Chapter 6; business income students (1)

CHAPTER 6
BUSINESS INCOME:
INDIVIDUAL
1ATXB 213 MALAYSIA TAXATION I9/4/2013

LEARNING OBJECTIVE

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.
To tax a person under sec 4(a), it is
important to establish that the taxpayer has
derived gains or profits from the carrying
on of a business.
ATXB 213 MALAYSIA TAXATION I 39/4/2013

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.
Trade – repetitious buying goods and selling
such goods with intention to make profit.
Vocation
Analogous to the word “calling”.
Means the way in which a person passes his or her
life

CONTINUE
Manufacture
Transforming original material so that a new and
different article or product emerges;
Adventure or concern in the nature of trade
Deal with isolated buying and selling transactions.
It is difficult to hold such transaction as trade
activities due to isolated nature.
However it is possible to hold them as an adventure
or concern in the nature of trade and apply income
tax upon them – referring to badges of trade.

Example
Melisa a chartered accountant has formed an
enterprise to provide accounting and tax
services to small medium enterprises in
Muar, Johor. Her enterprise has staff strength
of four persons and a client base of fifteen
companies and fifty sole proprietorships.
Discussion:
Melisa is exercising a profession and the profits from the
enterprise will be taxable as business income accruing to
Melisa.

Badges of Trade
It is well-defined characteristics of trade
which can be act as a guide in differentiate
gains arising from the disposal of an
investment and gains from trading or from
an adventure or concern in the nature 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.

Badges of Trade
Radcliff Commission has laid down six key
characteristics of trade called it as badges of
trade.
Existence of one or more of the said badges
of trade indicate trading or the existence of
an adventure or concern in the nature of
trade.

Badge 1:Subject Matter
The intention of the acquirer at the point in time
that the subject matter was acquired is the
important consideration to determine whether
a gain derived is capital or revenue in nature.
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.

Continue
Rutledge vs I.R.C – 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.

Badge 2:Period of Ownership
If period of ownership of asset is a short one, it may
interpreted that the asset was acquired for trading
and not for investment.
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

Badge 3: Frequency of Transaction
If a particular transaction is one of a series of such
transactions and if there is evidence of a systematic
and methodical activity, it will constitute an
adventure in the nature of trade.
Distinction must be established between a number of
transaction spread over a considerable period of time
and that is closely related to each other to form a
series.
A number of transactions in the same kind of
property raises the presumption that the particular
property was purchased for resale at a profit.
Pickford vs Quirke

Badge 4: Supplementary work
done prior to sale
When subsequent processing of an asset has
taken place, such processing indicate an
intention to trade.
This includes material improvement to an
asset after acquisition so that it more
marketable.
Cape Brandy Syndicate vs I.R.C
The company after purchasing a large quantity of
brandy, proceeded to blend and re-case the
brandy before selling it in lots.
It was held that the transaction was a trading
transaction.

Badge 5: Organization set-up to
dispose of the goods
If special exertion is made to find or attract
purchasers such as the opening up of an office
or extensive advertising such facts will
indicate the presence of a profit making
undertaking.
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.

Badge 6: Motive of the Transaction
Circumstance surrounding the transaction:
Sale due to sudden emergency or unanticipated need
for funds indicate that property was not acquired for
purpose of resale at a profit.
Steven v Hudson Bay Co
HCM v DGIR (1993)
Profit motive as a factor
Kirkham v Williams (1989)
SCL v Cit (1991)
KLE Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri
Intention to trade
Simmons v IRC

Principle of Mutuality
A man cannot trade with himself and make a profit
out of the transaction.
The surplus of contribution over expenditure
cannot be income

Derivation of Business Income
Business receipt are subject to income tax provided
they are revenue in nature and derived from
Malaysia.
Conditions that must exist:
The existence of business
The business transaction is income in nature
Such business income is deemed derived
from Malaysia

Derivation of Business Income
Gross income from business which is not
attributable to operations of a business
carried on outside Malaysia shall be deemed
to derived from Malaysia.
For business income is attributable to
operations of the business carried on o/side
Malaysia if one of following factors exist:
 Contracts are concluded o/side Malaysia.
 Stocks are maintained o/side Malaysia from which orders are filled.
 Sales proceeds are received overseas
 Service are rendered outside Malaysia.

Example
Meranti Sdn Bhd is a Malaysian resident company, involved
in the provision of professional computer services. It has a
branch in Jakarta, Indonesia. Meranti has signed a contract
with a commercial bank in Indonesia, to provide computer
services for the bank’s network of branches in Indonesia.
The service was provided by Meranti’s employees stationed
in Jakarta. The duration of the project is expected to be for a
period of least 20 months. Work on the project commenced
in January 2012. Meranti’s financial year ends on December
31.

Example
Issues:
Advice the Financial Controller of Meranti
Sdn Bhd on whether the income from the
Indonesian project is taxable when remitted
back to Malaysia.

