or expenses not being money wholly and
exclusively laid out or expended for the purpose of
producing the gross income
- Section 39(1)(b) would include excessive remuneration
paid to family members and also directors of the
company
• In Piramid intan Sdn Bhd v Ketua Pengarah HDN the
appellant entered into a contract for a consideration of
RM40m whereby RM20m is upfront payment must be
paid and the remainder settled by monthly premiums.
The High Court held such upfront payments were not
wholly and exclusively incurred in the production of gross
income
Prohibited expenses
• Capital withdrawn or any sum employed or intended to
be employed as capital is prohibited expenses s 39(1)
(c).
• In DGIR v RB Sdn Bhd (1984) 1 MLJ 248, the Federal

Court held that the payment of instalment of principal
debt falls into the ambit of s39(1)(c). It is the statutory
enactment that the payment of a capital nature is not
deductible
Prohibited deductions – Sect 39
• Any amount paid to pension, provident, savings, widows, orphans or
similar fund or society which is not an approved scheme is
prohibited
• Any expenditure in relation to business with the following nature:
- Qualifying mining expenditure for the purposes of Sch 2;
- Qualifying plant or building expenditure, qualifying agriculture
expenditure or qualifying forest expenditure for the purposes of Sch
3; or
- Qualifying prospecting expenditure for the purposes of Sch 4;
Which will be given capital allowance is prohibited expenses to prevent
double deduction claim
Any outstanding withholding tax unpaid, the proportionate amount paid
is allowable and the unpaid proportion non allowable.
Example:
Power S/B is a company engaged in batteries manufacturing. A
technical assistance agreement was drawn up between the company
and a non-resident to supply technical services. The consultancy fees
was paid without deduction of withholding tax.
Generally the consultancy fee is a deductible expense but given that

the withholding tax is unpaid, the consultancy fee is prohibited from
being deducted as business expense.
Example – withholding tax
Naturaltex (M)S/B manufactures latex mattresses in Malaysia, using
patent from Germany. The gross sum of royalty for YA2018 amounted
to RM525,000. The company has remitted RM472,500 to Germany
representing 90% of the gross sum on 1.4.2018. However, due to tight
cash flow, the company only paid RM22,500 to IRB on 28.4.2018.
Therefore, the amount not deductible for YA2018 would be the
gross income related to unpaid withholding tax:
RM
10% x RM525,000 52,500
-) amt paid to IRB (22,500)
Unpaid withholding tax (10%) 30,000
Non allowable expense (100%) = RM300,000
• Sect 39(1)(g) – any sums payable otherwise to a state

government, statutory body of fund approved by the Minister
for the use of license or permit to extract timber from a forest
in Malaysia. (includes sums paid to licensees for the informal
assignation of their license to extract timber)
This is to curtail unhealthy activity in the timber logging industry

where timber concession received from the authorities is
given to a third party for certain payment.
• Sect 39(1)(k) – sum paid as rental or lease for motor vehicle
in excess of RM50,000 (for vehicles costing more than
RM150,000) or RM100,000. However licensed or permitted
motor vehicle by the appropriate authority for commercial
transportation (lorry, truck, bus, minibus, van, station wagon
or taxicab) is not restricted.
Example
Cepat Masak manufactures noodle. For ye 31.5.2017, the
company has made lease rental for the following
Lease rental paid Accumulated Cost of car
during the year lease rental on (RM)
(RM) 1.6.2016 (RM)
Proton Wira 25,000 15,000 85,000
Van 15,000 50,000 120,000
BMW 45,000 35,000 210,000
Solution example
Proton wira
Total accumulated lease amount @ 31.6.2016 is RM40,000. Lease
rental paid for the year is fully allowable
Van
No restriction on lease rental since this is commercial vehicle
BMW
Total amount is restricted to RM50,000 since the cost of car exceeds
RM150,000. In this example the allowable lease rentals is limited to
RM15,000 only
•Sums payable for use of a license or permit to extract timber from a

