CHAPTER 8

Tax Planning for Companies

8.0 Topic Outcomes

Upon completion of this chapter, a student will be able to:

 Explain the importance of the commencement of business

 Explain the significance of a single or two separate businesses

 Explain the tax implication of pre-commencement expenses and basis periods.
 Explain the effects of claiming capital allowances.
 Explain the tax implications of allowable, non-allowable and double deduction
expenses on the profit of companies.
 Explain the interest restriction on loan.
 Explain the tax treatment of current year business loss and unabsorbed business
loss brought forward.
 Explain the tax effects of acquiring assets under leasing and hire purchase
methods.
 Explain the tax implications on the cessation of business and disposal of fixed
assets.
 Discuss the implication of controlled transfer/sales.
 Explain the application of group reliefs.

8.1 Source of Information

8.1.1 Section 33, 34, 39, ITA 1967

8.1.2 Schedule 3, ITA 1967
8.1.3 Allowable pre-operational and pre-commencement of business expenses
[Public Ruling No. 2/2010]
8.1.4 Public Ruling NO. 2/2011
8.1.5 Paragraph 38 – 40, ITA1967
8.1.6 Income Tax (capital allowances and charges) Rules 1969.
8.1.7 Section 44A, ITA 1967

8.2 Commencement of business

8.2.1 Basis Period

The date of commencement of business is important because it determine the basis

period. Secondly, under the ITA, only expenses which are incurred `wholly and
exclusively in the production of gross income’ are deductible against the gross
income of the business, meaning that there must business in existence. Capital
allowances can only be claimed if there is a business.

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 8.2.2 Testing of the commencement of business

Trading company – offers the goods for sale to the public

Manufacturing company – raw materials are received and when the company ready
to start with its production.

8.2.3 Single or two separate businesses

A company may have more than one business source at the same time (operating
trading and manufacturing business). The statutory income of each business is
computed separately. As such, the capital allowance of each business cannot be set
off with another business. However, if any of the business incurs losses in the
current year, these losses can be set off against the aggregate of the statutory
income from all business sources.

8.3 Pre-Commencement Business Expenses

Generally, the expenses incurred before the commencement of a business is not

deductible because they are not incurred wholly and exclusively in the production of
gross income. These expenses were incurred in the preparation of opening the
business.

However, some pre-commencement expenses such as training expenses [PU(A)

160/1996] and incorporation expenses [PU(A) 475/2003} are eligible for the
deductions against the gross income of the business.

8.4 Allowable, Disallowable, Specific and double deduction expenses

Some expenses are allowed as deductions while others are not. This is a
fundamental principle that must be grasped by anyone who wishes to gain a basic
understanding of income tax rule. In Malaysia, the deductibility and non-deductibility
of expenses are governed by Section 33 and Section 39 of the Income Tax Act
1967, respectively.

However, legal notification (P.U) is used for double deductions expenses.

Knowledge on the type of expenses that are allowable or entitled to double
deductions are beneficial in doing income tax planning.

Examples of allowable expenses under Section 33, ITA 1967 are:

Type Conditions Reference and

Effective Date

Rental Land or building occupied Section 33(1)(b)

by a person for business

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 purpose
Repairs Repair of premises, plant, Section 33(1)(c)
machinery employed in
the business

Examples of specific expenses under Section 34, ITA 1967

Type Conditions Reference and
Effective Date

Provision of equipment or To assist any disabled Section 34(6)(e)

alteration or renovation of person employed in the
premises business
Provision of library a) Library is Section 34(6)(g)
facilities accessible to
public.
b) Amount contributed shall
not exceed RM100,000.

Examples of double deductions expenses are:

Type Conditions Reference and

Effective Date

Interest payable on (a) Employer to produce certificate of PU(A) 90/1981

loans to small approval of loan from Authority Y/A 1982
businesses
(b) Interest must be allowable under
S. 33 of the Income Tax Act 1967 (ITA
1967)

First three months’ (a) Employer must register to PU(A) 91/1981

remuneration of participate in a training scheme Y/A 1982 Revoked
each employee w.e.f. Y/A 1992
trained in the (b) Employer to produce certificate
construction industry from Ministry of Labour and
Manpower

8.5 Interest Restriction on Loan (PUBLIC RULING NO. 2/2011)

Allowable expense

employed in the laid out on assets used or

production of gross held for the production of
income gross income
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8.6 Asset Acquisitions

8.6.1 Hire purchase Method

Capital allowance will be claimed because the acquirer is deemed to be the owner of
the assets. However, the claim is based on the deposit paid and the capital portion
of the hire purchase installments. The hire purchase interest is treated as a revenue
expense and can be deducted against the gross income of the business. For motor
vehicles not licensed for commercial transportation, the qualifying expenditure is
restricted either to RM50,000 or RM100,000. Therefore, it is very important to
consider the cost of the motor vehicles before buying it.

