CHAPTER 3

CORPORATE TAX

WHAT SHOULD YOU KNOW????

• Distinction between accounting income and taxation income

• Translation from profit & loss account to adjusted income

• Taxable income and capital receipt

• Tax allowable, non allowable and double deduction

• Donation available to company

• Tax computation

• Self-assessment for company

What should you be able to do??

Net Income Add : Non-Allowable expenses

Deduct: Double deduction

Deduct : Non-business Income

Adjusted Income Add: Balancing charges

Deduct: Capital allowances/balancing

allowances

Statutory Income Deduct: Unabsorbed business losses b/f

Add: Non-business income

Aggregate Income Deduct: Current year business losses/

prospecting exp/ AAP/ approved donations etc

Total/chargeable

Income

Income to be tax

What should you be able to do??

Gross Income Deduct : Allowable expenses

Deduct: Double deduction

Adjusted Income Add: Balancing charges

Deduct: Capital allowances/balancing

allowances

Statutory Income Deduct: Unabsorbed business losses b/f

Add: Non-business income

Aggregate Income Deduct: Current year business losses/

prospecting exp/ AAP/ approved donations etc

Total/chargeable

Income

Income to be tax

What is important???

• Distinguish Between Business And Taxation

Income

• Business Income Derived From Malaysia

• Capital Or Revenue Receipts

• Business Deductions

• Double Deductions

• Capital Or Revenue Expenditure

• Prohibited Deductions

Distinction between Accounting and Taxation Income

The net profit or loss shown in the taxpayer’s accounts may not necessarily equal to the taxable income or loss for tax purpose. This is due to a few reasons such as:

• Items of income shown in the accounts may not be assessable for tax purposes

• Items not included in income for accounting purposes may be assessable for tax purposes, ex: gain arising from sale of land held for many years;

• Items of income may be derived for tax purposes in an earlier or later year than that in which they are brought to account for accounting purposes; (temporary & permanent differences)

• Certain items which are treated as expenses for accounting purposes may not be allowable deductions or may only be deductible in part, ex: amortization of goodwill, higher rate of depreciation than rate for capital allowance; and

• Certain items not written off as expenses in the accounts may be deductible, in whole or in part, for tax purposes.

Technique or step in answering

Sales 2,850,000

Less: Cost of sale 1 (1,000,000) Gross Profit 1,850,000

Less: Operating expenses

Advertising 2,300

Water and electricity 8,000

Telephone 3,400

Staff remuneration 2 180,000

Training and research 3 90,000

Professional fees 4 53,000

Repairs and maintenance 5 153,300

Traveling and entertainment 6 206,000

Provision for bad debts 7 910,000

Depreciation 80,000

Miscellaneous expenses 8 20,000

Donations 9 90,000

Foreign exchange loss 10 62,500

Transportation 11 34,500

Contract payment 12 25,000

Insurance 13 18,145 (1,936,145) Add: Dividends 14 120,000

Other Income 15 99,840

219,840

Net Profit 133,695

Gasing Sdn Bhd

Profit and Loss Account for the year ended 31 December 2011

Taxable Income and Capital Receipt

• Only trading revenue or revenue receipts are taken into account in quantifying the amount of gross income chargeable to tax under Section 4(a).

• A trading receipt arises on the date when it becomes due and payable to the recipient. Business income taxed on an accrual basis and not on receipt basis.

• To be taxable as gross income for that basis period, the income must be earned or realized at the point of receipt.

• Where trading receipt is received in non-cash form, the market value would be taken as gross income.

• Receipts which are capital in nature or are taxable under other classes of income are excluded.

• Even though the distinction between income and capital receipts are well recognized, but cases arise when the items lie on the borderline.

Immaterial considerations in deciding capital

or income receipts

• Payment measured by estimated profits – ex: computing

damages;

• Lump sum and periodic sum

• Magnitude of a receipt

• The name given by parties concerned and treatment in

accounts

• Payment made out of capital

• Disallowance to the payer

Test to distinguish capital receipt from revenue receipt

– Receipts which relate to assets which form part of

permanent structure of the business,

ex: plant and machinery - sales of this asset will give

rise to capital receipt.

