Tutorial 6: Business income

Question 1

(a) Define business income.

 Profession
Generally refers to a person who used their intellect or skills. A calling requiring specialized knowledge
and often long and intensive academic preparation. For example, engineering, auditing, legal and
medical firms.

 Vocation
A person who attends races and places systematical bets was held in a decided case law to be carrying
on a vocation. The gains derived were chargeable to tax even if the vocation was unlawful.

 Trade
Trade normally consists of transactions where there is continuity and repetition of buying and selling or
manufacturing.

 Adventure or concern in the nature of trade

Where there is only one transaction if can be held to be in the nature of trade as the definition of
business includes “adventure or concern in the nature of trade”. For example, isolated transactions.

(b) Discuss ANY FIVE (5) tests that may be applied in ascertaining whether a gain arising
from a transaction is taxable (as income from business).

 Surrounding Factors
A forced sale to provide cash in emergency indicates that the property was not acquired for the purpose
of resale at a profit.
 Organisation of sales
In the case of a formation of a company, the nature of the company’s operation and the accounting
treatment of the asset in the records will be examined.
 Number of transactions
Where the same type of object or article is repeatedly bought and sold.
 Method of finance
Borrow money for potential investment. A person who borrows more than he could normally afford to
purchase an item could indicate that he was involved in a trading adventure.
 Timing
If the period of ownership between acquisition and disposal of assets is long, then less likely that such
disposal would be considered to be a trade.

(c) Discuss the tax significance of ascertaining the date of commencement of a business.
- To identify the expenditure incurred before the date of commencement.
- To identify capital expenditure incurred.

Question 2

When Ben (a Malaysian and a financial planner) was on a short vacation in Beijing, China, he
bought a piece of jade antique from the Ming Dynasty, costing RM80,000 as an intended birthday
gift to his rich grandfather. He paid the full amount by credit card with P Bhd.

A day after Ben was back in Kuala Lumpur on 1 July 2019, he met a wealthy old friend who saw the
said jade antique and offered to buy it at a cash price of RM150,000. Ben thought over it and
accepted the attractive offer and sold it. It was the first time he sold an antique. He used part of the
sale proceed to make full payment of his credit card balance at the end of the same month.

Discuss whether the gains of RM70,000 arisen from the sale of the above jade antique can be
chargeable to income tax.

Nature of asset – A piece of jade antique was a birthday gift to his rich grandfather.
Profit seeking motive - He is no intention to make profit when he bought the jade antique at first.
He is first time to sold an antique.
Surrounding factor – The jade antique was sold to one of his wealthy old friend, at first was a
birthday gift to his grandfather, so that it is not a force sales.
Number of transactions – Ben is first time involving in a sales of a piece of jade antique.
( In short, this is not a business income.)
Not chargeable to tax, because not a business income.
Not by advertisement.

如果要说是 business income

Period of ownership short
Have intention earn profit, sold at higher price.
Time period between purchase and sale - The time period is short.
Surrounding factor - He is bought and sale to his friend and earn a revenue of RM70,000. Then, he is
going to make payment of his credit card balance at the beginning of purchase a birthday gift for his rich
grandfather.

Question 3

Francis inherited a piece of agricultural land near Seremban from his grand-father in the year 2006.
On 1.3.2018, he applied to the Land Office and was granted the respective approval for converting
the land use to ‘residential use’ and splitting the land into 50 residential lots. Francis advertised over
a local newspaper to secure buyers. He successfully sold all the residential lots in the year 2019 and
received RM5,000,000 in total.

(a) Discuss whether the above total sale proceeds of RM5,000,000 is chargeable to income tax.

Profit seeking motive – Francis have the intention to sell the land to gain profit.
Number of transactions – There are 50 transactions have been made to sell all the residence lots.
Improvement work – The land is converted to use to sell all the residential lots.
The ways of sales - Francis have advertised over a local newspaper to promote the 50 residential lots.
Time period between purchase and sale – The land was sold in 1 year, it is short period.
Nature of asset – The main purpose of selling the land is to gain profit.
( Hence, the total sales is chargeable to income tax. )

(b) Would there be any difference to the above answer if the land was sold by Francis without
both the conversion of land use and sub-divisions into 50 residential lots?
Yes, not taxable to income tax.
Profit seeking motive - No intention to make profit.
Number of transactions - Only one transaction involved.
Time period between purchase and sale - The period of holding the land is very long (2006-2018 - 13
years).

