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TAX EDUCATION COURSE LECTURE 3

TAX EDUCATION COURSE LECTURE 3. BUSINESS DEDUCTIONS. THE LAW. Specific provisions – TE 3.2 - Section 34,34A,34B - Income Tax Orders/Rules Prohibited Expenses –TE 4.1 - Section 39 General provisions – TE 3.1 - Section 33. General Provision. Outgoing and expenses

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TAX EDUCATION COURSE LECTURE 3

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  1. TAX EDUCATION COURSE LECTURE 3 BUSINESS DEDUCTIONS

  2. THE LAW Specific provisions – TE 3.2 - Section 34,34A,34B - Income Tax Orders/Rules Prohibited Expenses –TE 4.1 - Section 39 General provisions – TE 3.1 - Section 33

  3. General Provision • Outgoing and expenses • Wholly & exclusively • Incurred • In the production of gross income • From that source Sectin 33(1)

  4. Sole Purpose Not only for purposes of earning income Exclusively - solely for the object of promoting the business or income earning activity

  5. Duality of Purpose Purpose of Activity : - Trade - promoting business - Some other purpose eg private and domestic

  6. Traveling Expenses Newsom v Roberston Barrister partly worked at his chambers and partly at home Claimed traveling bet home and chambers Not deductible – not W&E - Home – ‘living expenses’ ‘business expenses’

  7. International visits Bowden v Rusell & Rusell (1965) Solicitor attending conference in USA with wife Not deductible – Not W&E - included holiday and social purposes

  8. Incurred Provisions Sinking funds Estimated expenditure Contingent Except specific provision for doubtful debts

  9. Incurred Liability is established: – existence of liability to pay - even though the liability is not discharged at relevant time - differ from ‘a payment out/paid’

  10. Business Deductions In the production of gross income Nexus May relate to future income - Vallambrosa

  11. Business Deductions DGIR v KFY Apportionment of Director’s Fees Apportionment not allowed.

  12. Specific Deductions • S. 33(1) • Interest on borrowings: (i) Employed…. In the production of gross income eg; for staff salary, rent etc (ii) laid out on asset used or held.. eg: for factory building Para 3.2(a) Tax Elite

  13. Specific Deductions - Interest S 33(2) Borrowings for: Loan or investment or non-business Directly or indirectly Para 4.1(n) Tax Elite

  14. Interest Restriction • Interest expense > RM 10,000 • Total investment X Interest cost Total borrowing • Total investment > RM 500K – monthly • IRB - Allocation of interest to loans /shares /landed properties allowed

  15. Interest Restriction • Old basis – interest allowed on investments producing income and disallowed on non income producing investments for each YA • New basis- all dividends treated as a single source . All interest income treated as a single source.

  16. Interest Restriction • Shares: • Alpha Sdn Bhd RM 10000 ( income producing) • Omega Sdn Bhd RM 20000( non-income producing) • Interest applicable to investments: • Total investment X Interest cost Total borrowing = 10000 X 9000 = 3333 ………………..((IRB) 30000 = 30000 X 9000 = 9000 ………………..((Case Law) 30000

  17. P Securities Sdn Bhd vs KPHDN • Investment holding company • Investment in shares - income/non-income producing • Acquisition with interest-bearing loans HELD - Only one source of income ie dividend - Each counter of share investment does not constitute a source of income

  18. KPHDN v Multi Purpose Holdings Bhd • Investment holding company • Investment in shares /rental /loans/plantations HELD - Only one source of income ie dividend, interest. - No authority to split by treating each counter of share investment and each loan as constitute a separate source of income

  19. Specific Deductions • S. 33(1) • Rent payable…for ..producing income • Repairs, renewals and alterations Para 3.2(b)/(c) or Para 4(w) Tax Elite

  20. What is repairs? • Repairs = • -restoration by renewal or replacement of • subsidiary parts of a whole (UK) • - restoration of a thing to a condition it • formerly had without changing its character • (Australian) • Factors suggesting improvement • Different type of materials • Significant increase in value

  21. Different types of material 8.39 Conn v Robins Bros Ltd Extensive improvement – deductible 400 years Different materials

  22. Repairs and Improvements Entirety = whole or substantially the whole O’Grady 8.37 Samuel Jones 8.37 Chimney – “entirety”? Samuel – ‘ inseparable part of an entirety, which is the factory’

  23. Initial repairs Law Shipping Case Bought ship for $97000 Repairs needed at that time $40000 -Repairs survey Odeon Associated Theatres Distinguished Law Shipping - Cinema could be used in an unrepaired state

  24. Specific deductions • S. 34 –Business deductions- TE 3.2 • (d) Bad debts - PR 1/2002 • (e) EPF contribution • ( restricted to 19% remuneration ) • (f) Contribution to Approved Scheme • (g)Mining expenditure / Sch 2 Para 3.2(d)-(g) Tax Elite

  25. Specific and General Provision for Bad Debts Debt must be “bad”- ‘reasonably irrecoverable’ Evidences of step taken: Circumstances of debt recovery: - Reminder notices - Debt restructuring scheme - Rescheduling of debt settlement - Negotiation of a a disputed debt - Legal action

  26. Specific and General Provision for Bad Debts • Circumstances to considered the debt as bad: • debtor died • debtor bankrupt or in liquidation • debt is statute barred • debtor cannot be traced despite various attempts • and there are not known assets from which the • debt can be recovered • attempts at negotiation or arbitration have failed • no likelihood of cost effective recovery.