forest in Malaysia other than a State Government or statutory authority
or body approved by the Minister
Lease rental
• Lease rental paid in respect of passenger vehicle used in
business, the accumulated sum of each lease rental in
respect of each vehicle shall not in aggregate exceeds
RM50,000
• With effect from YA2002, the lease rental deduction will be
RM100,000 if the passenger vehicle has not been used by
any person for any purpose prior to the renting and the total
cost of the motor vehicle does not exceed RM150,000
• The RM50,000 or RM100,000 limit would not apply to
commercial vehicles such as lorry, truck, bus, minibus, van
station wagon or taxi used in the business
Entertainment Expenses
• Entertainment expenses provided to suppliers, trade
debtors and employees are an inevitable expense in
most businesses, varies in amount depending on
industries
• The government has since YA2004, only allowed 50% of
the business entertainment expenses be deductible in
arriving at the adjusted income of business
• During YA2004-2013, business promotion expenses is
fully deductible, confirmed in Court of Appeal case NV
Alliance Sdn Bhd v Ketua Pengarah HDN (2012) 1 MLJ
441
• With effect YA2014, entertainment has been defined with
wider scope to include expenses incurred for the
purpose of promoting business with or without
consideration
Entertainment is defined as:
a)The provision of food, drink, recreation or hospitality any kind
or
b)The provision of accommodation or travel in connection with or
for the purpose of facilitating entertainment of the kind
mentioned in the above in (a)
•by a person or an employee of his, with or without any
consideration paid whether in cash or in kind, in promoting or in
connection with a trade or business carried on by that person.
•Promotion includes activities to advertise, inform and to offer a
product/service which will be marketed to customers, dealers
and distributors but excluding suppliers. It is 50% deductible
before deriving adjusted income. (PR 4/2015)
Entertainment Expenses - fully deductible
Fully deductible entertainment expenses are:
(a) Entertainment to employees such as meals, refreshments, annual
dinners, gifts to employees
 however if lunch or dinner provided for clients and some employees
are also invited, expenditure is only 50% deductible
(b) Entertainment business such as hotels, restaurants that provide

entertainment to their patrons will be fully deductible
(c) Promotional gifts at foreign trade fairs such as souvenirs and bags
at trade fairs, trade or industrial exhibitions held outside Malaysia for
the purpose of promoting exports from Malaysia
Entertainment Expenses – fully deductible
(f) Entertainment related wholly to sales – provided to customers, dealers
and distributors but exclude suppliers. Included are:
• food and drinks for the launching of a new product
• redemption vouchers given for purchases made
• discount vouchers, shopping vouchers, concert or movie
tickets, meal or gift vouchers and cash vouchers
• free gifts for purchases exceeding a certain amount
• redemption of gifts based on a scheme of accumulated points
• lucky draw prizes to customers for purchases made
• expenditure on trips given as an incentive to dealers for
achieving the sales target (NV Alliance Sdn Bhd vs Ketua Pengarah
LHDN)
• light refreshment to trade customers at the business owner’s
premises
• Free” maintenance/service charges or contribution to sinking
fund by property developers
Entertainment Expenses - examples
Incurred Allowed
RM RM
Employees entertainment allowance 10,000 5,000 (50%)
Entertainment to suppliers 5,000 2,500 (50%)
Sponsorship of a cultural show 50,000 50,000(100%)
at a sporting event
Gifts to customers for purchases 15,000 15,000(100%)
above RM100
Launching of new product 20,000 20,000(100%)
Meals provided for employees 25,000 25,000(100%)
during staff meeting
Leave passage
• Leave passage means travelling during a period of
absence or vacation from employment.
• It covers only the cost of fares
• Meals and accommodation provided during the period of
vacation is tax deductible being staff amenities
• Any leave passage provided by the employer to the
employee within or outside Malaysia is not deductible
Leave passage
Exception:
 Effective YA2007, leave passage expenditure incurred
by employers for their employees and their immediate
family members to attend a yearly event held in
Malaysia is deductible if it involves the employer, the
employee and the immediate family members
Anti avoidance to incentives company s
39(3)
• With effect from 1.1.2012, pioneer status company or
company having tax exempt on business source shall
not have its following expenses to be added back
notwithstanding non-compliance to the withholding tax
provisions on:
a. interest/royalty (s 39(1)(f)
b. Contract payment (s 39(1)(i)
c. Special classes of income (s 39(1)(j); and
d. Commission expense and others casual expenses (s
39(1)(j)
Specific Deductions
Specific deductions
• Governed under S34(6)
• These are allowable deductions that do not fall under the
scope of S33 or could even be capital expenditures.
• These deductions are given as incentives to achieve some
national objectives and bring social benefits to the public.
• Specific deductions include:
- Mining expenditure: mining capital expenditure is given a
revenue deduction to promote the mining business. (S34(6)
(c))
- Replanting expenditure of the same crop on the same land is
given as revenue deduction the reduce the financial burden of
farmers. The expenditures include cost of clearing old trees,
cost of seedlings, cost of labour and cost of drainage
improvement. (S34(6)(d))
Provision of equipment and renovation of
building for disabled person s34(6)(e)
• Where the employer incurred expenditure on the provision of
any equipment or on the alteration or renovation of premises
necessary to assist the disabled employee in the performance
of employee’s duties the expenditure would be given full
deduction instead of the capital allowance on plant and
machinery
• To qualify for the deduction, employer needs to retain the
following documentation to facilitate tax audit:
a. The disabled employee is registered with Department of Social
Welfare or certified by SOCSO with an “OKU” card;
b. Original receipt for the equipment purchased; and
c. Supporting documents for expenses incurred on the alteration
and renovation of the business premises
Translation/Publication
- Translation or publication in Bahasa Malaysia of cultural,

