Malaysian Tax Theory Chapter 2: Business Income

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Questions and Answers

What is a significant factor in determining the existence of a business according to the badges of trade tests?

The amount of profit generated

The narrative of transactions

The duration of the asset's maturation

The presence or absence of special skills (correct)

Which of the following constitutes an indicator of business income being derived from Malaysia?

Exporting goods without conducting business in Malaysia

Business activity solely conducted online

Sales proceeds received in Malaysia (correct)

Purchase contracts negotiated in a foreign country

Which statement best describes how gross income from manufacturing in Malaysia is treated if sales occur outside the country?

It is only taxable if services were rendered in Malaysia.

It is deemed to be derived from Malaysia regardless of sales location. (correct)

It is considered as income solely based on local contracts.

It is exempt from tax in Malaysia.

What is one of the criteria classified under the Operations Test for identifying business income in Malaysia?

Passing of ownership and risk executed in Malaysia Signup and view all the answers

Under Section 12(1)(b), what happens if an article produced in Malaysia is exported?

Market value at the time of export is considered as gross income. Signup and view all the answers

What is the effect of contracts negotiated and concluded in Malaysia on the determination of business income?

They serve to identify income derived from Malaysia. Signup and view all the answers

Which of the following does NOT contribute to the derivation of business income in Malaysia?

Services rendered in another country Signup and view all the answers

Which of the following would likely NOT be considered when assessing the taxability of business income derived in Malaysia?

Previous years' sales performance Signup and view all the answers

How is the management and control of a company primarily determined?

Through the meetings of Board of Directors (BOD) Signup and view all the answers

Which statement about corporate residency is accurate?

A company may have dual residency in multiple countries. Signup and view all the answers

What must a company demonstrate to prove it is not a resident for subsequent years of assessment?

Meetings of the BOD held in another country Signup and view all the answers

Which of the following is NOT a pre-commencement expense allowable for companies?

General advertising costs before business commencement Signup and view all the answers

When is a company deemed to be resident in Malaysia for YA 2017?

When the BOD meets only once in that year Signup and view all the answers

Which of the following accurately describes an aspect of the commencement of a business?

Determining the basis period is crucial for tax assessments. Signup and view all the answers

What is the basis for determining where management and control is exercised, according to relevant court rulings?

Where business decisions are effectively made Signup and view all the answers

Which of the following expenses can a company with authorized share capital ≤ RM2.5 million claim?

Recruitment expenses from one year before business commencement Signup and view all the answers

Which scenario illustrates a business activity deemed to be derived from Malaysia?

A business earns dividends from shares both in and outside Malaysia. Signup and view all the answers

What is the basis period for a company commencing operations for the first time?

A period less than 12 months ending on a day in that basis year. Signup and view all the answers

In terms of business and trade, which of the following constitutes an example of capital expenditure?

Expenses incurred in the purchase of machinery. Signup and view all the answers

What do both dividends and interest income have in common regarding their assessment in Malaysia?

They are both deemed to be derived from Malaysia regardless of the source. Signup and view all the answers

Which of the following best describes the operational test in Malaysia's tax framework?

It assesses whether income is generated from Malaysian sources. Signup and view all the answers

Which of the following is an incorrect statement regarding the derivation of business income?

Income from overseas investments is not taxable if there are no operations in Malaysia. Signup and view all the answers

How is the market value of exports treated in the context of Malaysian business taxation?

It is regarded as derived from Malaysia regardless of destination. Signup and view all the answers

Which statement is true regarding interest income derived from loans in Malaysia?

Interest on all loans, domestic or foreign, is deemed derived from Malaysia. Signup and view all the answers

Study Notes

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.

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Description

Explore Chapter 2 of Malaysian Tax Theory and Practice, focusing on business income. This quiz covers various types of income sources including profits from employment, rental income, dividends, and other periodic payments. Deepen your understanding of the distinctions between 'business' and 'trade' in this essential chapter.