Discussion

Commencement of Business
ATXB 213 MALAYSIA TAXATION I 22
The determination of the date of
commencement of a business is important
because:
To determine the basis period in relation to year of
assessment
To identify the expenditure incurred before the date
of commencement
To identify capital expenditure incurred
To allow capital allowance against the business
income in relation to the relevant year of
assessment.
9/4/2013

New Business or a
Continuation of Business
The distinction is very important because it has
an impact on the deduction of capital allowance
and allow ability of business losses in the
computation of taxable income.
Conditions to be considered:
Customers
Management
Method of accounting
9/4/2013

Charge to Income Tax
 Sec. 3 of the Income Tax Act 1967:
“Income tax shall be charge for each year of assessment
upon the income of any person accruing in or derived
from Malaysia or received in Malaysia from outside
Malaysia..”
 Accrue: natural growth or increment; to arise or spring as a
natural growth or result
 Derive: to draw; to fetch; to obtain; to come into something
as its source
9/4/2013

Capital vs Income
Business activities (income) have to be
distinguished from investment transactions
(capital)
Capital natures business receipt are not taxable
(i.e. gain from disposal of fixed assets)
9/4/2013

The Ascertainment of Gross
Income
Section 22 (1) and (2):
Applies to revenue receipt
If the gross income resulted from past expenses
and outgoings of revenue nature, it would then
be treated as income.
9/4/2013

Sales of Goods and Rendering
of Services – S 24(1)
 The principle activity of most business concerns is either
trading or providing a service.
 Therefore, gross income from the sale of goods (stock in
trade) and rendering of services constitutes business
income.
 The gross business income is taxable on a accrual basis, for
both local and export sales.
 The gross business income for export sales can be based
either sales value or market value of the goods.
 When the export sales are made to related
company, Market Value is advocated.
9/4/2013

Example
Ah Chong has a business which sells hand phones. During the year 2012, the
business concern has sales of RM500,000 of which the breakdown is as
follows:
RM
Cash sales 250,000
Credit sales 250,000
----------
500,000
=======
Other information;
(a) RM100,000 credit sales remained uncollected as at 31st
December, 2012.
(b) 50% of the credit sales were to overseas customers (export sales)
Issue: Determine the gross income from trading for the year 2012.
Answer: Gross Income is RM500,000.

Non-refundable Advance
received – S 22(2)
Sum receivable by way of
insurance, indemnity, recovery and
reimbursement constitute gross business
income.
For instance, such sum include insurance
recoveries which are in respect of trading
stock, defalcation by employees, repairs of
assets as well as life and accidents insurance.
Insurance recoveries for replacement of
assets are capital receipt, thus not taxable.

Example
MESRA Car Seat is an enterprise selling leather car seats. It
obtained its leather from various suppliers in Europe. In
2012, several customers complained that their leather seats
which had been supplied by MESRA Car Seat had started to
peel after only four months of use. The company traced the
leather shipment which had been used for the defective car
seats and replaced all the car seats made from the said
shipment. It then made a claim against the leather supplier.
After a period of lengthy negotiations and to maintain
goodwill, the supplier paid MESRA Car Seat a sum of
RM55,000.

Discussion
 Discuss whether the RM55,000 is taxable.
 Answer:

Compensation for Loss of Income
Compensation for loss of income from a
source is a revenue receipt and is taxable.
This receipt exhibit one or more of the
following attributes:
The receipts must be filling a hole in profits.
The receipt must not be in respect of physical
damage or disposal of capital assets.
The receipt must not relate to the restructuring
of company.

Recovery of Trade Debt
The recovery of trading debt is taxable
subject to key condition being satisfied.
The debt previously written off as being bad and
were allowed as deductions in arriving at the
adjusted income from business.

Waiver of Amounts Owing
to Creditors
 The waiver of amounts owing to creditors (i.e. suppliers)
is taxable.
 Example:
Kamal, is an owner of a provision shop. As at 31-12-
2012,he had an amount of RM3,800 owing to one of his
confectionary suppliers. In the middle of 2011, the
supplier agreed to waiver the amount owed to him on the
basis of the long-term relationship between him and
Kamal. Kamal consequently debited the “supplier
account” in his monthly accounts and credited “the
income statement account”.

Waiver of Amounts Owing
to Creditors
Issue: Advise Kamal whether the waiver of RM3,800 is
taxable.
Discussion: The RM3,800 is gross business income
because it is a release of debt related to deductions
(“purchases” account) which have been made, in arriving
at adjusted income.

Taxation of Gains from Foreign
Exchange Exposure
 A foreign exchange exposure arises when a business
entity has transactions denominated in currencies other
than home country.
 Realized foreign exchange gains are taxable and losses on
revenue account are deductible.
 Unrealized forex gains or losses on revenue account are
not admissible for tax purpose.
 Gains or losses on capital account are neither taxable nor
deductible whether realized or unrealized.

BUSINESS DEDUCTIONS
- Chapter 10 -
CONTINUE
9/4/2013

Principles of Deduction
 Revenue versus capital expenditure
 Expenditure incurred by the taxpayers carrying on a
business
 Qualifying deduction under the ITA
 Timing of the expenditure
 Expenditure wholly and exclusively incurred in production
of gross income

General provisions for deductions
 Deductibility under Section 33 of ITA:
– Outgoings and expenses
– Wholly and exclusively
– Incurred
– During that period; and
– In the production of gross income

 Page 304 – 405
Deductions prohibited under the Act
9/4/2013

Adjusted and Statutory Income
from Business
 The format to compute the adjusted income and
statutory income from business as follows:
Add Less
Net profit/(net losses) xx
+) Any item/expenses not allowable for deduction xx
-) Items allowed for double deduction (xx)
-) Non business income / Non taxable income
Sec 4(c) : dividend, interest and discount
Sec 4(d): rent, royalty and premium
(xx)
Adjusted income/loss XX
+) Balancing charges xx
-) Capital allowance/ balancing allowance (xx)
Statutory Income XX
9/4/2013

THANK YOU
Q & A

Chapter 6; business income students (1)

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