ESSAY QUESTION
1. Two types of expenses incurred of the benefit of employees qualify for special
deduction under Section 34(6) of the Income Tax Act 1967.
There are two types of expenses incurred for the benefit of employees qualify for
special deductions under [Section 34(6) of the Income Tax Act 1967]:
• Expenditures incurred by an employer in provision and maintenance of a
childcare centre for the benefit of the employees are deductible under Section
34(6)(i) of the Income Tax Act 1967 in computing the adjusted income from
the employer's business. It is not allowed as a tax deduction when the capital
expenditure incurred on land, premises, buildings, structures, or permanent
work or on modifications, additions, or extensions to them. However, costs that
qualify for the special deduction include salaries for childcare centre staff,
utilities, maintenance, and purchase of equipment such as toys and furniture.
Besides, it must be exclusively for the benefit of the employer's employees and
operated in compliance with the relevant childcare regulations. Even if the
childcare centre is presented outside the business premises, an employer is still
eligible for a deduction under this provision. Therefore, establishing a childcare
centre with the aim of helping parents take care of their children and ensuring
their children are professionally managed and cared for while the parents are at
work.
• Expenditure on equipment for disabled employees or on the alteration or
renovation of premises for the benefit of disabled employees under Section
34(6)(e) of the ITA 1967. The expenses will be allowed if the disabled person
is registered with the Department of Social Welfare (DSW), has the Disabled
Person's Card, and must provide a certification from the Social Security
Organization (SOCSO) according to the decision of the government doctors.
The provisions that qualify for the special deductions include any equipment
such as braille printers, hearing aids, and more, and renovation or alterations of
premises like wheelchair ramps, accessible washrooms, and more. Next, it does
not consider special deductions when capital expenditure on land or new
buildings and modifications is not specifically intended to assist disabled
employees. Thus, this encourages companies to support and provide
employment opportunities for people with disabilities.
A notable case law related to expenses incurred for the benefit of employees is Ketua
Pengarah Hasil Dalam Negeri v Asia Energy Services Sdn Bhd (2020). Asia Energy
Services gave their employees stock options as part of their salary package. The
company said these expenses were necessary to reward and keep their employees
happy, which helped the business. They wanted to deduct these costs when calculating
their taxes, but the tax department (Ketua Pengarah Hasil Dalam Negeri) said these
costs could not be deducted because they were not directly for the company’s business.
However, the court agreed with Asia Energy Services. It said giving employees stock
options helps the company by motivating staff and making them more productive. This
case demonstrates that expenses incurred for the benefit of employees, such as stock
compensation schemes, can be considered tax-deductible if they are proven to
contribute directly to the operations and success of the business.
2. The tax treatment of entertainment expenses.
Entertainment expenses in Malaysia are governed by Section 39(1)(l) of the Income
Tax Act 1967 (ITA). This section states that only entertainment expenses related to
business purposes qualify for tax deductions, divided into fully deductible, partially
deductible, or non-deductible categories.
• Entertainment Expense which Qualifies for a One Hundred Percent
(100%) Deduction
This deduction includes employee-related expenses such as annual dinners,
festive celebrations, team-building events, promotional activities like product
launches or exhibitions, and related to sales arising from the business as well as
leave passage benefit from employer. These expenses are considered essential
for fostering employee morale, enhancing productivity, or generating business
revenue. To claim these deductions, businesses must maintain detailed records,
such as receipts, invoices, and attendee lists, to substantiate the purpose of the
expenses.
• Entertainment Expense which Qualifies for a Fifty Percent (50%)
Deduction
These include costs incurred for entertaining clients, suppliers, or other business
associates, such as meals, refreshments, or corporate hospitality. The partial
deduction acknowledges that such expenses, while business-related, might also
have personal or non-business elements. Accurate documentation and
categorization of these expenses are crucial to ensure compliance and avoid
disputes.
• Non – deductible Entertainment Expenses
non-deductible entertainment expenses include those not related to business,
such as lavish personal events or illegal activities. Such expenses are deemed
private consumption or unethical and are entirely disallowed under the ITA.
As an example, we can investigate the case of NV Alliance Sdn Bhd v Ketua
Pengarah Hasil Dalam Negeri [2012] 1 MLJ 441, which clarified the deductibility of
expenses under the Income Tax Act 1967 (ITA). The taxpayer’s claim for entertainment
expenses was disallowed by the IRBM, as they were not wholly and exclusively for
business purposes under Section 33(1). The court upheld the IRBM’s decision,
stressing the need for proper evidence, such as receipts and clear justifications, to prove
the expenses directly benefit the business. This case highlights the importance of
distinguishing between fully, partially, and non-deductible expenses under Section
39(1)(l) and maintaining proper documentation for valid claims.
