1

Chapter 5
BUSINESS INCOME
2 Introduction
 Business income (sole trader/ partnership) is taxed under
sec 4 (a) ITA.
 Business income of individual has calendar year as the basis
period [Sec.21] & business income of company has
accounting year as basis period [sec 21A(2)].
 Business in sec. 2(1) includes profession, vocation, trade
and every manufacture, adventure or concern in the nature
of trade but excludes employment.
 Profession – Indicates an occupation requiring exercise of
intellectual skill, i.e. doctor, painter (CIR v Maxse).
 Vocation – The way in which a man passes his life or calling,
i.e. musician (Billam v Griffith), racing bookie, etc.
 Definitions
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 Trade – Every trade is a business but not vice versa.
Connotes operations of a commercial nature by which a
trader provides goods and services to customers for reward
(Mount Pleasure Corp Sdn Bhd v KPHDN)
 Trade has the following features:
(a) It involves buying & selling
(b) It consists of a series of transactions having continuity & repetition of buying or
manufacturing & selling
(c) IT INCLUDES ISOLATED TRANSACTION, I.E 1 PURCHASE & 1 SALE OR 1
PURCHASE AND MANY SALES;THE INTENTION AT THE TIME OF
ACQUISITION
(d) WHETHER A TRADE EXISTS OR NOT, ONE MUST EXAMINE THE INTENTION
at the time of acquisition (whether to make profit or not?)
(e) Change of intention must be documented
 4 Badges of Trade
 10 badges of trade are used for ascertaining whether a taxpayer’s
profits or gains were from a trade or business or capital receipt.
Refer to Choong (2019) pg 211-212 for the summary.
 See pg 213 e.g 13.8; pg 214-215 e.g 13.9

BUSINESS expenses
 The adjusted income of a person from a source for a year of assessment is
ascertained by deducting from the gross income all outgoings and expenses wholly
and exclusively incurred during that period by that person in the production of
gross income from that source (sec 33 ITA).
 Refer to Choong (2019) pg 228 e.g14.1- 14.12
 5
General Deductions

 General Principle of Deductions [sec 33(1)(a)]

Adjusted Income = Gross income less deductible expenses.

 The deductible expense must be incurred in the production

of income chargeable to income tax.

 The expenses must be incurred during the relevant basis

period.
6 Specific Provisions

Sec. 33 (1) (a) - (d): Sets out some specific deductions

which were wholly and exclusively incurred in the
production of gross income.
▪ Sec 33 (1) (a): Interest expenses
▪ Sec 33 (1) (b): Rental payment
▪ Sec 33 (1) (c): Repairs and Renewals
▪ Sec 33 (1) (d): Other prescribed deductions made
under sec 154.
7 Interest Expenses
➢ Interest expense is deductible under sec 33(1)(a) whether
it is payable on moneys borrowed for purposes of
acquiring capital assets or paying trade debts. The main
issue is whether the money borrowed (on which the
interest is payable) is connected with the taxpayer’s
income earning operations. If it is not, then interest
payment is not deductible
➢ If the money borrowed is used for 2 purposes, one for the
purpose of producing income (business purpose) and one
which is to lend or invest, the interest payable on the
borrowing must be apportioned into the 2 components
and only the business related interest is allowed for
business deduction [sec 33(2)].
8
Rent and Repairs
 Rent payable in respect of any land or part thereof occupied for
the purpose of producing gross income is deductible in arriving at
adjusted income of a person.

 Choong (2019) pg 242, e.g 14.13 & 14.14

 Repairs - Two types of repair expenses:

o Expenses incurred on the repair of premises, plant, machinery

or fixtures employed in the production of gross income ; and

o Expenses incurred on the renewal, repair or alteration of any

item (Example utensils normally having a short life span)
employed in producing gross income.
 9
Repairs on acquisition
 Where a taxpayer acquires an asset in need of repairs, the cost of carrying out
those repairs is unlikely to be eligible for tax deduction..

 Acquisition repairs expenditure will be deemed to be capital if any of the following apply:

o The purchase price was materially affected by the property’s dilapidated state
(means you buy cheaper because the condition of the house is bad)

o The property was not in a fit state for use in the trade until it was repaired

o The property could not continue to be used in the trade without being repaired
shortly after acquisition

o The terms of the lease require the new tenant to reinstate the property to a
good state of repair

o Refer to Choong (2019) pg 244-245, e.g 14.15-14.17

o Refer to Choong (2019) pg 246 10.8 for summary of repairs.

