This Ruling applies in respect of the deduction for bad and doubtful debts under section 34 and the treatment of recoveries under section 30 of the Income Tax Act 1967 . It is effective for year of assessment 2002 and subsequent years of assessment.

2.1

3.1

3.1.1

A.

b. debt restructuring scheme;

c. rescheduling of debt settlement;

d. negotiation or arbitration of a disputed debt; and

e. legal action (filing of civil suit, obtaining of judgement

from the court and execution of the judgement).

3.1.4

After reasonable steps for recovery [ see paragraph 3.1.3 above ] have been taken, a debt can be considered bad on the occurrence of any one of the following:

A.

3.1.5

Example 1
Syarikat A Sdn. Bhd., a wholesaler, supplies goods worth a total of RM10,000 on various dates in 2002 to B Mini Market. Various payments totalling RM6,500 are received. It is later discovered that the mini market has closed down and the sole proprietor cannot be contacted. As it is unable to trace the debtor despite visits to his last known business and residential addresses, the company decides to write off this debt in its profit & loss account for the year ended 31.12.2002.

A deduction can be allowed for the bad debt of RM3,500 as the debt has arisen from transactions that have been included in the gross income and all reasonable steps have been taken to recover the debt.

Example 2
Syarikat C Sdn. Bhd. takes over the retail business of an existing partnership. Among the assets taken over are trade debts amounting to RM30,000. During its first 2 years of operation, the company manages to collect all the debts that had been taken over from the partnership, except for a debt of RM1,000 as the debtor cannot be traced. The company decides to write off this debt in the profit & loss account for the second year.

Although the debt was originally a trade debt in the accounts of the partnership, the amount constitutes a non-trade debt of the company (arising from taking over of the assets of the partnership and not from a transaction included as gross income of the company). Therefore, the amount of RM1,000 written off as a bad debt cannot be allowed as a deduction in computing the adjusted income. Conversely, the recoveries amounting to RM29,000 should not be regar ded as taxab le.

3.2

3.2.1

A.

3.2.4

Where a specific provision for doubtful debts has been made for a particular accounting period and the amount has been allowed in the relevant basis period for a particular year of assessment [ see paragraph 3.2.3 ], and there is a change in the amount of the specific provision in a subsequent year:

A.

Provided that the conditions mentioned in paragraphs 3.2.1, 3.2.2 & 3.2.3 have been met. the specific provisions made in the accounts are allowable for the relevant years and no adjustment is required in the tax computation [ see paragraph 4.7 ].

Example 4

Syarikat E Sdn. Bhd. makes a specific provision for doubtful debts of RM3,500 for the financial year ending 30.06.2001. For the financial year ending 30.06.2002, the specific provision is reduced to RM2,000 because some payments have been received. The decrease in the specific provision of RM1,500 (RM3,500 - RM2,000) is shown as ’specific provision written back’ in the profit & loss account.
No adjustment is required in the tax computation since the decrease in the specific provision of RM1,500 should be taxed.

3.3.1

A.

3.3.2

Syarikat F Holdings Sdn. Bhd. is negotiating the take-over of one of its subsidiaries, Syarikat G Sdn. Bhd., by a consortium of businessmen. At the request of the consortium and in order to facilitate the deal, the directors of Syarikat F Holdings Sdn. Bhd. decide to forgive an accumulated debt on account of goods and services supplied amounting to RM100,000 owed by Syarikat G Sdn. Bhd. A letter to that effect (enclosing a copy of the directors’ resolution) is issued to Syarikat G Sdn. Bhd., which then proceeds to extinguish the debt in its balance sheet as at 30.09.2002. In its accounts for the year ending 30.09.2002, Syarikat F Holdings Sdn. Bhd. writes off the amount as a bad debt.

In its tax computation for the relevant year of assessment, Syarikat F Holdings Sdn. Bhd. should not be allowed a deduction for the amount written off as the decision is made for reasons other than in the ordinary course of business and on the basis of considerations other than the likelihood of recovery.

In the accounts of Syarikat G Sdn. Bhd., the forgiveness of the debt should, by normal accounting convention, be reflected in its profit & loss account. No adjustment is required in the tax computation since the amount written back is taxable, being a reduction in the cost of goods and services previously charged in full in the profit & loss account.

3.4

3.4.1

3.5

Example 9

Syarikat P Sdn. Bhd. writes off RM2,700 being the trade debt of Encik Q (who has passed away) for the year ending 30.09.2002. During the same financial year, the company receives RM2,000 from Encik R, whose trade debt had been written off and allowed for tax purposes 3 years ago because he could not then be contacted.

The RM2,700 written off as a bad debt is allowable as a deduction and the recovery of RM2,000 is taxable. If both these amounts are shown in the profit & loss account for the year ending 30.09.2002, no adjustment is required in the tax computation.

If the recovery of RM2,000 is not entered into the profit & loss account, an adjustment for that amount should be made in the tax computation .

3.6.1

For the purpose of this Ruling:

4 .1

4.9.1

4.10

4.10.1

4.11

A. a relative [ see paragraph 4.10 ] of that person;
B. a company of which that person is a director;
C. a person who is a partner of that person; or
D. if that person is a company, a director or subsidiary of that company and a director of
that subsidiary.