Malaysian Tax Theory Chapter 2: Business Income

Malaysian Tax Theory and Practice - Chapter 2: Business Income

• Income Sources: Details on different types of income
  • Week 4/5: Gains/profits from businesses (for any period)
  • Week 2/3: Gains/profits from employment
  • Week 6: Rents, royalties, and/or premiums
  • Week 6: Dividends, interest and/or discounts
  • Week 7: Pensions, annuities, or other periodic payments
  • Week 7: Gains or profits not covered by the above

Meaning of "Business" & "Trade"

• Business encompasses profession, vocation, trade, manufacturing, adventure or concern related to trade.
• Business implies real, substantial, repetitive and systematic activity with a set purpose.
• Business has a wider scope than "Trade".
• Trade relates to commercial dealings, often centered around buying and selling.

Meaning of "Business" & "Trade" ...cont'd

• Vocation: A way of living and earning, which can include business or profession, even when part of an employment.
• Vocation Examples: Chartered Accountant giving a seminar, running a business, writing articles, teaching, singing (even as a judge in a reality show).
• Adventure or Concern in Nature of Trade: Isolated profitable transactions, can fall under income tax.
  • Elements indicating a trade: Organization, specialized skills, maturing assets, transactions.
  • The lack or presence of such elements can determine the substance of a transaction.

Derivation and Assessability

• Income from outside Malaysia carried out by a business in Malaysia will be deemed to be derived from Malaysia.
  • Operations Test (S.12(1)(a)): Activities like contract negotiation/conclusion, stocks/orders, ownership transfer/risk, sales proceedings, services, will determine if income originates in Malaysia.
• Manufacturing, growing, mining, producing, or harvesting in Malaysia (S. 12(1)(b)):
  • Income from the sale of the product/article outside Malaysia.
  • Market value of exported items.

Business Income - Taxable Situations

• S. 24: Defines business income that is subject to tax.
  • Debts from stock in trade sales
  • Debts from service provision
  • Debts from property use
  • Stock value, withdrawn or given
  • Share dealing business dividends
  • Investment dealing/money lending business interest

Derivation and Assessability - Exported Goods

• If business operations are in Malaysia, but products exported, the market value at the time of export is taxable.

Importance of Correct Determination of Basis Periods

• Businesses' capital expenditure on assets.

Derivation and Assessability - Dividends/Interest

• Dividends and interest from shares held in and outside Malaysia.
• Both are deemed to be derived from Malaysia if the business is operated in Malaysia

Basis Period for Assessment of Income

• Company operations date vs. account closing date: If a company starts on a non-31st December date and closes accounts within 12 months, that period is the first year of assessment basis period
• Second (and subsequent) year cases: The period following the first basis year will be considered the basis period for that year

Tax Accounting

• Taxable income differs from accounting profit.
  • Exempt income: income not subject to tax (e.g., certain types of capital gains).
  • Timing differences: Some income/expenses may be recognised for tax purposes in a year different from when they appear in the accounts.
  • Depreciation: Deductible expenses.

Corporate Residence

• Determining corporate residence: Focus on control and management, where the real business is operated, and the place where decisions are made and policy decisions are taken.
• Dual Residence: company might be resident in two or more countries at the same time.

Commencement of a Business

• Basis period: Determining the period for the business, crucial for allocating expenses.
• Pre-commencement expenditure: Expenses incurred before the business officially starts.
• Typically only allowable for small businesses (share capital less than RM2.5 million), recruitment (1 year prior), certain approved business ventures (e.g., REITs, Islamic stock brokers).

Date of Commencement of Trade

• Starting activities directly related to generating income: Opening an existing business.
• Activities directly related to generating income: Opening a hotel, Retailing operations.
• Manufacturing activities directly related to generating income: Starting manufacturing, with raw materials.
• Plantation activities directly related to generating income: Planting the seeds/seedlings.
• Additional points: Property development (essential preliminary tasks).

Cessation of a Business

• Termination ways: Business sold as a going concern, stock auctioned, continued sales without replenishment.

Basis Periods & Change in Accounting Dates

• Basis year for a company, trust, or cooperative society
• Accounts period (period operations are recorded) is the basis period for company's income.
• If the normal account date is not 31 December, the tax department will determine a different period.

Badges of Trade

• Various factors (e.g., quick turnover, frequent transactions, work to enhance assets, profit-seeking motive, sales organisation, source of finance, emergency circumstances) indicating whether an activity is a trade or a hobby/investment.
• No single factor is enough on its own to decide. The whole situation needs to be analysed.

Subject Matter

• Nature of asset: assets normally bought/sold.
• Examples: toilet rolls, silver bullion, manufactured/commodities, plant and machinery, shares, etc..

Quick Turnover

• Length of holding period: Assessing the time between items' purchase and re-sale that might indicate trade.
• Example case analysis.

Frequency of Transaction

• Series of transactions: Consistent and frequent buying and selling
• Example case analysis.

Work done to enhance the Asset

• Increasing value: Actions or works to increase an asset's worth.
• Case analysis- enhancing Brandy worth before sale.

A Profit-Seeking Motive

• Profit as primary goal: Determining profit-seeking motive in an action
• Case analysis: land sale with planning permission

Exercise 1 & 2 (Case studies)

• Employment vs. trading of fruit cutting machines.
• Factors concerning profit motive and circumstances of sale when selling property for medical expenses.

Sales Organisation

• Organised activity: Indicates a formal business activity.
• Size and structure: Business size is a factor.
• External management: Using a separate management company for the business.

Source of Finance

• Short-term loans: indicates intent to re-sell items quickly.
• Short term loans versus long term loans in financing an activity.

Circumstances of Sales

• Sudden emergency/necessity: Indicates the sale was forced and could be for investment rather than trade.
• Case analysis of house sales after incurring losses.

Mutual Transactions

• Mutuality: Income from transactions between members is not taxable.
• Various exemptions/deductions, mostly for co-operative societies and registered trade unions and similar.

Illegal Activities, Hobbies, and Gambling

• Illegal activities (liquor trafficking, gambling, etc.) with business characteristics are taxable.

Assessability of Receipts

• Features of income: "coming into" the recipient, form of money, periodicity, recurrence, result of normal activity, compensation for revenue loss..
• Payments: taxed when they become due and payable.
• Specific situations: Income received in advance, foreign exchange transactions, insurance recoveries, debt release.

What is Gross Income?

• Specific types of income: Debts from sales, services, property, stock withdrawn market value, dividends, investment income (from business/money lending), export value, recovery of bad debts, tax refunds, mining expenditure recovery, releases/waiver of debt, insurance/compensation.
• Detailed examples with scenarios.

Capital or Revenue Receipts

• Capital receipts: Sale of fixed assets.
• Capital-nature receipts: Receipts associated with significant restrictions of business activities.
• Revenue receipts: More frequent income, like recurrent payments.