Question 4

Discuss the general principles that may be applied in ascertaining whether a sum of money
received by a person carrying on a business is taxable or not.

Sale or destruction of the profit-making apparatus

 Destroy majority profit-making apparatus → Capital receipts
Case law: Van Den Berghs v Clark
 Contract cancelled is one of the several contract → revenue receipts
Case law: Kelsall Parsons & Co. v CIR
Sale of fixed asset
 Receipts for the disposal of fixed asset → Capital receipts
 Receipts for the disposal of inventory/stock → Revenue receipts
Sterilization of a capital asset / loss of a source of income
 Sale of know-how that causing business not able to run (income earning assets) → Capital
receipts
Case law: Evans Medical Suppies v Moriarty
 Sales of know-how is trade-sale / way of business → revenue receipt
Case law: Jeffrey v Rolls Royce Ltd
Restrictive covenant or for the imposition of substantial restriction on the activities of a trader
 Imposition of restriction on the activities by the regulator or competitor → Capital receipts
Case law: Glenboig Union Fireclay Company Ltd v CIR
Trading profit or loss of income
 Compensation receive for cancellation of a trading contract which is ordinary in business →
revenue receipt
Case law: Short Bros Ltd v CIR
 Compensation for late delivery of an asset where damages received is for loss of profit → revenue
 receipt Case law: Burmah Steam Ship Co Ltd v CIR

Question 5

Clear & Clean Sdn. Bhd. (CCSB) is a resident company which carries on a business of manufacturing
detergents. For the basis period ended 30.9.2020, it received various sums of moneys as follows:

Required:

Discuss the taxability of tax treatment for each of the above receipts for the year of assessment 2020.

(a) A compensation of RM2,000,000 was received from one supplier which terminated a five-year
contract to supply chemicals for manufacturing detergents. CCSB’s production of detergents dropped
by 30% following the termination of the contract. However, the manufacturing business continues as
there are four similar contracts with other suppliers in Malaysia.

The compensation of RM2,000,000 is a revenue receipt and is taxable. The contract cancelled is one of
the contracts entered into by company and its cancellation did affect but not materially the profit-making
business structure of the company. It was a normal incident in the business that contracts might be
terminated.

(b) A lorry used to transport goods to customers was involved in one road accident on 1.3.2020.The
insurance company paid a sum of RM150,000 on 30.6.2019, of which RM120,000 was in respect of the
damaged goods and RM30,000 for repairs for the badly damaged lorry.
The compensation of RM150,000 is a revenue receipt and is taxable. The compensation of RM120,000
was received as a compensation for late delivery of an asset where damages received is for loss of profit.
The remaining compensation of RM30,000 was given by insurance company for repairs the damaged
lorry in one road accident.

看 到 repair 就 是 revenue (either revenue receipt or revenue expense). For damaged

goods
考试回答问题方式
1. revenue (taxable) or capital receipt (not taxable)
2. why taxable

If lorry total loss and insurance compensate company, the compensation will be capital receipt (not
taxable). 完全坏了

(c) A sum of RM600,000 was received on 1.4.2020 as a compensation from a company Bright Sdn.
Bhd. under an agreement under which CCSB will not sell its manufactured detergents in the entire State
of Johor.

The sum of RM1,000,000 received is a capital receipt and not taxable. It was received as a
compensation under a restrictive covenant under which there is a substantial restriction on the business
activity of the recipient under which it is prevented from selling its manufactured detergents in the entire
state of Johor. There is a loss of the whole market in Johor.

Impact sales significantly

Tutorial 7: Business Expenses

Question 1

Discuss the tests (or principles) that may be applied in ascertaining whether an expense is allowable
or not in arriving at the adjusted income from a business. Support your discussion with the relevant
section(s) of the Income Tax Act 1967 and/or case law.

Question 2

Discuss briefly the following:

(a) Capital expense;

(b) Revenue expense;

(c) Initial expense;

(d) Dual-purpose expense; and

(e) Pre-commencement expense.

