TAXATION II
Topic 1:
BUSINESS INCOME
Noor Hasliaziziyati
Faculty of Business Management
& Professional Studies
BUSINESS INCOME
Section 4(a) ITA defines business income as gains or profits derived from a business, regardless
of the duration it's been conducted.
Effective from YA 2014, section 4C was introduced, clarifying that business income under section
4(a) includes amounts received from the compulsory acquisition of land by the Government.
This addition specifically targets property developers or traders, ensuring that proceeds from land
acquisition fall under business income, particularly those governed by Section 22 of the Land
Acquisition Act 1960.
Any receipts from such acquisitions are categorized as Section 4(a) business income.
DEFINITION OF BUSINESS
• Section 2 ITA 1967, business covers income derived from trade, business,
profession, vocation, or ventures aimed at making a profit, excluding employment
income.
• The Act allows taxpayers to have multiple business sources within a single year of
assessment.
- Profession
• A specialized occupation that requires formal education,
training, and recognized qualifications.
• Professionals typically provide services based on their
specialized knowledge, and they may belong to regulated
bodies or associations.
- Vocation
• A specialized skill, occupation, or calling through which an individual
earns income.
• Vocations often involve the provision of services that require specific
expertise, training, or qualifications.
- Trade
• Business or commercial activity engaged in for the purpose of
generating income.
• It covers a wide range of activities, including buying and selling goods,
manufacturing, retailing, and other business operations.
BADGES OF TRADE
• Concept used to help determine whether an activity should be classified as a
trade or non-trade activity.
• In Malaysia, the classification of income as a trade or business
activity is important because it affects how that income is taxed.
• Income derived from a trade is generally subject to income tax,
while income from non-trade activities may be subject to
different tax treatment or exemptions.
1) Intention of Taxpayer
2) Period of Ownership
3) Frequency of Transactions
4) Alterations to Property
5) Organization set-up to dispose of the goods
6) Subject Matter
CAPITAL INCOME VS REVENUE INCOME
The distinction between capital income and revenue income is crucial because it determines
how different types of income are taxed.
Element Capital Income Revenue Income
Definition • Gains or profits derived from the • Income generated from regular
disposal of capital assets or business activities, including the sale
investments. of goods or services.
• Capital assets typically include items • Income is typically earned in the
like real estate, shares in companies, ordinary course of a taxpayer's
bonds, and other investments. business.
Element Capital Income Revenue Income
Tax • Capital gains derived from the sale or disposal • Revenue income is generally subject to income
treatment of capital assets are generally not subject to tax in Malaysia.
income tax in Malaysia. However, there are • Businesses and individuals who earn income
exceptions, such as for real property gains tax from trading, services, rental income, interest,
(RPGT) on the sale of real estate. dividends, salaries, and other ordinary
business activities are required to report and
pay income tax on this revenue.
Holding • Longer holding period for assets, often • Income generated from ongoing, routine
Period considered capital gains. business activities.
Nature of • Typically involves capital assets and long-term • Arises from regular business operations and
the Asset investments. activities.
DERIVATION OF BUSINESS INCOME
• Business income to be taxed in Malaysia, conditions must be
met:
1) The existence of business
2) The business transaction is income in nature
3) Such business income is deemed derived from Malaysia.
• The derivation of business income is defined in Section 12 ITA
1967.
- Section 12(1)(a)
• This section serves as a residual section, to tax whatever gross
income that is not attributable to operations of business carried
on
SCOPE OF INCOME (SECTION 22)
• Gross income from a business comprise sale of goods or provision of
services. The scope of business income is set out in section 22 of ITA
1967.
• It should be noted that section 22 only applies to revenue receipt.
• Sections 22(1) and 22(2) of the ITA 1967 outline the determination of
gross income from a particular source for a basis period in a year of
assessment.
- Section 22(1)
• Gross income of an individual from a specific source for the
basis period of a year of assessment is determined according to
the provisions outlined in Chapter IV of the Act.
- Section 22(2)
• Gross income from a source for the basis period of a year of
assessment includes any sums receivable or deemed received for that
period related to that source.
• These sums can be received by way of:
(a) insurance, indemnity, recoupment, recovery, reimbursement, or under a
contract of indemnity.
(b) compensation for loss of income from that source is also included in the gross
income calculation.
- Scope of Compensation for Loss of Income
Compensation for loss of income considered a revenue receipt
because it serves to offset a profit loss, thus contributing to
gross income - Section 22(2)(b)
- Trading debts
Section 24(1) ITA states that any debt owed to a business for
stock in trade sold, services rendered, or the use / enjoyment
of property during business operations is considered gross
income for that assessment year.
This provision effectively assesses business income on an accrual
basis.
- Deposit on Services
Effective from Year of Assessment 2016, amendments
were made to section 24, introducing a new provision,
section 24(1A), which expands the scope of business
income to encompass deposits or advances received by
businesses.
Thank You &
Take Care
