Allowable deductions in Malaysian Corporate Tax System

Discuss About The Complexities Malaysian Corporate Tax System?

In compliance with the “Section 4-15 of the Income tax Assessment Act 1997”, the calculation of taxable income is carried out by subtracting allowable expenses from assessable income. Deduction could be claimed on the part of the taxpayer as laid out in “section 8-1(1) of the ITAA 1997” for the expenses spent on gaining assessable income and conducting the overall business activities (Lavermicocca and McKerchar 2013). Hence, the following points are taken into consideration:

According to Section 8-1, the amount spent for shifting machinery would be deducted only, in case; the same is utilised for making taxable income. For instance, the cases of “Smith v Westinghouse Brake Company(1888)” and “Granite Supply Association Ltd vKitton(1905)” state that the expenses spent for plant reallocation and other expenses would not be subtracted because of capital nature.

Section 8-1 of ITAA 1997” depicts that the revaluation cost associated with an asset is not taken into account as deductible expenditure (Bell and Hindmoor 2014).

Section 8-1 of ITAA 1997” denotes that an expense pertaining to lawful dealings is suffered to contrast the winding up of the firm, which would be treated as deductible expense.

According to “Section 8-1 of ITAA 1997”, in case of experience of any solicitor expense, it would be treated as permissible deduction for making business income (Saad 2014).

In case of any purchase in the context of an organisation, GST input credit is accepted only on keeping proper records of the documents associated with such transactions. According to “GST Act 1999”, any organisation operating for gaining business income possess the authority to take input credit for payments of GST include buying of assets or materials.

As identified from the case study, Big Bank Limited has incurred $1,650,000 on advertising, which includes GST as well. At present, it intends to assure that such amount would be permitted as input credit or not as the expenses were including GST.

In accordance with “Chapter 2 of the Goods and Service Act 1999”, a firm would be allowed to obtain input tax credit of GST on such expenditures that the firm incurs during normal course of business; however, these expenses need to include GST (Glover 2014).

Big Bank Limited has more than 50 branches in the nation and it is involved in providing finance-related services to the individuals. The main office of the organisation is situated in a 10-storied apartment. At present, it has brought forward home content and insurance policy in the market rather than giving only deposits and loans to the individuals over the years. In order to advertise, the organisation has kept a budget amount of $1,650,000. Out of this amount $550,000 is kept for home advertisement and insurance product; however, it only generates 2% of the overall bank revenues. The remaining balance is for advertising to promote the other services of the bank including GST (Isa 2014).

Hence, it has been assessed that the organisation has spent $1,100,000 for promoting its services, which helps in generating majority of the generated revenues. The amount of $550,000 would be considered as capital expense, since the newly launched product has not made adequate contribution towards its profit generation (Kenny,  Blissenden and Villios 2015).

Conclusion:

Based on the above discussion, the amount of $1,100,000 incurred on advertising the existing services would be allowed for taking input credit. On the contrary, the amount of $550,000 would not be limited to take input credit, since 2% of expense contributes towards the income generation of the firm.

Calculation of Input Tax credit
Particulars	Amount ($)	Amount ($)
Total spending on advertisement and promotional activities	1,650,000.00
GST input credit 100% eligible for:	1,100,000.00
Portion of advertisement expenditures ineligible for input credit in respect of GST	550,000.00
100%  GST input credit		100,000.00
Add: For 2% contribution in revenue		3,000.00
Amount of input credit allowed to the bank		103,000.00

The “Subdivision 717A” is concerned with rules associated with the offset of income tax. The computation is depicted as follows:

Assessable income of Angelo inclusive of foreign incomes
Particulars	Amount	Amount
Gross total income without any deductions		$ 68,000.00
Available deductions:
Medical expenditures	$   5,000.00
Expenses for deriving employment expenses disallowed for deduction	–
Expenses incurred in UK for generating Rental income	$      500.00
Interests expenditures for generation of dividend income	$      140.00
Expenses for generation of interest income	$        60.00
Total amount of deductions		$   5,700.00
Net income after deductions		$ 62,300.00
Income tax payable		$ 11,794.18

Assessable income of Angelo inclusive of foreign incomes
Details	($)	($)
Gross total income without any deductions		52,000.00
Available deductions:
Medical expenditures	5,000.00
Expenses for deriving employment expenses disallowed for deduction	–
Expenses incurred in UK for generating Rental income	–
Interests expenditures for generation of dividend income	–
Expenses for generation of interest income	–
Total amount of deductions		5,000.00
Net income after deductions		47,000.00
Income tax payable		6,821.68

Assessable income of Angelo inclusive of foreign incomes
Details	($)	($)
Gross total income without any deductions		52,000.00
Available deductions:
Medical expenditures	5,000.00
Expenses for deriving employment expenses disallowed for deduction	–
Expenses incurred in UK for generating Rental income	–
Interests expenditures for generation of dividend income	–
Expenses for generation of interest income	–
Total amount of deductions		5,000.00
Net income after deductions		47,000.00
Income tax payable		6,821.68

The offset associated with foreign tax is computed by deducting the income tax payable amount under first alternative from the income tax payable amount under second alternative. Hence, the limit is $4,972.50 (11794.18-6821.68). It could be seen that the foreign tax offset amount is greater than the payment of foreign tax, Thus, the limit of foreign tax offset is $4,400.

Statement showing Calculation of Income from Partnership
Particulars	Amount	Amount
Revenue from sporting goods sales	$            400,000.00
Interests incomes on bank deposits	$              10,000.00
Un-franked portion of dividend	$                8,400.00
Amount of Bad debts recovered	$              10,000.00
Incomes exempt	–
Income from capital gain	$              30,000.00
The amount of gross total income		$ 458,400.00
Expenses eligible as deduction:
Partners’ salaries	$              25,000.00
Fringe benefit tax	$              16,000.00
Interests on capital	$                2,000.00
Interests expenses on loan	$                4,000.00
Johnny’s travelling expenses	$                3,000.00
Office building renewal fees	$                2,000.00
Documentation related expenses	$                  700.00
Expenses on debt collection	$                  500.00
Council rates	$                  500.00
Salaries of employees	$              20,000.00
Cost of goods sold {(Opening stock + purchases) – Closing stock}	$              34,000.00
Retail shop rent	$              20,000.00
Bad debt  losses	$              30,000.00
Expenses related to business lunches	–
Pilferage	$                3,000.00
		$ 160,700.00
Income of the partnership firm for the income year before setoff of loss	$ 297,700.00
Less: Setting off loss incurred in the previous year	$     40,000.00
Net income of the partnership in the income year	$ 257,700.00

References:

Bell, S. and Hindmoor, A., 2014. The structural power of business and the power of ideas: The strange case of the Australian mining tax. New Political Economy, 19(3), pp.470-486.

Glover, J., 2014. Taxing trust income by” entitlement”: The end of the road?. Australian Tax Review, 43(2), pp.101-117.

Isa, K., 2014. Tax complexities in the Malaysian corporate tax system: minimise to maximise. International Journal of Law and Management, 56(1), pp.50-65.

Kenny, P., Blissenden, M. and Villios, S., 2015. Australian Tax 2015.

Lavermicocca, C. and McKerchar, M., 2013. The impact of managing tax risk on the tax compliance behaviour of large Australian companies. Austl. Tax F., 28, p.707.

Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075