Chapter 1

Business Income

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 Business Income - Introduction
• Business income is assessed in S 4(a) of Income Tax Act 1967.
• Sec 4: Scope of income includes:
(a) gains or profits from a business, for whatever period of time
carried on;
(b) gains or profits from an employment;
(c) dividends, interest or discounts;
(d) rents, royalties or premiums;
(e) pensions, annuities or other periodical payments not falling
under any of the foregoing paragraphs;
(f) gains or profits not falling under any of the foregoing
paragraphs.
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Business Income - Introduction

3
 Business Income - Introduction
The act also provided for preferential tax treatments for the
following:
(a)Utilisation of unabsorbed business loss b/f from any business
source ( 10 conservative years)
(b)Ability to claim capital allowance on plant, machinery,
industrial building used in business (can carry forward sampai
fully utilized)
(c)Accord current year business loss when revenue expenditure
exceeds gross income
(d)Unabsorbed capital allowance c/f to the following YA sand
be deducted from the same business source

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 Business Definition
• Section 2 of the Act defines “business” to include profession,
vocation and trade and every manufacture, adventure or
concern in the nature of trade, but excludes employment

• Definition of business is not exhaustive, it may expand

depending on the circumstances around it

• A tax payer can have more than 1 business source within a YA

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 Business Income
• The scope under S2 (Income Tax Act 1967) defines business to
include:
- profession
- vocation
- trade
- manufacture
- adventure / concern in the nature of trade but excludes
employment

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• Not defined by Income Tax Act 1967 (ITA)
• In The CIR vs Maxse, Scrutton L.J said
Profession in the present use of language involves the idea of an occupation
requiring either purely intellectual skill, or if any manual skill, as in painting and
sculpture, or surgery, skill controlled by the intellectual skill of the operator, as
distinguished from an occupation which is substantially the production,
or sale, or arrangements for the production or sale of commodities. The line
of demarcation may vary from time to time…..
• Profession can be carried out by either a company or an
individual for example, individuals carrying on engineering,
auditing, legal or medical practice as a profession.
• Include painting, sculpting, writing.

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• Not defined by ITA.
• Described as “the way a person passes his life”
• Potentially ambiguous and has a big scope
• For example in Partridge vs Mallandaine it was held a person
who attends races and make systematical bets, is liable in respect
of the profits he derives from the “vocation” of betting
• Following the principle in Patridge, it may seem that religious
preachers or meditation may amount to the exercise of vocation
Illegal activity (judi) kena tax.. Boleh jadii sbb ada
systematic ways

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9
 3) Meaning of trade
• In Simmons v IRC (1980) 1 WLR 1196 (HL),
– it was noted that trading requires an intention to trade.
• This question normally is asked at the time of asset
acquisition.
• However status of asset may change from
investment to trading stock or vice versa, so
intentions may change.
• Investments may also be sold to buy another
investment at a profit or loss (this does not involve
operation of trade).
• Therefore situations are open to review
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Trade – characteristics (profit agreement, repetition, intentions to make
profit, intentions to changes with documentation

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 Adventure or concern in the nature of
trade (TAXABLE)
• Malaysian Income Tax imposes tax on transaction that results in
“income”.
• An isolated transaction can be taxed as business income if it fells
into either “trade” or “adventure or concern in the nature of
trade”.
• An isolated transaction seen as realizing an investment, the surplus
is a capital gain and thus is outside the ambit of income tax
• It may be difficult to hold an isolated transaction to be “trade”, but
it would be easier to establish such transaction as an “adventure or
concern in the nature of trade”
• Precedent tax cases are used to guide whether a transaction is an
“adventure or concern in the nature of trade’

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Adventure or concern in the nature of trade
(CHARACTERISTICS UNTUK JUSTIFY)

13
 Badges of trade
• Various guidelines or tests has been laid down by Malaysian
courts to distinguish gains arising from the disposal of an
investment and gains from trade or adventure in the nature
of trade

• The acid test is “badges of trade”

• There are 10 badges of trade and it is the total effect of all

relevant factors and circumstances to determine the
substance of the transaction

• The badges of trade is the same but can be argued from

different perspectives by tax authorities and tax payers
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 1) Subject matter of transactions
BELI STOCK MEMANG UNTUK JUAL
• Where the property does not yield income or personal enjoyment to its
owner merely by virtue of its ownership, and which is normally the
subject of trading and rarely the subject of investments; more likely to be
acquired for the purpose of resale at a profit than property which does
yield such income or enjoyment.

• Where the subject matter has been treated as trading stock, then the sale
of it would be subjected to income tax even though it was a sale in a hard
pressed situation. This would not change the character of trading stock or
trading activities.

