Chapter 4

BUS INE SS INCO ME

Learning Objective
• Define the business income and business expenses,
• Differentiate between Allowable expenses and Non-allowable
expenses,
• Identify the Double deduction items,
• Prepare the computation of statutory business income.
Sec 4(a) – Business Income
• Sec 4(a) - the scope of business income as “gains or profits from a
business, for whatever period of time carried on.”
• Provide preferential tax treatments:
a) utilization of unabsorbed loss b/f from any business sources;
b) able to claim capital allowance on plant, machinery, industrial
building used in business;
c) accord current year business loss in the event the revenue
expenditure exceeds gross income;
d) unabsorbed capital allowance (D>C) to be c/f to the following YAs
and be deducted from the same business sources.
Computation of Business Income-Tax
RM
Business Gross Income xxx (A)
(-) Revenue expenses (xx) (B)

A>B A<B

Adjusted Business income xxx (C) Current Year Business Loss

(-) capital allowance (xx) (D) - To be deducted at Aggregate Income
Statutory Business income xxx - To be c/f as unabsorbed business loss
(-) unabsorbed business loss (x)
Net Statutory Business income xxx
Business Definition
 Sec 2 - defines business to include profession, vocation and trade
and every manufacture, adventure or concern in the
nature of trade, but excludes employment.
 The definition of business is, however, not exhaustive, it may
expand depending on the circumstances around it.
Business Definition
Profession - a paid occupation, especially one that involves
prolonged training and a formal qualification. (Intellectual skill)
Vocation - defined as a call to do something, especially regarding
religious work.
Trade – involves something in the nature of a commercial
undertaking, of which the buying and selling are the most obvious
characteristics.
Meaning of ‘adventure or concern in the
nature of trade’
 An isolated transaction would be taxed as business income, if it
fell into either ‘trade’ or ‘adventure or concern in the nature of
trade’.
 In the event an isolated transaction is seen as realizing as an
investment, the surplus is capital gain and thus is outside the ambit
of income tax.
Badges of trade
 Guidelines/ tests to distinguish gains arising from the disposal of
an investment and gains from trade or an adventure or concern in
the nature of trade.
 The acid test is the ‘badges of trade’
 10 badges of trade - to determine whether a gain from disposal of
assets, mainly landed properties, is capital gain or adventure in the
nature of trade(assessed as business income).
Summary of 10 badges of trade
Badges of Trade Capital Gain (no income tax) Adventure in the nature of trade,
assessed as s 4(a) income
1. Subject matter
(a) income generating √ X
(b) personal enjoyment to its √ X
owner
2. Period of ownership At least 5 years < 5 years
3. Formation of company X √
4. Frequency of transactions One off or <= 3 transactions in a Repeated and transactions are
year similar
5. Attention to property
(a) sub-division of land X √
(b) expertise in the field X √
Summary of 10 badges of trade
Badges of Trade Capital Gain (no income tax) Adventure in the nature of trade,
assessed as s 4(a) income
6. Circumstances responsible to (a) Emergency / unanticipated (a) The asset is the trading stock
realization needs of fund; of taxpayer;
(b) Approved by seller (b) Anticipates opportunity to sell
7. Intention Long-term investment Short-term investment
8. Methods employed in Ad-hoc Property set up of organization to
disposing a property dispose asset:
(a) office;
(b) Employment of staff.
9. Financing arrangement
(a) term loan √ X
(b) overdraft X √
(c) financed amount <70% 70% - 100%
(d) ability to hold long term √ X
10. Accounting Evidence Non-current asset (PPE) Current asset
Distinction between capital and income
 Business activities have to be distinguished from investment
transactions.
 Business transaction fall into income taxation, i.e the gain will be
taxed but business loss is also accorded.
 The mere realization of capital appreciation is not income and thus
fall outside the ambit of ‘income tax’.
 Derivation of business income
Business income to be taxed in Malaysia, if:
i. The existence of a business source;
ii. The business transaction is ‘income’ in nature – revenue profit;
iii. Such business income is deemed derived from Malaysia.
Gross income from a business
 Gross income from business comprises sale of goods or provision of services. The scope of business
income is set out in sec. 22.
 Sec 22(1) and (2) of the Act provides:
“(1) Subject to this Act, the gross income of a person from a source of his for the basis period for YA
shall be gross income from that source for that period ascertained in accordance with the following
provisions of this Chapter(that person and that period being referred to in those provisions as the
relevant person and the relevant period respectively).
“(2) Subject to this Act, the gross income of a person from a source of his for the basis period for YA
shall include any sums receivable or deemed to have been received for that basis period in relation to
that source by way of-
a) Insurance, indemnity, recoupment, recovery, reimbursement or otherwise-
i. where such sums are in respect of the kind of outgoings and expenses deductible in ascertaining the adjusted income of that person
from that source; or
ii. Under a contract of indemnity;

b) Compensation for loss of income from that sources.”

