1. BUSINESS INCOME

2. Learning Objectives You should learn from this topic:
Definition of business
Badges of trade
Gross income from business
Distinction between capital and revenue receipts
Derivation of business income

3. Learning Objectives (Cont’d)
You should learn from this topic:
Commencement of business
Basis period of business income
Adjusted and statutory income from business

4. Business Income
Section 4(a) income:
Gains or profits from a business

5. Business
“Business" includes profession, vocation and trade and every manufacture, adventure or concern in the nature of trade, but excludes employment
[S 2, ITA 1967]

6. Business income A profession Requiring a skill-intellectual or manual
Case: CIR v Maxse

7. ?????
VOCATION
The way in which a person passes his life. Eg. Betting systematically
Case: Partridge v Mallandaine
:BILLAM V GRIFFITH

8. Business income
TRADE
A commercial undertaking with the intention to make profit.

9. Trade
Busy
Multitudes of transactions
Repetitive

10. Trade –Determining factors in Malaysian Courts
BADGES OF TRADE 10

11. Badges – why? Taxable or not Income tax -4(a) or capital gains.
Capital gains – not taxable

12. Badges of Trade
Guide to establish the existence of 'trade' or 'an adventure or concern in the nature of trade' in a particular case
Income tax?
Trading receipt
Capital gain from
disposing investment
Income tax?

13. 10 Badges of Trade Intention/motive of taxpayer
Subject matter of transaction
Length/period of ownership
Frequency of transactions
Formation of organization
Financing arrangement
Alterations/supplementary work on the asset
Circumstances leading to the sale
Method of disposal
Accounting evidence/treatment

14. 1. Intention/Motive of Taxpayer
Badges of Trade
1. Intention/Motive of Taxpayer
Where the subject matter was held for resale at profit (profit-making motive), the profits earned should be treated as business income
Since
acquisition
Subsequent
change or

15. 2. Subject Matter of Transaction
Badges of Trade
2. Subject Matter of Transaction
Asset which can only bring benefit to its owner by realization is more likely to be subject of trading than asset which produce income or can be used or enjoyed during possession

16. 3. Length/Period of Ownership
Badges of Trade
3. Length/Period of Ownership
The longer the holding period of the subject matter, the greater the possibility that it was held for investment, instead of for resale at profit
A quick resale may point towards the transaction being in the nature of trade

17. 4. Frequency of Transactions
Badges of Trade
4. Frequency of Transactions
Where the same type of asset is repeatedly bought and sold, there is strong indication that trading activities are being carried out
An isolated transaction with some characteristics of trade could be considered as an adventure in the nature of trade

18. 5. Formation of Organization
Badges of Trade
5. Formation of Organization
It is presumed that the main purpose for forming companies or partnerships is to carry on business
Disposal of an asset by company, partnership or syndicate is more likely to be a business venture, compared to situation where the asset was disposed of by individual

19. 6. Financing Arrangement
Badges of Trade
6. Financing Arrangement
Where a person borrows more than he could normally afford to buy an asset, there is indication that he hopes to resell the asset at a profit within a short period of time
The shorter the period of financing, the higher the probability that the transaction constitutes business transaction

20. 7. Alterations/Supplementary Work on the Asset
Badges of Trade
7. Alterations/Supplementary Work on the Asset
Supplementary work to enhance the marketability of the asset would indicate the presence of a trade or an adventure in the nature of trade
Processing
Packaging
Modificaiton
Renovation

21. 8. Circumstances leading to the sale
Badges of Trade
8. Circumstances leading to the sale
A forced sale prompted by emergency need for fund, compulsory acquisition by government or some private factors would not constitute a trade
Proceeds from the sale of stock in trade under hard pressed situation would still be treated as normal business income

22. Badges of Trade
9. Method of Disposal
Organized activities undertaken in promoting the subject matter will indicate the existence of a profit-making undertaking
Extensive
advertisement
Setting up
sales office
Employment
of sales staff