10
Bad & doubtful debts
 Bad and doubtful debts [sec 34 (2)] – Allows a
deduction for any debt which is reasonably estimated in
all the circumstances of the case to be wholly or partly
irrecoverable at the end of the basis period.

 Deductions are only given for trade debts.

 Refer to Choong (2019) pg 249, e.g 14.18

 EPF
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 The deduction of EPF is allowed to a maximum of 19%.

 Refer to Choong (2019) pg 251, e.g 14.19, 14.20

ADVANCES TO EMPLOYEE
 Allowed if the advances are on anticipated commission payable –
general term of employment, if employee bankrupt, the loss is
allowable

 Refer to Choong (2019) pg 252 e.g 14.22

12 Keyman insurance
 Insurance taken for the life of an employee / director who is crucial to the profitability /
viability of the company

 The objective is to cover loss of business income due to sudden death, injury or accident
of key employees.

 The amount of premium incurred would be tax deductible against business income if:

(a) Policy no element of investment (must be term life / personal accident) endowment /
whole life disallowed

(b) The right to claim remains with employer / company

(c) Not insured on director of a controlled company, partner in a partnership or sole

proprietor.

 Refer to Choong (2019) pg 253, e.g 14.23 & 14.24

 Premium for professional indemnity insurance (lawyer, auditors, engineers, doctors) is a

revenue expense, deductible.
13
Disallowable Expenditures
 Disallowable expenditures are listed out in sec 39 ITA.

 Violation of law – expenses incurred in a capacity other than that of trading

(Refer to Choong (2019) pg 252, e.g 14.21)

 Loan to employee – not related to production of income

 Domestic and private expenses are not deductible [sec 39(1)(a)]. Example:
travelling expenses from home to office

 Expenditure not wholly incurred in the production of gross income are not
deductible [sec 39 (1)(b)].

 Example: Donations to political parties

 Expenses must not be on capital items or capital in nature, to be deductible

[sec 39(1)(c )].
 Disallowed Expenditure (Cont’d)
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 Defalcation by employees/directors. Section 15.0 pg

252.

 Contribution to a non-approved scheme -sec 39(1)(d).

 Withholding tax – if payer fails to account for the

withholding tax to LHND within one month of the
payment of consultancy fees to non-resident, the gross
payment of consultancy fees is non-deductible. Refer to
Choong (2019) pg 257, e.g 14.25 & 14.26
 Entertainment expenses [s39(1)(I)]
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▪ Entertainment is defined as:

(a) Provision of food, drink, recreation, hospitality

(b) Provision of accommodation, travel

▪ Free meals, annual dinners, gifts for employees, deductible

▪ Lunch / dinner for clients & employees together, 50% allowed

▪ For business consists of the provision of entertainment like hotels &

restaurants, e.g MAS’s cost of providing meals to passengers are
deductible

▪ Promotional gifts at foreign trade fairs, exhibitions held outside M’sia to

promote exports are deductible

▪ Promotional samples must consist of company logo, expenditures

incurred in providing promotional samples are deductible

▪ Refer to Choong (2019) pg 260, e.g 14.28

 Entertainment expenses [s39(1)(I)]
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No Types of Entertainment Allowed Allowed Not Not ITA Provision
100% 50% Allowed Allowed
deducti deducti 100% 50%
on on deducti deductio
on n
1 Entertainment given √ Not wholly and
to a potential exclusively incurred
customer in a closed under subsection
transaction 33(1) of the ITA

2 Entertainment given √ Proviso (vii) to

to potential or existing paragraph 39(1)(l)
customers during the of the ITA
launching of
company’s new
product
3 Wedding gift to √ Not wholly and
customer exclusively incurred
under subsection
33(1) of the ITA
 Entertainment expenses [s39(1)(I)]
17

No Types of Entertainment Allowed Allowed Not Not ITA Provision

100% 50% Allowed Allowed
deducti deducti 100% 50%
on on deduction deductio
n
4 Entertainment to √ Not wholly and
employees of related exclusively
companies incurred under
subsection 33(1)
of the ITA