Others (Gross income)
Sec 24(2),(3) The market value of any stock in trade which has been taken for private
purposes without payment or any stock withdrawn from business for gifts or
donation other than disposal.
Sec 24(4) Dividend income of a share dealing business
Sec 24(5) Interest income of an investment dealing business or a money lending business.
COMPUTATION OF STATUTORY BUSINESS INCOME
FOR YA 20XX
RM RM
Net profit before tax (as per I/S) XX
Add: Revenue not included
Sales omitted XX
Drawings (based on market value, if have been XX
recorded MV - COST)
Bad debt recovered (if the bad debt is previously XX XX
allowed and not yet added to I/S)
 NBI- Income
received from non-
business act
Less: Non Business Income(NBI)
Discount received NIL No need to adjust
Bad debt recovered (if already included in NIL due to these items
I/S) relate to business act
Insurance compensation on damaged stock NIL
To be found in Compensation received from supplier NIL
Other Income - Interest charged on debtors for late payment XX Need to adjust due
SOPL to these items are
Dividend income XX
not totally relate to
Interest income XX
main business act
Royalty income XX
Rental income XX
Gain on disposal of non current assets XX (XX)
NAE-Not allowed
for deduction for NAE:
tax purposes, -Not for business
Add: Non allowable expenses (NAE) purposes
need to be
adjusted (Add Remuneration to owner – salary, allowance, bonus, EPF,OT XX -Spend by owner for
back in tax comp) Salary, allowance, bonus, overtime for normal employees NIL private use
-Any cost for owner
EPF for normal and disabled employees (allowable only up XX -Provision cost
to 19% of the total remuneration, any excess is disallowed) -Damages/penalty
Lease rental - passenger vehicle, deduction restricted to XX cost
RM100,000 for vehicle < RM150,000, new vehicle (YA 2002) -Exceed the restricted
amount
RM50,000 for vehicle > RM150,000
Donations – approved or not approved, excluding for XX
Sec.34(6)(h)
Bad debt written off (trade debts) NIL Allowable exp:
Specific provision of bad debt/ doubtful debt NIL Allow for deduction
in SOPL and tax
General provision of bad debt/ doubtful debt XX (No need to adjust-
Trade debt taken over XX NIL)
Rent expense – for business purpose NIL
Interest expense – for business purpose NIL
Business expenses
 Sec 33(1)- 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.
 Allowable business expenses as it is deducted against gross income in arriving at adjusted
income of a business source.
 Has to fulfill all the following conditions for deduction from gross income of a business source:
- Each business source has to be accounted separately; Allowable exp:
- The scope of expense refers to ‘outgoing and expenses’; Allow for deduction
in SOPL and tax
- The expenses have to be wholly and exclusively’; (No need to adjust-
NIL)
- Incurred;
in the production of gross income from that business source.
Outgoing and expenses
Outgoing – encompass business losses due to theft, defalcation of
employees, bad debts etc
Expenses - refer to disbursement that come out of trader’s pocket
and involve some sort of volition
Sec 33(1)- allow ‘outgoing and expenses’ for deductibility.
‘Wholly and exclusively’ test
 Wholly- refer to the quantum of money expended;
 Exclusively- refer to the motive or object in mind of incurrence and the purpose must be the
sole purpose.
 “What is ‘money wholly and exclusively laid out for the purpose of the trade’ is question which
must be determined upon the principles of ordinary commercial trading.
 Principles of wholly and exclusively test:
- motive (must be incidental to the business)
- direct purpose for business
- commercial expediency(Payment to retrench senior employees, for relocation of
business premise, and to release from a business obligation with the sole object to
remain competitive)
- benefit to third party (expenses incurred to maintain the business efficiency)
Issue of apportionment
 Where an expense incurred is for business purposes and at the
same time gives rise to private benefit.
 In Malaysia, if taxpayer can show that a part of the expenditure
was in fact wholly and exclusively for business purpose, that part
should be given a proper deduction.
Incurred
o Money actually laid out or money for which a legal liability to pay has arisen.
o It includes amount paid, payable or becoming payable.
o Incurred Vs Provision
Provision is not given a deduction because the contingent nature would be
too uncertain to be fairly treated as an expenses.
o Accrual expenses
- Where outgoing are definitely committed, an accrual liability is said to have
existed. It would given deduction notwithstanding that there is no actual
disbursement.
- Allow for deduction in the year of accrual and not the year of payment.
In the production of gross income

