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Taxation 1 / BAC 2674 / Tutorial 5

Business expenses Part 2


QUESTION 1
What is the principle in tax law as regards deduction of an expense against income?
ANSWER
The principle is contained in section 33 of the ITA. It spells out that
Subject to this Act 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 all
outgoings and expense wholly and exclusively incurred in the production of gross income.
Essentially one need to consider the following:
1.
2.
3.
4.
5.

The nature of the business deduction


The nature of the expenses whether revenue or capital
Whether it is wholly and exclusively incurred
Whether it is actually incurred
Whether it was incurred in the production of gross income.

One need to also check with section 39 that the said expenditure is not disallowed under that
section.

QUESTION 2
A company has a profit of RM 10,000 after incurring the following expenses:

Water bill

3,000

Traveling

10,000

Salary

30,000

Repairs and maintenance

20,000

Medical expenses for the staff

1,000

Loss on sale of fixed asset

3,000

Leave passage to the sales manager

5,000

Entertainment

25,000

Electricity

4,000

Donations to an approved institution

5,000

Depreciation

15,000

Bank interest

3,500

Audit fee

2,000

Advertisement

16,000

Administrative expenses

35,000

Accounting fee

1,000

Required:
1) What are the expenses that you would allow for income tax purposes to arrive at the
adjusted income.

QUESTION 3
Hullay Entertainment Sdn. Bhd. (the company) trades in imported entertainment equipment
which is popular among the teenagers. Its financial year end is 31 December. It had prepared its
income statement for the year ended 31 December 2011 as follows:
Hullay Entertainment Sdn. Bhd.
Statement of accounts
Year ended 31 December 2011
Notes
RM 000
Sales
Less:

Cost of sales

Less: Salaries and wages


Staff welfare
Freight and insurance
Traveling and entertainment
Rental of premises
Depreciation
Bad and doubtful debts
Tax and accounting fees
Gain on disposal of fixed assets
Legal expenses
Donations
Profit before taxation

RM 000
85,000
64,000
21,000

1
2
3
4
5
6
7
8
9

5,600
400
700
316
290
240
750
170
(2)
9
3
12,524

Notes to the accounts:


1
Cost of sales
Thirty units of the equipment from the opening stocks were transferred to fixed assets. The cost
of the thirty units was RM 80,000 and the normal selling price is RM 96,000.
2
Staff welfare
This consists of the following:
Expenditure
Staff medical and dental expenses
Leave passage for directors
Education loan to employees written off
Maintenance of child care centre

RM 000
80
30
100
190
400

3
Freight and insurance
This includes RM 99,000 premium paid to an insurance company incorporated in Malaysia for
the good imported.
3

4
Traveling and entertainment
This includes an amount of RM 20,000 being annual dinner expenses for the staff, and lunches
(wholly related to sales) for customers costing RM 35,000
5
Rental
The rental of premises includes RM 60,000 paid for the months from November 2011 to January
2012.
6
Bad and doubtful debts
Bad and doubtful debts are in respect of trade debts as follows:
General provision at year ended 31 Dec 2011
Specific provision at year end 31 Dec 2011
Bad debts on loan to employee

RM 000
285
415
50
750

7
Tax and accountancy fees
Tax and accountancy fees include registration and secretarial fees of RM 20,000 on the increase
of authorized share capital
8
Legal expenses
This consists of the following:
Legal fees on preparing loan agreement
Fine imposed by the police for traffic offences

RM 000
4,000
5,000
9,000

9
Donations
On Christmas Day (25 December 2011) the company donated some mobile entertainment
equipment being trading stock of the company to an approved orphanage. The equipments were
worth RM 2,000. In addition, the company gave each of the orphans a cash gift of RM 20
totaling
RM 1,000.
10
Capital allowances
The company is entitled to an allowance of RM 204,000 for the year of assessment 2011.
Required:
(a)
Compute the tax payable by Hullay Entertainment Sdn. Bhd. for the year of assessment
2011
(b)
Explain your treatment of each of the items mentioned in the note.
4

Hullay Entertainment Sdn. Bhd.