3. The tax treatment of renovation and repair expenses.
The Malaysian Income Tax Act 1967 (ITA) provides guidelines on the tax treatment of
renovation and repair expenses. It is crucial to understand this treatment as to ensure an
accurate tax reporting can maximize tax savings. The treatment depends on whether the
expenses are classified as revenue in nature (deductible) or capital in nature (non-
deductible). The tax treatment is managed under Sections 33 and 39. To ensure
compliance with tax regulations, taxpayers must accurately classify renovation and
repair expenses. Improper classification may result in penalties or rejected deductions.
Supporting papers, such as invoices, contracts, and comprehensive breakdowns, should
be kept for tax audits. For instance, if a taxpayer repairs a damaged ceiling (deductible
under Section 33(1)) but simultaneously builds a new extension (capital under Section
39(1)), they must apportion the costs accordingly.
• Revenue in Nature (Deductible Repair Expenses)
This expense is incurred to maintain or restore the original condition of an asset. This
deductibility is under Section 33(1) of the ITA. Examples of deductible repair expenses
are repainting, fixing leaks, and replacing broken tiles. For instance, if the building is
repainted to maintain its current state, the cost is deductible.
• Capital in Nature (Non-Deductible)
This falls under Section 39(1) which disallows deductions of capital expenditures
unless specifically permitted. Expenses incurred to upgrade, improve, or replace an
asset over its original state are considered capital in nature. These include structural
alterations, extensions, and new installations. The examples are adding a new floor or
wing to a building or installing a new air-conditioning system.
• Special Deduction for Renovation and Refurbishment Expenses
The Income Tax Rules (Special Deduction for repair and Refurbishment Expenditure)
2020 provide for a special deduction of up to RM300,000 for repair and refurbishment
(R&R) expenses incurred between March 1, 2020, and December 31, 2024. These
expenses include painting, replacement of electrical wiring or lighting and installation
of flooring or roofing. This special deduction helps support business to recover
renovation costs during the COVID-19 pandemic and applies only to specific expenses
listed in the rules.
One of the relevant cases that can be an example is case Law Shipping Co Ltd vs IRC
(1923). This example proves the importance to distinguish between deductible repair
expenses and non-deductible capital expenses in tax law. Law Shipping Co Ltd bought
a second-hand ship. At the time of purchase, the ship was in disrepair and required
extensive repairs to be seaworthy. The company incurred money to complete these
repairs. The taxpayer claimed that the repair costs were revenue-generating and hence
should be tax deductible. The prominent issue is whether to classify the expenses as
deductible revenue expenses or non-deductible capital expenses. As a result, the court
decided that the repair costs were capital expenses. The ship was purchased in an
inoperable state. The repairs were necessary to restore the ship to operational status for
the first time under the company's ownership. These repairs effectively contributed to
the cost of acquiring the ship, rather than just the cost of maintaining it. This case
demonstrates the importance of considering the purpose and timing of expenses.
Expenses incurred to bring an asset into operation for the first time are recognised as
capital, but those for continuing upkeep are considered revenue. This distinction is
critical for organisations looking to accurately classify expenses and maximise tax
deductions.
4. The types of donation or sponsorships are eligible for special deductions under
Section 34(6) of the Income Tax Act (ITA).
Section 34(6) of the Malaysian Income Tax Act 1967 (ITA) provides a comprehensive
framework for encouraging charitable giving and sponsorships. This provision enables
taxpayers to claim deductions for contributions made to approved institutions,
organizations, and community projects, aligning financial activities with social welfare
objectives. By fostering public welfare initiatives, this section plays a crucial role in
supporting Malaysia’s national development goals.
Under Section 34(6)(g), donations made in cash or in-kind to organizations
approved by the Director General of Inland Revenue qualify for tax deductions. These
organizations typically include charitable institutions, public educational entities, and
organizations promoting environmental conservation or public welfare. For example, a
business donating funds to build homes for disadvantaged groups or providing
construction materials for approved public projects can claim these contributions as
deductions. However, to qualify, these deductions must serve public welfare objectives
and comply with documentation, such as retaining official receipts or agreements.
In addition to direct donations, contributions to community projects approved
by the Minister of Finance fall under Section 34(6)(h). These projects are designed to
improve public welfare, focusing on initiatives such as constructing schools, healthcare
centres, or disaster relief efforts. A significant example of this provision’s application
was seen during the COVID-19 pandemic, where donations made to government-
approved relief efforts qualified for tac deductions. This underscores the adaptability of
Section 34(6) in addressing national emergencies and urgent societal needs.
