Question

a) MAC Sdn.Bhd (MAC) carries on the business of manufacturing rubber gloves and sells them to local customers as well as overseas. MAC also owns a guesthouse. During the year, MAC paid RM600,000 to purchases raw materials, RM120,000 as damages to one of its customers who sued for late delivery of the rubber gloves, RM54,000 as damages to account for injuries suffered by guest who was injured when the guesthouse was flooded, RM24,000 as contributions in respect of its employees to an approved private retirement equivalent to 12% of the employees’ remuneration, RM66,000 as donation to public library and RM30,000 for research and development to make an improvement for the current product.

Required:

State with reason whether the above outgoings are deductible, not deductible, approved donation or double deduction for tax purpose.

Answer 1

1. MAC paid RM600,000 to purchases raw materials

The above purchases are deductible expense for tax purpose. As such payment is incurred for business purpose i.e. carrying out of business activities and revenue expense in nature. Hence deductible.

2. RM120,000 as damages to one of its customers who sued for late delivery of the rubber gloves

All the damages or penalties paid in relation to default on any contract with customer will be considered as revenue and business expenditure. Damages or fines or penalties paid in relation to violation of any law will not be allowed as a deduction. Hence in the given case such RM120000 paid as damages to its customers for late delivery of rubber gloves is an deductible expense for tax purpose.

3. RM54,000 as damages to account for injuries suffered by guest who was injured when the guesthouse was flooded.

All the damages or penalties paid in relation to default on any contract with customer will be considered as revenue and business expenditure. Damages or fines or penalties paid in relation to violation of any law will not be allowed as a deduction. Hence in the given case such RM54000 paid as damages on account for injuries suffered by guest who was injured when the guesthouse was flooded is an deductible expense for tax purpose.

4. RM24,000 as contributions in respect of its employees to an approved private retirement equivalent to 12% of the employees’ remuneration

Employers are allowed to claim tax deduction from the business income based on the Private Retirement Scheme (PRS) contributions made on behalf of their employees, up to 19% of the employee’s remuneration. In the present case, since it is equivalent to 12% of employee’s remuneration, the same is an deductible expense for tax purpose.

5. RM66,000 as donation to public library

If a entity has a business source, then any gift of money for the provision of library facilities should be claimed under Section 34(6)(g) and not under Section 44(8). Incidentally, Section 34(6)(g) provides for a maximum deduction of RM100,000. Hence, RM66000 paid as a donation to public library is eligible as approved donation and hence will be deductible expense for tax purpose.

6. RM30,000 for research and development to make an improvement for the current product.
The incentive measure provided under section 34A of the Act provides for a double deduction in respect of qualifying research expenditure (which is revenue in nature) related to a research programme undertaken by a business entity. In the present case, it is assume that the expense incurred is for research and revenue in nature only. Hence the entity will be eligible for a double deduction for tax purpose