All expenses attached to the performance of a business operation

for the purpose of earning income are deductible(AE).
Capital expenditure Vs Revenue expenditure
Revenue Expenditure/Expense Capital Expenditure
Allowable expenses(Deductible) Non allowable exp (Not deductible)
- Business process - Initial expenditure in setting up an income
earning asset
- Working expenses - Connected with business structure
- Circulating capital - Acquiring of income earning asset/profit
making apparatus
- recurring - Improvement to an asset: intangible or
tangible
- Fixed capital
- Once and for all
Interest expenses
Sec 33(1)(a) – interest expense on money borrowed would be
allowed as a deduction (AE) under the following 2
circumstances:
(i) the loan is employed in the production of gross income; or
(ii) the loan is laid out on asset used or held in that period for
the production of business income
Rent
Allowed a deduction (AE) if it was:
(a) payable for occupying the land/building;
(b) used in relation to the period;
(c) incurred for the purposes of producing gross income of that
source.
Repair & renewal
Capital in nature Revenue in nature
Not deductible (NAE) Deductible (AE)
(i) Improve on an asset (i) Repairs of premises, plant,
machinery, fixtures on employed in the
production of gross income
(ii) Acquisition repair (ii) Replacement on part of the asset
(iii) Replacement on whole of the asset (iii) Renewal
(entirely)
(iv) Maintaining the commercial
viability of an asset
 Bad and doubtful debts
 Trade debts are debts arise in the course of business.
 Public Rulling 4/2019:
Specific provision for bad debts - Deductible (AE)
Assumption General provision for bad debts - Not deductible (NAE)
(based on
percentage)
Bad debts written off - Deductible

 Trade debts taken over (acquisition another business)- Not

deductible (NAE)
Employer’s contribution to approved schemes -
EPF
 Sec 34(4)(a) – provides for some ceilings on the deduction, the
deduction is allowed in respect of the employer’s contribution to an
approved scheme is the lower of:
(i) the contribution; or
(ii) 19% of employee’s remuneration
Remuneration include monthly wages, allowances, commission and
bonus. It does not include service charge, overtime payment,
gratuity, retirement benefit, retrenchment benefit and travelling
allowance.
Legal and professional expenses
 Damages – Not deductible, not trading expenses
 Cost of tax appeal – Not deductible, not a trading expenses
 Violation of law - Not deductible, not a trading expenses
Advances to employees
 Loss resulting from employee’s defaulting on loan – Not deductible
 Advances to employee – Not deductible, not a trading expenses
Defalcation/business loss
Defalcation by employee (trading loss) – Deductible (AE)
Defalcation by director – Not deductible (NAE)
Premium on Keyman insurance
 Is the insurance taken for the life of an employee or a director who is crucial to
the profitability of viability of a company.
 The objective of the keyman insurance is to cover loss of business income due
to sudden death, injury or accident of key employees.
 The premium is tax deductible if:
(a) Policies have no element of investment;
(b) The right to insurance proceeds remains with the employer / company;
(c) It is not insured on director of a controlled company, partner in a partnership
or sole proprietor.
Lease rental
Passenger vehicle Commercial Vehicle
Car, motorcycle, bicycle & etc Lorry, truck, van, bus,
wagon, taxi

If Cost > RM150,000 Deductible up to RM50,000 Deductible – no limit

If Cost < RM150,000 & Deductible either
New Vehicle RM100,000 or Cost of
Vehicle, whichever lower.
Example- Mac 2016 Q3, Add info No.8-YA 2015
Solution- Mac 2016 Q3, Add info No.8-YA 2015
New Proton Axia – Passenger Vehicle
Cost RM220,000 >RM150,000
So, AE for Acc LR restricted to RM50,000
Amount Excess RM50,000, need to be
add back as NAE
YA 2015

31/12/2015
31/12/2014

3,200x4 Lease Rental for 2015 Acc LR =(12800+38400)