literary, professional, technical or scientific books
approved by Dewan Bahasa dan Pustaka. (S34(6)(f))
Social responsibility payment
Social responsibility payment (cash or in-kind) for: (S34(6)(h)(ha))
1. Provision of services or public amenities such as bus stops.
2. Contributions to charity or community projects relating to
education, health, housing, conservation or preservation of
environment, enhancement of income of the poor,
infrastructure and information and communication technology,
as approved by the Minister, will be accorded full revenue
deduction.
This includes:
services which comprise of specialist care services, cleaning and
transportation
contribution either in cash or in-kind
To beneficiaries such as charity centres, schools, universities, colleges,
Government hospitals and various ministries eg. Education, Health
Rural Development etc.
Heritage Site
• The Commissioner of Heritage under the National
Heritage Act 2005 undertakes the task to identify
historical buildings for preservation
• Private sectors in carrying out corporate social
responsibility are encouraged to participate in these
preservation and maintenance projects relating to
heritage site
• Resident person participating in the maintenance of
designated heritage site would be accorded business
deductions
• This takes effect from YA2020 and subsequent YAs
Infrastructure, Cultural & Arts
- Infrastructure expense for public facility such as road, car park,
toilet, jogging tracks, gardens etc. The facilities must be free of
charge and significantly benefit the public. Prior approval from the
Ministry of Finance is required
- Establishing and managing a musical or cultural group approved by

the Minister. Example: Petronas Philharmonic Orchestra. (S34(6)(j))
- Cash contribution and cash sponsorship related to cultural or arts

show held in Kuala Lumpur and approved by Ministry of Culture,
Arts and Heritage and organized with the participation of foreign
nationals who have made at least 3 other performance outside of
their countries is allowed as revenue expense
Arts & Cultural
- Arts or cultural activity: expenditures incurred for sponsoring any
local or foreign arts, cultural or heritage activities approved by the
Ministry of Information, Communication and Culture are given
specific expenditures.
- Restricted to RM1,000,000 for local arts and RM300,000 for foreign
arts. (S34(6)(k)). (effective YA2020).
Example – cultural activities

• MM (Holdings) Bhd manufactures instant noodle in Malaysia since
1.1.2008. For year ending 31.12.2017, the company sponsored both
local and foreign cultural activities as follows:
Cultural activity RM
(a) Local 320,000
(b) Foreign 410,000
Total 730,000
Arts & Cultural
Solution :
The threshold is limited to RM1,000,000. Thus RM110,000 will
be disallowed. Foreign culture limited to RM300,000.
Example
Using previous example, the amount incurred as are follows:
Cultural activity RM
(a) Local 720,000
(b) Foreign 360,000
Total 1,080,000
The threshold of deduction for sponsoring, foreign cultural
activity is RM300,000 and the overall threshold is RM1,000,000.
Thus RM80,000 is disallowed for deduction.
Scholarship expense – available to
company
• Companies providing scholarship to a student for any
course of study leading to an award of a diploma, degree
(including master and doctorate) would be given a tax
deduction provided:
a. The student is receiving full time instruction;
b. The student has no means of his own; and
c. The total monthly income of whose parents or guardian
does not exceed RM5,000
• The scholarship expense refers to the course fees and
reasonable living expenses of such student
• The educational institution must be established or
registered in Malaysia
Practical training to non-employees
• Expenditure incurred by a business person on the
provision of practical training in Malaysia related to his
business to a resident individual who is not his employee
will be given a tax deduction.
• This is to facilitate the training of unemployed graduates

on English, computer, financial and industrial courses
International Standardisation Activities
• With effect from YA2004, an expenditure incurred by a
company for participating in International Standardization
activities approved by the Department of Standards Malaysia
such as conference, workshop, seminar and meeting
overseas shall be given a tax deduction against its business
income. Approval from Department of Standards Malaysia
must be retained to be eligible for tax deduction
• With effect from YA2005, any revenue expenditure
incurred by a company for the purpose of obtaining
accreditation for a laboratory or as a certification body,
as evidenced by a certificate issued by the Department
of Standards Malaysia will be given a tax deduction
Cost of developing website (YA2002
and subsequent YAs)
- Resident person who has incurred cost of developing website
which is “electronic commerce enabled” for the basis period
for a YA shall be given a special revenue deduction against
the business income.
- Cost of developing business website is given 20% deductions
for a period of 5 years.
- “Electronic commerce enabled” means a system of processes
where transactions involving the transfer of information,
products, services or payments can be made through
electronic networks for an electronically confirmed
consideration as verified by the Malaysian Communications
and Multimedia Commission
Wood manufacturer
• Resident Malaysian company manufacturing wood

