Deductible and Non-deductible expenses 

For corporate tax computation, the chargeable income of a Company are the total income to be taxed after taking into consideration the tax adjustments such as disallowed expenses, non business income, capital allowances and etc.

Here we will go in further on deductability of expenses in your business. Knowing which expenses are non-deductible and deductible in the production of income will help you to minimise cost in the non-deductible expenses. Here are some of deductible expenses in taxation that you should be aware of.

GENERAL DEDUCTION OF EXPENSES

Under the s33(1) of Income Tax Act 1967, “…the adjusted income of a person from a source for the basis period for a year of assessment 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 and exclusively incurred during that period by the person in the production of gross income from that source….”

The few key criteria to general deduction rule to ascertain whether an expenditure is tax deductible are:

  • wholly and exclusively incurred
  • in the production of gross income
Therefore, the expenditure incurred for private and non business purpose are strictly not tax deductible. (such as private entertainment, expenditure for personal or family benefits). Besides, the expenditure incurred must be “in the production of gross income” which means the expenditure must be “revenue expenditure” in nature. Initial expenditure relating to pre-commencement of business or capital expenditure are generally not deductible.

The below are some expenditures generally deductible for tax:
  • rent expenses of business premises
  • repair and maintenance of premises, plant and machinery
  • loan interest or borrowing cost (subject to interest deduction restriction)
  • employee salaries, allowance and statutory contribution
  • stock in trade (refer to sec 35)
  • and many more

Sec 34 of the Income Tax Act 1967 also specify some special tax deduction in arriving at adjusted income:
  • Bad debts or specific provision for doubtful debts (to comply with IRB public ruling 4/2019)
  • Contribution to the approved pension scheme
  • Replanting expenditure
  • Expenditure on research and development expenditure
  • Contribution to an approved research institute
  • Expenditure on treasury shares; and many more

Non-deductible expenses

Generally an expenditure is not tax deductible if:
  • Not wholly and exclusively incurred for the purpose of business (e.g. private expense)
  • Pre-commencement expenditure
  • Capital expenditure
Besides the above, the Income Tax Act 1967 also specially listed down in Sec 39- deduction not allowed, such as:
  • Domestic or private expenses;
  • Any expenses not being wholly and exclusively laid out expended for the purpose of producing the gross income;
  • Any capital withdrawn or any sum employed or intended to be employed as capital:
  • Any contribution to not an approved pension scheme;
  • Any payment from Malaysia to non resident where withholding tax is not withheld;
  • Any sum payable to State Government or Minister for the use of a license or permit to extract timber;
  • Any sum paid by way of rentals in respect of a motor vehicle (except for commercial transportation), in excess of fifty thousand ringgit (RM50,000);
  • A sum equal to 50% of any expenses incurred in the provision of entertainment (with some exemptions); and many more 

Conclusion

For expenditures not deductible for tax, the chargeable income of a Company will be higher as a result and paying more income tax. Hence, careful review and consideration is needed. 


Finally, the Company must also remember proper supporting documents and records must be kept and retained in Malaysia at least 7 years, to substantiate the deduction for tax purpose. 


Under Sec 82 of Income Tax Act 1967, “…..shall keep and retain in safe custody sufficient records for a period of seven years from the end of the year to which any income from that business relates to enable that income from that business for each year of assessment or the adjusted loss from that business for the basis period for any year of assessment to be readily ascertained….”.
For the purposes of this section, “records” include—
a) books of account recording receipts and payments or income and expenditure;
b) invoices, vouchers, receipts and such other documents as in the opinion of the Director General are necessary to verify the entries in any books of account; and
c) any other records as may be specified by the Director General under subsection (3). 


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