– Circulating and fixed capital,

ex: stock-in-trade – sale of circulating asset will give

rise to revenue receipt.

Amongst the key features of income are:

• The receipt must be in the form of money or something

capable of being turned into money;

• It must be received as income in the hand of the recipient;

• The characteristics of periodicity, recurrence and regularity

are prima facie indicators that an amount is of an income

character;

• Receipts which are the result of normal business activities

will usually be income. Conversely, gain or receipts not link

to such factors will not usually be income. Ex: windfall gain.

• A receipt which is compensation for an item which would

have had the character of income, is itself assessable

income and vice versa.

Items to be treated specifically as gross income

Section 22, 24 & 30 provide for certain items to be treated specifically as gross income. The items include:

• A debt arising from the sale of stock-in-trade;

• A debt arising from the provision of services rendered in the course of carrying on the business;

• The market value of stock-in-trade which has been taken for private purposes by the owner without payment, or withdrawn from the business;

• Dividend income from share dealing business;

• Interest income of an investment dealing business or a money lending business;

Items to be treated specifically as gross income (cont.)

• The market value of goods exported in the course of carrying on the business;

• Recovery of bad debt which has previously been allowed as deduction;

• Release / waiver of a debt pertaining to any amount of expenditure previously allowed as deduction;

• Any sums receivable or deemed to have been received by way of: – insurance, indemnity, recoupment, recovery, reimbursement or

otherwise in respect of the kind of outgoing and expenses deductible in ascertaining adjusted income,

– compensation for loss of income from that source

Tax Allowable, Non Allowable and Double Deduction

• Legislative provisions (sec 33, 34, 34A, 34B, 35 & 39)

• sec 33 and 39 are general sections for both business

and non-business expenditure.

General rule

Sec 33(1) sets out the general rule which governs deductions to be made from gross income:

1. Outgoings and expenses;

2. Wholly and exclusively (Prince v Mapp (46 TC 169);

3. Incurred during the basis period (Malayan Weaving Mills Sdn Bhd v DGIR [(2000) MSTC 3778]; and

4. In the production of gross income.

Specific deductions

• Sec 34 – specific deductions allowable in calculating the adjusted income from a business, to include:

• Debts which at the end of the basis period are reasonably estimated to be either wholly and partly irrecoverable;

• Contributions to an approved scheme in respect of an employee not exceeding 19% of the employee’s remuneration;

• Replanting expanses in respect of income from the working of a farm;

• Amount incurred on the provision of any equipment to assist any disable employee. From YA 2008, its include expenses incurred on alteration or renovation of premises to assist disabled employees;

• Expenditure incurred on the provision of public library facilities, school libraries or IPT’s libraries (limit RM100,000);

• Expenditure incurred on the provision and maintenance of a childcare centre for the benefit of employees;

• Expenditure incurred on the provision of scholarships to students for any course of study leading to a diploma or degree or it equivalent at Malaysian educational institutions;

Sec 39 – specifically disallowed expenditure

• Domestic or private expenses;

• Expenses not wholly and exclusively laid out for purpose of producing gross income;

• Capital withdrawn;

• Any amount paid to a pension provident or other similar fund or society which is not an approved scheme;

• Entertainment expenses (other than specifically allowed).

Sec 34A & 34B – double deductions

• Halal certification;

• Research expenditure

• Approved research institute/company

• Interest payable on loans to small businesses

• Remuneration paid to employees employed and trained under an approved training scheme in the

construction industry

• Remuneration paid to disabled employee

• Insurance premium on import of cargo

• Export credit insurance premium

• Freight charges

• Participation in approved international trade fairs

• Overseas expenses for promotion of tourism

• Approved training for small-scale companies

• Approved training

• Insurance premium on export of cargo

• Export promotion expenses

• Manufacturing/Manufactured product

Donation Available to Company

• Sec 44(6) – the gift of money made to government, state government, local authority or an approved institution shall be given a deduction in arriving at total income.

