Commencement of Business & Pre-Operational Expenditure

1.Introduction

Commencement of business is a critical concept in Malaysian tax. It determines when expenses become deductible and how companies should treat pre-operational costs.

2.Commencement of Business & Business Expenditure

• Pre-commencement expenses are generally not deductible.
• Qualifying Capital Expenditure (QCE) may be eligible for capital allowances once the business begins.
• Companies and LLPs must also decide their financial year-end when they start operations.

3.Qualifying Pre-Operational Expenditure (Gazette Orders)

Incorporation Expenses (for companies with share capital ≤ RM2.5M)

Deductible against gross income:

• Preparation of Memorandum & Articles of Association.
• Registration fees, stamp duties, statutory filings.
• Preliminary contracts and debentures.
• Share certificates and company seal.
• Underwriting commission.
  
  

These are deemed incurred in the year the business commences.

4.Approved Overseas Ventures [Sch 4B]

Qualifying pre-operational expenses for Malaysian resident companies:

• Feasibility studies and market research.
• Travel costs for representatives.
• Accommodation and sustenance (max RM400/day).
  
  

Any unutilized pre-operational expenses can be carried forward indefinitely.

5.Business Sources & Expense Apportionment

• Each business source is assessed individually.
• Capital allowance cannot be transferred between sources.
• For common expenses, LHDN applies the gross income method.

Case: LHDN vs Daya Leasing Sdn Bhd – High Court agreed with apportionment using gross income.

Case: River Estates Sdn Bhd vs DGIR – Plantation and timber were treated as separate sources, capital allowances segregated.

6.Other Qualifying Expenditures

i. Approved Training (Manufacturing Companies)

• Double deduction available if:
  • Training occurs before commencement.
  • Skills acquired are technical or supervisory.
  • Programme is approved by MIDA or MoF.
• Not applicable if already claimed under HRDF levy.

ii.Employee Recruitment

• Expenses (job fairs, agencies, head-hunters) incurred up to 1 year before commencement are deductible on commencement date.

iii.Franchise Fees

• One-off, non-refundable payment to use a local Malaysian franchise brand registered with MDTCC.
• Brand must be Malaysian-owned (≥70% local equity).
• Excludes royalties or recurring payments.

7.Key Takeaways

• Commencement date defines when expenses become deductible.
• Incorporation and certain pre-operational expenses qualify under Gazette Orders.
• Overseas ventures have special rules under Sch. 4B.
• Common expenses are apportioned using the gross income method.
• Approved training, recruitment, and franchise fees may qualify as deductible.

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