Chapter 8 PTX1033/Business

Income

CHAPTER 8

BUSINESS INCOME

1.0 INTRODUCTION

Business income is assessable under s 4(a) of the Act. The Act provides preferential treatment
to business income and it is therefore important to understand its scope.

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Adjusted income
Gross income RM XX
Less : Deductible/Allowable expenditure (XX)
Adjusted Income XX 5

Deductible/Allowable expenditure – Section 33

Subject to this Act, the adjusted income from a source for the basis period for a year of
assessment shall be an amount ascertained by deducting from the gross income from that
source for that period all outgoings and expenses wholly and exclusively incurred during that
period in the production of gross income from that source. Example : salary to employees,
office rental, insurance, utilities

2.0 SPECIFIC DEDUCTION

Specific deductions – Section 34

Specifically legislated to allow certain specific expenses revenue deductions notwithstanding
such expenses do not satisfy under Sec 33 ‘wholly and exclusively’ test. These expenses are
encouraged by the Government as they can achieve some national objectives or bring social
benefits to the public.
(i) Sec 34 (2) Specific provision for bad debts on trade debtors arising from sales

(ii) Sec 34 (4) 19% of the employees’ remuneration

(iii) Sec 34 (6)(e) Provision of equipment and renovation expense to disabled person,
necessary to assist in the performance of employees’ duties

(iv) Sec 34 (6)(g) Provision of library facilities to public library, contribution to public
libraries of schools and higher educational institutions of up to
RM100,000

3.0 DOUBLE DEDUCTION

Refers to the revenue expenses incurred that us given twice the amount of deduction in
arriving at the adjusted income of a business. This is a tax incentive provided by the
government to provide tax relief to business persons and to encourage the use of promoted
activities such as:

(i) Research expenditure [section 34, ITA 1965]

Any research expenditure including contributions in cash to approved research
companies/institutions approved by Minister

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(ii) Remuneration of handicapped employees [PU (A) 73/82]

Remuneration paid to an employee who is physically and mentally disabled and is not able
to perform the work of a normal person

(iii) Quality standard and halal certification

(iv) Approve training

4.0 NON ALLOWABLE EXPENSES

Non-allowable expenses that are shown in the profit and loss account are non-tax deductible.
Such expenses have to be added back. Non- allowable expenses can be categorised into four
groups:

 Expenses that are not incurred

i) General provision for bad debt and doubtful debt
ii) Provision for gratuity
iii) Provision for warranty cost, stock obsolescence
iv) Depreciation
v) Amortisation for renovation of premises
vi) Unrealized exchange loss in relation to acquisition of raw material
vii) Provision for repair and maintenance
viii) Preliminary expenses written off

 Capital expenditure
i) Cost of printing and distribution of annual report
ii) Stamp duty and secretarial fees for increase share capital
iii) Stock listing expenses
iv) Pre-commencement business expenses
v) Entrance fee to club
vi) Payment of fines or penalty or any payment relating to violation of laws
vii) Donation and business zakat
viii) Loss on disposal of assets
ix) Fess for designing company logo

 Expenses related to investment income

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i) Any expenses relating to the investment income is not deductible against business
income. It has to be added back.

 Section 39 prohibited expenses

i) Private and domestic expenses
ii) Expenses that are not wholly and exclusively used for producing gross income
iii) Capital employed
iv) Contribution to unapproved pension
v) Leave passage

Miscellaneous expenditure

Deductible/ Non deductible/

Allowable Non allowable
Repairs Normal repair Initial repair

An entire
Replacement Part of an entire
assets

Provision of bad debts Specific General

Entertainment expenses For employees -

Relates wholly to sales -
For client (50% NOT
For client (50% allowable)
allowable)
For potential client

5.0 APPROVED DONATION

The gift of money to the Government, State Government, local authority or an approved
institution or organization shall be given a deduction in arriving the total income. Any approved
donation made during the basis period is cannot be carried forward if there is no sufficient of
aggregate income. With effect from YA 2009, the amount of cash donation to approved
institution is limited to 7% of the company’s aggregate income for that year. However, there is
no limit on cash donation to the Government, State Government, or a local authority.

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5.1 Gift of artefact, manuscript or painting [s 44 (6A)]

Generally, donation has to be in cash and not in kind but affect from YA 1997 any gift of
artefacts, manuscript or painting to the Government or state government would be given a
deduction and the amount of deduction would be based on valuation by the Museum and
Antiquities.
5.2 Donation to approve libraries [s 44 (8)]
Limited to RM20,000 of cash contribution made by the company for the provision of library
facilities which are accessible to the public.
Section 44 (8) and section 34 (6) (g) are mutually exclusive. An amount claimed under section
34 (6) (g) would not accord any deduction under Section 44 (8).