Year of assessment 2011
Notes

Profit before taxation


Stock transfer to assets
Medical and dental
Leave passage
Education loan
Child care centre
Insurance premium (double deduction)
Staff entertainment
Rental of premises
Depreciation
Bad and doubtful debts general provision
Bad doubtful debts specific provisions
Bad debts loan to employees
Registration and secretarial fess share
capital
Gain on disposal of fixed assets
Legal expenses bank loan preparation
Legal expenses fine
Donation in kind
Donations cash to orphans

Adjusted income
Less: Capital allowance
Statutory income from business source

RM
000
(+)

RM
000
(-)

12,524
96
0
30
100
0
99
0
20
240
285
0
50
20
2
4
5
2
1
13,377

101

(101)
13,276
204
13,072

Notes:
Leave passage is specifically disallowed under the Income Tax Act 1967 (as amended)
Maintenance of child care is specifically allowed under the Income Tax Act 1967 (as amended)
Insurance premium qualifies for a double deduction as the insurance company is incorporated
in Malaysia.
The cost of the entertainment expenditure is allowable since the main intention or purpose of
the dinner is to entertain the staff. Entertainment of the customers is allowable as it is wholly
related to sales arising from the business.
The rental paid for the period January 2012 does not relate to the current basis period and
therefore is not deductible. But the expenditure would rank for a deduction in determining the
chargeable income of the following year of assessment.
As for bad and doubtful debts, the general provisions are not deductible. The specific
provisions would be allowable as it is related to the trade debts. As such no tax adjustments are
necessary. Bad debts recovered in respect of the trade debts are taxable and as such no tax
adjustments are necessary in this case.
Registration and secretarial fees in respect of the increase of share capital are capital
expenditure and therefore should be disallowed.
The fine imposed by the police for breaking the law is not a trading expenditure.
Donation in kind is not deductible in arriving at the total income. Also the cash given to the
orphans directly do not amount to a donation to an approved institution itself as such it is not
deductible in arriving at the total income.

QUESTION 4
SuperSaver Sdn. Bhd. was incorporated on 1.10.2006. The company commenced business on
1.2.2007 and make up its 1st set of accounts to 31.12.2007.
The companys profit and loss account for the year ended 31.12.2007 is as follows:
Note RM000
RM00
0
Sales
Less: Cost of sales
Less:
Payroll costs
Freight and insurance
Legal and professional fees
Office up- keeping expense
Miscellaneous expense
Interest cost
Net income

5,400
(1,540)
3,860
1
2
3
4
5

1,160
160
120
40
85
70

(1,635)
2,225

Notes:
1. Payroll costs : the above comprises of
Salaries
Bonus
EPF
Provision for retirement benefits
Entertainment allowance

RM000
720
80
160
140
60

2. Freight and insurance


Included in the above expenditure is an amount of RM4,000 paid to Reliable Insurance Bhd. a
company incorporated in Malaysia , for insuring goods imported by the company.
3. Legal and professional fees include:
Preparation of loan agreement
Valuation of land
Legal services on trade debt recovery
Architects fees on building construction
Stamp duty on increase in authorized share capital

RM000
60
13
11
10
20

4. Office up- keeping expense

Included in the above expenditure are furniture and fittings costing RM10,000 purchased on
1.3.2007.
5.
Interest cost
Included in interest cost is an amount of RM2,000 charged by a supplier for late payment of cost
of raw materials .
6. Additional information
The company is entitled to an allowance of RM 267,000 for the year of assessment 2007.
Required:
Starting with net income before taxation, compute the chargeable income for SuperSaver Sdn.
Bhd. for YA2007 showing all the relevant tax adjustments.
Answer
Computation of chargeable income for SuperSaver Sdn. Bhd.
RM000 ( -) RM000 (+)
Net income
EPF
Provision for retirement benefits
Entertainment allowance
Double deduction for insurance premium
Preparation of loan agreement
Valuation of land
Legal services on trade debt recovery
Architects fees on renovation of premises
Stamp duty on increase in authorized share capital
Office up-keeping expense (furniture and fittings)
Interest cost
Adjusted income
Less: capital allowance
Statutory income / chargeable income