Question 3

BBF Sdn. Bhd. is a resident company incorporated in Malaysia on 1.10.2009 with a paid-up
ordinary share capital of RM2.7 million. It carries on trading of medical equipment in Malaysia. The
adjusted income from its trading business for the basis period ended 30.6.2020 was RM4 million,
after charging interest expenses on a bank loan of RM8 million taken from a local bank at an interest
rate of 6% per annum.

The loan of RM8 million was used for various purposes as follows:

1. RM2 million was invested in the shares of its fully owned subsidiary company, BFI Sdn.
Bhd. (resident in Malaysia) and a dividend of RM500,000 was received on 1.6.2020. BFI
Sdn. Bhd. has pre-tax accounting profit of RM1,000,000 for the basis period ended
30.6.2020.

2. RM1 million was invested in a house in Petaling Jaya which is let out and the annual rent
(net of allowable expenses, not including loan interest) is RM40,000;

3. RM2 million was to acquire a shophouse used as its business premise;

4. RM3 million was for purchases of medical equipment (trading stock).

The capital allowance for the year of assessment 2020 is RM100,000.

Required:

(a) Discuss the tax treatment for the interest on the loan of RM8 million for the year of
assessment 2020. (Assume the balance of the loan at 30.6.2020 remained at RM8 million.

1. RM2,000,000 Invested in shares of BFI Sdn Bhd with the interest rate 6% which is (RM2
million x 6% = RM120,000).
 Explanation: The interest (on this portion of loan) is not deductible in arriving at the
adjusted income from business as it was not incurred in the production of business income.
这是 dividend income, taxed under S4c.
It was incurred in the production of dividend from shares investment in the subsidiary
company but it cannot be deducted as the single tier dividend of RM500,000 received from
a Malaysian company is exempted from tax. As such, the interest on loan would be a
permanent loss.

2. 这 公 司 是 关 于 medical 的 ， 所 以 invest in house not deductible. Not for business

purpose, only for investment purpose.
RM1,000,000 invested in a house and the interest rate is 6% equal to RM60,000 (RM1
million x 6%). The interest is not deductible in arriving at the adjusted income from
business as it was not incurred in the production of business income.
Not deductible under S4a

Rental income is taxable, located in Malaysia (S4d)

It was a revenue expense incurred in the production of rental income and it can be
deducted in arriving at the adjusted loss of RM20,000 (RM40,000 – RM60,000). This
rental loss is a permanent loss.

3. RM2,000,000 used for purchase of a shophouse and the interest rate is 6% equal to
RM120,000 (2 million x 6%). The interest is deductible in arriving at the adjusted income
from business because it was a revenue expense incurred in the production of business
income as the shophouse was in use as a business premise. S4a

4. RM3,000,000 used to buy trading stock and the interest rate is 6% equal to RM180,000
(RM3 million x 6%). The interest is deductible in arriving at the adjusted income from
business because it was revenue expense incurred in the production of business income as
the loan was used to finance the purchase of trading stock.
Revenue expense – incurred to produce business income

(b) Compute the tax payable by BBF Sdn. Bhd. for the year of assessment 2020.
01-07-2019 to 30-06-2020
4 million 是已经减掉 3&4 的了(120,000 & 180,000)
Less = not taxable item (other income)
Deductible = nil
BBF Sdn Bhd
Tax computation for the YA 2020
RM RM RM
Add Less
Section 4(a): Business income
Adjusted income from business 4,000,000
Adjustments:
Loan interest in investment in subsidiary 120,000
Loan interest on a house 60,000
Loan interest on a shophouse nil
Loan interest on trading stock nil
180,000 - 180,000
4,180,000
Less: Capital allowance (100,000)
Statutory income from business 4,080,000

Section 4(c ): Dividend income

Single-tier dividend (Exempted) nil

Section 4(d): Rental income

Rental income 40,000
Less: Loan interest (60,000)
Adjusted loss from rental (20,000)
Statutory income from rental nil
Aggregate income/ Total income/ Chargeable income 4,080,000

Tax payable (4,080,000 x 24%) 979,200

Question 4
BC Sdn. Bhd. is a resident company and carries on a manufacturing business in Petaling Jaya. For the
year ended 30.6.2020, it incurred the following expenses:

(a) Purchases of raw materials amounting to RM10,000,000;

(b) Purchase of a high-tech machine for RM1,000,000 and used immediately for the
manufacturing business;

(c) Payment of RM500,000 to a local resident manufacturer for the right to use its patented
secret process in manufacturing.

