1. BUSINESS DEDUCTIONS By: Associate Professor Dr. GholamReza Zandi zandi@segi.edu.my

2. General Deduction Provision The adjusted income of a person from a source for a year of assessment is ascertained by deducting from the gross income all outgoings and expenses wholly and exclusively incurred during that period by that person in the production of gross income from that source (sec 33 ITA). 2

3. General Deductions (Cont’d) General Principle of Deductions [sec 33(1)(a)] Adjusted Income = Gross income less deductible expenses. The deductible expense must be incurred in the production of income chargeable to income tax. The expenses must be incurred during the relevant basis period. 3

4. Specific Provisions Sec. 33 (1) (a) - (d): Sets out some specific deductions which were wholly and exclusively incurred in the production of gross income.  Sec 33 (1) (a): Interest expenses  Sec 33 (1) (b): Rental payment  Sec 33 (1) (c): Repairs and Renewals  Sec 33 (1) (d): Other prescribed deductions made under sec 154. 4

5. Interest Expenses Interest expense is deductible under sec 33(1)(a) whether it is payable on moneys borrowed for purposes of acquiring capital assets or paying trade debts. The main issue is whether the money borrowed (on which the interest is payable) is connected with the taxpayer’s income earning operations. If it is not, then interest payment is not deductible 5

6. Interest Expenses (Cont’d) If the money borrowed is used for 2 purposes, one for the purpose of producing income (business purpose) and one which is to lend or invest, the interest payable on the borrowing must be apportioned into the 2 components and only the business related interest is allowed for business deduction [sec 33(2)]. 6

7. Rent and Repairs Rent payable in respect of any land or part thereof occupied for the purpose of producing gross income is deductible in arriving at adjusted income of a person. Repairs - Two types of repair expenses: o Expenses incurred on the repair of premises, plant, machinery or fixtures employed in the production of gross income ; and o Expenses incurred on the renewal, repair or alteration of any item (Example utensils normally having a short life span) employed in producing gross income. 7

8. Rent and Repairs (Cont’d) Other deductions as may be prescribed by Minister will be allowed to determine taxpayer’s adjusted income) [sec 33(1)(d)]. Examples:  Income Tax (Deduction for Employment of Disabled Persons) Rules 1982  Income Tax (Deduction for the Cost of Acquisition of Proprietary Rights) Rules 2002 8

9. Disallowable Expenditures Disallowable expenditures are listed out in sec 39 ITA. Domestic and private expenses are not deductible [sec 39(1)(a)]. Example: Wages of domestic helpers, private phone calls Expenditure not wholly incurred in the production of gross income are not deductible [sec 39 (1)(b)]. Example: Donations to political parties Expenses must not be on capital items or capital in nature, to be deductible [sec 39(1)(c )]. 9

10. Disallowed Expenditure (Cont’d) Contribution to a non-approved scheme -sec 39(1)(d). Lease rentals for the lease of motor vehicles: sec 39(1)(k) some conditions apply. 10

11. Disallowed Expenditure (Cont’d)  Non-deductibility of entertainment expenses is covered under sec 39(1)(l) ITA.  The provision stated under items (i) to (vi) of sec 39(1)(l) ITA provide circumstances when entertainment expenses are allowed a deduction. 11

12. Other Deductions Bad and doubtful debts [sec 34 (2)] – Allows a deduction for any debt which is reasonably estimated in all the circumstances of the case to be wholly or partly irrecoverable at the end of the basis period. Deductions are only given for trade debts. 12

13. Double Deductions There are a number of double deductions permitted under the ITA 1967 as incentives to encourage certain sectors.  Remuneration to disabled employees who are unable to perform the work of a normal person,  Insurance premiums to a Malaysian insurance company for import/export activities,  Training of handicapped persons,  Promotion of exports and professional services,  Research, and  Freight charges paid to a Malaysian shipping company. 13

14. The End