• With effect from YA 2009, the deduction for donations to approved institutions / organizations is restricted to 10% of the aggregate income of the company. With effect from YA 2008, the restriction is also extended to q body of persons, individuals and corporation sole.

• No limit on cash donation to the government, state government or a local authority.

List of donations

• Gift of artifact, manuscript or painting [s44(6A)];

• Donation to approved libraries [s44(8)];

• Donation of painting to National or State Gallery [s44(11)];

• Zakat perniagaan [s44(11A)] (w.e.f. YA 2005) – the deduction will be the lower of zakat perniagaan paid or 2.5% from aggregate income; and

• Approved sport activity or project of national interest [s44(11B&C)] – restricted to 10% of aggregate income.

Translation from Profit & Loss Account to Adjusted Income

1. The computation starts with “profit/(loss) before taxation” shown in the account;

2. Add items which are disallowed or disregarded for tax purposes such as:

– Depreciation;

– Capital losses;

– Expenditure of a capital in nature;

– Donation;

– General provision for bad debts, retirement benefits, leave passages, etc; and

– Generally all expenses incurred not wholly and exclusively in the production of income.

Translation from Profit & Loss Account to Adjusted Income

3. Deduct items which are not charged to profit and loss

account such as:

– Renewal or replacement of items which do not

qualify for capital allowance;

– Deferred expenditure;

– Items that qualify for double deduction;

4. Add/deduct certain items that need special treatment for tax purposes, such as:

– Trading stock and work in progress;

– Remittances from overseas;

– Dividend received from exempt profit;

– Allocation of expenses by a parent company to its subsidiaries;

– Withholding taxed on payment made to non-resident persons;

– Losses from previous years (brought forward or carry back);

– Capital allowances on asset; and

– Donation to approved institutions.

Translation from Profit & Loss Account to Adjusted Income

5. Once the chargeable income and the tax thereon have

been computed, the following deduction may be

relevant:

– Tax deducted at source from Malaysian dividends

(Sec 110);

– Double tax relief;

– Zakat paid (2.5% from the statutory income)

Translation from Profit & Loss Account to Adjusted Income

Self-assessment for company

• SAS is a process by which taxpayers are required by law

to determine the taxable income, compute the tax liability

and submit their tax returns based on tax laws, policy

statements and guidelines issued by the tax authorities.

• SAS shifted the responsibility of determining and

computing the amount of tax liability from the IRB to the

taxpayer.

• SAS for companies was effective from YA 2001.

Estimation of tax payable

• Form CP 204.

• Must be submitted 30 days before the start of the basis period.

• W.e.f. YA 2006, companies are allowed to furnish estimates of tax payable for YA of not less than 85% of the revised estimate for the immediately preceding YA. If no revised estimate is furnished, the estimate should not be less than 85% of estimate tax payable for the immediately preceding YA.

• For new company, the estimation for the YA should be furnished within 3 months from the date of commencement.

Estimation of tax payable

• W.e.f. YA 2008, new SMEs are given exemption from submitting their estimates of tax payable or making instalment payments for 2 years beginning from the date of commencement. They are required to make full income tax payment at the point of submission of the income tax return.

• Any revised estimate must be made in the sixth month of the basis period and not earlier. In addition, the ninth month revision is allowed w.e.f. YA 2003.

• Penalties are imposed on late payment of tax instalments and on under-estimation of tax liability (the different between the estimation and the actual tax payable exceeds 30% of the actual tax payable).

• The balance of tax payable is due on the seventh month from the date of closing accounts (w.e.f. YA 2003).

Installment Payment Scheme

• The installment is on a twelve-monthly basis.

• If the company commenced operation in a YA, the

installment would be for the number of months in the

basis period.

• The due date of the first installment is the tenth day of

the second month of the basis period. For the

company commenced in a YA, the first installment

would be due on the tenth day of the six month of the

basis period.