8.6.2 Leasing Method

Capital allowance is not claim because the acquirer is not the owner of the assets.
The lessee is allowed to charge the full leasing charges in its account. For vehicles
not licensed for commercial transportation of goods and passengers, the leasing
charges is restricted to either RM50,000 or RM100,000 (satisfying certain rules).

The lessee is able to recover the full cost of leasing in a shorter period as compared
to claiming of capital allowances.

8.7 Cessation of Business

Usually, when the company disposed its premises and plant and machinery, the
business is said to have ceased. Still, in some situation, uncertainty occurs and
requires the interpretation of the court. Revenue expenses such as legal fees and
compensation paid to employees during or after the cessation of the business is not
allowable to be deducted against the gross income.

8.7.1 Disposal of Plant and Machinery

Balancing charge or allowance will arise on the event of the disposal of the plant and
machinery. Balancing charge arise when the disposal value exceeds the residual
expenditure. Balancing charge is added to the adjusted income and this will increase
the statutory income from business.
Balancing allowance arise when the residual expenditure exceeds the disposal value.
The allowance will reduce the statutory income from business because the balancing
allowance is deducted against the adjusted income.

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 8.7.2 Disposal of real property

The longer the period of acquisition of the real property, the lower will be the rate of
real property gains tax.

8.8 Controlled Transfer/Sales

One of the specific anti avoidance provision is regarding the disposal of assets
subject to control. The rules are provided under Paragraph 38 – 40, ITA1967 and
Income Tax (capital allowances and charges) Rules 1969.

These rules relate to the calculation of capital allowance where the qualifying assets
are transferred between related parties under common control, or where one party
controls the other, or where the assets are transferred in a scheme of reconstruction
or amalgamation.

The controlled sale rules are designed to deem the asset to be transferred at the
residual expenditure of the asset. This will lead to a nil balancing adjustments – i.e no
balancing allowance and no balancing charge. In addition, the acquirer will claim
capital allowance at a rate and amount no different from what the disposer would
have claimed had the disposer continue owning the asset.

8.9 Group relief

8.9.1 Group relief refers to the practice of allowing current business losses
incurred by one company within a group to be deducted against profits
from another company within the same group.

8.9.2 Eligibility for group relief

From YA 2006, group relief is available for all locally incorporated resident
company provided that the conditions for eligibility are met. A company that
qualifies may surrender a maximum of 70% (YA 2009) of its adjusted loss for a
year of assessment to one or more related companies. The claimant company
may claim adjusted loss from more than one surrendering company.

Conditions for eligibility:

a) Claimant and surrendering companies must be resident and

incorporated in Malaysia.

b) Claimant and surrendering company, each has a paid-up capital of

ordinary shares exceeding RM2.5 million at the beginning of the basis
period.

c) Both claimant and surrendering companies must have same (twelve

month) accounting period.

d) Claimant and surrendering companies are `related companies’.

Related companies mean that at least 70% of ordinary shareholding is
either owned by surrendering company or claimant company or

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 commonly controlled by another Malaysian resident company and must
be related throughout the relevant basis period as well as the 12
months preceding that basis period.

e) Companies currently enjoying certain incentives such as pioneer status,

investment tax allowance, reinvestment allowance, etc are not eligible.

f) The claimant must has defined aggregate income in that year of

assessment.

g) Both companies must be subjected to tax at the full rate, i.e 25% in YA
2015.

8.10 FORMAT : CALCULATION OF TOTAL INCOME BY THE CLAIMANT

COMPANY

RM
Aggregate income xx
Less:
Current year business loss (xx)
Prospecting expenditure/pre operating business expenditure (xx)
Approved donations (xx)
Defined aggregate income Xx
Less:
Group relief loss surrendered by related companies (70%) (xx)
Total income xx

Example 1

A is the holding company of SA Group of companies which is made up as follows:

100% 89% 50% 70%

B C D E

Resident and Foreign Resident and Resident and

incorporated incorporated incorporated in incorporated in
in Malaysia Malaysia Malaysia

Required:
Determine which of the companies are related and be able to apply the group relief
incentives.

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Answer 1:

The related companies are:

Companies Reasons
A and B B is directly owned by A
A and E E is directly owned by A
A , B and E Common ownership by A

Example 2

T Sdn Bhd is a non-active company and has no income but companies W, X, Y, Z has the
following results for the year of assessment 2013:

W X Y Z
RM’000 RM’000 RM’000 RM’000
Business adjusted income/(loss) - 480 - (265)
Capital allowances – current and previous year - 280 - 150
Unabsorbed losses brought forward - 450 - -
Interest 100 17 65 25
Approved donations to federal government 30 2 - 10

Note: all companies are related to each other.