Acc. Lease Rental = 51,200
=12,800 = 38,400
Max All Exp RM50,000(Cost >150K)
(51.2K-50K)= 1,200 is Non all exp
37,200 - AE 1,200 - NAE
 9 items in entertainment relates to wholly sales-
100% deductible
I. Food and drinks for launching of a new product
II. Redemption vouchers given for purchase made.
III. Discount vouchers, shopping vouchers, concert or movie tickets, meal or gift vouchers and
cash vouchers.
IV. Free gifts for purchase exceeding a certain amount.
V. Redemption of gifts based on a scheme of accumulated points.
VI. “free” maintenance/service charges or contribution to sinking fund by property developers.
VII. Lucky draw prizes to customers for purchase made
VIII. Expenditure on trips given as an incentive to dealers for achieving the sales target
IX. Light refreshment to trade customers at the business owner’s premises.
 Leave passage
Public Ruling No. 4/2015
The provision of leave passage benefit provided by an employer to its employees - proviso
(viii) to paragraph 39(1)(l) of the ITA
 Expenditure on leave passage benefit provided by an employer to its employees to facilitate a
yearly event within Malaysia which involves the employer, employees and immediate family
members of the employees.
Example 9
Era Gemilang Sdn Bhd held a family day trip for its employees at Pulau Manukan, Sabah to foster family
values among its employees. The total cost incurred amounted to RM70,000 comprising cost of travel
totalling RM40,000 and cost of food, drinks and accommodation totallingRM30,000.
Era Gemilang Sdn Bhd is allowed the following deductions:
(a) RM40,000 for the cost of leave passage by virtue of proviso (viii) to paragraph 39(1)(l) of the ITA; and
(b) RM30,000 for the cost of food, drinks and accommodation by virtue of proviso (i) to paragraph 39(1)(l)
of the ITA.
Donation, Contribution & Zakat
 All expenses relate to donation, contribution or zakat are not allow for
deduction, EXCEPT:
I. Contribution/provision of library facilities
II. Social responsibility payment-approved by Minister
III. Provision and maintenance of child care centre, for the employees’ benefit
IV. Musical and cultural group – approved by Minister
V. Sponsoring Arts or cultural activity:
-tax deduction up to RM700,000 (local + foreign) – approved by Minister
-tax deduction up to RM300,000 (foreign)
Contribution/provision of library facilities
 Sec 34(6)(g) - allows donation in kind and cash contributions.
The donation in kinds are, however, restricted to the provision of
library facilities which are accessible to the public,
i.e such library has to open to the public such as national or state
library.
The amount of deductible is restricted to RM100,000 for each YA.
 Sec 44(8)- allows cash contribution restricted to RM20,000
Social responsibility payment
Sec 34(6)(h) - Social responsibility payment such as
i. Expenditure incurred on the provision of services, public
amenities; or
ii.Contribution to a charity or community project
– approved by the Minister, it would be accorded full
revenue deduction.
Administration fee
Practical training to non-employees – deductible expenses(AE)
Information technology related expenditure – deductible expenses (AE)
Cost of developing website – 20% deductible for YA (spread throughout 5 years)
Accounting fees – deductible expenses (AE)
Secretarial fees – deductible, restricted to RM5,000
Taxation fees: – deductible, restricted to RM10,000
– submission of income tax return (deductible wef YA 2016);
– submission of estimates of tax (deductible wef YA 2015);or
– submission of GST return (deductible wef YA 2015)
Other fee
 Entrance fees to trade association – Not Deductible (NAE)
 Annual fees to trade association – Deductible expense (AE)
 Legal fees on recovery of trade debts – Not Deductible (NAE)
 Legal fees on tax appeal / purchase of asset – Not Deductible (NAE)
Others
 Guarantee, commitment fees & bank commission -AE
 Compensation paid to employee for dismissal of employment -AE
 Employee benefits – medical expenses, payment of monthly bills, travelling
allowance, petrol card, PDA, mobile phone - AE
 Business expenses in respect of disabled person - AE
 Settlement of employee’s PTPTN loan by employer - AE
 Loss on disposal of non current asset – NAE
 Depreciation - NAE
Less: Double Deduction
No. List of Double Deduction
1 Remuneration for disabled employee – salary, allowance, bonus
2 Remuneration paid to senior citizen or ex-convicts(Age>=60 & designated)
3 Approved research and development expenses:
-Cash contributions to approved research institutes
-Service fee to approved research institutes or companies
-Service fee to an R&D company
4 Interest payable on loans to small scale business
5 Overseas expenses for promotion of tourism
6 Export credit insurance premium – conventional or takaful
7 Expenses for promotional of exports:
-Registration of patent, trademarks and product licensing in overseas
-Approved international trade fair in Malaysia
-Professional services
-Invitation to importers
8 Expenditure incurred on approved training
Double Deduction
No. List of Double Deduction
9 Scholarship to students - technical and vocational level, diploma and degree in
engineering and technology
10 Approved internship programme
11 Ship freight charges for shipping goods from Sabah and Sarawak to Peninsular
Malaysia
12 Vendor development programme
13 Skim Latihan 1 Malaysia – training programme for unemployed graduates
14 Provision and maintenance of child care centre & child care allowance to
employees
15 Advertising Malaysian brand name goods within Malaysia/overseas
16 Quality systems and standards & halal certification
ADJUSTED BUSINESS INCOME XX
Add: Balancing charge XX

Less: Capital Allowances

Unabsorbed CA – b/f XX
Current year CA XX
Balancing allowance XX (XX)

STATUTORY BUSINESS INCOME XX

Less: Business losses b/f (XX)
NET STATUTORY BUSINESS INCOME XX
THE END