MFRS 112 Deferred Tax A+ Notes

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1. Definition of Business Income (ITA 1967) Business income is chargeable under S4(a) of ITA . Sec 2 of the Act defines 'business' to include: Profession, vocation, trade. Every manufacture, adventure, or concern in the nature of trade. Excludes employment. The definition of business is not exhaustive. 2. Derivation of Business Income For business income to be taxed in Malaysia, the following conditions must exist: Existence of business: The activity must constitute a "business." Income in nature (Revenue Profit): The business transaction must be revenue in nature, not capital. Derived from Malaysia: The business income must be deemed derived from Malaysia. 3. Gross Business Income Gross income from business includes: Sales of goods or provision of services. Compensation for loss of income (business loss). Trading debt: Once the bill is issued to the customer, it is gross income notwithstanding payment not received. Recoverable bad debt. Deposit on services (but deposit received on sale of goods remains not taxable) - [PR4/2020]. 4. Revenue vs. Capital Income/Expenditure a) Revenue Expenditure (Deductible) Revenue expenditure is "wholly and exclusively" incurred in the production of gross income. Repairs of premises, plant, machinery, fixtures employed in the production of gross income. Replacement on part of the assets. Renewal. Maintaining the commercial viability of an asset. Salaries and wages for employees. Rental expense on land and business premise. Interest paid on money borrowed and employed in producing income. Repairs and renewals on business premise/plant/machinery or fixtures employed in the production of gross income. Insurance premium paid on policy covering the business from any losses caused by fire/theft/defalcation etc. Transportation cost for distributing goods or rendering services. b) Capital Expenditure (Not Deductible) Deduction of capital expenditure is prohibited by S39 ITA . Even if it satisfies the S33 "wholly and exclusively" test, it is non-deductible if it is of a capital nature. Examples: Improvement of an asset. Repairs on acquisition. Modify, expand Business Structure. Relates to Fixed Capital. Initial expenditure. Once and for all. 5. Non-Allowable Expenses (S39(1) ITA) Domestic or private expenses. Expenses not being wholly and exclusively laid out or expended for the purpose of producing the gross income. Capital withdrawn or any sum employed or intended to be employed as capital (payment for capital nature). Any amount in respect of any payment to any pension, provident, savings, widows and orphans or other similar fund or society which is not an approved scheme . Withholding tax (interest/royalty, contract payment, special classes of income) where the payer fails to pay the withholding tax to the tax authority. Entertainment expenses incurred on clients and/or suppliers (only 50% allowable ). Leave passage provided by the employer to employees is not tax deductible. (Exception: Leave passage for annual event within Malaysia, effective YA 2007). Initial expenditure (before production). Cost of tax appeal. Expenses incurred for violation of law (e.g., fine, penalty, traffic summonses). Annual general meeting expenses. 6. Special Deduction (S34) These expenses are allowed as deductions even if they do not satisfy the S33 "wholly and exclusively" test or are capital expenditure. They are encouraged by the Government for national/social benefits. Provision of equipment and renovation of building for disabled employees. Social responsibility payment (incurred expenditure on services, public amenities; or contributed to charity/community project pertaining to education, health, housing, conservation/preservation of environment, if approved by Minister). Bad debts written off. Specific allowance for bad debts. Contribution to EPF, private retirement scheme, or any approved fund in respect to an employee (subject to max contribution of 19% of total remuneration). Expenses incurred in providing practical training to non-employees. Bonus paid to employees (effective YA2002). Entertainment given to employees (except where incidental to entertainment for others like suppliers/clients). Secretarial and tax filing fees, up to RM15,000. Practical training to non-employees (e.g., unemployed graduates in English, computer, financial, industrial courses). Expenses incurred on recruitment of employees (even if prior to commencement of business). Cash contributions up to RM100,000 to build or equip public libraries, school libraries, or institutions of higher education. Expenses incurred by businesses for publishing/translating into the National Language of cultural, literary, professional, scientific, or technical books approved by Dewan Bahasa dan Pustaka. Provision of entertainment for cultural or sporting events open to the public to promote the business (if open to members only, not considered open to public). Sponsorships for any arts, cultural, or heritage activity approved by the Ministry of Culture, Arts and Tourism, up to RM1 million (foreign arts/cultural/heritage activity sponsorship limited to RM300,000). Special Deduction (Gazette Order) Cost of developing website: 20% of total costs spread over 5 years. Statutory audit fees. Compensation paid to dismissal of unsatisfactory employee. Payment for employee benefit (e.g., monthly broadband/phone bill, personal digital assistance, telephone, mobile phone, pager). Cost of renovation and refurbishment for business premises (incurred from 1 March 2020 to 31 December 2022, maximum RM300,000). Costs associated with the adoption of self-funded booster vaccines. Personal Protective Equipment (PPE) - cost incurred from 1 March 2020 to provide PPE to employees for COVID-19 protection. 