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EXAMPLE

Ummu Aiman(owner) operates a boutique under the name of Mu’allimah Boutique. The
forecasted trading profit and loss accounts for the year ended 31 December 2019 are as
follows:
RM RM
Gross sales 350,980
Less : Cost of sales 186,710
Gross profit 164,270

Profit from sales of motor van 34,200

Tax exempted dividends 3,110 201,580
Less : Expenses
Salary, bonus and EPF 1 78,420
Interest 2 8,000
Bad debts 3 1,920
Entertainment 4 15,800
Rent 5 6,000
Water and electricity 6 3,200
Telephone 6 3,690
Depreciation 7 3,520
Taxes 8 3,630
Donations 9 14,000
Motor vehicles expenses 10 2,720
Miscellaneous expenses 11 5,900 146,800
Net profit before tax 54,780

Notes to the accounts :

1. Salary, bonus and EPF consists of the following :

Salary Bonus EPF
RM RM RM
Ummu Aiman 28,000 9,700 6,480
(owner – Add Back)
Bilal 12,000 3,200 2,950
Ummi Khalsom (disabled) 11,000 3,200 1,890
(double deduction)
2. Interest expense relate to RM30,000 loan was used to purchase assets for the business.

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3. Trade debts written off were RM620(deductable), while specific and general provisions for
bad debts were RM530 and RM770 respectively.
4. Entertainment expenses include RM12,600 (deduct) family day celebration for the
employees and their families. The remaining RM3,200 was incurred for entertaining clients.
5. Ummu Aiman rented a double storey shop house. The ground floor was used for the
business while her family occupied the upper floor. The Inland Revenue Board has agreed
that 65 percent of the rent were for business purposes
6. Only 50% of the water and electricity expenses were for private usage and 40% of the
telephone expenses were for domestic use.
7. Depreciation is provided on the fixed assets used in the business. The capital allowance
related to these assets are RM2,730, The balancing charge related to the sale of motor
vehicle is RM8,450.
8. Taxes consist of the following:-
RM
Income tax of Ummu Aiman 2,710
Road tax for motor vehicle used in the business 680
Penalty on late submission of business's income tax return 240

9. Cash donations of RM2,000 were made to a Penang political party and RM12,000 to the
Kelantan State Library .
10. It was agreed that 85% of the motor vehicle expenses was for business use.
11. Miscellaneous expenses include RM3,170 air fares to Mesir for Ummu Aiman's daughter.
12. Ummu Aiman took some supplies costing RM2,300(harga cost) for personal consumption.
The market value of these supplies(drawing) was RM3,700(harga jualan) and the drawing
was not recorded elsewhere. – COST OF SALES

Required:

Starting with net profit before tax, compute the statutory business income of Ummu Aiman for
the year of assessment 2019. (Indicate 'nil' or '-' in the appropriate column for any item/s that
does not require any adjustment).

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COMPUTATION OF STATUTORY INCOME FOR UMMU AIMAN FOR YA 2019

Net profit before tax 54,780

(12) (+) Drawing (3,700-2,300) (Sales – cost)-not yet 1,400
recorded
( - ) Others income
Profit –sales motor van 34,200
Dividend 3,110 (37,310)
(+) Non-Allowable Expenses
(1)Salary, bonus & EPF – Ummu Aiman 44,180
(1)Salary & bonus – Bilal Nil
(1)EPF - Bilal [19% * 15,200 = 2,888 – 2,950 62
(1)EPF – Umi Khalsom [19% * 14,200 = 2,698 – 1,890] Nil
(2)Interest on loan purchase assets Nil
(3)Trade debt written off Nil
(3)Specific bad debt Nil
(3)General bad debt 770
(4)Family day employees Nil
(4)Entertain client [50% * 3,200] 1,600
(5)Rental – business Nil
- Private [35% * 6,000] 2,100
(6)Water & electricity – business Nil
- Private [50% * 3,200] 1,600
(6)Telephone – business Nil
- Private [40%* 3,690] 1,476
(7)Depreciation 3,520
(8)Income tax of Ummu Aiman 2,710
(8)Road tax for motor vehicle - business Nil
(8)Penalty on late submission income tax return 240
(9)Donation political party 2,000
(9)Donation Kelantan State Library 12,000
(10)Motor vehicle expenses – business Nil
- Private [15%*2,720] 408
(11)Miscellaneous expenses - private 3,170 75,836
(-) Double Deduction
(1)Salary & bonus – disable (14,200)
ADJUSTED INCOME 80,506
(+) Balancing charge (7) 8,450
( - ) Capital Allowance (7) (2,730)
STATUTORY INCOME 86,226

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