Sponsorships for arts, culture, and heritage activities are another category of
contributions eligible for deductions under Section 34(6)(k). The Ministry of Tourism,
Arts, and Culture (MOTAC) must approve these sponsorships to qualify. For instance,
a company sponsoring a cultural festival or event recognized by MOTAC can deduct
the sponsorship costs from its taxable income. This provision plays a vital role in
preserving and promoting Malaysia’s cultural heritage, fostering national pride and
cultural diversity.
While Section 34(6) offer significant tax incentives, it imposes limitations to
ensure fair application. Sponsorship deductions under Section 34(6) (k) are capped at
RM1 million annually, with a sub- limit of RM300,000 for sponsorship involving
foreign activities. Theses caps encourage business to prioritize local projects while
allowing some room for international contributions. Similarly, donations under Section
34(6)(g) are limited to 10% of the taxpayer's aggregate income for the year of
assessment, with excess contributions disallowed from being carried forward. Proper
documentation is crucial to support claims under this section and ensure compliance
with the ITA’s requirements.
The interpretation of Section 34(6) has been clarified through case law, such as
Director General of Inland Revenue v. Kulim Rubber Plantations Ltd. In this case, the
court examined whether specific expenses qualified as donations or sponsorships under
the provision. The ruling emphasized that contributions must align with public welfare
objectives and be made to approved organizations or projects. Such judicial decisions
reinforce the boundaries of Section 34(6) and provide taxpayers with clear guidelines
for compliance.
In practice, Section 34(6) has broad applications across various sectors. For
example, businesses that donate to government-endorsed disaster relief funds during
floods or pandemics can claim deductions under Section 34(6)(h). Similarly, companies
sponsoring educational programs or cultural events approved by MOTAC can benefit
from deductions under Section 34(6)(k). Contributions aimed at employee welfare,
such as funding training programs or scholarships, may also qualify under related
provisions.
In conclusion, Section 34(6) of the ITA is a vital tool for promoting social
responsibility and encouraging charitable giving in Malaysia. By providing tax
incentives for contributions to approved organizations under Section 34(6)(g),
community projects under Section 34(6)(h), and cultural sponsorships under Section
34(6)(k), it aligns taxpayer initiatives with Malaysia's broader developmental goals.
Through careful planning and compliance with the guidelines, taxpayers can support
public welfare initiatives while benefiting from tax deductions, fostering a more
inclusive and sustainable society.
5. The tax treatment of professional fees.
Professional fees are deductible for businesses under Section 33(1) of the Income Tax
Act 1967 (ITA 1967) if they are incurred wholly and exclusively to produce gross
income and are not prohibited under Section 39(1) of the ITA 1967. The related
provisions state the two types of treatment which are:
• Deductible Professional Fees
Expenses are deductible in ascertaining a person's adjusted income under
section 33(1) of the ITA which includes legal and other costs for collecting trade
debts, renewing existing loans, defending title to business assets, statutory audit
fees, and accountancy charges for maintaining books and preparing financial
records as well as legal expenses related to trading contracts, lease renewals, or
employment disputes. Litigation costs connected to trade, such as enforcing
contracts or claiming compensation for lost goods, are also deductible when
incurred for business purposes.
• Non – Deductible Professional Fees
Legal and professional expenses that will not qualify for deduction include
those incurred in collecting non-trade debts or loans of a capital nature, legal
expenses for renewing loans or mortgages, and costs related to raising additional
capital. Other non-deductible expenses are Annual corporate filings and
meeting expenses including secretarial fees and AGM costs as well as filing tax
returns and computations and appeals against income tax assessments.
Additionally, legal expenses incurred by a landlord when letting out a property
for the first time, defending a fraud case or criminal prosecution, and those
related to unlawful activities in business operations are not deductible as well
as expenses for varying vehicle licenses also do not qualify for deduction.
In the case of FR Sdn Bhd v. Ketua Pengarah Hasil Dalam Negeri (2002), the
taxpayer, an investment holding company, sought to deduct bank guarantee
commission and facility extension fees under Section 33(1) of the Income Tax Act
1967, arguing that these were revenue expenses incurred wholly and exclusively in
generating income. The Inland Revenue Board (IRB) contended that the payments were
capital in nature, as they were made to facilitate the acquisition of shares and warrants,
which were capital assets, and thus were non-deductible under Section 39(1)(c). The
Special Commissioners ruled in favour of the IRB, holding that the expenses were not
incurred in the production of income but were related to acquiring capital assets. As
such, the payments were deemed non-deductible, emphasizing the capital versus
revenue distinction in tax law.
