Malaysian Tax Theory and Practice PDF

Veerinder on Malaysian Tax Theory and Practice CHAPTER 2: BUSINESS INCOME  TYPES AND INCOME SOURCES 4 (a) Week 4(d) Gains or profits from a Week 6 4/5 Ren...

Veerinder on Malaysian Tax Theory and Practice CHAPTER 2: BUSINESS INCOME  TYPES AND INCOME SOURCES 4 (a) Week 4(d) Gains or profits from a Week 6 4/5 Rents, royalties, business, for whatever and/or premiums period of time carried 4(e) Week 7 4(b) Week Pensions, annuities, or other periodical 2/3 Gains or profits from an employment payments not falling under any of the foregoing paragraphs 4(c) 4(f) Gains or profits not falling Week 7 Dividends, interest, and/or under any of the foregoing Week 6 discounts paragraphs  2.1 Meaning of “Business” & “Trade” ▪ “Business” include profession, vocation and trade and every manufacture, adventure or concern in the nature of trade. ▪ “Business” connotes some real, substantial, repetition and systematic course of activity or conduct with a set purpose. ▪ “Business” has a wider scope than “Trade” ▪ “Trade” connotes something in the nature of a commercial undertaking, of which buying and selling are the most obvious characteristics.  2.1 Meaning of “Business” & “Trade”…cont’ “Vocation” which is a way of living and a person can have more than one vocation. 'Vocation' is nowadays used for an person Partridge activitybets done systematically by a person where Any carryingvonMallandaine - A person a business or profession or who places she has a special fitness, even awas personheld to be carrying in employment can engage inon a vocation, thesometimes vocation. gains derived were A fullchargeable. Denman time practising Chartered J. saidtaking Accountant “I think the word donevocation is as occasionally, admitted hobby, a seminar to the analogous to the word ‘calling’.... It ormeans is a 'vocation’. out of the interest, wayout in ofwhich inner urge and not mainly with the a person passes his life, and A proprietor or partner of a business organisation it is a very large work motive indeed” of making (CKF,and not a profit writing articles/blog 2018, Chp 13)is a 'vocation’. as a means of livelihood. A teacher who is in regular employment in an educational institution taking tuition class for Billam v Griffith, a barrister who was a full time employee wrote children. plays Singers during hisBut are professionals. spare time if they performwhich as he hoped to sell. 1 of the plays judgeswas in a reality producedshow, itand is a bought 'vocation'. for a film for which he received a lump sum as an advance for royalties. Royalties was held assessable. 4  2.1 Meaning of “Business” & “Trade”…cont’ “Adventure or concern in the nature of trade” where sometimes isolated profitable transaction falls within this ambit and income tax applies. ▪ How to determine? Leeming v Jones – presence of any of the following conditions: MEANING i. Existence of an organisation OF ii. Existence of special skill, opportunities in relation to the BUSINESS articles dealt with INCOME iii. Activities which lead to the maturing of the asset being sold iv. Nature of assets lend itself to commercial transactions ▪ Badges of trade tests –absence or presence helps determine the substance of the transaction 2.2 Derivation and Assessability ▪ Income from a business not attributable to operations carried on outside Malaysia is deemed to be derived from Malaysia. © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.2.1 Derivation of business income ▪ Income from a business not attributable to operations carried on outside Malaysia is deemed to be derived from Malaysia. (S.12(1)(a)) ▪ S. 12(1)(a)- Operations Test (in Malaysia if one or more are present): ▪ Contract negotiated and concluded in Malaysia ▪ Stocks maintained in Malaysia from which orders are fulfilled ▪ Passing of ownership and risk in Malaysia ▪ Sales proceeds are received in Malaysia ▪ Where services are rendered in Malaysia ACC2054 Property of Sunway University  2.2.2 Derivation of Business Income…cont’ S 12(1)(b)- ▪ if the business consists wholly or partly of the manufacturing, growing, mining, producing, or harvesting in Malaysia of any article, product, produce or other thing- i. the gross income from any sale of the article, product, produce or other thing taking place outside Malaysia in the course of carrying on the business; or ii. where the article, product, produce or other thing is exported in the course of carrying on the business and subparagraph (i) does not apply, an amount equal to the market value of the article, produce, product or other thing at the time of its export, Shall be deemed to be gross income of that person derived from Malaysia from the business. ACC2054 Property of Sunway University  2.2.3 