• However, where a subject matter is an investment; the owner of an

investment chooses to realise it and obtains a greater price for it than
originally acquired, the enhanced price is not profit assessable to tax

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THIS QUESTION NOT TAXABLE

Example 1

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 2) Period of ownership
• Generally the longer the period of ownership of the subject matter before
its disposal, the less likely such disposal would be considered as trade
• In Mount Elizabeth (Pte) Ltd v Comptroller of Income Tax (1987) 2 MLJ 130
(HC)the taxpayer acquired land and developed a block of high rise
apartments. Out of 59 apartments, 51 were sold in 2 years and 8 retained
by the company. After holding period of 7 years, 6 units were sold.
Retention of a property for a period followed by its subsequent sale did
not preclude the profits from being treated as a trading receipt. The sale
was assessable as trading income
• The terms “short period” or “long period” are not defined in the Act or
case laws. The period is relative. In recent years, the court ruled even
though the sale took place after 5 years, it does not reinforce the
investment motive.
• A quick resale supports transaction to be considered as trade where other
elements of trading are present

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 3) Formation of a company
• In International Investment Ltd v CGIR (1975) 2 MLJ 208 “ If a company
was formed to carry on a business, and in fact it carried it on, I think, it
cannot matter that its activities had been an isolated one. Business is not
confined to being busy; in many businesses long intervals of inactivity
occur. A company’s business may have been quiescent for a number of
reasons. For example, following a business set-back, consolidating its
business, waiting for the ripe opportunity to occur…”

In this case, the company constructed a shopping arcade and hotel on its
only piece of land, disposed of the property (WIP) in exchange for shares
in another company. Within a year, the shares were disposed for a profit
The Sp Comm held that the company carrying on a business of trafficking in
immovable property pursuant to its clause in Memorandum of
Association, and the profits obtained from the transfer of the said
property were profits from business assessable to income tax

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 3) Formation of a company

• In KLE Sdn Bhd v Ketua Pengarah Jabatan HDN (1995) 2 MSTC 2245, the
company had purchased a piece of land which was left idle for 5 years
after acquisition. The land produced no income nor personal enjoyment
to the company and the company subsequently disposed it at a profit. It
was held by the Sp Comm to be trading income

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 4) Frequency of transactions
• A number of transactions on the same kind of property (repetitive),
suggests resale at a profit and therefore considered as business income
• However, a single or isolated transaction can also constitutes trading.
• In International Investment Ltd v CGIR (1979) 1 MLJ 4 (PC) it can
summarized that isolated or single transaction is considered trade if the
company or individual has set itself with the intention of trading
• In Pickford v Quirke (13 TC 251) (CA) it has been summed up that there
need not be many purchases to constitute trade.
• One purchase of large quantity of shares or any quantity of property or
commodity or anything can be for the purpose of a business transaction
or an adventure in the nature of trade

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 Example 2
Encik Smart, a builder from Ipoh, bought 4 acres of agricultural land near the
expanding Industrial Area in 2018 for RM80,000. The purchase was financed
by a bank loan. He did not develop or advertise the land for sale. In January
2020, he received an offer to sell. He sold off part of the land for RM80,000.
In July 2020 he sold the remaining land for RM120,000 to another real estate
company in which he had controlling interest.
Solution:
It can be considered as business income based on the following arguments:
a.En Smart is a builder and his business is in land. The is a link between his
trade and purchase of land
b.Land was financed through a bank loan, indicative that the land was bought
for trade purposes
c.The interval between purchase and sale of land was very short ie 1-2 years
d.The land was located near the expanding Industrial Estate which makes it
marketable. This shows the intention to make profits rather than holding as
long-term investment. A profit seeking motive can be presumed.
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 5) Alterations to property
• Alterations or improvements made to property acquired that
changes its character or quality to render it more merchantable
would indicate property was derived for profit making.

• However, if at the point of acquisition the property was clearly

meant for other purposes; and when no longer useful for the
original purpose, the property was extensively altered to make it
more saleable, it may be considered as non trade.

• In the case of land, the taxpayer subdivides the land, or converts

the land from agriculture to commercial use, such a move would be
viewed by the tax authorities as a step towards “adventure in the
nature of trade”

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 Example 3
• En Sulaiman is a land surveyor by profession. In 2016, he bought a durian
plantation near the expanding township of Gombak for RM1 million.
• Bank loan of RM600,000 was obtained.
• For the first 3 years the plantation gave an income of RM45,000
• In 2020, he applied to the Land office to convert and subdivide the land
into 30 lots of industrial land.
• The application was approved.
• 6 months after the approval, he appointed a real estate company to sell
the industrial land for 2% commission on gross sales.
• All 30 lots were bought by Apex Housing S/B for RM4.8 million.
• This is the only land transaction for En Sulaiman.
• Set your arguments FOR and AGAINST the accessibility to income tax of
gains arising from the sale of the industrial land

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 Example 3 – suggested answer
Arguments for chargeability to income tax
En Sulaiman had no intention to hold the property as a long term
investment. He had expected (as a land surveyor) that the land, being
near the township of Gombak would appreciate in value especially
after conversion and sub-division.

