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Topic 5: Tax Planning for Companies (Investment income (income derived…
Topic 5: Tax Planning for Companies
Financing arrangement
Claim of Capital Allowances
Wholly in cash
Full cost of qualifying asset
Term loan/overdraft
Full cost of qualifying asset
Initial allowances + annual allowances for the first year
Remaining annual allowances claimable at future year until full relief
Passenger vehicles are restricted to RM50,000 to RM100,000
Interest allowable to deduct on revenue - s 33(1)(a)
Hire purchase
Refer to instalment paid
Initial allowances on new instalment paid on the year
Accumulated instalment paid for annual allowances
Interest on hire purchase given a deduction on the unadjusted income
Leasing
Non-claimable as not the owner of the asset
Full leasing charges claimable as revenue expense if related to income production
Advantageous
Time
More flexible
Set off
Utilisation
Interest restriction
Deductibility of interest paid (interest expense) on money borrowed for income producing purpose would be restricted
Investment/Borrowing x Interest expense
Amount of interest restricted
Added back to arrive at business adjusted income
Allocated to individual investment source
If amount of interest restricted cannot be offset against the income of the related investment
The excess interest expense cannot be carried forward
Permanent loss
Measures
Arrange company to borrow directly from bank
Dispose non-profitable investments
Review interest charges annually
Identify investments funded from existing borrowings & directly allocating cost of borrowings to the investments
What is tax planning?
Analysis of financial plan from a tax perspective
To ensure
tax efficiency
Investment in a company
Share capital (equity)
Interest restriction
Interest expense incurred in buying the shares can only be set off against the dividend income
Withdrawal of investment
Not allowed to withdraw
Debt financing (loan)
Profit extraction
Form of return of investment:
INTEREST INCOME
Interest restriction
Full deductibility (of interest expense) by charging the required amount of interest income to offset the interest expense suffered
Withdrawal of investment
Can be withdrawn at any time
Controlled transfer
assets transferred at the
tax written down values
of the transferor.
NO balancing charge or balancing allowance
would arise on the transferor
Transferee would only be entitled to claim annual allowance
based on the assets'
original acquisition cost
Disposal of assets
< 2 years
claw back capital allowance
2 years >
Balancing allowance
dispose this year
to reduce income
Balancing charge
dispose next year
to defer tax liability
Treatment of business income/loss
Business income
Structure business activities into one source of business income
Benefit
availability of
capital allowance
reduce adjusted income arising from a source consisting of a business
limited to income from that source
IF
unabsorbed capital allowance
exist,
only can be set off by the same business source of the business
Is there
interconnection
,
interlacing
,
interdependence
, or
unity
in business
activities
and
assets
?
Yes: Same source
Unabsorbed losses and capital allowances can be offset
No: Separate business sources
Unabsorbed losses and capital allowances cannot be offset
River Estates Sdn Bhd v DGIR (1984)
Business loss
Adjusted loss
deducted against aggregate income
Group relief
70%
of current year loss can be
surrendered
to other company in
group
Conditions to be met:
a) both companies must be
tax residents
and part of group for the last
12 months
b) each company's
paid-up capital is > RM 2.5 million
Company also cannot enjoy these incentives:
a) pioneer statues or investment tax allowance
b) Malaysian ship exemption
c) income tax exemption
d) reinvestment allowance
e) revenue deduction on approved food production, cost of acquiring foreign-owned company, and proprietary rights
Unabsorbed business losses
Current year's loss not fully deducted can be
carried forward to future YAs
Accumulated as one balance
To be deducted from
aggregated statutory income
of business
If one business has multiple income source:
Income can be offset against any unabsorbed loss from the other income source
American Leaf Blending Co Sdn Bhd v DGIR (1979)
Investment income
income derived from
interest
,
dividend
, or
rental
a) Loss from one source cannot be offset --
permanent loss
b) Expenses > income = excess is permanent loss
c)
Rental
: cannot be divided by use;
Interest
: cannot be divided according to income-producing or non income-producing
Commencement of business
Can claim a tax deduction for revenue expenses incurred
If a business does not generate income?
Can be set off against other income in the current year
Can be carried forward to the subsequent years
An
essential activity
of a business has started (
Commissioner of Income Tax v Saurashtra Cement and Chemical Industries Ltd
)
Purchasing activity
Production of manufactured goods
Opens its doors to the public
Profit extraction
Form of return of investment:
DIVIDEND
Financing method