Required:
Calculate the amount of loss available for surrender, and the amount(s) of any defined
aggregate income.

Answer 2:

Company Z has an amount of adjusted loss available for surrender:

RM
Aggregate income –interest 25,000
Less: current year loss (25,000)
Total income Nil
Current year loss unabsorbed 240,000
Adjusted loss available for surrender – 70% (W.E.F YA 2010) 168,000

Calculation of defined aggregate income is as follows:

W X Y Z
RM’000 RM’000 RM’000 RM’000
Adjusted business income Nil 480 Nil Nil
Less: capital allowances Nil (280) Nil Nil
Nil 200 Nil Nil
Less: unabsorbed loss brought forward Nil (200) Nil Nil
Statutory income Nil Nil Nil Nil
Add: interest income 100 17 65 25
Aggregate income 100 17 65 25
Less: current year business loss Nil Nil Nil (25)

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 Less: approved donations (30) (2) Nil Nil
Defined aggregate income 70 15 65 Nil

Company W, X and Y are eligible to be claimant companies. Since the claimant companies
are more than one, the companies can decide the order of set off. Otherwise, the DG may
make the decision for the setting off. Usually the set off is made in the proportion to the
respective defined aggregate income.

Example 3

CCee Sdn Bhd, commenced a business for manufacturing office stationeries since 2005 with a
paid up capital of RM3 million. For the year ended 31 December 2015, the company’s profit and
loss statement showed a profit before taxation of RM280,000.

CCee Sdn Bhd

Profit and Loss statement for the year ended 31 December 2015
RM
Sales 5,000,000
Less: Cost of sales (3,700,000)
Gross profit 1,300,000
Add: other income 200,000
1,500,000
Less: expenses (notes) 1,220,000
Profit before taxation 280,000

Notes: The expenses included the following items:

1) Insurance premiums on the export of cargo amounted to RM75,000. The risks are insured
with a company incorporated in Singapore.

2) CCee Sdn Bhd leased a new motor car for its marketing executive for a period of two years
at RM7,000 per month. The cost of the car is RM168,000. CCee Sdn Bhd commenced
the lease rental in February 2015.

3) CCee Sdn Bhd donated cooking oils worth RM20,000 to approved institutions in the Klang
valley.

4) Employees’ salaries amounted to RM109,000. None of the employees are disabled

individual.

5) Replacement of damaged doors with new specification of materials and size costing
RM10,000.

Required:

a) Calculate the adjusted income of CCee Sdn Bhd for the year of assessment 2015.

b) Explain the income tax treatment of each of the above expenses in arriving at the adjusted
income from the business.

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c) Based on the information above, advise a tax planning strategies that could help CCee Sdn
Bhd in minimising its income tax liability.

Answer:
(a)
RM
Profit before taxation 280,000
Add:
Insurance premium NIL
Lease rental (77,000 – 50,000) 27,000
Donation 20,000
Employees’ salaries NIL
Replacement of doors 10,000
Adjusted income 337,000

(b) Tax treatments

i) The insurance premiums are allowable expenses because these are normal business
expenses Therefore, no adjustment is required.

ii) The lease rental for the motor car is restricted to RM50,000 because the cost of the car
exceeds RM150,000. Therefore, the excess amount of lease rental should be added back
in arriving at the adjusted income.

iii) The donation was not incurred in the production of gross income. Therefore, the amount
should be added back to the net profit.

iv) The salaries are allowable expenses incurred in the production of gross income. Therefore,
no adjustment is required.

v) The replacement of the damaged door was capital in nature because the door was replaced
using different specification and size. Therefore, the amount should be added back to the
net profit in arriving at the adjusted income.

(iii) Tax planning strategies

i) CCee Sdn Bhd should insure the risk with a Malaysian Incorporated company. This will
entitled CCee Sdn Bhd for a double deduction in arriving at the adjusted income.

ii) CCee Sdn Bhd should lease a new car costing not more than RM150,000. As such, the
qualifying lease rental amount will be increased up to RM100,000 rather than RM50,000.
By doing so, the amount of lease rental would be allowed for deduction.

iii) Even though the donation was not incur in the production of gross income, it can still be
deducted against the aggregate income of the company provided that the amount does
not exceed 7% of the aggregate income and the donation must be in cash.

iv) CCee Sdn Bhd should consider to employ disabled employees because their remuneration
will be entitled to double deduction.

v) CCee Sdn Bhd should replace the door with the same material and size. This would be
revenue in nature and allowed for deduction.

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