The fact that he took a loan to buy the property and that the yield
from the land was minimal suggests that the land was acquired for
resale and not as an investment

He undertook to convert and sub-divide the land which is an activity

normally undertaken by a property developer.
The fact that this was the only transaction does not confer immunity
to taxation if the transaction is an adventure in the nature of trade
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 Example 3 – suggested answer
Arguments against chargeability to income tax
It could be argued that En Sulaiman intended to hold the land as an
investment, deriving income from the sale of durian fruit.
A change of intention does not necessarily indicated trading if what
was done was merely to enhance the value of the land. Conversion
and sub-division alone should not be construed as development
activity.
He has no track record in land dealing and the land was held for about
5 years. There was no organized activity to promote the sale of the
land.
When he engaged a housing or realty broker to sell the land, the act
was similar to what an investor would do to dispose of his investment

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6) Circumstances responsible for
realisation

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 Example 4
Mr Happy retired at the age of 55 in December 2013 and received a gratuity of
RM100,000. He used his gratuity and his EPF withdrawal of RM150,000 to partly
finance the cost of acquisition of a piece of agricultural land costing RM300,000.
The balance of the acquisition cost was financed through borrowings from a bank.
Part of the agricultural land was developed into a durian plantation and the
balance of the land was rented out. In 2020, he and his wife migrated to Australia
to be with their children. Before he left Malaysia, he sold the agricultural land for
a gain of RM200,000. The sale was made through a real estate agent. Neither he
nor his wife has previously disposed of any real property.
Answer
The profit is treated as capital gain and subject to real property gains tax. It is not
business income because:
a.Period of ownership - 7 years
b.Frequency of transactions – only once
c.Method of financing – 50% own financing
d.Circumstances leading to disposal – migration to Australia
e.Property used to derive income – sale of durians and rental income
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 7) Motive/intention of tax payer
• Establishing intention at the time of acquisition is important
to determine investment or stock in trade.

• If the dominant purpose of acquiring property is to resale at a

profit, deriving income such as rental from the property does
not remove any profit on ultimate sale from tax

• For the purpose of ascertaining the objective and intention

of a limited liability company that makes a particular
purchase, we must look at the objectives of the company
described in the memorandum of association

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 7) Motive/intention of tax payer
• In SL Sdn Bhd v DGIR (1998) MSTC 198 (Sp Comm), a company
tried to camouflage its intention by planting fruit trees on the
land purchased and subsequently sold off the land. The
company then voluntarily wound up.
• The Sp Comm found that the company had embarked on an
adventure in the nature of trade by intentionally buying the
land at a low price and then selling it in period of escalating
prices
• It should be noted that a permanent investment may be sold
in order to acquire another investment thought to be more
satisfactory and that does not involve an intention of trade,
whether the first investment is sold at a profit or at a loss.

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 Example 5
Highland Sdn Bhd , an investment holding company, has several pieces of
landed properties. With the intention of carrying out housing development
on a piece of land owned by the company, it submitted a layout plan for the
proposed housing scheme. The land in question was transferred from fixed
asset to current assets in the company’s balance sheet.

Other pieces of land owned by the company remained as fixed assets in the
balance sheet. Several years later, Highland changed its intention of carrying
out housing development on the land and retracted the layout plan. The land
was accordingly re-classified as a fixed asset in the company’s balance sheet.
Subsequently, the land was sold at a profit.

Explain with reason, whether the profit arising from the sale of land is
assessable to income tax

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 Example 5 - Answer
The profit arising from the sale of land would be taxable if the circumstances
surrounding the sale amount to an adventure in the nature of trade. In this
case, although the intention of Highland was to move into housing
development, it changed its intention and reverted to being an investment
holding company

The layout plan was retracted and the land re-classified as fixed asset in
the balance sheet. Other than this, no other activity was carried out. It is
felt that the above facts are sufficient to result in an adventure in the nature
of trade. As such, the sale represents a sale of an investment and the profit
is not assessable to income tax under s4(a) of the Act

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 8) Methods employed in disposing a
property
• If special effort is made to find or attract buyers, it will indicate the
presence of profit making undertaking.
• However the original intention of acquiring the asset plays a part in
determining trade.
• In KLE Sdn Bhd v Ketua Pengarah Jabatan HDN (1995) 2 MSTC 2245
(Sp Comm), it was determined that the subject’s land commercial
potential combined with its good location was a ready made
advertisement itself.
• Therefore, there was no necessity to have a specialized organization
with skilled staff, and no further exertion needed to promote sale. As
such, disposal of land was held to be an adventure in the nature of
trade

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 9) Financing arrangements
• Mode of finance placed great importance in determining whether
the taxpayer is trading in property or merely realizing its
investment.

