DEDUCTIBLE EXPENDITUREDeductible REVENUE EXPENDITURECAPITAL ALLOWANCES
DEDUCTIBLE EXPENDITUREA tax deduction represents an expense incurred by a taxpayer that can be subtracted from taxable income.RESULT: the tax deduction will lower overall taxable income . Gross Taxable Income . RM 10,000 Less tax deductions . RM 2,000 Income subject to tax . RM 8,000
Difference Between Tax Credit & Deductible ExpenditureA Tax Credit is a relief against total tax liability
Income subject to tax RM 8,000 Tax @ 10% RM 800Less TAX CREDIT RM 100Tax to be paid RM 700
How does a TAX CREDIT ariseWithholding tax-tax imposed on non-residents who have business dealings in Msia. Payments are made net of tax sections 4A,15,107,107A.109, 109ACorporate tax paid before dividend distributionForeign tax paid.
THE LAWSECTIONS333434A34B3539Sections 33 and 39 relate to all income, the other sections are applicable to business source
The Law- section 33(1)Subject to this Act, the adjusted income of a person from a source for the basis period for a YA 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 & exclusively incurred during that period by that person in the production of gross income from that source .
WHOLLY & EXCLUSIVELYBentlys Stokes & Lowless (33TC 491)Wholly- refers to quantum of money expendedExclusively refers to motive or object in the mind of incurrence & the purpose must be the sole purpose.
DGIR V Dr. Arunjit Dutt (1995 2 AMR 1430)
Dr. was dismissed and obtained compensation. As deductions he claimedLegal fees Car maintenanceTelephone cost
Held: only legal fees were within section 33
North Borneo Timbers Bhd. V DGIR (1998) 4 MLJ706Tax payer a timber logger and exporter had a fleet of heavy equipment for this business. Maintained a stock of spare parts for equipment. But when equipment lost its useful life, the value of the unused spare parts were also written off and claimed as a deduction under sect 33. Revenue disputed.Held: The spare parts were wholly & exclusively necessary for the machinery that produced the income. Sect 33 applies.
BY THAT PERSON IN THE PRODUCTION OFINCOME FROM THAT SOURCE-DGIR V International Foods
Commissioned efficiency study and retrenchment exerciseAnd paid costNESTLE (M) SDN BHD
COSTINTL FOODS SDN BHDSUBSIDIARYEmployees & Business transferred out LIQUIDATED
BY THAT PERSON IN THE PRODUCTION OFINCOME FROM THAT SOURCEDGIR v International Foods Sdn. Bhd. (2000)7 MLJ 102Taxpayer did an efficiency study and retrenchment exercise and claimed cost as deductionfollowing this the Company went into voluntary liquidation and share capital acquired by another subsidiary which continued the operations with the same employees.Held: The efficiency study was conducted to liquidate and not to produce income.The retrenchment exercise was for the benefit of the successor SO BOTH not within section 33.
Incurred during that periodOwen V Southern RailwayThe right to receive or the liability to pay, .notwithstanding that the date for actual payment is outside the year.2 CONDITIONS MUST BE SATISFIEDThe liability must be certain, not contingentThe benefit, in respect of which the liability is incurred, must be exclusively referable to the year in which it is soughtas an expense
EXampleSofia Sdn. Bhd. Makes a provision for warranty claims that could possibly arise, for RM 25,000 which is charged in accounts as an expense in YE 2008.The provision is not incurred-only an estimate.
Sulong Sdn. Bhd. manufactures toasters and has consumed RM 10,000 in electricity for YE 2008 but no bill has been issued,The expense is incurred- benefit obtained and certain
THE OTHER SIDE OF THE COINDeductible under section 33 but not prohibited by section 39
Capital Or REvenueVALLAMMBROSA RUBBER CO LTD V FARMER -5TC529Vallambrosa owned a newly planted rubber estate. Trading had commenced on Vallambrosas new estate, about 1/7th of which was productive - rubber trees do not yield rubber until they are about six years old but they still require attention during those unproductive years. Expenditure of a revenue nature was incurred each year mainly on superintendence; weeding and pest destruction for the whole estate while only 1/7th yielded income. The Crown argued that 6/7ths of the expenditure:was not referable to profits reaped within the year, and represented capital improvement of the estate.
P/s Venue-Latin to come Re venue - to keep coming, to re turn Capital Latin meaning origin or head
The Lord President, Lord Dunedin, saying at page 535:Supposing a man conducted a milk business, it really comes to the limits of absurdity to suppose that he would not be allowed to charge for the keep of one of his cows because at a particular time of the yearthat cow was not in milk and therefore the profit which he was going to get from the cow would be outside the year of assessment Held: all maintenance was revenue in nature and none Capital in nature.VALLAMMBROSA CONT
The unproductive trees did not increase their value because of the weeding. Rather the expense prevented them from decreasing in value. but in a rough way I think it is not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year.
Not Deductible if capital in natureEnduring benefitFixed capital v circulating capitalIdentifiable assetBusiness structure v processInitial expenditure
Capital allowances and tax adjustments in perspectiveIncome for accounting but NOT for taxIncome for tax but NOT for accountingExpenditure for accounting but NOT for taxExpenditure for tax but NOT for accounting
Capital allowancesCERTAIN expenses that are capital in nature can be claimed as a deduction
SCHEDULE 3 outlines these
TYPES OF ALLOWANCESCapital allowances- plant, machinery,furniture, fittings, vehiclesIndustrial building allowance- factoryAgricultural allowance-farm, plantationForest Allowance- timber extractionMining Allowance- metal, mineral
What qualifies Is carrying on businessIncurred on plant and building by ownerAssets used in the business
WHAT is PLANT
Definition of plant whatever apparatus..used by a businessman for carrying on his business NOT his stock-in-trade but all goodsfixed or moveable, live or dead, which he keeps for permanent employment in his businessCase: Yarmouth v France
What is NOT plant
Human beingLight bulbCanopyNot functional in supplying the product of the business eg. Canopy in petrol kioskIf contributed to enhancing the ambiance not just functional-light bulbCost of conversion
Accounting TaxCost of asset Qualifying Expen(depreciation) (Capital Allowance)-----------------------------------------------------------Net book value Residual Expen/ Tax written down value-----------------------------------------------------------(sales price) (sales price)-----------------------------------------------------------Loss/(Gain) Balancing Allowance/(charge)
How do you claim deductionStaggered over a few years but commencing in the year incurred.Initial allowanceAnnual allowance
Industrial buildingfactorydockmineUtility building-electricity
Industrial BuildingA building used in the manufacture of any product
What qualifiesEverything from planning to construction of buildingNot land and cost relating to acquisition of land
ReferencesChapter 9Chapter 12Chapter 13