ALLOWABLE PRE-OPERATIONAL & PRE-COMMENCEMENT OF BUSINESS EXPENSES FOR COMPANIES

1.0 TAX LAW

This Ruling applies in respect of pre-operational and pre-commencement of business expenses allowable to a company under the following:
    1.1
 Income Tax (Deduction of Incorporation Expenses) Rules, 1974 [P.U. (A) 134 / 1974];
2.0 THE APPLICATION OF THIS RULING

This Ruling considers the pre-operational and pre-commencement of business expenses that are allowable, under the specific provisions [hereinafter referred to as the specific provisions ] in the Income Tax Act 1967 or the specific Rules [hereinafter referred to as the specific Rules ] mentioned in paragraph 1.0 above, to a company when it commences its operations or its business.
3.0 HOW THE TAX LAW APPLIES
    3.1
 Generally, expenses incurred by a company prior to the commencement of its operations or its business [see paragraphs 4.1 and 4.2] would not be allowable as a deduction against the gross income of its business as they are not con-sidered wholly and exclusively incurred in the production of the income.

3.3.1
    the gross income in arriving at the adjusted income of the business; or
    3.4
 Incorporation expenses
[Income Tax (Deduction of Incorporation Expenses) Rules, 1974]

3.4.1
    For a company incorporated in Malaysia on or after 1 January 1973 with an authorized capital not exceeding RM250,000, the following expenses of incorporation are allowed as a deduction against the gross income from its business:

A.
    the cost of preparing and printing the Memorandum, the Articles of Association and the Prospectus, and of circulating and advertising the Prospectus;

3.4.2
    The said incorporation expenses should be allowed as a deduction against gross income in ascertaining the adjusted income in respect of the business source of the company for the basis period for the year of assessment [Y/A ] in which it commenced that business.
Example 1
Company A is incorporated in Malaysia on 11.02.2002 with an authorized capital of RM250,000. It commences a retail business dealing in hardware on 01.08.2002 and closes its accounts on 31.07.2003. The following incorporation expenses have been capitalised in its first balance sheet as at 31.07.2003:
Details of expenses

Amount [RM]
The incorporation expenses amounting to RM4,200 can be deducted against the gross income of the company for the basis period 01.08.2002 - 31.07.2003. [For details of the determination of the basis period, see Public Ruling No. 7/2001.]Example 2
Company B is incorporated in Malaysia on 01.03.2002 with an authorized capital of RM300,000 and an issued capital of RM150,000. Incorporation expenses (similar to those in Example 1 above) amount to RM4,200.

The incorporation expenses cannot be allowed as a deduction against the gross income of the company as its authorized capital exceeds RM250,000.

3.5.1
    Certain pre-operational business expenditure in relation to a proposal to undertake investment in a business venture in a country outside Malaysia can be claimed if:

A.
    the company is resident in Malaysia; and

3.5.2
    The pre-operational business expenses in connection with an approved business venture which qualify for deduction are:

A.
    expenses which are directly attributable to the conduct of feasibility studies, including the cost of employing consultants;
Example
ABC Sdn. Bhd., a company resident in Malaysia, produces household electrical equipment. It proposes to build a factory in Mongolia. Before embarking on this venture, the company sends its marketing director to Mongolia to conduct a survey. The following expenses are incurred:
Details of expenses

Amount [RM]
While the expenses are incurred overseas and appear to be within the prescribed limits, deduction cannot be allowed under these provisions unless the venture has been approved by the Minister of Finance

3.5.3
    Qualifying pre-operational business expenses should be allowed as a deduction against aggregate income in the manner provided for in Schedule 4B of the Act. Any unabsorbed qualifying pre-operational business expenditure can be carried forward to the following Y/A.
    Example
    ABC Sdn. Bhd. has incurred qualifying pre-operational business expenses [see the Example in paragraph 3.5.2 above] for a business venture which has been approved by the Minister of Finance. It has the following position for Y/A 2002:
Details

Amount
[RM]
The computation should be as follows:
    3.6
 Pre-commencement of business expenditure on approved training
[Income Tax (Deduction for Approved Training) Rules 1992]

3.6.1
    A manufacturing company can be allowed a double deduction for pre-commencement of business expenditure on approved training in computing its adjusted income if it satisfies the following conditions:

A.
    it has incurred the said expenditure during the period of pre- commencement of its business;

3.6.2
    The expenditure qualifying for the deduction is the amount paid by the company to the training institution in respect of the said training programme. The claim must be supported by the letter of approval from MIDA or a letter from the approved training institution certifying details of the training programme (including the amount paid) and that the employees of the company have attended the training programme.Example
    A company which intends to produce condensers for automobile air conditioners commences operations on 01.08.2002. Before commencement of production, the company recruits 30 employees, all of whom are Malaysians. 20 of them are sent for training on machining at Institut Kemahiran MARA [ IKM ], a training institution approved by the Minister of Finance, and the other 10 are sent to study machining and assembly of condensers at the factory of its associate company in Japan. The following expenditure is incurred:
Details of expenditure

In Malaysia
[RM]

In Japan
[RM]
    A letter from IKM is submitted to confirm that the amount paid by the company for the training programme is RM40,000 and that the employees of the company have attended it.The company commences production on 01.01.2003 and the first accounts are prepared for the period 01.08.2002 to 31.07.2003.

    The company can be allowed a double deduction under these Rules for the expenditure of RM40,000 incurred on the training programme in Malaysia in ascertaining its adjusted income for the basis period 01.08.2002 - 31.07.2003 [for details of the determination of the basis period, see Public Ruling No. 7/2001]. The travelling allowance (RM4,000) cannot be allowed as only the amount paid to the training institution (IKM) in respect of the programme qualifies for deduction.

    The expenditure on training in Japan cannot be allowed under these Rules as the associate company is not a training institution approved by the Minister of Finance [see, however, paragraph 3.7.1 below] .
    3.7
 Pre-commencement of business training expenses
[Income Tax (Deduction of Pre-commencement of Business Training Expenses) Rules 1996]


3.7.1
    A company which provides training to its employees prior to the commencement of its business can be allowed a single deduction on such training expenses in ascertaining its adjusted income from the business if:

A.
    the training is to impart basic skills to enable the company to commence its business;
E xample
[See the Example in paragraph 3.6.2 above . ]
The expenses incurred in training the employees in Japan prior to commencement of business amounting to RM75,000 can be allowed as a single deduction under these Rules in ascertaining the company’s adjusted income for the basis period 01.08.2002 - 31.07.2003 .

3.7.2
    The following do not qualify for a deduction under these Rules: :

A.
    a company receiving training grants from the Government; and
4.0 INTERPRETATION

For the purpose of this Ruling:
    4.1
 “Pre-operational” has the meaning as defined in the specific provisions [ see paragraphs 3.5.2 above ] and any reference to “pre-operational” or “prior to the commencement of operations” should be interpreted subject to the conditions imposed under the specific provisions.
4.2.1 the purchase of raw materials in the case of manufacturing;
However, any reference to “pre-commencement” or “prior to the commencement” of business may only be so interpreted if it is consistent with the relevant conditions imposed under the specific Rules.
    4.3
 “Adjusted income”, “statutory income”, “aggregate income” and “total income” refer to income as determined under Chapters 4, 5 and 6 of the Act.