• If a company intends to hold the property as long term investment,

the company should inject more funds into the company instead of
borrowing funds (SCL Pte Ltd v CIT (1991) 1 MST 5032).

• However, it is by no means determinative. It depends on facts of

each case. In Lim Foo Yong Sdn Bhd v CGIR (1986) 2MLJ 161 (PC),
the asset was held to be an investment even though it was
financed by loan

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 Example 6 & answer
Bunga Raya Sdn Bhd was in the business of managing a chain of
restaurants. In 2019, the company acquired quoted shares using its
surplus funds. 2 months later, the shares were sold for a gain and
the proceeds were utilised to acquire other quoted shares. During the
year, the company was involved in buying and selling shares on 2
other occasions and made a gain of RM800,000 which was reflected
as an extraordinary gain in its audited accounts.

Answer:
It would not business income because:
a.The company was not dealing in shares. It is in restaurant
business
b.It was merely investing its surplus funds and realising investments
c.It did not finance the acquisition of shares through borrowing
d.The shares did not constitute its stock-in-trade
e.The gains were capital receipts

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 10) Accounting evidence
• Accounting evidence is not conclusive as to whether the tax
payer is trading or not, it being merely a factor to be taken
into consideration.

• The Act does not necessarily follow the system of accounting

of the tax payer (Bernhard v Gahan 13 TC 735). The
accounting system merely serves as a guide but not
conclusive (Gold Coast Selection Trust Ltd v Humphrey 30 TC
209)

• Method of accounting does not alter the character of the sum

received (The Seaham Harbour Dock Co v Crook 16 TC 333)

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 10) Accounting evidence
• In Bukit Yew Sdn Bhd v DGIR (1987) 2 MLJ 379 Judge Harun said
at p382
“The way in which a Company keeps its accounts may be
evidence of the Company’s intention but such evidence must
be weighed against other evidence to decide the nature of the
transaction”

• Many cases can be cited where land described as fixed assets

in the accounts was held to be a trading asset upon its
disposal. (Shadford x H. Fairweather & Co Ltd 43 TC 291; Bowie
(HM Inspector of Taxes) v Reg Dunn (Builders) Ltd 49 TC 649;
WM Robb Ltd v Page4 47 TC 465
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 Example 7
• Investment S/B was incorporated on 1.6.2018 as an
investment holding company. On the same day, the company
acquired quoted shares using proceeds from its share capital.
• 3 months later, due to favourable stock market conditions,
these shares were disposed of for a gain. The proceeds from
the sale were then used to acquire other quoted shares. To
acquire additional shares, the company obtained borrowings
from banks.
• During the year ended 31.5.2019, the company was involved
in buying and selling quoted shares on 10 occasions. The
company made a total gain of RM1.5 million, which was
reflected as an extraordinary gain in its audited accounts.
Determine if this is business income.
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 Example 7 - answer
The gain of RM1.5 million will be considered to be revenue gain
and therefore taxable. This is based on the existence of the
following points:
a.Period of ownership is short (1 year)
b.Frequency of transactions (10 times)
c.Method of financing (i.e. borrowing from banks)
d.Nature of subject matter (i.e. quoted shares are easily
marketable)
The intended principal activity is not material. What happened in
reality is the determining factor. Further, the presentation in the
accounts as an extraordinary gain is irrelevant in determining
taxability of the gain.
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 Badges of Trade - Summary
Badges of Trade Capital Gain Adventure in nature
of trade
1. Subject matter:
a. Income generating √ X
b. Personal enjoyment √ X
to owner
2. Period of ownership 5 years and above <5 years
(not defined in the act) (guide only) (guide only)
3. Formation of X √
company
4. Frequency of One off or Repeated and
transactions maximum 3 transactions are
transactions/year similar
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 Badges of Trade - Summary
Badges of Trade Capital Gain Adventure in nature
of trade
5. Material alterations
to property with the
purpose of profit: X √
a.Sub division of land
b.Conversion to
agriculture status to X √
commercial

6. Circumstances a. Emergency/ a. The asset is the

responsible to unanticipated trading stock of
realisation needs of fund taxpayer
b. Approached by b. Anticipates 40
seller opportunity to sell
 Badges of Trade – Summary

Badges of Trade Capital Gain Adventure in nature

of trade
7. Intention at the Long-term investment Short term
acquisition investment
8. Financing
arrangement
a.Term loan √ X
b.Overdraft X √
c.Financed amount <70% 70% -100%
d.Ability to hold long √ X
term

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 Badges of Trade – Summary

Badges of Trade Capital Gain Adventure in nature

of trade
9. Methods employed Ad-hoc Proper set-up:
in disposing a a.Office
property b.Employees
10. Accounting Non-current asset Current assets
evidence (Property, plant &
equipment)

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 Discussion questions
1. Encik Soo, a land surveyor bought a durian plantation near an expanding
township for RM 1 million. He financed the purchase with RM600k loan.
For the first 3 years, the plantation yielded RM45k income only. He
decided to convert the land status from agriculture to commercial
status and upon receiving approval sub divided the land into 30
bungalow lots. He sold all the lots to Maju Realty for RM4.8 million. Encik
Soo has never sold any property before this.