Business Income S.24 = when a business income is taxable 24(1)(a) A debt arising from the sale of stock in trade 24(1)(b) A debt arising from the provision of services rendered 24(1)(c) A debt arising from the use of any property 24(2),(3) Market value of stock in trade withdrawn for own use or gifts or donation other than disposal 24(4) Dividend income of a share dealing business 24(5) Interest income of an investment dealing business or a money lending business  2.2.4 Derivation and Assessability ▪ If the business is carried on in Malaysia and the gross income is from outside Malaysia? ▪ Products are exported? Example : Thorny Enterprise owns a durian orchard in Johor. In 2017, the durian harvested in orchard either sold in Johor or in Singapore. The durians sold in Singapore were delivered and sold by the proprietor of Thorny Enterprise to the fruit stall. Some durians were also exported to Hong Kong. The following are the records relating to the sales in 2017 : Sales (at the orchard in Johor 60000 Sales ( at the fruit stall in Singapore) 70000 Export (Hong Kong) 80000 (market value of export) Proceed from Malaysia → deemed to be derive din Malaysia business operations were in Malaysia Proceed at fruit stall in Singapore → deemed to derived in Malaysia as it is produced and harvested in Malaysia Thorny Enterprise did not sell the fruits in Hong Kong, thus S.12(1)(b)(i) is not applicable. However, since the fruit were exported, the market value of the exports deemed to be derived from Malaysia © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.2.4 Importance of correct determination of basis periods nses are capital ated as expenditure on red, thus assets is treated uctible as incurred © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.2.5 Derivation and Assessability ▪ A business is carried on in Malaysia and gross income of the business consists of a dividend or interest forming part of the stock in trade of the business carried on in Malaysia? Example : 1. AB niaga operates a business dealing in the purchase ans sales of shares in and outside Malaysia. In 2017, AB niaga earned dividens on shares that itheld as trading stocks as follows – RM20000 dividend on shares held in Malaysia, and - RM15000 dividend on shares held outside Malaysia Both dividends received are deemed to be derived from Malaysia [S.12(12)] 2. XYZ credit operates a business dealing in the granting of loans. In 2017, XYZ Kredit earned I terets on loans that it gave out in and outside Malaysia as follows : RM50000 interest on loans given out in Malaysian, and RM60000 interest on loans given out outside Malaysia Both interest income are deemed to be derived from Malaysia [S.(12)(2)] © 2015 Commerce Clearing House (Malaysia) Sdn Bhd 2.2.6 Basis Period for Assessment of Income Where a company, limited liability partnership, trust body or co- operative society commences operation on a day in a basis year for a YA (first YA) and makes up its account: a. for a period of < 12 months ending on a day in that basis year, that period shall constitute the basis period for the first YA © 2015 Commerce Clearing House (Malaysia) Sdn Bhd 2.2.6 Basis Period for Assessment of Income…cont’ First Accounts Closed In The Same Year Riang Segar Sdn. Bhd. submitted its accounts as follows: Accounts Accounting Period Period First 1.02.2014 - 30.9.2014 8 months Second 1.10.2014 - 30.9.2015 12 months The basis periods for the company are: Year Of Assessment Basis Period Period 2014 1.02.2014 - 30.9.2014 8 months 2015 1.10.2014 - 30.9.2015 12 months Note: 1. The first accounts closed in 2014. 2. The first accounting period of 8 months is accepted as the basis period for the first year of assessment although the period is less than 12 months or closed on a date other than 31 December. © 2015 Commerce Clearing House (Malaysia) Sdn Bhd 2.2.6 Basis Period for Assessment of Income..cont’ b. for any period of months ending on a day in the immediately following basis year (second basis year) that period shall constitute the basis period for the YA (second YA) immediately following the first YA, these shall be no basis period in relation to any of its sources of income for the first YA; or © 2015 Commerce Clearing House (Malaysia) Sdn Bhd 2.2.6 Basis Period for Assessment of Income..cont’ First Accounts Closed In The Following Year Amanah ABC submitted its accounts as follows: Accounts Accounting Period Period First 1.5.2013 - 31.3.2014 11 months Second 1.4.2014 - 31.3.2015 12 months The basis periods for the trust body are: Year Of Assessment Basis Period Period 2014 1.5.2013 - 31.3.2014 11 months 2015 1.4.2014 - 31.3.2015 12 months Note: 1. There is no basis period for the year of assessment 2013. 