based product are allowed to deduct cost of chain of
custody certification from Malaysian Timber Certification
Council
Audit fees
• Statutory tax audit – mandatory under The companies
Act 1965 is allowable
Annual General Meeting expenses
• In Sharikat KM Bhd v DGIR (1972) 1MLJ 224 (HC); AGM
expenses related to:
a. Postage for sending out notice of general meeting;
b. Printing of notice of general meeting, minutes of previous
meeting, directors’ report and statement of accounts;
c. Cost of “nasi briani” for shareholders attending the
general meeting
Are NOT deductible
Annual General Meeting expenses
• Mutiara Bhd has its annual general meeting which was attended
by 100 shareholders. After the meeting, the company organised
a lunch for the shareholders and 50 employees of the company.
The lunch was also to celebrate the company’s 20th anniversary.
The cost of organising the lunch came up to RM19,500
• Generally expenses connected with the annual general meeting
are not deductible since they are not incurred in the production of
income (Sharikat KM Bhd v DGIR)
• The lunch expense could also be considered as an entertainment
expense. Since the entertainment expenses are not related to
sales, only 50% of the expenses are allowed. Since the provision
of entertainment to the company’s employees was incidental to
the provision of entertainment to others (the shareholders), the
expenses were therefore 50% disallowed under s39(1)(1) of the
Act
Guarantee and commitment fees
- Guarantee and commitment fees relating to a loan are

deductible provided the loan is used to finance operating
activities.
 Example: loan taken by a developer company to develop an
office block which will be sold after completion
- Bank commission and guarantee fees relating to investments

made are deductible provided the company deals with
investments products
Example
Skyline Development Sdn Bhd (SD), a company formed to develop
Menara Skyline at a total construction cost of RM80 million. In 2020, it
entered into a syndicated loan package agreement to obtain financing
for the building. Under the syndicated loan package agreement, it was
granted a bridging loan facility by a consortium of financial institutions.
The bridging loan facility is repayable within 3 years of initial draw
down. Apart from the payment of interest, the terms and conditions of
the loan require SD to pay the following fees:
(i)Commitment fee of ½ percent per annum to the lenders on the
principal amount not drawn down as at 31 December each year
(ii)Guarantee fee calculated at the rate of 1 percent based on the
outstanding loan as at the beginning of each calendar year to the
guarantor of the loan
Cont…
SD incurred RM100,000 commitment fee and RM200,000 guarantee
fee in 2020. Explain with reason, whether the commitment fee and
guarantee fee are deductible.
Answer
Commitment fee is revenue expense and is allowable because it was
wholly and exclusively incurred in the production of income. It was a
payment for the use of loan facility and is payable regardless loan
utilised or not
Guarantee fee is a business expense as the borrowing of money often
requires guarantee by a third party in case of loan defaults. It can be
argued that since interest is an allowable expense, guarantee fee
should be deductible since both payments are similar. Futhermore, the
loan was taken for the construction of a building which is a trading
stock of the company
Unsatisfactory employee
In Mitchell v BW Noble Ltd (11 TC372), the Court of Appeal
held that compensation paid to employee for dismissal of
employment was atrading expense
Example
In 2020, Hawa Homes Bhd, a property development
company, discovered certain serious misconduct by a
senior executive and decided to terminate his services.
However to avoid adverse publicity and to protect the
company’s image, the company negotiated for the senior
executive’s voluntary resignation. In return, the company
paid RM1 million to purchase an insurance policy under
which the senior executive would be paid RM150,000 per
year for 8 years commencing 2020
Cont…
State with reasons whether:
(i)The payment of RM1 million by Hawa Homes Bhd is
deductible
(ii)The annual sum receivable by the senior executive is
assessable on him
Answer:
Hawa Homes
•The RM1 million payment is deductible because it was
incurred to get rid of an unsatisfactory employee for the
purposes of commercial expediency
•The amount was incurred wholly and exclusively in the
production of income
Cont..
•It is normal for employees to be hired and fired
•A payment to get rid of an unsatisfactory employee cannot
constitute capital expenditure
(case law: Mitchell v BW Noble Ltd)
Senior executive
•Annual sum received is taxable as income under s 4(e)
•It represents an annuity/periodical payment
•Annuity will be tax exempt if it is an annuity contract issued
by Malaysian life insurers (para36, Sch 6)
Deduction of discount expenses
• Resident manufacturing, construction business and
listed investment holding company may issue bonds at
discount to finance its business
• Revenue expense related to discounts incurred are
deductible on an accrual basis for new business source
• Effective YA2011, any unutilised discount expense can
be deducted against adjusted income of any business,
for company which has insufficient gross income from
the new business
Treasury shares
• Listed company may acquire, redeem or repurchase its
shares from open market (treasury shares) and transfer
to its employee under the employee’s share option
scheme. (ESOS)
• The company is given tax deduction in relation to its
business income on the cost of acquiring the shares
(include stamp duty, brokerage fee, interest cost incurred
to finance the acquisition of treasury shares) less any
amount payable by that employee.
• The cost is computed on first in first out basis (FIFO)
Treasury shares
• The deduction is given in the YA where employee
exercised his rights to acquire such treasury shares. The
cost of acquisition of treasury shares would be kept in an
account
• In the event that the amount payable by an employee on
the treasury shares exceeds the cost of acquiring under
the FIFO basis, the excess shall reduce the overall cost
of acquisition of treasury shares
• This takes effect from YA2013
Share option by employee of
subsidiary
• Where employee of the subsidiary company exercised
his share option for treasury shares, the deduction is
given to the subsidiary company if the subsidiary
company paid to the holding company for the transfer of
treasury shares
• The deduction is given on the date:
a. of the transfer of the shares to the employee of subsidiary
company
b. of payment to the holding company
Whichever is lower
Share option by employee of
subsidiary
The amount of deduction would be:
a.The cost of acquiring the shares by holding company less
any amount payable by that employee; or
b.The payment made by the subsidiary company to the
holding company
Whichever is lower
Local franchise brand
• Franchise fee paid by resident franchisee for the usage
of local franchise would be tax deductible. This takes
effect from YA2012.
• The local franchise brand must be within a company of
which 70% shareholding is Malaysian owned
• The franchise fee is usually paid prior to the
commencement of business and is deemed incurred in
the YA where business commences
Tax Incentive on Business
Deductions
Pre-commencement expenses
• Pre-commencement expenses are not deductible as
these expenses are said to be incurred “in order to” to
produce income, or expenditure incurred to initialize an
income earning asset, namely a capital expenditure
• Tax deduction are allowed on:
(a)Recruitment cost
(b)Training cost for employees
 Incurred within one year prior to the commencement of
business
 This deduction is given in the first YA where a business
commence
• Tax deductions are also given for expenses incurred
wholly in relation to the recruitment of employees
• The expenses must be incurred within one year prior to
commencement of business
• Notable example of recruitment expenses are
advertisement and agency fees
• This applies to any resident employer and it takes effect
from YA 2009
• Incorporation expenses for a company having an
authorized capital of less than RM2.5million.
• The expenses allowed are those relating to preparation