2. Tanah Tinggi Sdn Bhd is an investment holding company has a large

piece of land. It submitted a layout plan to the authorities with the
purpose of developing the land into housing development. The land was
transferred from fixed assets to current assets. Due to the falling demand
on houses, Tanah Tinggi retracted the layout plan and proposal to
develop houses. It transferred the land back as fixed assets.
Subsequently the land was sold at a profit.

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 Discussion questions
3. Mr X and Mr Y are equal shareholders of a stockbroking company, Co Z which
was incorporated on 1.12.2013 with an issued and paid up capital of RM2.00
consisting of 2 ordinary shares of RM1.00 each. The share capital of Co Z was
increased to RM20 million through the issue of additional shares to the 2
shareholders over a 4 years period. Mr X and Mr Y had each taken borrowings
from a bank to subscribe for the additional shares in Co Z.

Co Z commenced operations on 2.2.2017. In view of the bullish stock market, Co Z

performed extremely well and made significant profits for the years ended
31.12.2018 and 2019.

On 1.7.2020, a public listed company acquired the entire capital paid-up capital of
Co Z from Mr X and Mr Y, for a cash consideration of RM200 million.

State with reference to the badges of trade, whether the disposal of the shares
by Mr X and Mr Y are subjected to income tax.

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 Discussion questions
4. In 1998, Mr Simon Templar passed away and his wife Mrs Templar inherited
his business upon his death. The late Mr Templar engaged in the real estate
business. For sentimental reason, Mrs Templar carried on her late husband’s
business. There were a few pieces of land and some of them were developed
into prime residential areas and put up for sale. Sale proceeds were subjected
to income tax.
There were two other lots of land that were not developed and Mr Templar has
bought it when he first arrived in Malaysia in 1975 after quiiting the secret
intelligence service in Britain. He had intended to build his family home on
these two pieces of land, Lot 2125 and 2126 but he never got around to it and
he never made his intention known.
In 2007, Mrs Templar decided to retire from business and several pieces of land
including Lot 2125 and 2126 were classified as fixed assets in the balance sheet.
Lot 2125 and 2126 were disposed by Mrs Templar after being approached by
Beng Choo, a land collector and the sale proceeds were used to pay off her
nephew’s gambling debts. In 2020, IRD assessed the gains to income tax. Mrs
Templar objected the assessment. What is your opinion on this?

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 Differentiating capital and income
• Gain arising from business transactions is taxable
under income tax. (Business Income)

• Gain arising from disposal of capital (investments or

other assets) is not taxable under income tax.
(Capital Gain)

• This means capital appreciation falls outside the

scope of income tax. (Capital Gain)

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 Differentiating capital and income
• Two identical transactions can yield a capital receipt
in one case and an income receipt in another
Example:
An accountant who sells his car sells it on capital account
whereas a car dealer who sells a car does it on revenue
account

• Generally the accounting treatment is indicative to

the nature of receipt but is not conclusive. Facts of
each case must assessed separately.

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 Derivation of business income
• For business income to be taxable in Malaysia, the following
conditions must be fulfilled:
a. existence of business source
b. revenue profit not capital gain
c. business income is deemed derived in Malaysia

The derivation of business income is defined in s 12 of the Act.

Note : Income deemed derived outside of Malaysia is no

longer taxable even if the proceeds are brought back to
Malaysia.
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 Section 12(1)(a)
• Section 12(1)(a) of the Act provides:
“Where for the purposes of this Act it is necessary to ascertain any gross
income of a person derived from Malaysia from a business of his, then
(a) Subject to sub-s (2), so much of the gross income from the business as is
not attributable to operations of the business carried on outside Malaysia
shall be deemed to be derived from Malaysia;”

• Section 12(1)(a) serves as residual section, to tax whatever gross income

that is not attributable to operations of business carried on outside
Malaysia would be deemed Malaysian derived income. The scope is wider
than merely to treat gross income that is attributable to business
operations carried on in Malaysia

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 Example 8
Choon Yaw Sdn Bhd carried on business of food manufacturing
in Malaysia. The production is wholly for the local consumption.
On 14.2.2020, the company managed to arrange a deal between
chicken suppliers in Taiwan to dispose of their live stock to Hong
Kong. The company earns a commission of RM48,000.