2. Although the operations started in 2013 but the first accounts closed in 2014, thus the new provision of subsection 21A(4) of the ITA applies. The first set of accounts for 11 months ending in 2014 is the basis period for the year of assessment 2014. © 2015 Commerce Clearing House (Malaysia) Sdn Bhd 2.2.6 Basis Period for Assessment of Income..cont’ c. for a period of > 12 months ending on a day in the basis year immediately following the second basis year, that period shall constitute the basis period for the YA immediately following the second YA and there shall be no basis period in relation to any of its sources of income for the first YA and the second YA. A company commences operations on 26.06.2001 and accounts are made up to 30.09.2002 (>15 months), and subsequently to 30.09.2003. The basis period for the Y/A 2001 is 26.06.2001 to 31.12.2001. The basis period for the Y/A 2002 is 01.01.2002 to 31.12.2002. The basis period for the Y/A 2003 is 01.10.2002 to 30.09.2003. © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.3 Tax Accounting Taxable income to be different from the accounting profit : ▪ income shown in the books might not be taxed at all → exempt income ▪ things that aren't counted as income in accounting might be taxed at all → gain on the sale of land held for many years ▪ income may be derived for tax purposes in an earlier or later year; things that are counted as expenses in accounting might not be allowable deductions → depreciation Lord Denning, MR in Heather v PE Consulting Group Ltd (48 TC 293) : “The courts have always been assisted greatly by the evidence of accountants. The practice should be given due weight; but the Courts have never regarded themselves as being bound by it… The question of what is capital and what is revenue is the questions of law by the Courts. They are not to deflected by their true course by the evidence of accountants, however imminent.” © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.4 Corporate Residence ▪ Determination of residence status - [PR No. 5/2011] ▪ “Control and Management” refer to real or effective control Place where decision and management (see Todd v Egyptian Delta Land & are made to control Investment). and direct, make policy - where superior In determining where Management and Control is exercised: authority is where “real business is carried on” through meetings of BOD (see De Beers Consolidated Mines Limited v Howe) “Exercise and where actual management and policy decisions take place Management” at (see North Australian Pastoral Company Limited v FC). any time during basis year Need not be exercised over the whole basis year. © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.4 Corporate Residence…cont’ ▪ A company may has a dual residence – two ore more countries at the same time ABC Sdn Bhd’s accounting year end 31 December. In 2017, the management and control of its business was exercised in Malaysia (its BOD met in Kuala Lumpur). For YA 2017, ABC Sdn Bhd was resident in Malaysia [S.8(1)(b)]. For the subsequent year of assessment, ABC is deemed to be resident in Malaysia, until the company proves otherwise. [S.8(1)(c ). DEF ends its accounting year on 30 September. Since its incorporation in 2014 until 2016, its BOD never held any meeting in Malaysia. Its first and onl BOD meeting’s that was held in Malaysia was in July 2017. Prior to YA 2107, DEF was not resident in Malaysia. For DEF Sdn Bhd, July 2017 (when BOD meeting) falls in the basis period for YA 2017. Therefore, for the YA2017, DEF Sdn Bhd, deemed to be resident in Malaysia [S.8(1)(b) For subsequesnt YA, DEF is deemed to be resident in Malaysia, until the company proves otherwise. [S.8(1)(c ). © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.5 Commencement of a Business ▪ Important to determine: a. the basis period; b. pre-commencement expenditure; and c. capital allowance set off. ▪ Pre-commencement expenses is not allowable except for: ✓ Companies with authorised share capital ≤ RM2.5 million. ✓ Recruitment of employees one year prior to commencement ✓ Qualifying expenses incurred overseas of an approved business venture ✓ Establishment expenditure of REIT, Islamic stock broking. © 2015 Commerce Clearing House (Malaysia) Sdn Bhd 2.5.1 Date of Commencement of Trade ▪ Business embarks activities directly related to generation of income: PR 2/2010 Acquisition of an existing business – business operations are acquired Hotel – opened to the public Retailing – opened to the public © 2015 Commerce Clearing House (Malaysia) Sdn Bhd 2.5.1 Date of Commencement of Trade ▪ Business embarks activities directly related to generation of income: PR 2/2010 Manufacturing – raw materials received & in position to manufacture; Plantation – seeds are sown or