Tax filing for sole proprietorship 03

SOLE proprietors can optimise their taxes by taking capital allowances on business assets into account.

Fixed assets: Fixed assets acquired for use in the business are eligible for tax relief in the form of capital allowance. Capital allowances are deducted from the adjusted income of a business to arrive at statutory income. Depreciation on fixed assets is not tax deductible.

Newly acquired assets will be given an initial allowance of 20% and annual allowance of 10%, 14%, 20% or 40%, depending on the asset category.

The capital allowance amount is computed on a straight-line basis by reference to the cost. Full capital allowance is given even though it is acquired and in use for less than a year.

The cost of the asset includes alteration costs and incidental costs for the installation of fixed assets.

Small-Value Assets: With effect from YA 2006, where the sole proprietor acquires fixed assets (small- value assets) which are not valued at more than RM1,000 for each asset, the full cost of the asset enjoys capital allowance in a year (100% cost = capital allowance).

The maximum capital allowance allowed for small-value assets in a year is restricted to RM10,000.

To optimise tax planning, the acquisition of fixed assets like printers, telephone systems, fans, calculators and kettles should be staggered to reduce taxable income.

Capital allowance is given on a year’s basis even if it is acquired and in use for less than a year. Sole proprietor may consider accelerating the acquisition of small-value assets in November/December 2008 instead of January 2009 as capital allowance is available in YA 2008 to reduce taxable income.

Motor vehicles: Motor vehicles used in business are entitled to capital allowances.

The qualifying cost eligible for capital allowance is restricted to RM100,000 provided:

·it is a newly acquired car; and

·the cost does not exceed RM150,000.

Other motor vehicles which do not satisfy the above two conditions will be given qualifying cost of RM50,000 even if the actual cost may have exceeded RM50,000.

Capital allowance can be claimed on the full cost of commercial vehicles, which are motor vehicles used directly to transport trading stock, such as lorries and vans.

Other motor vehicles used in the business are known as passenger vehicles, which are restricted to a maximum cost of RM100,000. These are used in business to meet customers, bankers or suppliers. To maximise claims on passenger vehicles up to RM100,000, the sole proprietor has to ensure the cost of the new motor vehicle does not exceed RM150,000.

Personal fixed assets: Sole proprietors may transfer personal assets for use in their business. Once such assets are used in the business, capital allowance is then available.

The sole proprietor has to first establish the market value of the assets at the time they were brought into use in the business. The assets will then be recorded in the balance sheet of the business.

Annual allowance is given on the market value of these assets, but no initial allowance is allowed.

In the event that the sole proprietor continues using the assets for personal use, the portion of such personal usage must be excluded and no capital allowance is available on that portion.

Details: Tax planning for business assets

Tax filing for sole proprietorship 02

SOLE proprietors should take advantage of allowable business expenses and deductions on bad debts to reduce their taxable income.

Business expenses: Revenue expenses incurred directly in the production of business income are tax deductible against the gross income of said business and are commonly known as business expenses.

The general rule of thumb is that business expenses must be recurring in nature, permissible under the Act, have been incurred, reasonable and acceptable to a particular industry, and are not related to the acquisition of capital assets or expenses.

Other deductible expenses available for tax deductions include accounting fees, legal fees for recovery of trade debts, rental for premises, sales advertisement, entertainment expenses for trade debtors, and cash stolen from the cash register by cashiers.

Non-deductible expenses would include items like prepayment of insurance expenses for fire and theft; costs of renovation or construction for premises; fines imposed for traffic offences or custom offences; penalties on income taxes; donations to political parties, church or religious body; legal fees for bank loans or acquisition of premises; and legal fees for defense in suits for violation of trade regulations.

Mixed overhead expenses: Sole proprietors often have limited resources to acquire assets for exclusive business use. Therefore, personal assets such as motor vehicles, mobile phones, home offices and computers are mutually used for business and private or domestic purposes.

In such cases, a sole proprietor in a business has to segregate expenses incurred, differentiating between business expenses and private expenses. Items such as petrol, repair and maintenance on vehicles, telephone charges, Internet charges, house interest expense and utilities have to be apportioned into business and private expenses.

In practice, sole proprietors first need to segregate out the private expenses.

A reasonable and reflective basis has to be developed by analysing the actual expenses and usage for several months.

Once a basis is ascertained, the ratio will be applied on such expenses from year to year. The common basis from a practical viewpoint will be 1/3, 1/4 or 1/5 for private use, depending on the business industry and personal conditions.

Since the taxpayer is fully responsible for the tax computation in a self-assessment system, penalties on an incorrect return would be imposed if the taxpayer intentionally and purportedly claims private and domestic expenses as business expenses. This could amount to:

·100% of the tax undercharged

·a fine of RM1,000 to RM10,000.

Entertainment expenses: These are incurred primarily to maintain existing sales revenue or to increase sales.

Although entertainment expenses are generally 50% deductible, the following entertainment expenses are, however, fully tax deductible as specifically allowed by the Act:

·Staff amenities such as the provision of food and beverages in the office, annual staff dinners, company trips, and family days.