Answer:
Since the commission income is not attributable to business
operation in Taiwan or Hong Kong, then the Malaysian tax
authorities is empowered to deem such income to be derived
from Malaysia by virtue of s12(1)(a).

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 Operations of business carried on
outside Malaysia
• Income derived in Malaysia is taxable. Income not derived from
Malaysia is non taxable (YA2009)
• Understanding the phrase “operations of the business carried on
outside Malaysia” is important to determine income derived in or
out of Malaysia.
• The following factors can be used as a guide to determine income
derived from Malaysia:
a. contract concluded in Malaysia
b. stocks are maintained in Malaysia from which orders are fulfilled
c. passing of ownership and risk of trading stocks in Malaysia
d. sale proceeds received in Malaysia
e. services rendered in Malaysia
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 Example 9
Aqua Sdn Bhd deals in home appliances. The company has a branch in Hong
Kong. Goods were shipped the Malaysian office to the Hong Kong branch at
cost of RM150,000 plus mark up of 10% and subsequently the branch sold
the goods to local customers for RM200,000.
How much of profit, if any, was derived from Malaysia and hence subject to
tax in Malaysia?
Would it make a difference if the company does not have a branch in Hong
Kong but sells directly to Hong Kong customer for RM200,000?
Answer
Since there is a branch in HK, some of the gross income would be
attributable to that branch, the profits subject to income tax is 10% mark up
(RM150k x 10%= RM15k).

If there was no branch in HK and the company sold the goods directly to the
consumer in HK at RM200k, then all the profit i.e. RM50k would be
attributable to the Malaysian operations.
52
 Section 12(1)(b)
• This section applied specifically to business like manufacturing,
plantation and mining. The gross income is either based on:
(a) Sale value of the article, product or produce sold overseas; or
(b)Market value of the article, product or produce sold overseas in the
event of the sale value does not apply

• The use of market value in s 12(1)(b)(ii) is to prevent group

companies entered into “transfer pricing” techniques to minimize
or eliminate Malaysian tax exposures.

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 Examples
Example 10
Cool Air Sdn Bhd manufactures refrigerator in Malaysia. In 2020, the
company sold 20% of its products to Saudi Arabia. The sale although is made
outside Malaysia would nevertheless deemed to be Malaysian gross income.

Example 11
Using example 10, if Cool Air Sdn Bhd export its products to its wholly owned
subsidiary in Saudi Arabia, then the market value at the time of export
would be deemed to be Malaysian gross income

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 Section 12(2)
Section 12(2) of the Act provides:
“Where in the case of a business to which sub-s (1)(a) applies-
(a)The business or a part thereof is carried on in Malaysia;
(b)Any of the gross income of the business (from wherever derived) consists
of a dividend or interest to which S24(4) or (5) applies
(c)The dividend or interest relates either –
(i) to a share, debenture, mortgage or other source which forms or
has formed part of the stock in trade of the business or, where only
part of the business is carried on in Malaysia, of that part of the
business; or
(ii) to a loan of the kind mentioned in s 24(5) granted in the course
of carrying on the business or that part of the business, as the case
may be,
so much of that gross income as consists of that dividend or interest
shall be deemed to be derived from Malaysia
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 Section 12(2)
• Sections 24(4) and (5) relate to the basis period to which gross
income from a business is related.

• In general, dividend income or interest is to be treated as gross

income from business in the period it accrues notwithstanding that
such dividend is paid, credited or distributed or the interest income
received in a later period.

• The effects of s 12(2) is to deem gross income “wherever derived”

as Malaysian derived income. Section 12(2) applies to financial
institution (Bank, finance company) and insurance company where:
(i) share, debenture, mortgage or other source froms stock in trade of
the business carried on in Malaysia; or
(ii) loan granted in the course of caarying on the business
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 Section 12(3)
• Business income is taxed on territorial basis, referring to business income
attributable to a place of business in Malaysia. The place of business is set
out in s 12(4) to include:
(a) a place of management
(b) a branch
(c) an office
(d) a factory
(e) a workshop
(f) a warehouse
(g) a building site, or a construction, an installation or an assembly
project;
(h) a farm or plantation; and
(i) a mine, an oil or gas well, a quarry or any other place of extraction of
natural resources

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 Section 12(3)
• Section 12(4) further extends and elaborates that a person shall be
deemed to have a place of business in Malaysia if that person:
(i) carries on supervisory activities in connection with a building or work site,
or a construction, an installation or an assembly project;
(ii) has another person acting on his behalf who –
(A) habitually concludes contracts, or habitually plays the principal role
leading to the conclusion of contracts that are routinely concluded
without material modification;
(B) habitually maintains a stock of goods or merchandise in that place of
business from which such person delivers goods or merchandise; or
(C) regularly fills orders on his behalf

This takes effect from 28.12.2018

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 Section 12(3)
• The incorporation of s 12(3) and (4) is aimed to aimed to assess
business income derived from online trading, gaming and digital
services. In addition to that, an agent appointed to:
(a) import goods and sell on its behalf in Malaysia;
(b) provide education consultancy in Malaysia,

• would inevitably expose the overseas principal to be taxed in

Malaysia, being business income derived from Malaysia.

