Introduction
Malaysia outgoings and expenses rules determine which business costs are deductible for tax purposes. Understanding deductible vs non-deductible expenses, accrual of expenses, and relevant case law is crucial for proper tax compliance.
Deductible Outgoings and Expenses
Expenses wholly and exclusively incurred in producing gross income (accrual basis) include:
- Interest on borrowed money.
- Rent payable.
- Repairs of premises, plant, machinery, or fixtures.
Non-Deductible Expenses
Expenses considered capital in nature are not deductible, such as:
- Replacement of assets.
- Enhancement or improvement of assets.
- Initial extensive repair before use.
📚 Case: Federal Commissioner of Taxation vs James Flood Pty Ltd
- Outgoing is “incurred” when the taxpayer is fully committed to liability, even if unpaid.
- A provision (uncertain liability) is not deductible as it may be reversed.
Accrual of Expenses
Expenses are deductible on an accrual basis, even without actual payment.
📚 Case: Exxon Chemical (M) Sdn Bhd vs KPHDN
- RM881,270 set aside for employee retirement/resignation benefits (YA 1986–1991).
- IRB disallowed deduction, calling it “mere contingency.”
- Court of Appeal allowed deduction, holding it was wholly and exclusively incurred once employees met eligibility (11 years of service).
Allowable Interest [Section 33(1)]
Interest is deductible if:
- Loan is used in producing gross income; or
- Loan is applied to acquire assets used to produce gross income.
Key Takeaways
- Deductible: interest, rent, repair expenses.
- Non-deductible: capital nature costs (replacement, improvements, initial repairs).
- Accrual principle applies → expenses deductible when liability is incurred.
- Case law: James Flood, Exxon Chemical clarify rules.
- Interest allowed under s.33(1) if related to income production.
ANC Group – Your Personal Tax Advisor
Tax consulting is the core service of ANC Group. Our tax professionals provide clients with comprehensive tax support and guidance. We offer tax consulting and compliance services for expatriates, entrepreneurs, and listed and non-listed companies.
Our tax consulting services include business tax, transaction tax, personal tax, and corporate income tax. We don’t just guide you in interpreting and applying complicated taxation rules, but to explore new opportunities and business trends.
ANC Group keep you abreast with Malaysia tax updates and any changes in the local regulations.
We work closely with industry specialists, authorities, and associated professionals within ANC Group to provide the best-in-class integrated tax planning solutions. ANC specialists coordinate the accounting and taxation services to bring your business to success.
If you need professional tax advisory services regarding the Malaysia Income Tax Act 1967, our team is ready to assist you. Contact us here to discuss how we can support your business.
