Masters of Financial PlanningTaxation Planning

BUSINESS DEDUCTIONS

By: Associate Professor Dr. GholamReza Zandi

zandi@segi.edu.my

General Deduction Provision

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).

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General Deductions (Cont’d)

• 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.

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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.

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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

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Interest Expenses (Cont’d)

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)].

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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.

• 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.

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Rent and Repairs (Cont’d)

Other deductions as may be prescribed by Minister will be allowed to

determine taxpayer’s adjusted income) [sec 33(1)(d)].

Examples:

Income Tax (Deduction for Employment of Disabled Persons)

Rules 1982

Income Tax (Deduction for the Cost of Acquisition of Proprietary

Rights) Rules 2002

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Disallowable Expenditures

• Disallowable expenditures are listed out in sec 39 ITA.

• Domestic and private expenses are not deductible [sec 39(1)(a)].

Example: Wages of domestic helpers, private phone calls

• 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 )].

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Disallowed Expenditure (Cont’d)

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

• Lease rentals for the lease of motor vehicles: sec 39(1)(k)

some conditions apply.

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Disallowed Expenditure (Cont’d)

Non-deductibility of entertainment expenses is covered

under sec 39(1)(l) ITA.

The provision stated under items (i) to (vi) of sec 39(1)(l) ITA

provide circumstances when entertainment expenses are

allowed a deduction.

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Other Deductions

• 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.

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Double Deductions

There are a number of double deductions permitted under the ITA 1967

as incentives to encourage certain sectors.

Remuneration to disabled employees who are unable to perform the

work of a normal person,

Insurance premiums to a Malaysian insurance company for

import/export activities,

Training of handicapped persons,

Promotion of exports and professional services,

Research, and

Freight charges paid to a Malaysian shipping company.13

The End