General Adjusted Income (Sec 33)

In any tax jurisdiction, there are legislations that prescribe the conditions for expenses to qualify for tax deduction. In Malaysia, the deductibility of expenses is governed by Section 33 of the Income Tax Act, 1967 (ITA) and the general rule for deduction of an expense is contained in Subsection 1.

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The phrase "expenses wholly and exclusively incurred… in the production of gross income" incorporates the basic rule which spells out the conditions for allowing a tax deduction. For an expense that is incurred in the course of operating a business to be allowed as a deduction from income of the business, it must be:

(a) Incurred;
(b) Wholly and exclusively; and
(c) In the production of gross income (from the business).

Underlying each of these conditions is a comprehensive library of case laws, which defines the meaning of the words and delineates the boundaries for their applications. Some guiding principles established in cases brought before the courts include:-

(a)     Only "revenue" expenses are deductible while "capital" expenditures are not.

(b)     In general, an expense has been "incurred" when a legal liability has arisen for the sum to be paid (for example, when goods have been delivered to the purchaser and an invoice issued for the price of the goods delivered). Hence, an expense is deductible even though the bill has not been paid, so long as the debt is due to be paid.

(c)      An expense must be incurred for the sole purpose (exclusively) of producing income from the business. A dual-purpose expenditure is one which is incurred for more than one reason. Expenses incurred for both a business and private purpose would fail the 'exclusively incurred' test. However, if an incidental personal benefit arises as a result of an expense incurred to achieve a business objective, it does not mean that the expense is disallowed simply because of the personal benefit.

(d)     "Wholly" refers to the quantum of the expense. If a definite proportion of an expense was laid out wholly and exclusively in the production of income from the business, that proportion should not be disallowed merely because the expense was not entirely laid out wholly and exclusively in producing income from that source.

(e)      There must be a nexus between the expenditure and income which is assessed, so that the expenditure is "incidental and relevant" (Ronpibon Tin NL versus CIT(1949) 78 CLR 47) to producing the income that is assessed. In other words, it is not sufficient for the expense to be incurred for any business related purpose, but it must be incurred for the purpose of producing income from that business. A connection must be established between the expenditure and the process of earning income.

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Summarize from [Tax deductibility of business expenses]

(you can also refer to: Section 33. Adjusted income generally.)