7. Double Deductions These expenses are given deduction twice the amount of expenditure incurred. Salaries/wages/remuneration of disabled employees. Remuneration to: Senior citizen (above 60 years old). Designated person (ex-convict, person convicted for any offence by court, or a parolee). Expenses on Flexible Work Arrangement (FWA): consultation fee, cost of capacity development, cost of software and software subscription. Expenditure on the maintenance of child care centre for employees. Child care allowance to employees. Research expenses: Cash contributions to an approved research institution. Payment for service used from R&D company or an R&D contract. Participation in an approved career fair. Overseas expenses incurred by hotel and tourism business to promote tourism. Insurance premium for importing cargo covered by an insurance company of Malaysia. Expenses incurred by manufacturers, trading company, hotel and tourism business on approved training. Scholarships to University Students. Approved structured internship program (SIP) by TalentCorp. Training cost to unemployed graduates. Freight charges for exporting rattan or wood-based products. 8. Non-Business Income Any other income not from the main business activities. Interest Income. Rental Income. Gain from disposal of assets. 9. Computation of Adjusted Business Income Method 1 (From P&L Account) Net Income/loss as per P&L account YYYY Add: Business income not yet added in P&L XXX Non-allowable expense that was deducted in P&L XXX Less: Non-business income that was added in P&L (XXX) Allowable expense not yet deducted in P&L (XXX) Specific deduction not yet deducted in P&L (XXX) Double deduction expense (XXX) Adjusted Business Income/Losses YYY Method 2 (From Gross Business Income) Gross business income YYYY Less: Allowable expense (XXX) Specific deduction (XXX) Double deduction expense (XXX) Adjusted Business Income/Losses YYY 10. Adjusted Business Loss Adjusted loss: Allowable expenses > gross business income (S.40). Current adjusted loss can be deducted against other income in the same basis year [S.44(2)]. Any unabsorbed adjusted loss can be brought forward and deducted against business source (S4(a)) only [S.43(2)]. Unabsorbed loss can be brought forward to subsequent years until it is fully absorbed. 11. Statutory Business Income Adjusted business income XXX Add: Balancing charge XXX Less: Capital Allowance Balancing allowance (XXX) Unabsorbed capital allowance (XXX) Capital allowance (Current year) (XXX) Statutory business income XXXX 12. Capital Allowance Deduction given to replace depreciation expense (which is not allowed for tax deduction). Subtracted from adjusted business income to derive statutory business income. Rate depends on the type of assets. Equipment for disabled employees is not entitled to capital allowance if deduction is given under special deduction. On disposal of asset, gain/loss is ignored but replaced with balancing charge or balancing allowance. Balancing charge: Selling price > residual value (considered as gain and taxable). Balancing allowance: Selling price Capital allowance and balancing allowance can be brought forward to subsequent years until fully absorbed. 13. Business and Non-Business Source Income To compute total income when there are other income sources: Statutory business income XXX Less: Adjusted business loss b/f [43(2)] (XX) Add: Non-business income XXX Aggregate income XXXX Less: Current year adjusted business loss [44(2)] (XXX) Approved donation (XXX) Total Income XXXX Less: Relief entitled (XXX) Taxable/Chargeable income XXXX 14. Tax Payable/Refund Chargeable income XXX Tax: On the first RMxx XX On the next RMxx @ x% XX Tax Liability XX Less: Rebates Personal/Spouse rebate (XX) Zakat (XX) MTD (XX) (XX) Tax Payable/Refund XX 15. Accounting Income vs. Chargeable Income Accounting Income Chargeable Income Computed based on accounting standard requirements. Computed based on ITA 1967. Disclosed in the Income Statement/Profit & Loss Account. Disclosed in the income tax return form: Form B. Available to public (if company: included in the company annual report). Confidential – only for IRBM. Due to differences in computing net profit and chargeable income, adjustments must be made to the net profit amount to derive the chargeable income.