Required:

Discuss the tax treatment for the above expenses for the year of assessment 2020.
不懂不要写是 revenue 或者 capital expense 或者 initial capital,不然整个错
(a) The purchases of raw material for RM10,000,000 is revenue expense and it was wholly and
exclusively incurred in the production of income. It can be deducted in arriving at the adjusted income
from business.
Trading stock

(b) The purchases of a high-tech machine is a capital expense and not deductible in arriving at the
adjusted income from business. An initial allowance at 20% and an annual allowance at 14% on the
qualifying cost of RM1,000,000 can be claimed for the year of assessment 2018. These capital
allowances can be given deduction in arriving at the statutory income from business.
PPE – Fixed asset – capital expense
Depreciation = capital allowance

(c ) The payment of RM500,000 was a royalty payment for the right to use a patented secret process in
manufacturing. It is a recurring revenue expense and is deductible in arriving at the adjusted income
from business. (Assume the royalty is payable yearly).
FOR BUSINESS PURPOSE - DEDUCTIBLE
Tutorial 8: Computation Of Tax For A Company

Question 1

Jaya Sdn. Bhd. is a Malaysian tax resident company and it carries on a manufacturing business. The
paid up share capital of the company on 1 January 2020 is RM4 million. The company’s Income
Statement for the year ended 31 December 2020 is as follows:

Notes RM'000 RM'000

Turnover 25,790
Less: Cost of goods sold 1 19,300
6,490
Add: Other income 2 100
6,590
Less: Expenses
Salaries and wages 3 3,700
Loan Interest 4 180
Maintenance and repair expenses 5 510
Bad debts written off 6 80
Doubtful debts provision 7 120
Professional fees 8 46
Lease rentals 9 155
Miscellaneous expenses 10 32
Entertainment expenses 11 40
Travelling expenses (for business) 98
Depreciation (plant & machinery) not deductible 57 5,018
Profit before taxation 1,572

Notes:
1. Cost of goods sold
It includes: RM’000
Provision for stock obsolescence 90
2. Other income
RM’000
Unrealised gain from foreign exchange (trade) 50
Bad debt recovery (non-trade) 30
Dividend from a Malaysian resident company 20
100
 3. Salaries and wages
These include: RM’000
Salaries and bonus 3,280
Salaries to one handicapped staff (double deduction – not taxable) 20
多一次 deduction at (less)
Contributions to Employees’ Provident Fund 340
Gratuity to an employee who retired on 1 December 2019 60
Paid in 2020, deductible in 2020 3,700
4. Loan interest
Loan interest payable during the year on a loan borrowed of RM3,000,000. The company utilised a
part of the loan amounting to RM1,000,000 to acquire an adjacent piece of vacant land.
 5. Maintenance and repair expenses
RM’000
Repair of damaged windows of factory building 10
Extension of factory building (CAPITAL EXPENDITURE) NOT DEDUCTIBLE 500
510

6. Bad debts written off

This amount includes a write off related to a trade debt (DEDUCTIBLE) of RM80,000 involving a
corporate trade debtor which has gone under liquidation in August 2020.

7. Doubtful debts (trade) provision S34

RM’000
General provision NOT DEDUCTLE FOR GENERAL UNDER S34 40
Specific provision 80

120
8. Professional fees
RM’000
Secretarial fee (max 15)
(secretarial fee + tax fee re = 18,000, max deductible expenses only up to RM15,000) 12
Accounting fee 9
Audit fee 11
Tax fee re: filing of tax return 6
Tax appeal (FINE, PENALTY, NOT DEDUCTIBLE )
UR OWN WRONGDOINGS 8
46
9. Lease rental expenses
RM’000
Lease rental of a new car costing RM300,000 (commercial or non-commercial) 55
Lease rentals for a machine used in manufacturing 100
155

