Topic 6 Business Income
Topic 6 Business Income
Topic 6 Business Income
TOPIC 6
BUSINESS INCOME
LEARNING OUTCOMES
Introduction
Income tax is imposed under sec 4(a) of ITA 1967 on the gains or profits
of a business.
The tax is imposed not on business itself BUT on the person carrying on
the business or trade.
Definition of Business
Profession
Not defined in the Act.
Intellectual skill or manual skill controlled by intellectual skill.
Carried out by a company or an individual.
Vocation
Analogous to the word “calling”.
Means the way in which a person passes his or her life.
Eg: musicians, dramatists, persons who attends race and engaging
themselves in systematic bets.
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ATAX1113 – Principles of Taxation
Definition of Business
Manufacture
Transforming original material so that a new and different article or
product emerges.
Badges of Trade
Badges of Trade
The former is not subject to income tax but gains from trading or from an
adventure or concern in the nature of trade are taxable.
If intention mainly to resell the subject matter at a profit, then the gain
received is revenue in nature and liable to be taxed.
Where the property does not itself yield income or personal enjoyment to
its owner merely by virtue of its ownership, it more likely to have been
acquired for the purpose of resale.
where a taxpayer bought a large quantity of toilet paper, an act which not part
of his normal business. It was said that “as the purchase was made for no
other purpose, except that for resale at a profit, thus the deal was in the
nature of trade”.
It implies that longer the period of ownership of asset, the less likely to
have a trade.
Wisdom v Chamberlain (1968)
Mount Elizabeth (Pte) Ltd v The Comptroller of Income Tax
Martin v Lowry
KLE Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri – the subject’s land
commercial potential was a very good ready made advertisement in
itself.
Intention to trade.
Simmons v IRC
3.Intention to trade.
Mutual Transactions
• It follows that the surplus of mutual fund cannot be treated as income for
income tax purposes. (Styles v New York Life Insurance Co,
2 TC 460)
• The dealing should not be by way of trade or even in the nature of trade.
Illegal Activities
• S. 4(a) does not distinguish between a legal and an illegal business
income.
• The crux of the issue is if the activity carried on has the characteristics of
a business, then the income will be assessed under S.4(a)
notwithstanding its illegal or immoral character.
The various badges of trade must also be applied to the above factors.
• The fact that companies are formed with a view of making profits make it
difficult to prove that their share transactions are merely investments.
• The badges of trade and the Leeming v Jones test apply in establishing
the existence of trade.
Taxability of Grants
The following activities (one or more) would determine whether the business
income is deemed to be derived from Malaysia:
•Contract concluded in Malaysia.
•Stocks maintained in Malaysia from which orders are fulfilled.
•Ownership and risk passes in Malaysia.
•Sale proceeds received in Malaysia.
•Services rendered in Malaysia.
Commencement of Business
General guide:
•When it embarks on activities directly related to the generation of income
from the business.
•When everything is in place for the activity to commence.
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ATAX1113 – Principles of Taxation
Commencement of Business
• Considerations:
• Customers – whether customers consider that two trades exist;
whether their dealings with one department are influenced by other
department(s)?
• Management – under separate management or not?
• Accounting methods – separate accounts or not?
Cessation of Business
Advance Receipts
• With effect from YA 2016, S. 24 provides that any sum received in the
course of carrying out a business constitutes income which should be
duly subject to tax in that year (basis period).
• This is despite the fact that no debt has arisen yet — services have not
been rendered or property has not been used or enjoyed yet — and that
the sum may be wholly or partially refundable.
Advance Receipts
• The IRB has clarified that security deposits and return deposits, such as
for the return of beverage crates or bottles, are not revenue in nature, are
not to be treated as income and, therefore, are not subject to tax when
received.
• The essential test is not whether the profits concerned arose from a
business carried on in Malaysia but whether the operations from which
the profits arose took place in Malaysia.
• These factors are not conclusive on their own but should be collectively
considered in arriving at a final decision.
THE END