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 Commencement of business
Commencement date of a business is important for income taxation because:
(i)pre-commencement revenue expense is not deductible. It is a permanent
loss;
(ii)Qualifying capital expenditures which are eligible for capital allowance
would be given in the first basis period from the date of commencement
(iii)It would affect the selection of the year-end. The first YA that is subject to
income taxation would vary depending on whether a calendar or non-
calendar year-end is chosen. This applies to companies, trust bodies and co-
operative societies
Example:
Total Approach Sdn Bhd commenced business on 1.3.2020. The YA would be:
(a)2020 1.3.2020 – 31.12.2020 (if calendar year-end is chosen)
(b)2021 1.3.2020 – 28.2.2021 (if February year-end is chosen)

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 Foreign Income
• Income not deemed derived from Malaysia or foreign income
is no longer taxable effective YA2009 except for 3 types of
industries:
1. Financial institution
2. Insurance companies
3. Marine or air cargo companies

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 Single or separate business
• The Act allows more than one business to be carried out within a business
entity which refers to sole proprietor, partnership, LLP Bhd or Sdn Bhd
• Whether different types of businesses in a company is treated as single or
separate is important to determine as capital allowance is only allowed
specific to the business that uses the assets to generate income.
• When a company starts a new activity, it can be considered as single
business (extending existing business) or separate business (commence
new business source).
• There are no specific rules to determine single or separate business, the
level of interdependence of the different business will be an indication.
• Manufacturing and trading are to be treated as two business sources

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 Example 12
Sin Lak Sdn Bhd manufactures instant noodles in Malaysia since 2010. The
company closes its accounts to 31.12 every year. On 1.1.2020, the company
decided to import other famous brand of instant noodles from Korea and
sell it in Malaysia.

Answer
The company is said to commence a trading business in 2020. Qualifying
plant expenditure used in the trading business would qualify for capital
allowance and set off against adjusted income from trading business

In the case where common assets are used for both manufacturing and
trading businesses, the capital allowance would be allocated between the
two business sources on a just and reasonable basis. The same principle
applies to revenue expenses incurred which are common to both the
business sources.

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 Single/Separate business
Malaysian experience
In DGIR v Central Sugars Bhd (1978) 2 MLJ 71 (HC) the company enjoyed
pioneer status for which profit is exempted from income tax then. The
company also undertook the activity of hedging, which briefly consists of
forward sales and purchases of raw sugar.

The question here is whether hedging activity constitutes separate business

or same business of the manufacture of refined sugars.

The High Court ruled the hedging and the sugar refinery constitutes one
business source. This is because the purchase of the raw sugar and the one
recognized method of stabilizing the price of the required sugar is to hedge
on the terminal markets. Therefore hedging is an “adjunct, ancillary to and a
very advantageous adjunct” to the business of sugar refinery. Hedging does
not in context of this case become a separate business.

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 Gross income from business
• Generally gross income from a business comprise sale of goods or provision of
services. The scope of business income is set out in s 22
• S 22 applies to revenue receipts – refer to circulating assets (current assets).
Business income is calculated to include trading debts (accrual basis) and not
limited to cash sales.
• Any recoveries of allowable deductions is assessed as gross income.
Example A:
A businessman incurred insurance expense for its trading stock and claim as
revenue expense in arriving at the business adjusted income. In the event of
any claims (recoveries) from the insurance company for loss or damage to the
trading stock will be treated as gross income in the period in which it arises
Example B:
ABC S/B incurred RM10,000 of repair expense for its factory due to a fire. This
repair expense is allowed to be deducted in the calculation of taxable income.
Subsequently ABC S/B received insurance compensation of RM6,000. The
insurance compensation must be included as part of gross income now.

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 Gross income from business
• Any compensation received for “loss of income” is considered as
business income. For example, compensation received for cancelled order
is to be included as gross income.

• The scope of s22(2)(b) would not cover future income i.e. the receipt of
restrictive covenants would be considered as capital receipt.

• Cancelled agreement that involves “destruction” of capital asset, the sum

paid for its cancellation is considered to be capital receipt.

Eg: agreements to have joint arrangements to prices and limitations to

areas of supply and prohibition to enter into a similar arrangement with
another party upon cancellation is considered as capital receipt and is not
part of gross income.