5 Entertainment for √ Not wholly and

annual general exclusively
meeting of company incurred under
subsection 33(1)
of the ITA
6 Cash contribution for √ Not wholly and
customer’s annual exclusively
dinner incurred under
subsection 33(1)
of the ITA
 Entertainment expenses [s39(1)(I)]
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No Types of Entertainment Allowed Allowed Not Not ITA Provision

100% 50% Allowed Allowed
deductio deductio 100% 50%
n n deduction deduction
7 Annual dinner for √ Proviso (i) to
employees paragraph
39(1)(l) of the
ITA

8 Gift with business logo √ Proviso (vi) to

for customer’s annual paragraph
dinner 39(1)(l) of the
ITA
9 Gift without business √ √ Not included
logo for customer’s under
annual dinner provisos (i) to
(viii) to
paragraph
39(1)(l) of the
ITA
 Entertainment expenses [s39(1)(I)]
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No Types of Entertainment Allowed Allowed Not Not ITA Provision

100% 50% Allowed Allowed
deductio deductio 100% 50%
n n deduction deduction
10 Free trip as an √ Proviso (vii) to
incentive to sales paragraph
agent for achieving 39(1)(l) of the
the sales target ITA

11 Gift of flower for √ √ Not included

customer’s opening of under
new outlet provisos (i) to
(viii) to
paragraph
39(1)(l) of the
ITA
12 Entertainment to √ √ Not included
suppliers under
provisos (i) to
(viii) to
paragraph
39(1)(l) of the
ITA
 Entertainment expenses [s39(1)(I)]
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No Types of Entertainment Allowed Allowed Not Not ITA Provision

100% 50% Allowed Allowed
deductio deductio 100% 50%
n n deduction deduction
13 Hampers for √ √ Not included
under
customers during provisos (i) to
festive seasons (viii) to
paragraph
39(1)(l) of the
ITA
21 Leave passage
▪ From employer’s point of view: leave passage (air fares)
within M’sia which involves employer, employee and
immediate family members of that employee will be tax
deductible

▪ Any leave passage provided by the employer to

employees either within or outside Malaysia are not
deductible;

▪ However, meals & accommodation is tax deductible

being staff amenities
 Provision of equipment & renovation of building
22 for disabled person
▪ Full deduction instead of normal capital allowance

SCHOLARSHIP
▪ Companies providing scholarship to students studying diploma,
degree, master, doctorate would be given a deduction provided that:

(a) Full time study

(b) Student has no means of his own

(c) Total monthly income of parents does not exceed RM5k

 Double deduction available from ya2011-2016

SPONSORING ARTS / CULTURAL ACTIVITIES.

PG 265***
 STATUTORY AUDIT FEES
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▪ allowed

Secretarial fees
▪ Restricted to RM5,000 starting YA2015 upon payment by the customers

TAX FILING FEES

▪ Restricted to RM10,000 upon payment by the customers

▪ Deductible for YA2015 for Tax filing fees on preparation & submission
of estimates tax instalment for sdn bhd & submission of GST
returns
▪ Deductible for YA2016 for tax filing fees on preparation and
submission of income tax return for individual, sdn bhd, LLP,
partnership, trust etc
 Practical training to non-employees
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▪ Training for unemployed graduates on English,
computer, finance & industrial courses, Full deduction

Cost of developing website

▪ Special revenue deduction against business income.

▪ 20% of cost for the YA and each of the four following Yas => spread out
5 years

INCORPORATION EXPENSES

▪ Not deductible but for SME capital less than RM2.5m, allowable

▪ See pg 268
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Retrenchment payment during liquidation

▪ Not deductible.
▪ Refer to choong (2019) pg 269, e.g 14.33

AGM EXPENSES

▪ Not deductible
▪ Refer to choong (2019) pg 269, e.g 14.34
26 Double Deductions***
There are a number of double deductions permitted
under the ITA 1967 as incentives to encourage certain
sectors.
▪ Child care centre for benefit of its employees, DD on
allowances paid to staff, maintenance
▪ Training cost t unemployed graduates
▪ Remuneration to disabled employees who are unable
to perform the work of a normal person,
▪ Training of handicapped persons,
▪ Research, pg 281
▪ See Choong (2019) pg 274-276, 281
27 TUTORIAL (Employment
Income + Business Income)
 ACCA F6 June 2018 Q6
 ACCA F6 June 2015 Q2****
 ACCA F6 Dec 2015 Q6