2,225
nil
140
30
4
60
13
nil
10
20
10
nil
2,504
(267)
2,237

QUESTION 5 ADDITIONAL EXERCISE


Shuhaz Enterprise is a trading company. Its profit and loss accounts for the year ended 31
December 2011 is as follows:
Note
Sales
Cost of sales
Gross profit
Depreciation
Legal charges
Promotional expense
Entertainment
Water and electricity
Petrol cost for business vehicles
General and administrative expenses
Compensation
Wages and salaries
Motor vehicle expenses
Bad debts
Tax consultancy charges
Subscription to political party
EPF contributions to employees
Profit before taxation

i
ii
iii
vi
v
vi
vii
viii

RM

3,450
3,140
2,750
6,870
3,145
7,100
4,100
3,750
76,560
640
5,400
5,420
1,400
10,440

RM
964,000
(201,400)
762,600

134,165
628,435

Notes:
(i)
Legal charges of RM3,140 consists of :
Loan processing fee charged by the bank
Cost of income tax appeal
Total
(ii)

RM
1,200
1,940
3,140

Entertainment of RM6,870
This is the amount incurred for the Thanksgiving dinner treat held by Shuhaz at her home
for the companys customers to thank them for their overwhelming support of the
business.

(iii)

Water and electricity of RM3,145 consist of:


Water and electricity consumes
Late payment penalty on electricity bill
Total

RM
2,715
430
3,145

(iv)

Compensation of RM3,750
This refers to payment made to an employee injured on Shuhaz Enterprises business
premise.

(v)

Motor vehicle expenses of RM640 consists of:


Insurance on motor vehicle used in the business
Fine for traffic offence
Total

RM
500
140
640

(vi)

Bad debts of RM5,400


In addition to RM600 in respect of an irrecoverable trade debt written off, this amount
includes a loan of RM4,800 to a worker, which is now considered not recoverable. No
provision has been provided for this debt.

(vi)

Tax consultancy charges RM5,420


In April 2011, Shuhaz sought advice regarding business tax matters from Outlook Tax
Consultancy Sdn. Bhd. As a result, Shuhaz Enterprise was charged RM5,420 consultation
fees.

(vii)

Subscription to political party RM1,400


Shuhaz is interested in politics. The amount of RM1,400 is the fee charged when Judy
became a member of her favorite political party in the year of 2011 .

Other information:
For the year of assessment 2011, capital allowances in respect of assets amounted to RM49,500.
Required:
Compute the statutory income of Shuhazs Enterprise for the year of assessment 2011.
Note: Your computation should start with the profit before taxation figure and follow the
descriptions used in the notes to the profit and loss account. Indicate nil in the appropriate
column for any item that does not require adjustment.
(Total: 20 marks)

10

Shuhazs Enterprise Tax Computation


RM ( - )
Net profit before tax
Loan processing fee
Cost of income tax appeal
Entertainment (50% @ 6,870)
Water & electricity
Late payment penalty
Compensation
Insurance on motor vehicle
Fine by traffic police
Bad debts
Loan to workers
Depreciation
Promotional expense
Tax consultancy charges
Petrol cost for vehicles
Subscription to political party
General administrative expenses
Wages and salaries
EPF for employees (within 19%)
Adjusted income
Less: Capital allowance
Statutory income

RM ( + )
628,435
1,200
1,940
3,435

Nil
430
Nil
Nil
140
Nil
4,800
3,450
Nil
5,420
Nil
1,400
Nil
Nil
Nil
650,650
49,500
601,150

Note: EPF is allowed up to 19% of salaries and wages of employees. 19% of RM76,560 =
14,546. The RM10,440 paid to EPF is within the 19% allowable EPF. Hence, all EPF is an
allowable expense.

11

QUESTION 6 ADDITIONAL EXERCISES


Batik Uniform Sdn. Bhd. is a business owned by Mr. Rashid. Currently, Batik Uniform Sdn.
Bhd. produces and distributes quality uniforms including industrial uniforms, medical apparels
and safety apparels to various customers. For the year ended 31 December 2011, the companys
financial statement is as follows:
Note
Sales
Less: Cost of sales
Gross profit
Less: Operating expenditure
Marketing & Promotion Expenses
Payroll costs
Employees Provident Fund (EPF)
Professional fees and subscriptions
Depreciation
Utilities
Provision for doubtful debts
Other expenses
Donations
Add: Other income
Net profit before taxation

3.