23. 10. Accounting Evidence/Treatment
Badges of Trade
10. Accounting Evidence/Treatment
Current asset
- stock in trade
Non current asset
Held for long term investment/own use
Held for resale
Business income
Capital gain

24. Summary of Badges of Trade
Business income
Capital gain 1
Intention of taxpayer
Profit-making
Investment 2
Subject matter
Subject of trading
Income producing or for personal enjoyment/use 3
Length of ownership
Short period
Long period 4
Frequency of transactions
Repetitive
One-off

25. Summary of Badges of Trade (Cont’d)
Business income
Capital gain 5
Formation of organization
Company, partnership or syndicate
Individual 6
Financing arrangement
Borrowed fund (short term)
Own fund or long term loan 7
Alterations on the asset
With alterations
Without alterations 8
Circumstances leading to the sale
Free will
Forced sale

26. Summary of Badges of Trade (Cont’d)
Business income
Capital gain 9
Method of disposal
Active (organized activities)
Passive (ad hoc) 10
Accounting treatment
Current asset (stock in trade)
Non current asset
The badges/factors needs to be considered collectively to ascertain the nature of a transaction

27. Badges of Trade - Example
1993: A company acquired an oil palm plantation & operated plantation business subsequently
2000: Applied to convert part of the plantation land from agricultural use to residential use
2003: Obtained approval for the conversion. Constructed some basic infrastructure, subdivided the land into bungalow lots, advertised & set up a sales team to promote the bungalow lots

28. Badges of Trade – Example (Cont’d)
2005: Sold all the lots at a gain of RM18 million. The lots were classified as non current asset in the company's account prior to the sale. The gain was reflected as an extraordinary gain in its accounts
Required:
Argue whether the gain of RM18 million is assessable to income tax.

29. Badges of Trade – Example (Cont’d)
Arguments for business transaction:
Intention of taxpayer The land was acquired for agricultural use but the intention has changed to profit-making by selling it as bungalow lot
Formation of organization The sale is made by a company
Alternations on the asset The marketability of the land has been enhanced by the process of conversion & construction of basic infrastructure

30. Badges of Trade – Example (Cont’d)
Arguments for business transaction (Cont’d):
Circumstances leading to the sale Not a forced sale
Method of disposal The company advertised & set up a sales team to promote the bungalow lots
Assessable to income tax

31. Badges of Trade – Example (Cont’d)
Arguments for capital transaction:
Length of ownership Long holding period (11 years)
Frequency of transactions No previous dealing in land
Accounting treatment The lots were classified as non current asset in the company's account
Not assessable to income tax

32. Badges of Trade – Example (Cont’d)
The gain of RM 18 million is assessable to income tax because the sale of bungalow lots constitute an adventure in the nature of trade

33. Gross Income from Business
Debts arising in the course of carrying on a business
- sale of stock in trade
- provision of services rendered
- use or enjoyment of any property
Market value of goods exported in the course of carrying on a business
Market value of stock in trade withdrawn for own use

34. Gross Income from Business (Cont’d)
Dividend income of share dealing business
Interest income of investment dealing business/money lending business (eg bank & finance company)
Release/waiver of debt by creditor pertaining to expense previously been allowed as business deduction (eg rent payable)

35. Gross Income from Business (Cont’d)
Recovery of bad debt which has previously been allowed as business deduction
Insurance recovery where insurance expense has been claimed as business deduction (eg for loss of trading stock)

36. Gross Income from Business (Cont’d)
Compensation for loss of income (eg upon cancellation of ordinary trade agreement which is normal incident in business)
Realized foreign exchange gain arising from revenue transaction which forms part of normal business activities

37. Capital Receipts Proceeds from disposal of fixed assets
Receipt for substantial restriction on business activities (restrictive covenant)
Compensation for destruction of profit-making apparatus (eg termination of major business contract)

38. Derivation of Business Income
Gross income from a business that is not attributable to operations of the business carried on outside Malaysia would be deemed derived from Malaysia