of company memorandum, articles of association,
prospectus, registration of companies, statutory
documents (inclusive of fees and stamp duties),
preliminary contracts, debentures, share certificates,
letters of allotment, cost of company seal and
underwriting commissions.
Example – incorporation expenses
State with reasons, whether the expenditure incurred in the following
circumstances are deductible for tax purposes:
Synergy S/B was incorporated on 1.3.2020 with an authorized share
capital of RM1million. It incurred incorporation expense of RM3,500. The
company did not commence business until 1.4.2020. Its authorized share
capital was increased to RM5 million on 1.8.2020
Solution:
•Incorporation expenses are generally non-allowable.
•However, a specific deduction is given for company incorporated in
Malaysia on or after 13.9.2004 with share capital not exceeding
RM2.5million.
•The determining factor is the level of authorized share capital at the date
of incorporation. The deduction will be given for YA2020.
•Cost for the increase in authorized capital is considered as capital
expenses.
Pre-commencement
employees’ training
• Qualifying training expenses incurred by company on employees
prior to commencement of business is deductible
• The pre-requisites for the deduction are:
(a)The training expenses have to be connected to imparting basic
essential skills to enable the company to commence its business
(b)The expenses are restricted to revenue expense, being the kind
allowable under s 33 of the Act
(c) The expenses have to be incurred within one year prior to the
commencement of business
• The deduction is given provided it is incurred from the
company’s own fund.
• Company which received training grants from the Government,
or claimed from HRDF is not eligible for this deduction
1-Innocert certification
• 1-Innocert certification is assessed by SIRIM for SME to
transform and improve its quality.
• The costs deductible are:
(a)Certification fee of RM5,000
(b)Reimbursement of revenue expenses to SIRIM’s auditor
on:
i. travelling cost to and from SIRIM office to qualified
persons’ premises (mileage claims)
ii. toll
iii. parking fee
iv. air fare (economy ticket)
v. airport transfer claim
vi. accommodation cost in hotel (restricted to
standard room)
vii. lodging allowance; and
viii. meal allowance
• The deduction is given once when obtaining the

first 1-Innocert certification
• The expenses are aggregated to be deducted in

the YA in which 1-Innocert is granted
• Qualifying person means a resident person in:
(a) Manufacturing industry with:
(i) 5 ≥ full time employees ≤ 200; or
(ii) RM300,000 < annual sales ≤ RM50 million
(b) Services, primary agriculture, construction or mining

