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Business income and taxation for companies - Coggle Diagram
Business income and taxation for companies
Scope of charge
General
Taxable
Income accruing in or derived from Malaysia, and
Income received in Malaysia from outside Malaysia
Exempted from tax under para 28 of Sch 6 of ITA, but is tax under this charging section
Foreign income received in Malaysia
The exemption excludes specialised business carrying on business, insurance, sea and air transport
Concept of a source or where the source arises
The source of income must be in Malaysia or must be located in Malaysia
A source is the graphic location of the originating source of income
Foreign income received in Malaysia
It is either
Exempted under para 28 of Sch 6 of ITA. or
This exemption is applied to all persons except to resident companies carrying on specialised business of banking, insurance, sea and air transport
non- taxable if the foreign income is not received in Malaysia
The word received is important to determine whether the foreign income is exempted or non-taxable
Not considered received
Mere book entries in Malaysia
Considered received
Two persons being involved where one would give and the other would take
Contra, even though there is no actual money being remitted
Doctrine of first receipt
Once the accrued amount has been received, the subsequent dealing which relates to the said amount, cannot be said to have been received
Election by Labuan entity
Meaning
Labuan trading or non-trading activities
Carry on: in/from/through Labuan
Excludes any activities which is an offence under any written law
Labuan entity may make irrevocable election to either be taxed under
The election must be made within 3 months from the starting of basis year of assessment
ITA 1967 instead of LBATA 1990
The election is to allow them to enjoy any tax treaty benefits
What is income?
Recurring but not necessary
Definition of business
Importance of distinguishing an income as employment or business
Business can enjoy capital allowance and some reductions
Profession
Refers to any person who
Use his intellect to obtain the end of a product, or
Professional person carries on business on his own account
Vocation
A person who placed bets systematically was held to be carrying on his vocation
The gains are taxable even if it is unlawful
Trade
Normally consists of a series of transactions where there is continuity and repetitions
Business has wider context than trade
Badges of trade
PROFITS WIN
Gross income from a business
Liquidated debts arising from
Goods
Services
Use or enjoyment of property
Advance receipt
Refundable
Exclude from the gross income
Non-refundable
Include in gross income
Service/ use or enjoyment of property
Any sums received shall be included in the gross income
Release of debt
Shall be included in the gross income where capital allowance has been claimed for that asset sold
Withdrawal of stock
For own use/ for use as non-business/transfer of stock manufactured or developed to fixed assets
The MV shall be included in the gross income
Not applicable to
Assets specifically manufactured or developed for use as a capital asset
Because it never form part of the trading stock
Stock in trade parted with by any element of compulsion
Dividend or interest income
Dividends
If dividend relates to stock in trade of the business
Interest
Received from banks, moneylenders, financial institutions
Other receipts
Examples
Insurance recoveries
Compensation from breach of contract
discounts and commissions
If they relate to circulating capital
If relate to fixed capital then not included in gross income
Insurance, indemnity, recoupment, recovery, reimbursement, otherwise
Relate to outgoing and expenses deductible in ascertaining adjusted income from that source, and
under contract of indemnity
Compensation for loss of income from that source
Professional indemnity insurance, irrespective of whether the professional chooses to claim the insurance premium as a tax deduction
Recoveries from loss of cash
Where the loss has been allowed as tax deduction
Include
Insurance
Agreement of payment from staff concerned
Legal action
Other recovery action
Bad debts recovered
Included where it was qualified for deductions in previous years
Business income derived from Malaysia
Income is said to be derived in malaysia when the activities are carried out in malaysia
Section 12 of ITA: circumstances where income is derived or deemed derived from Malaysia
Deemed derived when:
When the gross income is not attributable to the operation of the business carried on outside Malaysia
Export but no sales
Section 12(1)(b)(ii)
Where the output is exported outside Malaysia but section 12(1)(b)(i) does not apply, then an amount equal to the MV shall be deemed derived from Malaysia
Sales exported
Section 12(1)(b)(i)
If the business consists wholly or partly of the manufacturing, mining, growing, producing or harvesting. thr gross income from the output of sales outside Malaysia shall be deemed derived from Malaysia
Place of business in Malaysia
Income that is attributable to a place in Malaysia shall be deemed derived from Malaysia
Deemed to be derived from Malaysia if either
That person carries on supervisory activities in connection with the building or work site (place of business), for a period or periods exceeding 5 months in aggregate in any 12 months, or
has another person on his behalf who:
habitually conclude contracts, or habitually plays the principal role leading to the conclusion of contract that are routinely concluded without material modification;
habitually maintains a stock of goods or merchandise in that place of business from which such person deliver goods or merchandise, or
regularly fills orders on his behalf
Preparatory or auxiliary activities do not constitute a place of business
For display, delivery or storage
Commencement of business
The commencement of business is important to determine
The capital allowance that can be claimed
The basis period for a year of assessment
The pre-commencement expenditure which are does not qualify for tax deductions
Distinguished between
Commencement of business
That relate to the income-producing process
Setting up of business operations
Preparatory in nature
Examples of date of commencement
Retail business
When the shop or outlet is open to public
Date of first sale made is irrelevant
Manufacturing business
Raw materials are received
Date when machinery is purchased is irrelevant because no raw materials, no manufacturing
Acquisition of existing business
When the business operations was acquired provided that the operations continue unabated by the change of ownership
Hotel business
When the beverage outlet, service, hotel rooms are opened to public
Property development business
Date of construction of project
Where the date of sub-division is close to the date of purchase of land, then the commencement date is the date the land was purchased
Maintaining an existing business source or commencement of new business source
The business has temporarily ceased, and the source of income still continues, and the business re-commence subsequently
Unabsorbed capital allowance can be used to reduce the adjusted income
The business has ceased and recommencement of a trade is of new business
Unabsorbed capital allowance of the old business shall be lost
Extension of an existing business source or commencement of a new business source
If there is inter-connection or interlacing or interdependence or unity embracing the company activities, is it sufficient to justify that only one business was being carried on
Revenue or capital receipt
Revenue
Consideration in lieu of trading profit or loss of income
Cancellation of agency contact which is incidental to the normal business of the counterparty, even though the contact might be modified, altered or discharged from time to time
Compensation for an amount in addition to the repair cost, and the compensation is not for the damage of the asset, but to put the company as far as possible in the case the delay would not happen
Compensation received for late delivery which has caused lost of profit for the company
Compensation received for the cancellation of a trading contract which is in the ordinary course of the business
Compensation received for giving out benefits or sale of part of rights/know-how where the rights or know-how is retained and the vendor can still make profit from the asset
Capital
Case law
Sale or disposal of profit-making apparatus
Sale of fixed assets
Sterilization of capital assets
Restrictive covenants or for imposition of substantial restrictions on the activities of a trader
Compensation for cancellation of future rights under the agreement which are not in the ordinary course of the company and which relates to the whole structure of the person's profit-making apparatus
Compensation received for any loss resulting from the alteration of the agreement which relates to the framework of the business
Compensation received for termination of unexpired agreement which affect the structure of the business as it was for the loss of the company's major assets
Disclosure of secret process where no part of it was retained