39. Derivation of Business Income (Cont’d)
Business of manufacturing, growing, mining, producing or harvesting any article, product, produce or other thing in Malaysia:
Income from sale made outside Malaysia would deemed to be derived from Malaysia

40. Derived from Malaysia Section 12 (1) a
Gross income from the business as is not attributable to operations of the business carried on outside Malaysia
*”operations of the business” is not defined in the Act

41. Carry on Business in Malaysia? Malaysian Source- how ascertained
Place of
concluding contract
rendering services
maintaining trading stocks where orders are regularly fulfilled
passing ownership and risk of trading stocks from the seller to the buyer
receiving sale proceeds

42. CASES CONSIDERED

43. Paid $15,000 Sold tiles Cost of production $7000
Profit on
Paid $15,000
Sold tiles
Cost of production $7000
Atas Sdn. Bhd.a company manufacturing tiles in Malaysia sold a batch to a customer in Finland for $15,000. The cost of manufacturing was $7,000. Thus the profit was $8000.
Where should the profit be taxed? What are the issues you need to consider to support your argument.

44. Sale Price $15,000
Atas Sdn Bhd
( Branch )
Customer
Sale Price $8,000
Finland
Cost of production $7,000
Malaysia
Atas Sdn. Bhd
How much is attributed to Malaysia for taxation. What are the issues you need to consider?

45. Chunilal B Metha v Comissioner of Income Tax, Bombay
Taxpayer was trading as a broker and speculator in cotton. Silver and other commodities
He traded from his only office in Bombay
The business was conducted in India,Liverpool, London & New York
He entered into future delivery contracts with foreign parties
No delivery of goods was ever undertaken- only the difference between buying & selling were settled.
The profits were not remitted to India.

46. Revenue Contended taxable because :
Directions were given from India to carry out the transactions
There was exercise of skill & judgment in India
Taxpayer Contended :
Profits do not accrue or arise in India
Privy Council decision:
One must not look only at the place where the decision was made but more importantly, the place where the transactions took place. The purchase and sale took place in New York and the profits were in the hands of the broker in New York who held them on behalf of the taxpayer. It made no difference to the result whether the transactions were dealings in goods or differences.

47. CASE STUDY
The taxpayer was a firm of brokers and speculators in cotton, silver and other commodities.
The firms office was in Bombay
The speculation business was done both directly and through other brokers.
The taxpayer gave instructions to another firm of brokers SP & Co, whose business was in Bombay, to buy and sell cotton on the New York Exchange
SP & Co gave instructions to brokers in new York to carry out the transactions
Any profits arising were payable to the taxpayer in Bombay
No privity of contract between the taxpayers and brokers in New York
Profits were not remitted to India
Q Is the taxpayer taxable in India assuming the laws are similar to Malaysia? The question that beckons is what exactly is foreign income.

48. HIGH COURT DECISION
The profits arose in India because
No privity of contract between the taxpayers and brokers in New York as the dealings were done between taxpayer and SP & Co in India
SP & Co were directly responsible to the taxpayers and vice versa
The taxpayer placed orders to buy and sell with SP & Co in India and not with the brokers in New York
CASE: CIT Bombay v Govindram Seksaria

49. Accrue/Arise/Derive!!!
Business income derived from Malaysia if section 12 applies
Employment income derived from Malaysia if sect 13(2) and (3) apply
Dividend & interest income derived from Malaysia if sections 14 & 15 apply
Royalties, periodical payments & pensions if sections 15,16,17(1-3) apply
Special classes of income if section 15A apply

50. STEPS TO FOLLOW Determine income type- business, rental…
Ascertain the originating cause of income. What was done to obtain income
Geographical location
Review tax legislations in corresponding country.
DTA determines who has right to tax & PE issues.