and quarrying industry with:
(i) 5 ≥ full time employees ≤ 75; or
(ii) RM300,000 < annual sales ≤ RM20 million
The assessment is at the end of the basis period for a YA.
The rules comes into operation from YA2015
Secretarial fee
• Professional fees in general are not deductible. It is either:
(a) capital expenditure prohibited by s39; or
(b) a revenue expenditure incurred “after” the production of income
• The government in YA2015 allows secretarial fee, and tax filing fees
on income tax and GST to be deductible in arriving at the adjusted
income of a business
• Secretarial fees – limited to secretarial services as required under
the statutory act of Company Act 1965 for example submission of
various forms as stipulated in the Companies Act 2016, preparation
of director resolution, members’ resolutions, meetings of company
and all other matters relating to company affairs
• It excludes SSM filing fees, fees paid for certification and any other
administrative charges like telephone/fax, printing, stationery,
postage, travelling and accommodation incurred by the company
secretary
• Restricted to RM5,000 per year and only available upon payment
in the basis period for that YA. Effective YA2015.
Income tax filing
• Tax filing fee – allowable for the following payments to
approved tax agent:
a) preparation and submission of income tax for the
basis period immediately preceding YA. Includes
amendment of return.
b) preparation and submission of estimates of tax
for instalment payment of Sdn Bhd
• All 2 payments in total is restricted to RM10,000 per
year. Effective YA 2014
• Reimbursement or out of pocket expenses such as
telephone/fax, printing, stationery, postage, travelling
and accommodation are prohibited from the deduction
PTPTN loan repayment
• Repayment of PTPTN loan by the employer on behalf of
its full time Malaysian employee as gift would be
accorded a business deduction in arriving at adjusted
income of the business
• This payment has to be on its own free will without
imposing any condition on its employee, and to be
incurred during 1.1.2019 – 31.12.2021
• The Malaysian employee has to be independent from the
employer, without any immediate relative relationship
such as spouse, parents/parents in law, child/step
child/adopted child, siblings, step siblings and
grandparents or step grandparents
• Takes effect from YA2019-2022
ACE/LEAP market
• The Government aims to spearhead the listing of
technology-based companies and SME companies at
ACE/LEAP in Bursa Malaysia, and thus allowing the
listing cost comprise of:
a) fees to authorities;
b) professional fees; and
c) underwriting placement and brokerage fees
• To be deducted in arriving at adjusted income of the
business
• The threshold amount is restricted to RM1.5million.
• This takes effect from YAs 2020 to 2022
Donations
• Donations are not revenue expense and therefore not deductible
against gross income. Considered as social responsibility expenses.
• Donations are deducted from Aggregate Income. If the business
records Aggregate Loss for the year, donations are not allowed to
be carried forward to following year assessment.
• Effective YA 2009, cash donation to approved institution or
organisation is restricted to:
Company 10%
Non-company 7%
(Non company includes individuals, trust, club, co-operative society
and trade association)
• However the limitation does not apply to cash donation to the

Government, a state government or local authority
Donations – gift of artefact,
manuscript or painting
• Generally donations must be in cash
• However effective YA 1997; any gift of artefacts,

manuscripts or painting to the Government or State
Government would be given would be given a deduction
• Amount deducted will be based on valuation by the