the seedlings planted. © 2015 Commerce Clearing House (Malaysia) Sdn Bhd 2.5.1 Date of Commencement of Trade ▪ Addition : PR 1/2009 ; Property development – essential preliminaries undertaken. PR 2/2009 Construction contract - date contract is secured; a letter of award is offered; © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.6 Cessation of a Business ▪ Business may be terminated through several ways: a. The business is sold as a going concern, i.e. “lock, stock and barrel”. b. The stock of the business is auctioned at the date of cessation. c. The business may continue to sell all his stock in the ordinary way and not replenish it. ▪ Death of a Trader – should the executor continues to trade? ▪ Liquidation of a Company – Whether liquidator is trading? © 2015 Commerce Clearing House (Malaysia) Sdn Bhd 2.7 Basis Periods & Change in Accounting Dates PR No. 6/2001 and PR No. 8/2014: ▪ Basis year for a YA shall constitute, in relation to a source of a company, trust body or co-operative society, the basis period for YA. ▪ Where a company has made up the accounts of its operations, that period shall constitute the basis period for all sources of income. ▪ If the normal accounting date is other than 31 December and there is a failure year then the DG will direct the basis period for YA in which the failure occurs. © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.7 Basis Periods & Change in Accounting Dates…cont’ PR No. 6/2001 and PR No. 8/2014: ▪ Overlap of Basis Periods - no period should fall out of taxation and profits would not be taxed twice. ▪ On commencement, basis period of the place of incorporation within a group of companies or existing operation(s) will be the basis period for the new operation. © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.8 Badges of trade i. Judicial tests: ii. Subject matter (Rutledge v CIR, 1929) iii. Quick turnover (Wisdom v Chamberlain, 1969) iv. Frequent transactions (Pickford v Quirke, 1927) v. Work done to enhance the asset (Cape Brandy Syndicate v IRC, 1921) vi. A profit-seeking motive (Marson v Morton, 1986) vii. Sales organisation(Martin v Lowry, 1926) viii. Source of finance (Wisdom v Chamberlain, 1969) ix. Emergency that necessitates the sale (West v Phillips, 1956-1960) No single badge of trade is conclusive evidence in itself. It is necessary to critically examine the overall picture, distinguishing any unique features‘  i. Subject Matter Nature of the asset: Property like commodities or manufactured articles which are normally the subject of trading Rutledge v CIR, 1929 On a business trip to Germany a taxpayer purchased one million toilet rolls. On returning to the UK the sole consignment of toilet rolls were sold to one individual for a profit. Profit made on this single purchase and resale item (i.e. the subject matter) was not made for own use or investment purposes. Purchase was ‘an adventure in the nature of trade’. Examples of ‘subject matter’: ▪ investment usually, but not necessarily, yields income, e.g. shares ▪ for personal use or enjoyment, e.g. paintings and classic cars ▪ fixed asset used in business, e.g. plant and machinery  ii. Quick turnover Interval between purchase and re-sale and the reason for that interval, i.e. the length of the period of ownership Disposal of an asset held for many years is arguably to be realisation of an investment, than if the sale follows very soon after purchase which is of trade in nature Wisdom v Chamberlain, 1968 ▪ A taxpayer purchased two large quantities of silver bullion to counter the effects of the devaluation of the pound. ▪ Purchase was made following advice and was financed by loan. ▪ Purchase was done on a short term basis in order to realise profit. ▪ Adventure in the nature of trade and was therefore assessed as trading profit. ▪ Other badges of trade observed in this case, i.e. source of finance (see later slide)  iii. Frequency of transaction Part of a series of such transactions and systematic and methodical activity may constitute an adventure in the nature of trade ▪ Pickford v Quirke, 1927 ▪ A syndicate purchased a cotton-spinning mill with the intention of using it in a trade ▪ However, the mill was in a worse state than first anticipated ▪ Taxpayer then decided to strip the mill of its assets and sell it piecemeal, making a profit. ▪ This was repeated a number of times with a number of mills. ▪ Rowlatt J opines that ‘it is very well known that one transaction of buying and selling a thing does not make a man a trader, but if it is repeated and becomes systematic, then he becomes a trader and the profits of the transactions, not taxable so long as they remain isolated, become taxable as items in a trade as a whole’  iii. Frequency of