10. Miscellaneous expenses

RM’000
DONATION IN KIND - INCREMENT
Cash donation to an approved old folks home
NOT DEDUCTIBLE UNDER S4a, but deductible under aggregate income 30
Fine for traffic offences 2

32

11. Entertainment expenses

Include the following: RM’000
Food and drink during annual general meeting 10
Annual dinner for staff 30
40

12. Additional information

RM’000
Current year industrial building allowance (not including new extension to factory) 30
Capital allowances for plant & machinery DEPRECIATION X DEDUCTIBLE,这个 deductible 50

Required:

(a) Compute the tax payable by Jaya Sdn. Bhd. for the year of assessment 2020. You are to
indicate ‘nil’ in your computation for every item that does not require any tax adjustment.

(b) Explain the respective tax treatment for the expenses under Notes (9), (10) and (11).

CAPITAL ALLOWANCE = INITIAL + ANNUAL ALLOWANCE

CAPITAL ALLOWANCE FACTORY BUILDING IS 65
CASH DONATION DEDUCTIBLE MAX CAN UP TO 10% OF AGREGRATE INCOME.220
Question 2

Majujaya Sdn. Bhd. is a Malaysian tax resident company and it carries on a manufacturing business.
The paid up share capital of the company on 1 January 2020 is RM6 million.

The company’s Income Statement for the year ended 31 December 2020 is as follows:

Notes RM'000 RM'000

Turnover 160,570
Less: Cost of goods sold 1 129,300
31,270
Add: Other income 2 150
31,420
Less: Expenses
Salaries, wages and bonuses 3 5,400
Loan interest 4 200
Maintenance and repair 5 530
Bad debts written off 6 60
Doubtful debts provision 7 150
Professional fees 8 60
Lease rentals 9 130
Miscellaneous expenses 10 85
Entertainment expenses 11 80
Transportation of goods 90
Depreciation (plant & machinery) 200 6,985
Profit before taxation 24,435

Notes:
1. Cost of goods sold
It includes: RM’000
Provision for obsolescence of stocks 90
2. Other income
RM’000
Realised gain from foreign exchange (trade) 80
Bad debt recovery (trade) – bad debts previously not allowable = not taxable30
(Add)
Interest from fixed deposit with P Bank, Kuala Lumpur 40
 150
3. Salaries, wages and bonuses
These include: RM’000
Salaries, wages and bonuses 4,720
Salaries to one handicapped employee 40
Compensation for an employee who retrenched on 1 June 2020 60
Contributions (by employer) to Employees’ Provident Fund 580
5,400

4. Loan interest
This is loan interest payable during the year on a bank loan of RM3,000,000. The loan was used to
acquire new machines used for manufacturing.
 5. Maintenance and repair
RM’000
Repair for the leaking roof of factory building 30
Extension of the existing factory building (refer Note 12) 500

6. Bad debts written off

This amount includes a write off related to a car loan of RM60,000 in respect of one former
employee who was unfortunately killed in a fatal road accident on 2 February 2019.

7. Doubtful debts (trade) provision

RM’000
General provision 85
Specific provision 65

150
8. Professional fees
RM’000
Secretarial fee (max 15) 10
Accounting fee 15
Audit fee 14
Tax fee for filing annual tax return 12
Legal fee for bank loan 9
60
9. Lease rental expenses
RM’000
Lease rental of a second-hand car costing RM400,000 when new 70
Lease rental for a van costing RM200,000 used for transporting goods 60
130
10. Miscellaneous expenses
RM’000
Cash donation to an approved orphanage in Selangor 30
Flowers for weekly office decoration (motivate employees – increase business income) 5
A penalty for ‘incorrect return’ for the year of assessment 2019 50
 85
11. Entertainment expenses
Include the following: RM’000
Lunch provided to shareholders attending annual general meeting 5
Printing of report for annual general meeting 15
Free meals provided for employees on working days 60
80
12. Additional information
RM’000
Current year industrial building allowance (not including the new extension to factory) 90
Capital allowances for plant & machinery (including new machines) 240

Required:

(a) Compute the tax payable by Majujaya Sdn. Bhd. for the year of assessment 2020. You are
to indicate ‘nil’ in your computation for every item that does not require any tax
adjustment.