4.

RM000
1,330

2
3
4
5
6
7
8
9
10
11

Notes:
1.
Included under cost of sales are:
Damaged stocks written off
Provision for the foreign exchange loss expected
upon payment of raw material (textile) purchased
2.

RM000
2,300
( 970)
23
510
60
10
60
180
30
70
15

(958)
372
40
412

RM27,000
RM32,000

Marketing and promotion expenses include:


Donation of school uniforms to Bestari School
Participation in an approved international trade fairs
Customers entertainment relating wholly to sales

RM 5,700
RM14,300
RM 3,000

Included under payroll costs are:


Medical expenses of staff and their family
Provision for retirement benefits
Mr. Rashids salary
Employees salary
Salary of two disabled47 operators

RM 47,000
RM 50,000
RM 75,000
RM310,000
RM 28,000

Included under EPF are contributions for:


Mr. Rashid
Employees

RM10,000
RM50,000

12

5.

Included under professional fees and subscriptions are:


Audit and tax fees
Annual subscription fee to ASEAN Manufacturers
Association

RM 9,800
RM

200

6.

Depreciation expenses comprise of depreciation for sewing machines, RM35,000


depreciation for office equipment, RM5,000, depreciation for furniture and fittings,
RM5,000 and depreciation for vehicles, RM15,000.

7.

Utilities expenses are expenses incurred for the purpose of business. It includes cost of
electricity, water, telephone bills and rental of factory.

8.

Provision for doubtful debts comprises:


General provision for doubtful debts
Specific provision for doubtful debts
Trade debts written off

RM 8,000
RM14,000
RM 8,000

Other expenses consist of:


Staff refreshments and annual dinner
Cost of new computerized security system

RM25,000
RM45,000

9.

10.

Donations:
A cash donation of RM15,000 was made to the Heart Foundation of Malaysia (an
approved institution).

11.

Other income comprises income derived from Malaysia as follows:


Tax exempt dividend
RM17,000
Interest on deposits from bank licensed under
the Banking and Financial Institution Act 1989
RM23,000

12.

Capital allowance due for the year of assessment 2011 is RM80,000. This allowance has
included all the qualified assets bought during the year.

Required:
Starting with the net profit before taxation, compute the total income of Batik Uniform Sdn. Bhd.
for the year of assessment 2011. State your reason for the deductibility or non-deductibility for
each of the item in your computation.
Note: You should indicate by the use of the word nil any item referred to in the question for
which no adjusting entry needs to be made in the tax computation.

13

Suggested Template for solution:


Items

Less (-)
RM

Explanation

Net profit before taxation

Add (+)
RM
412,000

(1) Cost of sales


Stock written-off
Provision of foreign exchange loss

Nil
32,000

Realised loss-allowable
Non-allowable exp

?
?
?

(2) Marketing & promotion


Donation of uniforms
Participation in approved fairs
Customer entertainment
(3) Payroll costs
Medical expenses
Prov. for retirement benefit
Owners salary
Employees salary
Salary for handicapped staffs

?
?
?
?
?
?
?

From Income Statement

?
?
?
?
?

(4) EPF
Mr Rashid
Employees (50,000 (19% x (310k + 28k)

?
?

?
?

(5) Professional fees & subscriptions


Audit & tax fees
?
Subscription fee to AMA

?
?

?
?

?
?

?
?

?
?
?

(6) Depreciation expense


(7) Utilities
(8) Provision for doubtful debts
General provision
Specific prov. for doubtful debts
Trade debts written off
(9) Other expenses
Staff refreshments
Security systems
(10) Donation
Cash donation
(11)

?
?
?
?
?

?
?

Other income

14

Dividend
Interest
income

After
?

statutory
After

Adjusted income
Less: Capital allowance
Statutory income from business

???
???
(?)
?

Add: Other income


Tax exempt dividend
Interest income
Aggregate income

Nil
Nil
?????

Exempted
Exempted

Less: Approved donations


Total income

15,000
???

Sec 44(6)

income
statutory

15