51. Commencement of business
Commencement is when one finally embarks upon the activities directly related to the production of the business income as distinct from activities, which are merely or preparatory or preliminary

52. Commencement of Business
Embarks on activities that are part of the income producing process
Retailing – the day shop is opened for business
Hotel – the day hotel is opened to public
Manufacturing – the day factory is in a position to start manufacture
Plantation – the day seeds are sown or seedlings are planted
Acquisition of existing business – the acquisition date of business operation

53. Commencement - Significance
Basis period
Accounting period
Deductibility of expenses
Capital expenditure-deeming provisions apply

54. Basis Period of Business Income
Companies
Trust bodies
Co-operative societies
Others: Calendar year
Financial year

55. Adjusted Income from BusinessRM
Gross income xx
Less: Deductible expenses (xx)
Adjusted income* xx RM
Net profit xx
Add: Non-deductible expenses (xx)
Adjusted income* xx

56. Adjusted & Statutory Income from BusinessRM xx RM xx
(xx)
Gross income
Less: Deductible expenses
Adjusted income
Add: Balancing charge
Less: Capital allowances
Unabsorbed allowance b/f
Current year allowance
Balancing allowance
Statutory income

57. Adjusted Loss from Business
Deductible Expenses > Gross income
Adjusted loss
Adjusted income: Nil
Adjusted loss (current year business loss) can be utilized to reduce the aggregate income from all sources in the same Y/A.
Unutilized loss – c/f to subsequent Y/A to reduce the aggregate statutory income from all business sources

58. Unabsorbed Capital Allowance
Statutory income is ‘Nil’
C/f unabsorbed capital allowance to subsequent Y/A to reduce the adjusted income of the same business source

59. Aggregate Statutory Business IncomeRM xx
(x)
Statutory income
Business 1
Business 2
Business 3
Aggregate statutory business income
Less: Unabsorbed business loss b/f
Net aggregate statutory business income

60. Computation of Statutory Business Income - Example
Results of Tony’s businesses for the y/e :
Manufacturing business
Adjusted loss
Capital allowances
Balancing allowance
Balancing charge
Unabsorbed capital allowances b/f
Unutilized loss b/f RM
(14,000)
1,700
300
5,000
1,200
1,000

61. Computation of Statutory Business Income – Example (Cont’d)
Trading business
Gross income
Expenses
deductible
non-deductible
Net profit
Capital allowances RM
38,000
31,500
1,900
4,600
7,000
Required:
Compute the statutory business income of Tony for the year of assessment 2005.

62. Computation of Statutory Business Income – Example (Cont’d)
Tony
Computation of Statutory Business Income
Y/A 2005
Manufacturing business RM
1,200
1,700
300 RM
Nil
5,000
(3,200)
1,800
Adjusted income
Add: Balancing charge
Less: Capital allowances
Unabsorbed allowance b/f
Current year allowance
Balancing allowance
Statutory income

63. Computation of Statutory Business Income – Example (Cont’d)
Tony
Computation of Statutory Business Income
Y/A 2005
Trading business RM
7,000
(6,500)
500 RM
38, (31,500)
6,500
(6,500)
Nil
Gross income
Less: Deductible expenses
Adjusted income
Add: Balancing charge
Less: Current year capital allowances
Utilized
Capital allowances c/f
Statutory income

64. Computation of Statutory Business Income – Example (Cont’d)
Tony
Computation of Statutory Business Income
Y/A 2005 RM
1,800
Nil
(1,000)
800
Statutory income
Manufacturing business
Trading business
Aggregate statutory business income
Less: Unabsorbed business loss b/f
Net aggregate statutory business income

65. Learning Outcomes After studying this topic, you should be able to:
Define what is meant by ‘business’
Apply the badges of trade to establish the existence of ‘trade’ or ‘an adventure or concern in the nature of trade’
Determine the gross income from business
Distinguish between capital and revenue receipts

66. Learning Outcomes (Cont’d)
After studying this topic, you should be able to:
Explain how business income is derived or deemed to be derived from Malaysia
Determine the date of commencement of business
State the importance of commencement date of business
Compute the adjusted income and statutory income from business