ATAX1113 – Principles of Taxation

Topic 7 – BUSINESS EXPENSES

TOPIC 7
BUSINESS EXPENSES

School of Accounting and Taxation

 ATAX1113 – Principles of Taxation

Topic 7 – BUSINESS EXPENSES

LEARNING OUTCOMES

By the end of the topic, students should be able to:

•Define various types of business expenses.

•Differentiate various types of business expenses.

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Topic 7 – BUSINESS EXPENSES

Principles of Deduction

• Capital receipts are not taxable, capital expenditures are not deductible.

• For expenditure to qualify for deduction, it must be related to the business

carried on by the taxpayer.

• The expenditure must be incurred in the period which the income is

brought to charge.

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Topic 7 – BUSINESS EXPENSES

Principles of Deduction

Qualifying deductions under ITA 1967:

• Allowable deductions under S. 33 – “wholly and exclusively incurred in

the production of gross income”

• Disallowable expenditures under S. 39

• Specific provisions to allow a deduction under specific situations

-- Interest, rent, repairs and renewals, S. 33(1)(d) deductions

-- Specific business deductions under S. 34 & S. 35

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Topic 7 – BUSINESS EXPENSES

Character of Revenue and Capital Expenditure

• Lump sum payment.

• Magnitude of the expenditure – size of the expenditure.

• General test: Fixed capital vs Circulating capital test 

• receipts are capital in nature if connected with fixed capital (fixed assets) of
the business but revenue in nature if connected with circulating capital
(current assets) 
• Fixed capital is what a person turns to profit by keeping it in his possession;
circulating capital is what a person makes a profit of by parting with it and
letting it change masters, i.e. for resale purpose.

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Topic 7 – BUSINESS EXPENSES

Character of Revenue and Capital Expenditure

•Accounting treatment:

• Test 1: Once and for all

• Test 2: Enduring benefit
• Test 3: Identifiable asset
• Test 4: Fixed capital and circulating capital
• Test 5: Business entity

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Topic 7 – BUSINESS EXPENSES

Test 1: Once and for all

“capital expenditure is a thing that is going to be spent once and for all, and
income (revenue) expenditure is a thing that is going to recur every year.”
[VallambrosaRubber Co Ltd v Farmer (1910)]

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Test 2: Enduring benefit

“when an expenditure 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
a trade, there is a very good reason for treating such an expenditure as
properly attributable not to revenue but to capital.” [Atherton v British
Insulated & HelsbyCables Ltd (1926)]

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Topic 7 – BUSINESS EXPENSES

Test 3: Identifiable asset

In Tucker v Granada Motorway Services Ltd (1979), Lord Wilberforce at

page 106H described the lease as an 'identifiable asset’.

•Lord Wilberforce went on to comment on the lack of a universal formula

and the importance of identifying an asset (the so-called 'identifiable asset'
test). Money spent on:
•i) the acquisition of an asset, or
• ii) getting rid of a disadvantageous asset, or
• iii) improving an asset to make it more advantageous

All to be recorded as capital.

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Topic 7 – BUSINESS EXPENSES

Test 4: Fixed capital and circulating capital

• An expenses will treated as capital expenditure when it is relates to the

fixed capital while expenses relates to circulating capital would be treated
as revenue expenditure.

• According to Adam Smith the distinction between fixed capital and

circulating capital would depend on the nature of business.

• In the case of John Smith and Son v Moore, Viscount Haldane applied
Smith’s definition of fixed capital and circulating capital, and he said:
”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 it and
letting it change masters.”

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Topic 7 – BUSINESS EXPENSES

Test 5: Business entity

• In Sun Newspapers Ltd v FC of T (1938) 61 CLR 337, the taxpayer

company published several newspapers – one of them being an evening
paper for distribution in Sydney area.

• A competitor was also publishing an evening paper in the same area.

• The taxpayer company then decided to buy off the competition by paying
a sum of money. In returns, the competitor agreed not to publish another
newspaper in the region for the next 3 years.

• The sum so paid was held to be on capital account.

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Topic 7 – BUSINESS EXPENSES

Deduction Provision (S. 33)

S. 33(1):
“… the adjusted income of a person from a source for the basis period for a
year of assessment shall be an amount ascertained by deducting from the
gross income of that person from that source for that period all outgoings
and expenses wholly and exclusively incurred during that period by that
person in the production of gross income from that source, …”

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Deductions Prohibited (S. 39)

• The specific expenses outlined in S. 39(1)(a)–(q) are not deductible at

arriving at the adjusted income from a source.
• Expenses that are specifically disallowed apply to both business and non-
business sources.