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 Example 13
In 2017, Asper Sdn Bhd entered into an agreement for a term of 5 years with
a competitor, Duka Sdn Bhd. The agreement provided for the sharing of
profits from their respective businesses, pricing and areas of operations.
Asper Sdn Bhd has similar agreements with several other companies. In
2020, there was a dispute with Duka Sdn Bhd and both parties decided that
the agreement be terminated. Asper Sdn Bhd received a sum of RM200,000
from Duka Sdn Bhd as compensation.
State with reasons, whether the sum received by Asper Sdn Bhd is assessable
to tax.
Answer:
The sum of RM200,000 received by Asper Sdn Bhd would be taxed as:
(a)It arised in the normal trading of the company. The company did enter
into and cancel trading agreements in its business dealings. It is reasonably
expected that the contract is entered or cancelled from time to time
(b)The agreement was only one of many similar agreements signed
(c)The business structure of the company was not affected by the
cancellation of agreement
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 Example 14
ABC Sdn Bhd entered into an agreement with a competing company,
which provided for the sharing of profits of their respective
businesses. The agreement, which was the only one of the kind
entered into between the parties and which was to last for 20 years,
also provided for the creation of joint arrangements as to prices and
limitations of areas of supply, and a restriction on the parties
preventing them from entering into any pooling arrangements with
third parties inimical to the interests of the allied business. After a
dispute, it was settled that the agreement should be terminated on
condition that the competing company pays a sum of RM150,000 to
ABC Sdn Bhd. The agreement terminated had another 15 years to run.

Consider the taxability of the sum received by ABC Sdn Bhd

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 Example 14 - answer
The sum received by ABC Sdn Bhd is not liable to tax. The sum
represents capital receipts as it was paid for the destruction of ABC
Sdn Bhd’s profit making apparatus. The cancelled agreement related
to the whole structure of ABC Sdn Bhd’s profit-making apparatus. It
regulated ABC Sdn Bhd’s activities, defined what they might and might
not do, and affected the whole conduct and structure of their
business.

The agreement cancelled was also the only one of a kind possessed by
ABC Sdn Bhd. The agreement, accordingly, constituted a capital asset
of ABC Sdn Bhd and the sum paid for its cancellation was therefore a
capital receipt. (Van Den Berghs Ltd v Clark 19 TC 390)

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 Trading debts
• Business income is assessed on an accrual basis. Once the bill is issued to
the customer, it would form part of the gross income notwithstanding
that the payment is not received
• Business income is accrued in the following circumstances:

(a) Sale of stock in trade in the course of carrying on a business;

(b) Compulsory acquisition of stock in trade which comprises landed
properties;
(c) Services rendered or to be rendered in the course of carrying on a
business;
(d) The use or enjoyment of any property dealt or to be dealt with in the
course of carrying on a business

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 Deposit on services
• Effective YA 2016, s 24 is amended together with a new s 24(1A) to
extend the scope of business income to cover deposit or advances
received.

• Section 24(1A) read with s 34(7) would extend the scope of

business income to include any sum received in respect of:
(a) Any services to be rendered; or
(b)The use or enjoyment of any property to be dealt with

• Advance payment or deposit is now be treated as business income

at the time of receipt. Any subsequent amount refunded can be
treated as a business deduction

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 Other types of gross income
The following shall be treated as gross income:
oThe market value of any stock in trade which has been taken for private
purposes without payment or any stock withdrawn from business for gifts or
donation other than disposal (s 24(2, (3))
oDividend income of a share dealing business (s 24(4))
oInterest income of an investment dealing business or a money lending
business (s 24(5))
oMarket value of the goods exported in the course of carrying on the
business ( s24(6))
oRecovery of bad debt which has been previously allowed as business
deduction (s 30(1))
oExcess of recovered expenditure within the meaning of Sch 2 (mining
allowance) (s30(3))
oWaiver of debts by creditors which pertaining to any amount of expenditure
previously allowed as a deduction in ascertaining the adjusted income

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 Cessation of business
Temporary cessation
•A company is said to be temporarily ceased if the assets are under working
conditions and constant upkeep and maintenance.
•The company intends to operate the business as and when the opportunity
arises.

A company in temporary cessation can:

(i)Deduct revenue expense in deriving adjusted income regardless the
business may generate no income or minimal income. Any current year loss
can be set off against aggregate income. Any excess would be carried to
future years to be off set against any business income at statutory level;
(ii)Capital allowance on the qualifying expenditure would continue to be
claimed. In the event of no income, unabsorbed capital allowance would be
carried forward to future years, to be set off against that particular source of
income

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 Permanent cessation
• Circumstances of each case has to be carefully analysed.
• Some sources are board minutes or if there any situation such as disposal
of all plant and machinery used in the business

The tax implication would be:

(i) Revenue expense are not deductible and such expense is a permanent
loss to the taxpayer;
(ii) Unabsorbed capital allowance would be permanently lost;
(iii)Any distribution of asset (including undistributed profit) would be capital
receipt in the hand of recipient

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