Department of Museums and Antiquities or National
Archives
Donation of painting to National
or State Art Gallery
• A deduction equal to the value of painting (as
determined by National Art Gallery or any state
Art Gallery for the donation of painting to the
National Art Gallery or any State Art Gallery
would be allowed a deduction against aggregate
income
Donations
Example: ABC Sdn Bhd incurred the following donations:
RM RM
Aggregate Income 200,000
Less: donations
(a) Cash donation to approved institution 12,000
(b) Approved sport body 11,500
(c) Project of national interest 13,000
(d) Cash donation to school libraries 20,000(restricted to RM20,000)
(incurred RM31,000) ______
56,500
(Restricted to 10% of aggregate income
20,000
or the lower of)
Total Income 180,000
Library
• Provision of library facilities which are accessible to the
public or contributions to public libraries, school libraries
or institutions of higher learning libraries.
• Restricted to RM100,000 per annum. Contributions in
kind is restricted to public libraries only. (S34(6)(g)).
• In cases where donation to library is in cash, the
company has a choice to either claim it out of adjusted
income or claim it under donation (S44(8)) out of
aggregate income.
• Donation under section S44(8) is restricted to
RM20,000.
DOUBLE DEDUCTIONS
168
Child Care Centre
• Resident person carrying on the business will be given double
deduction on the following expenses in respect of:
(a)Expenditure on the provision and maintenance of a child care
centre
(b)Child care allowance to the persons employed by him in his
business
• The setting up of the child care centre is for the benefit of his
employees.
• The child care centre has to be registered with the
Department of Social Welfare under the Child Care Centre
Act 1984.
• This takes effect from YA2013
• However, capital expenditure such alterations, additions or
extensions of a permanent nature is not allowable. (S34(6)(i))
169
Training cost to unemployed graduates
• Training costs to unemployed graduates for companies participating in
SL1M as approved by EPU under PM’s dept for the following:
(a) Monthly training allowance of RM1,000 or more paid to the trainees for
a maximum of 12 months
(b) Training expenditure
(c) Food, travelling and accommodation allowances
(d) Fees to instructors to conduct soft skills training
• Total amount for (b), (c) and (d) must RM5,000 n below
• SL1M is a structured training programme for unemployed graduates
which is defined as:
(a) Malaysian citizen
(b) Registered with Jobs Malaysia under Ministry of Human Resource
(c) Has a min bachelor’s degree from local or foreign Higher Education
Institution as approved by EPU
(d) Unemployed for at least 6 months after graduation
• Applicable from 1.62012 to 31.12.2020
170
Vendor development programme
• Vendor development programme approved by MITI by anchor
company as its chain of supplies. Products must be of world
class. The expenditures allowed:
(a)Product development namely quality, innovation and R&D
(b)Capability development namely certification programme,
assessment programme, business process re-engineering
(c)Related to human capital namely hard skill training, lean
management, financial mgmt. system or capacity building
• The total amount shall not exceed RM300,000 in each YA for
3 consecutive YS. The expenditure must be verified by MITI.
171
Halal certification
• Cost of obtaining international quality standards (eg ISO)
• Revenue expenditure incurred by the company for the
purpose of obtaining certification for:
(a)Recognised quality systems and standards; or
(b)Halal certification
• Evidenced by a certificate issued by a certification body
as determined by the Minister, twice the amount of the
expenditure incurred is given a tax deduction (double
deduction)
• Expenditure deemed to incur in YA where certificate is
obtained (effective YA2005)
172
Expenditure on issuance of Sukuk
• Resident companies under Companies Act 2016 or the
Labuan Companies Act 1990 would be given deduction
on issuance of Sukuk
• The costs refer to professional fees relating to due
diligence, drafting and preparation of prospectus, printing
costs of prospectus, advertisement cost of prospectus,
Securities Commission prospectus registration fee,
Bursa Malaysia processing fee and initial listing fee,
Bursa Malaysia new issue crediting fee and primary
distribution fee
• This takes effect from YA2019-2020
173
Expenditure on issuance of retail
debenture and retail sukuk
• Double deduction would be given to additional costs incurred
on the issuance of retail debenture and retail sukuk (a) and
(b) only:
(a)Retail debenture;
(b)Retail sukuk pursuant to the principles of Mudharabah,
Musyarakah, Istina’, Murabahah and Bai’ Bithaman Ajil based
on the concept of Tawarruq; and
(c)Retail sukuk pursuant to the principles of Ijarah or Wakalah
comprising a mixed component of asset and debt,
• Approved or authorised by the Securities Commission
Malaysia under the Capital Markets and Services Act 2007;
• This takes effect from YA2019-2020
174
Employment of disabled persons
• Employers who employ disabled persons as certified by
the Dept of Social Welfare can claim double deduction
• Effective YA2019, double deduction is extended to
employees who are affected by accidents/critical
illnesses and certified by SOCSO
• This deduction is limited to s13(1)(a) income and
comprises of salary, wages, overtime payment,
commission, tips, allowances, bonus or incentives, fees,
perquisites, ESOS, gratuity and tax borne by the
employer
175
Employment of disabled persons
• Employment of disabled persons and graduates
- wholly and exclusively in the production of income
Example:
ABC Sdn Bhd paid a blind operator (using special equipment
in his work) RM 6,000 wages for the year. The tax
computation:
RM
Profit for the year 20,500
Less: wages to disabled employee * 6,000
Adjusted income 14,500
* this expense has been deducted when deriving profit for the year.
This expense is deducted for the second time in deriving at adjusted income
176
Structured Internship Programme
• Resident person approved by Talent Corp to conduct approved
internship programme is eligible for double deduction of business
expenses on training, allowance to students, meal, travelling,
accommodation for the students during the internship programme,
limited to RM5,000 per student, excluding the internship allowance
• The pre-requisites:
 students are Malaysian citizens on full time basis
 internship programme completed before the final semester
 minimum internship period of 10 weeks
 minimum allowance of RM500/mth per student
 for bachelor’s degree, diploma and vocational
 letter of confirmation from Talent Corp
• Takes effect from YAs 2017 to 2021
177
National dual training scheme
• Companies participating in National dual training scheme
for Industry 4WRD forp programme approved by Ministry
of Human Resources during 1.1.2020 to 31.12.2021
would be eligible for double deduction
178
Senior citizen
• The employment of:
(a) senior citizen of 60 years and more; and
(b) designated person **
Who is not relative of the employer is eligible for double
deduction on the remuneration paid to them in arriving at
adjusted income of the business
• This takes effect from YAs 2019 – 2020
** ex-convict, a parolee, prisoner under the supervision of
prison officer, ex-drug addict post rehab or under
supervision (registered with National Anti-Drugs
Agency). Proof of letter from Malaysian Prison Dept or
National Anti-Drugs Agency
179
Double deductions – promotion of
exports
• Since 1986, Malaysia Government has been making
efforts in encouraging companies to venture into overseas
and wider market to promote Malaysian brand name
goods
• The tax measures taken to reduce the business cost
include:
(a)Additional tax deduction on revenue expenses incurred
primarily and principally for the purpose of promoting
export of services
(b)Tax deduction on pre-commencement expenditure
(c)Allowing tax deduction on capital expenditure incurred on
building to up income generation
180
Promotion of exports
• Registration of patents, trademarks and product
licensing overseas
• Advertising expenditure of Malaysian brand name in and
outside of Malaysia. Product must be of export quality
• Participation in approved International trade fair held in
Malaysia (meet s33 criteria but excludes cost of exhibits)
• Expenses incurred for promotion of exports (seeking
opportunities, creating and increasing demands)
• Expenses incurred for participating in virtual trade show/
trade portal and costs of maintaining warehouses
overseas
181
Promotion of exports
• Expenses incurred for promotion of export of services
• Expenses incurred for promotion of professional services
• Expenses incurred for promotion of export of higher
education
• Overseas promotional expenditure incurred by profit-
oriented private and international schools
• Overseas expenses incurred for promotion of tourism
182
Double deductions – R&D
• Non R&D company: double deductions given for:
 Cash contribution to an approved research institute
 Payment for use of services of an approved research
institute/company
 Payment for use of services of a R&D company or a
contract R&D company
• In house R&D (excludes It and software)