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Topic 7 – BUSINESS EXPENSES

Deductions Prohibited (S. 39)

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Topic 7 – BUSINESS EXPENSES

Deductible and Non-deductible Expenses (S. 33)

S. 33 specifies the type of expenses deductible in arriving at the adjusted

income. It applies to all sources of income.
•Interest
•Interest expense and income
•Rent
•Repairs and renewals
•Other deductions [S. 33(1)(d)]

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Topic 7 – BUSINESS EXPENSES

Specific Business Deductions Under S. 34 and S. 35

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 ATAX1113 – Principles of Taxation

Topic 7 – BUSINESS EXPENSES

Specific Business Deductions Under S. 34 and S. 35

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Topic 7 – BUSINESS EXPENSES

Deduction of Outgoings and Expenses

• S. 33(1) generally permits 2 types of deductions:

• Expenses wholly and exclusively incurred in the production of income;
and
• “Outgoings … wholly and exclusively incurred.”

• “Outgoings” do not refer to disbursements and is generally accepted to

have wider meaning that “expenses”.

• For a tax deduction to succeed, it is important that the event must be

connected to the conduct of the taxpayer’s business.

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Topic 7 – BUSINESS EXPENSES

Deduction of Outgoings and Expenses

• “Outgoings” do not refer to disbursements and is generally accepted to

have wider meaning that “expenses” – example: expenses occasioned by
theft or defalcation by employees.

•Case of AA [(1960) FB XXIII], the taxpayer alleged that someone entered his
home and stole his money, and claimed the losses incurred as deduction. The
claim was rejected since there was no evidence an employee of the company
was involved.

•If the losses was due to defalcation by employee in the normal course of
carrying on the duty of employment, it would rank for a deduction.

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Topic 7 – BUSINESS EXPENSES

Deduction of Outgoings and Expenses

Deductions that are not specifically mentioned in ITA provisions include:

1 Accountancy fees
2 Advances and loans
3 Advertising costs
4 Bonus
5 Books and periodicals
6 Business acquisition costs
7 Acquisition of trading stock on takeover
8 Travelling costs
9 Trade and club subscriptions
10 Income taxes

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Topic 7 – BUSINESS EXPENSES

Deduction of Outgoings and Expenses

11 Clothing and tools

12 Company general meetings
13 Conference and trade exhibition travelling expenses
14 Consumable aids
15 Crop replanting
16 Damages
17 Defending capital assets
18 Devaluation losses
19 Fines and penalties
20 Deductibility of medical expenses for directors of companies
21 Terminating redundant employees

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Topic 7 – BUSINESS EXPENSES

Deduction of Outgoings and Expenses

22 Legal expenses incurred in a restructuring exercise

23 Audit fees
24 Guarantee fees
25 Stamp duties
26 Insurance premiums
27 Renovation of workplace for disabled employees
28 Community projects
29 Employee recruitment expenses
30 Franchise fees
31 Secretarial Fees, AGM expenses tax filing fees
32 Repayment of PTPTN loans
33 Industry4WRD
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Double Deductions

• There are provisions in ITA 1967 to allow double deductions for certain
expenses, meaning they are allowed in addition to any deduction falling to
be made under S. 33.
• Rules by way of Statutory Orders are periodically introduced by the
Government to provide double deduction on specific expenses.
• Expenses incurred on certain activities can be set off twice against
taxable profits.

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Double Deductions - Examples

Promotion of Exports
•Expenses which are aimed at promoting exports and the supply of goods
overseas can be deducted twice from taxable profits.
•The list of allowable expenses are set out in the income tax legislation and
include overseas advertising, export market research, preparation of tenders
for the supply of goods overseas, overseas travel (economy class only),
sustenance (max: RM150/day) and accommodation (max: RM 300/day),
cost of maintaining overseas offices & approved industrial exhibitions.
•This incentive is available to manufacturing & agricultural companies
producing "promoted products" or engaged in "promoted activities".
•The allowance is also available to the tourist industry in respect of costs
incurred in the overseas promotion of Malaysia as a tourist destination.

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Topic 7 – BUSINESS EXPENSES

Double Deductions - Examples

Employee Training Programs

•Expenditure incurred by manufacturing companies on government
approved training programs designed to develop and upgrade skills to
modernize manufacturing processes can be deducted twice from taxable
profits.
•This incentive is available to manufacturing companies & companies
engaged in the hotel and tourist industry.

Disabled Persons
•All remuneration payable to physically or mentally disabled employees can
be deducted twice from taxable profits.

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Double Deductions - Examples

Research & Development

•All expenditure incurred on government approved research, payments
made for the use of services of approved research institutes and voluntary
cash contributions made to approved research institutes can be deducted
twice from taxable profits.

Freight Charges
•Certain manufacturing industries located in certain regions of the country
(e.g. timber companies in Sabah) can deduct double the amount of freight
charges incurred to Peninsular Malaysia.
•Provided they use the ports in Peninsular Malaysia.

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Topic 7 – BUSINESS EXPENSES

Double Deductions - Examples

Brand Promotion Advertising

•Expenditure incurred promoting an export quality standard Malaysian
owned product is subject to double tax deduction.
•Promotion of a brand name means making a name internationally known
and therefore would include such expenditure as bill-boards in international
airports or highways.
•The company must be 70% Malaysian owned and the product must
achieve export quality standards.

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Topic 7 – BUSINESS EXPENSES

THE END

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