(b) Explain the tax treatment for each of the expenses under Notes (9) and (10).
Tutorial 9: Capital Allowance and Industrial Building Allowance

Question 1

H Sdn. Bhd. was incorporated with a paid-up ordinary capital of RM1.5 million. It commenced its
operations of a budget hotel business on 1.3.2019 and close its account on 31 December annually.
The fixed assets account of H Sdn. Bhd. for the year ended 31.12.2019 indicated the following assets
that were acquired and used in the hotel business:
RM
Hotel building (inclusive of land cost of RM 1,000,000) 4,000,000
A van to transport hotel guests (Commercial vehicle) 120,000
30 televisions (RM1,000 x 30) (small value assets- refer to (b)) 30,000
Office equipment, furniture and fittings 200,000
Crockery and cutlery (refer to (c )) 180,000

On 1.4.2019, the company purchased a new car with cash of RM120,000 for the hotel manager to
use in performing his employment duty. (Non-commercial vehicle- restricted to RM100,000)

Required:
(a) Compute the capital allowances of H Sdn. Bhd. for the years of assessment 2019 and 2020
respectively, and indicate the respective residual expenditure at the end of the year of
assessment.
YA 2019 Basic period 1.3.2019 to 31.12.2019
YA 2020 Basic period 1.1.2020 to 31.12.2020
CAR PAGE 57

(b) Discuss conditions whereby qualifying assets could be treated as “small value” assets and
the tax implications.
 Paragraph 19A of Schedule 3 in Income Tax Act 1967 allows a 100% deductible of cost as
capital allowance for small value assets.
Criteria to be fulfilled:
- Assets with a life span of more than 2 years
- Value of each asset does not exceed RM2,000
- Expenditure on the qualifying asset incurred in the basis period
- It is in use in the business at the end of the basis period
- Claimant is the owner at the end of the basis period
- The maximum amount of 100% deduction of cost as capital allowance is however
restricted to a total of RM20,000 in any one YA. However, such limitation does not
apply to SMEs.

(c) Explain the tax treatment of the capital expenditure on the crockery and cutlery.

Replacement basis, straight away charge to expenditure, not need to charge to asset.
Qualifying expenditure = asset value
如果 dispose, maybe have gain on disposal, gain of disposal is business income.

(d) Assume the car will be disposed of on 1.7.2020 for RM80,000, discuss the tax
implication(s) on H Sdn. Bhd. for the years of assessment 2020.
去看 YA 2020 的 RE = 40,000
IF BALANCING CHARGE MORE THAN 40,000 (eg 50,000), THEN RESTICTED TO 40,000

Question 2

(a) State briefly when is the date of qualifying expenditure on the construction of an industrial
building is incurred or deemed to be incurred.
Slide 26
(b) What are the conditions that must be fulfilled for the following allowances to be given
with respect to qualifying expenditure on construction of a building:

(i) Initial allowance (IA); and

(ii) Annual allowance (AA).

Slide 25
Question 3

Sudimari Sdn. Bhd. was incorporated on 1.7.2014 and carries on a business of

manufacturing plastic containers for local market. It commenced business on 1.4.2016 and
closes its annual accounts on 31 March. It constructed a factory which was completed on
1.10.2016 and used for the business soon after its completion when business commenced.
The expenditure incurred related to the factory are as follows:

Expenditure Amount (RM)

(i) Land (inclusive of legal fees of RM40,000) -Nil 2,040,000
(ii) Architecture fees 80,000
(iii) Foundation and piling 300,000
(iv) Construction materials 1,500,000
(v) Plumbing and wiring 360,000
(vi) Drainage 60,000

9% of the factory building (by area) was used as an office.

The factory (completed on 1.10.2016) was subsequently sold to an unrelated company Suria Sdn.
Bhd. on 8.2.2019 for RM5,200,000 (inclusive of RM2,400,000 for the land).

Required:

(a) Identify the first year of assessment (and its basis period) for Sudimari Sdn. Bhd.

(b) Compute the industrial building allowance(s) that can be given or balancing charge
for each relevant year of assessment up to the year of assessment 2019.