 Double deduction for approved in-house R&D
expenditure
183
Other double deductions
• Ship freight charges for shipping goods from Sabah/
Sarawak to Peninsular Malaysia via ports in Malaysia
• Export credit insurance paid to Malaysia Export Credit

Insurance Berhad
• Export credit insurance based on Takaful concept (to

insurer approved by Minister of Finance)
184

Chap 2 - Business Expenses

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Chap 2 - Business Expenses

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Chapter 2

• The Act provides the general deductibility test and

• In some areas, ambiguity in treatment may arise and

a. Each business source has to be accounted separately

Expenses prohibited under S39 is non deductible

• The business income and allowable business expenses

• Only at the statutory income / loss level, the net profit

Example - insurance premium

State with reasons, whether the above expenditures are deductible

(i)The sum of RM100,000 was aimed to secure an advantage

(ii)RM80,000 is paid for the lease of the premises, which is

•In Exxon Chemical (Malaysia) Sdn Bhd vs Ketua Pengarah

• The following test can be applied in differentiating capital

1) asset is enduring in nature

• Pay offs made to competitors to have exclusive rights to

• The interest may be paid in later year but the deduction is

• Interest may be paid later but the deduction is available in

• Rent is deductible on an accrual basis

State with reasons, whether the lease rental would be deductible

Example – rental expenses

1)Expenses incurred during that period for repair of premises, plant,

•The cost of reconstructing or rebuilding any premises, building,

• Tax authorities expressly state that general provision of bad

•Evidence showed that in addition to brewing business, the

• This is because such non-trade debts have never been

Amount allowed as contribution in YA 2019:

• This special contribution refers to the funding at the

• Cost of tax appeal – Smith’s Potato Estates Ltd v

The making of loans or advances made to employees are

In Bookers Central Services Ltd v CIT the court held loss

• The court held that it is necessary for a company to

• The High Court held that since the director was in a

• When an employee is responsible for the loss it is deductible.

• Subsequent recoveries are taxable. Recoveries are to be added

• When the managerial staff is responsible for the loss, it becomes

In Curtis v J&G Oildfield,

• However, where the expenditure has a dual purpose

• In Newsom v Robertson (33 TC 452) which concerned a

• In DGIR v RB Sdn Bhd (1984) 1 MLJ 248, the Federal

Generally the consultancy fee is a deductible expense but given that

• Sect 39(1)(g) – any sums payable otherwise to a state

This is to curtail unhealthy activity in the timber logging industry

•Sums payable for use of a license or permit to extract timber from a

(b) Entertainment business such as hotels, restaurants that provide

- Translation or publication in Bahasa Malaysia of cultural,

- Establishing and managing a musical or cultural group approved by

- Cash contribution and cash sponsorship related to cultural or arts

Example – cultural activities

• This is to facilitate the training of unemployed graduates

• Resident Malaysian company manufacturing wood

- Guarantee and commitment fees relating to a loan are

- Bank commission and guarantee fees relating to investments

• The expenses allowed are those relating to preparation

• The deduction is given once when obtaining the

• The expenses are aggregated to be deducted in

(b) Services, primary agriculture, construction or mining

• However the limitation does not apply to cash donation to the

• However effective YA 1997; any gift of artefacts,

• Amount deducted will be based on valuation by the

• In house R&D (excludes It and software)

• Export credit insurance paid to Malaysia Export Credit

• Export credit insurance based on Takaful concept (to

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