transaction..cont’ Leach v Pogson, 1962 ▪ A taxpayer owned and operated a driving school. ▪ When the driving school was sold, the taxpayer purchased another driving school, turned around the business and sold the driving school. ▪ The taxpayer did this 30 times. It was held that the frequency of the purchase, turnaround and sale of driving school transactions were indicative of a trade. ▪ The decision also reversed the tax treatment of the sale of the first driving school, which was originally treated as a capital sale.  iv. Work done to enhance the asset Subject matter is enhanced to increase its value / marketability. Breaking down of assets into smaller lots to facilitate a sale may be a pointer to a trading motive Cape Brandy Syndicate v IRC, 1921 Members of a wine syndicate joined in a separate syndicate to purchase brandy from South Africa. Some was shipped to the East with the remainder being sent to London to be blended with French Brandy, re-casked and sold at a profit. Taxpayer tried to argue that the transaction was of a capital nature from the sale of an investment. It was held that a trade or business was carried on and was assessable as a trading profit.  v. A profit-seeking motive ▪ Marson v Morton, 1986 ▪ Some lands was purchased with the intention to hold it as an investment. ▪ No income was generated by the land, however, it did have planning permission. ▪ In the same year, the land was sold following an unsolicited offer with a gain. ▪ Far from the taxpayers normal activity (potato merchant), it was not an adventure in the nature of trade. ▪ Presence of a profit-seeking motive is not necessarily a decisive pointer to the existence of a trade. ▪ However, evidence indicating that the sole object of acquiring an asset was to re-sell at a profit, with no apparent investment motive, will normally favour trading treatment. Exercise 1 : Logan is an employee in a fruit manufacturing company and Razak is a bank manager. They bought 9 units of fruit cutting machines and sold them to different buyers. Choose the relevant badges of trade below (you may choose more than 1 badges) in determining the nature of the sales. Subject matter Quick turnover Frequency of transaction Profit-seeking motive Referring to the scenario above, is the sales of fruit cutting machines revenue or capital in nature? Revenue Capital 35  vi. Sales organisation ▪ Ferguson v FC of T, 1979 ▪ Taxpayer was a naval officer. ▪ During his service, he already started a breeding business to prepare for his retirement. ▪ Business was small, only 5 cows. ▪ He engaged a management company to breed the cows for him. ▪ Organised activity to carry out the business confirm the sign of trade (i.e. engaging management company) ▪ Size of business causes doubts, could be hobby. ▪ Absence of an organised selling system may be a pointer against trading.  vii. Source of finance ▪ Wisdom v Chamberlain, 1969 ▪ Taxpayer financed the purchase of silver bullion with loan from bank and broker. ▪ Interest rate for both loans was high and to be repaid in 1 year’s time. ▪ Among other things, the short term loan showed that the taxpayer did not intend to hold the silver bullion for long, thus showing an intention for trade. ▪ Where short term loan is used to finance a transaction, this often indicates an intention to re-sell in the short term, a fair indicator towards trading.  viii. Circumstances of Sales ▪ The circumstances that were responsible for the realisation. ▪ A sudden emergency or necessity to quickly realise an asset is therefore likely to dispel any argument as to the existence of a trade ▪ West v Phillips (1956-1960) ▪ Taxpayer built houses, 287 were sold, 2208 were rented out. ▪ After 8 years, the letting business was incurring loss, thus the taxpayer was forced to sell the rented houses. ▪ The High Court found that the sale of rented houses was a forced sale. ▪ It is a sale of investment, and thus capital in nature. Exercise 2 : Robert has several properties in Putra Heights which he had no intention to sell. In December 2015, he was diagnosed with a serious illness and had to incur high medical bills. In January 2016, he sold a property for RM1 million in order to fund his medical fees. Which ONE of the badges of trade below is the most relevant to this scenario? Work done to enhance asset Quick turnover Circumstances of sales Frequency of transaction Referring to the scenario above, is the sale of property revenue in nature? Yes No 39  2.9 Mutual Transactions ▪ The mutuality principle : a. a person cannot trade with himself; and b. surplus of contributions over expenditure is not income. ▪ Subscriptions paid by members into the funds of a club is not assessable income. ▪ The following treatment is applicable: a. income from transactions with members is not subject to tax; b. income from transactions with non-members is subject to tax; c. income from investment and external sources being non- mutual receipts is subject to tax; d. deductions are allowed for expenses incurred to the portion attributable to non-members. ▪ Some mutual kinds of undertakings are partially exempted (e.g. co- operative societies); registered trade unions which are fully exempted. © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.10 Illegal Activities, Hobbies & Gambling 1. Illegal Activities with business characteristics is chargeable to tax: ▪ Illegal trafficking in liquor [MOF (Canada) v Smith]. ▪ Automatic gaming machines [Mann v Nash]. ▪ Illegal bets by bookmakers [Partridge v Mallandaine]. ▪ Street betting or betting through the post [Southern v AB Ltd)] ▪ Illegal drug dealing activities [Case D57 (1980)] ▪ Ultra vires activities of a company [England v Webb (1898)] ▪ Earnings from prostitution [CIR v Aken (1988)]. 2. Gambling Activities? 3. Hobbies? 4. Commercial Speculation/Transactions in Commodity Futures? © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.11 Assessability of Receipts ▪ Key features of income: i. It must “come in” to the recipient; ii. The receipt must be in the form of money; iii. It must be received as income in the hands of the recipient; iv. The characteristics of periodicity, recurrence and regularity; v. Receipts which are the result or a normal incident; vi. compensation for a revenue asset or loss of income flows. ▪ Business income is taxed when it becomes due and payable. ▪ To be taxable, income must be earned or realised. ▪ Income Received in Advance? © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.11 What is Gross Income? i. A debt arising from the sale of stock in trade; [e.g. 2.3a] ii. A debt arising from the provision of services rendered; iii. A debt arising from the use of any property; iv. Market value of stock in trade withdrawn; [e.g. 2.3a &b] v. Dividend income of a share dealing business; vi. Interest income of an investment dealing business or a money lending business; vii. The market value of the goods exported; viii. Recovery of a bad debt; [e.g. 2.3c] ix. Refunds of payroll or turnover tax; x. Excess of recovered expenditure over qualifying mining expenditure; xi. Release (or waiver) of a debt; [e.g. 2.3d&e] xii. Insurance, indemnity, recoupment, recovery, reimbursement; [e.g. 2.3f] xiii. Compensation for loss of income. © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.11 What is Gross Income?...cont’ i. A debt arising from the sale of stock in trade; ii. A debt arising from the provision of services rendered; iii. A debt arising from the use of any property; Example : In 2020, Alam Sdn. Bhd., a housing developer, commenced construction of 50 units of shop houses in Kajang for sale. Selling price/unit is RM400,000, the cost of construction estimated for RM300,000. In 2022, when the construction completed, 47 units were sold. Some purchaser yet to make full payment to Alam Sdn. Bhd. The company withheld 3 units for its own use for their office operation. Proceed from sales : RM400,000 x 47 units constitute the gross income for Alam Sdn Bhd business [S. 24(1)(a)]. The market value (i.e. the sales price :RM400,000 x 3 units used for office operation also consider as gross income for the company [S. 24(2)]. © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.11 What is Gross Income?...cont’ iv. Market value of stock in trade withdrawn; Example : During the year 2018, Bashir has taken home some goods from her mini market for her own use, the cost of the goods was amounted to RM5,200. No payment was made. If these goods were being sold to customers, the total sales price would be RM6,900. Any stock in trade which has been taken for private purposes by the proprietor without payment/consideration is to be treated as gross income at market value under s.24(2) & (3). As such, the goods withdrawn of RM6,900, constitute gross income from Bashara’s business for the YA2018 © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.11 What is Gross Income?...cont’ v. Dividend income of a share dealing business; vi. Interest income of an investment dealing business or a money lending business; vii. The market value of the goods exported; viii. Recovery of a bad debt; [e.g. 2.3c] Example : Bashara operates a mini market in Mantin. In 2015, Bashara had a trade debt of RM7,000. This debt was written off and claimed as a deduction against its gross income of the year of assessment 2017. In 2018, Bashara recovered RM2,000 of that debt that was written off The RM2,000 trade debt recovered in 2018 constitutes gross income from Bashara’s business for the