Tax allowable expenses

By David Hor http://mytaxpages.googlepages.com

When is an expense allowable for deduction? Section 33 of the Malaysian Income Tax Act, 1967
states that “……the adjusted income of a person from a source for the basis period for a year of
assessment shall be an amount ascertained by deducting from the gross income of that person
from that source for that period all outgoings and expenses wholly and exclusively incurred
during that period by that person in the production of gross income from that source….”. This
means that expenses incurred to derive an income will be allowed as deduction. For example
packaging material store goods for delivery to customers, delivery expenses incurred to deliver
goods to customers, rental of office space and warehouse for storage of goods, printing of sales
invoices. Some expenses are allowed under separate statutory orders even the expenses do not
fulfill the general deductibility test above.

Penalties

Knowing the types allowable expenses can lower your tax bill. However, you will be courting
trouble if you deduct an expense which is not allowable. Taxpayer will be heavily penalized for
any understatement of taxes discovered during tax audit. A penalty will be imposed under
subsection 113(2) or 112(3) of the ITA in which the penalty equal to the amount of tax
undercharged (100%) or equal to treble the amount of tax payable (300%) respectively. However,
the Director General of Inland Revenue, in exercising his discretionary powers may consider a
lower penalty of 45% to be imposed for the first offence.

The concession penalties imposed by the Inland Revenue Board for voluntarily disclosing the
understated tax liabilities are follows:

Period from the date of Rate

submitting return form
Voluntary disclosure before case is selected for Less than 1 year 15%
audit.
1 year to less than 3 years 20%
3 years and above 30%
Voluntary disclosure after taxpayer has been Not applicable 35%
informed but before the commencement of the
audit visit.

For each repeated offence, the rate of penalty shall be increased by 10% as compared to the last
penalty rate imposed for the previous offence but limited to a sum not exceeding 100% of the
amount of tax undercharged. The Inland Revenue Board agreed that they will not impose any
penalties on technical in nature adjustments. What constitute technical adjustments and what is
not is argumentative.

Planning

Prevention is always better than cure. In order to avoid any penalties one needs to classify the
transaction correctly in the accounts. Then, it can be easily identified and adjusted accordingly in
the tax computation. Furthermore, the company will be able to budget how much taxes they have
to pay for the year of assessment rather than to leave this tasks to their tax agents who may not be
aware any disallowable expenses “hidden” in the wrong accounts classification.

Examples of allowable and non-allowable expenses

Here are some examples of allowable expenses:

• Printing of stationary
• Rental
• Traveling
• Transport
• Staff entertainment
• Audit fees
• Factory overheads
• EPF contributions
• Insurance
• Repairs and maintenance
Non-allowable expenses

• Personal expenses
• Capital expenses such as plant and machine
• Entertainment incurred on prospective customers
• Secretarial fee
• Tax fee
• Legal fee incurred for purchase of capital asset
• Donation
• Overseas staff trip
• Tax consulting fees
• Expenses not incurred by the business

To learn more about business deductions and taxability of income, join our workshop on 2nd
August 2008 at Universiti Sains Malaysia, School of Management Seminar Room, 9 am to 1 pm.