  27. Specific and General Provision for Bad Debts Each debt has to be evaluated separately When and whom this was done What specific information was used in arriving at that evaluation

  28. Specific and General Provision for Bad Debts Related parties debt Non trade debts – eg staff advances

  29. EPF Restriction • Contribution of approved scheme by employer: • 21% of employee’s remuneration • Allowable limit – 19% • Disallowable – 2% • 2% contribution not deductible in arriving the adjusted business income of the company Para 4.2(o) Tax Elite

  30. Specific deductions • S. 34 –Business deductions (h) Replanting expenditure – same crop (i) Equipment for disabled employees (j) Translation/publication in BM (approved) (k)Library facilities- public libraries- RM 100K Contribution –44(8)- RM20K Para 3.2(h)- (k) Tax Elite

  31. Specific Deductions (Cont’d) (l)Provision of services, public amenities, contributions to charity/community project – education, health, housing, infrastructure ( approved) (m)Child care center (n)Approved musical/cultural group (o)Approved Arts/cultural activity RM200K Para 3.2(1)- (o) Tax Elite

  32. Specific Deductions (Cont’d) (p) Scholarship:- Diploma, Degree, Masters, Phd ‘Higher institution’ Full time student No means of its own Total monthly income of parents <= 5000 Para 3.2(p) Tax Elite

  33. Specific Deductions (Cont’d) • Halal and quality certification • Scientific research • Research expenditure approved by Minister – S 34A • Cash contribution or payment of services to approved research institute – S 34B Para 3.2(q/r) Tax Elite

  34. Entertainment Purpose – business - private Law: S 39 S 18 – Definition Para 3.2(s)-(t) Tax Elite

  35. Entertainment “ recreation and hospitality of any kind” “any kind” “recreation” – sports , amusement, pleasure..after work - trips - recreation centre - stay at holiday resort - tickets show -subsidised club membership - gifts and giftaways

  36. Deduction of Entertainment Expenses • Specifically prohibited – S 39 except: • Entertainment for employees • Biz in the provision of entertainment • Promotion of export gifts at trade fairs overseas • Promotion sample – product of biz • Gifts – conspicuous logo • Cultural or sporting events- to public

  37. Entertainment – S 39(1) “… including any sum paid to employees…..for the purposes of entertainment: Sum paid Entertainment employees Entertainment allowance Reimburse entertainment expenses

  38. Entertainment – S 39(1)Proviso • Promotional gifts • (vi) ‘…. Conspicuous advertisement or logo…’ • IRB’s letter • “Business logo” …. Co’s logo or product logo • Without logo: • Gifts at trade fairs or exhibitions held outside • Malaysia • For promotion of exports

  39. Entertainment – S 39(1)Proviso Promotional samples Product of the business -------------- Allowable Not product of the business --------- Not Allowable

  40. Entertainment – S 39(1)Proviso (i)Entertainment for employees - sole purpose - dual purpose (ii) Business in the provision of entertainment Provided for payment by clients eg airlines

  41. Deduction of Entertainment Expenses • ‘related wholly to sales arising from the business’ • Matching principle • Future income • Past income

  42. Specific Deductions (Cont’d) Provision for practical training for non-employees Donations to approved institutions - 5% of aggregate income Cost of acquisition of propriety rights - 70% equity owned by Malaysians Para 3.2(u)-(v) Tax Elite

  43. Non-deductibility of Expenses • S.39 • Domestic/private • Not wholly & exclusively incurred • Capital withdrawn • Unapproved scheme • QME, QAE, QFE, QPE, QFE – Sch 2-4A • Interest / royalty - w/tax not complied • Use of license/permit to extract timber Para 4.2(a)-(g) Tax Elite

  44. Non-deductibility of Expense • Bonus restriction (upto YA 2001) • Contract payment – w/tax not complied • S 4A income – w/tax not complied • Lease rental • Entertainment • Leave passage Para 4.2(a)-(m) Tax Elite

  45. Non-deductibility of Expense • Lease rental for private motor vehicles Restricted RM 50000 YA 2002 onwards Brand new Cost <= RM 150,000 Restricted RM 100000

  46. Withholding Tax Time Liable to pay ------------ Deductible Pay / Credit to NR Pay WHT to IRB Within 1 mth

  47. Withholding Tax Time Liable to pay ------------ Deductible Pay / Credit to NR Due date Pay WHT to IRB -------------------Deductible Include10% 1 mth Non Deductible

  48. Non-deductibility of Expense • Provisions of expenses • Shareholders expenses • Stock exchange listing expenses • Pre-commencement expenses • Expenses related to share capital • Expenditure in acquisition or disposal of fixed assets Para 4.2(a)-(m) Tax Elite

  49. Insurance premiums Taxable - S 22 – Co beneficiary - Premiums allowable -‘Nexus’ Insured against capital nature – NT - Premiums- Allowable -eg. Indemnity contract,building,burglary. - day-to-day income earning activities, no enduring benefit

  50. Insurance premiums Employee: Keyman : Beneficaries-Co Premiums – Allowable - term life & accident -Keir and Cawdler Ltd Directors of Controlled Co - personal advantage- disallowed - Samuel Dracup

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