YA2018, because the trade debt previously written off was allowed as a deduction against the gross income. [S.30(1)] © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.11 What is Gross Income?...cont’ ix. Refunds of payroll or turnover tax; x. Excess of recovered expenditure over qualifying mining expenditure; xi. Release (or waiver) of a debt; [e.g. 2.3d&e] Example 1 : De Café operate da restaurant. In 2020, De Café purchase supplies of its trading stock from Pembekal Kopi on credit costing Rm18,000. The cost of purchase was allowed as deduction against De Café gross income in the year 2020. By 2022, De Café managed to pay Pembekal Kopi only Rm12,000. In 2023, Pembekal Kopi wrote off balance of RM6,000 still owing by De Cafe, releasing from the debt. The RM6000 debt released constitutes gross income for De Café for YA 2023 [S.30(4)]. © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.11 What is Gross Income?...cont’ ix. Release (or waiver) of a debt; [e.g. 2.3d&e] Example 2 : In 2014, Bashir gave a personal loan of RM1,500 to her employee. This loan was fully written off in 2017, but was not allowed as a deduction against its gross income. In 2018, she recovered RM1,000 of the loan that was written off. The RM1,000 personal loan recovered in 2018, does not constitute gross income from Bashara’s business for the YA2018, because the debt previously written off was not allowed as a deduction against the gross income [S30(1) not applicable]. © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.11 What is Gross Income?...cont’ xii. Insurance, indemnity, recoupment, recovery, reimbursement; [e.g. 2.3f] Example : Elite Enterprise operates electrical appliances. Every year it pay insurance premium against loss of its trading stock. The premium payment were allowed for deduction against its gross income. In 2017, Elite suffers a loss due to flood, and received RM15,000 compensation from the insurance company. The compensation constitute gross income from business for YA2017 [S.22(2)(i)(a)] © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.11 Capital or Revenue Receipts a. Payments for the sale of the fixed assets of a business are capital receipts. b. Payments received for the destruction of the recipients’ profit-making apparatus are receipts of a capital nature. c. Payments in lieu of trading receipts are of a revenue character. d. Payments made in return for the imposition of substantial restrictions on the activities of a trader are of a capital nature. e. Payments of a recurrent nature are more likely to be treated as revenue receipts. © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.11 Assessability of Receipts ▪ Foreign Exchange Transactions? An exchange gain or loss arises when the value of an asset or liability valued in a foreign currency is compared to the value in RM at two different dates (eg. on the date of transaction and date of settlement of payment). A foreign exchange gain or loss is recognized when payment of a transaction amount is settled. © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.11 Assessability of Receipts…cont’ ▪ Insurance Recoveries? Sum received in relation to particular source of income receivable from the source of income are to be included as part of gross income. © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.11 Assessability of Receipts…cont’ ▪ Release of a Debt Previously Allowed as a Deduction? Example 1 : In 2013, ABC Sdn Bhd, acquired machine costing RM100,000 from XYZ on credit. For years of assessment, 2013 until 2016, ABC Sdn Bhd had claimed all eligible capital allowances. By 2016, ABC Sdn Bhd had paid XYZ only RM70,000. In 2017, XYZ Bhd wrote off the balance of Rm30,000 as a bad debt, releasing ABC Sdn Bhd off the debt. The RM30,000 debt that ABC Sdn Bhd was released constitutes of gross income for YA2017 [S.30(4)]. However, ABC Sdn Bhd still eligible to claim capital allowance on the machine. © 2015 Commerce Clearing House (Malaysia) Sdn Bhd  2.11 Assessability of Receipts…cont’ Example 2 : In 2015, DEF Sdn Bhd purchase a new car costing RM170,000 from Uni- Auto Bhd., with a down payment of RM30,000, and the balance to be paid by instalment. For the YA 2015 and 2016, DEF Sdn Bhd had claimed all eligible capital allowances. By 2017, an amount RM60,000 was still owing by DEF Sdn Bhd. However, Uni-Auto Bhd wrote of the RM60,000 as bad debt, effectively releasing DEF Sdn Bhd of the bad debt. The RM60,000 debt released constitute as gross income. For YA 2017 [S. 30(4)]. DEF Sdn Bhd had claimed all eligible capital allowances on the car. The taxability of released debt is not subject to the quantum of capital allowances claimed by DEF Sdn Bhd © 2015 Commerce Clearing House (Malaysia) Sdn Bhd Questions?