DEDUCTIBLE EXPENDITUREDeductible •REVENUE EXPENDITURE•CAPITAL ALLOWANCES

DEDUCTIBLE EXPENDITURE•A 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 Expenditure•A 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 arise• Withholding tax-tax imposed on non-residents who have

business dealings in M’sia. Payments are made net of tax –sections 4A,15,107,107A.109, 109A

• Corporate tax paid before dividend distribution• Foreign tax paid.

THE LAW

SECTIONS•33•34•34A•34B•35•39Sections 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 & EXCLUSIVELY

Bentlys Stokes & Lowless (33TC 491)•Wholly- refers to quantum of money

expended•Exclusively –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 claimed

•Legal fees •Car maintenance•Telephone cost

Held: only legal fees were within section 33

North Borneo Timbers Bhd. V DGIR (1998) 4 MLJ706

• Tax 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 OF…INCOME FROM THAT SOURCE-DGIR V International Foods

Commissioned efficiency study and retrenchment exerciseAnd paid cost

NESTLE (M) SDN BHD

COST

INTL FOODS SDN BHD

SUBSIDIARY

Employees & Business transferred out

LIQUIDATED

BY THAT PERSON IN THE PRODUCTION OF…INCOME FROM THAT SOURCE

DGIR v International Foods Sdn. Bhd. (2000)7 MLJ 102

• Taxpayer did an efficiency study and retrenchment exercise and claimed cost as deduction

• following 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 Railway•The right to receive or the liability to pay,

…….notwithstanding that the date for actual payment is outside the year.

• 2 CONDITIONS MUST BE SATISFIED•The liability must be certain, not contingent•The benefit, in respect of which the liability is

incurred, must be exclusively referable to the year in which it is sought…as 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 COIN

Deductible under section 33 but not prohibited by section 39

Capital Or REvenueVALLAMMBROSA RUBBER CO LTD V FARMER -5TC529• Vallambrosa owned a newly planted rubber estate. Trading

had commenced on Vallambrosa’s 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 year…that 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 CON’T

•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.

VALLAMMBROSA CON’T

Not Deductible if capital in nature•Enduring benefit•Fixed capital v circulating capital•Identifiable asset•Business structure v process•Initial expenditure

Capital allowances and tax adjustments in perspective

• Income for accounting but NOT for tax

• Income for tax but NOT for accounting

• Expenditure for accounting but NOT for tax

• Expenditure for tax but NOT for accounting

Capital allowances

• CERTAIN expenses that are capital in nature can be claimed as a deduction

SCHEDULE 3 outlines these

TYPES OF ALLOWANCES

• Capital allowances- plant, machinery,furniture, fittings, vehicles

• Industrial building allowance- factory

• Agricultural allowance-farm, plantation

• Forest Allowance- timber extraction

• Mining Allowance- metal, mineral

What qualifies• Is carrying on business

•Incurred on plant and building by owner

•Assets 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 goods…fixed or moveable, live or dead, which he keeps for permanent employment in his business”

Case: Yarmouth v France

What is NOT plant

Human beingLight bulb

Canopy

•Not functional in supplying the product of the business eg. Canopy in petrol kiosk

•If contributed to enhancing the ambiance not just functional-light bulb

•Cost 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 deduction

Staggered over a few years but commencing in the year incurred.

• Initial allowance• Annual allowance

Industrial buildingfactory dock

mineUtility building-electricity

Industrial Building

A building used in the manufacture of any product

What qualifies

Everything from planning to construction of building

Not land and cost relating to acquisition of land

References

• Chapter 9

• Chapter 12

• Chapter 13