·Promotional gifts at trade fairs, trade or industrial exhibitions held outside Malaysia and for the promotion of exports from Malaysia.

·Promotional samples of the business’ products.

·Provision of entertainment for cultural or sporting events; open to public; wholly to promote business.

·Provision of promotional gifts; within Malaysia; consisting of articles incorporating a conspicuous advertisement or business logo.

·Provision of entertainment which is related wholly to sales arising from the business.

Public Ruling 3/2004 clarifies entertainment related wholly to sales as entertainment which is directly related to sales provided to customers, dealers and distributors but excluding suppliers (trade creditors).

Bad debts: Specific provisions for bad debts are tax deductible, provided they arise from credit sales (trade debts) and there are commercial reasons for such provisions. Bad debts arising from sales of fixed assets to other debtors are not tax deductible.

Bad debts written off on trade debts are tax deductible in situations where trade debtors are bankrupt, dead, have absconded or liquidated.

At the year ending Dec 31 and interim periods at March 31, June 30 and Sept 30, 2008, sole proprietors must analyse their trade debtors aging report to ensure immediate action can be taken on defaulted trade debtors and make continuing provision of specific provision for bad debts.

As the sale is assessed to tax on an accrual basis, the specific provision for bad debts can reduce business adjusted income. The particulars of the trade debtors must be recorded in detail and the reasons for the provision and the non-supplying of stock to them are to be compiled for tax audit purposes.

Specific deductions: The following expenses are tax deductible against gross business income even although they may be capital expenditure and only remotely connected with the business:

·Equipment like wheel chairs to assist disabled employees to work in business premises.

·Cash donations or in kind to public, college or school libraries up to RM100,000 in a year.

·Expenses incurred to maintain a child care centre for employees.

·Sponsorship of art/cultural or heritage activities approved by the Culture, Arts and Heritage Ministry up to a ceiling of RM500,000 for local, RM200,000 for foreign and RM500,000 for combined local and foreign activities.

Double deductions: The following expenses enjoy additional deductions in arriving at adjusted income:

·Remuneration paid to disabled employees.

·Insurance premiums paid to a Malaysian insurance company on importing and exporting cargo or raw materials.

Details: Business expenses and bad debts

Tax filing for sole proprietorship 01

ACCORDING to the Companies Commission of Malaysia, the majority of the 810,150 registered companies in Malaysia are owned by sole proprietors or business enterprises.

These entrepreneurs are probably paying too much in taxes, since professional tax advice would be too costly for sole proprietors with a typical annual turnover of RM300,000 to RM500,000.

Here is how you can optimise taxes and avoid penalties by implementing permitted accounting standards, segregating trading stock from items for personal use and applying stock write-down and obsolescence policies.

·Sales/Revenue: Revenue is recognised once trading goods are sold to customers. In practice, the issuance of sales invoices are demarcation points for sales to be recorded in the accounts. For service industries, revenue is recognised at the point when services are rendered and completed.

Sales revenue at all times must be recorded at market price, which is the arm’s length or actual sales price between the trader and his customer.

·Sales recorded on accrual basis: Accounting standards in Malaysia require revenue to be recorded on an accrual basis. This means sales must be recorded notwithstanding whether it takes place on credit or cash terms; whether cash is received or not is irrelevant.

·Cash accounting: This is not a permitted accounting standard in Malaysia. Under the cash accounting basis, revenue is recognised solely based on cash received and there is no reference to the sale of goods or completion of services.

Sole proprietors computing income tax on this basis are considered as submitting an incorrect return and will be liable to a tax penalty of 100% and/or a fine up to RM10,000.

·Deemed sales for use of own stocks: Traders who wish to use their trading items (stocks) for donation, personal use or as gifts must record these items at market value, since Section 24(2) of the Act deems these as sales revenue. These transactions are treated as sales and the “profit” which was never earned is subject to income tax.

To avoid this situation, the sole proprietor has to request that the supplier invoice him separately on his personal account for the item that he intends to give away or keep for his own use. Do not bill the item to the business enterprise.

·Cost of sales: Trading stocks are assets to the sole proprietor and reflected in the balance sheet. The cost of trading stock is only allowed as a deduction against sales revenue when the stock is sold.

Excess unsold stock is an asset and not deductible. Sales quantity and the cost of sales must be identical.

The sole proprietor should develop a stock write-down policy to evaluate the quantity or quality of unsold stocks as the Act allows tax deductions for stock written down or stock write-offs due to obsolescence.

The stock policy has to be applied consistently for at least three years. Tax authorities may review such a stock policy during the tax audit.

The write-offs of the stocks or write down in the value of trading stock must reflect actual market conditions. Sole proprietors must record the details of such stocks and provide the specific reason why certain stocks are written off or written down as part of the documentary evidence for tax audit inspection.

Details: Revenue recognition and cost of sales

Slow recovery for global economy?

A NEW survey by the Association of Chartered Certified Accountants (ACCA) shows that finance professionals are forecasting a slow recovery in the world economy.

The professional body says in a statement that the Global Economic Conditions Survey among 805 of its members in 80 countries reveals a slow and credit-constrained recovery that can threaten the world’s leading economies with stagnation.

It suggests that “confidence has been lost in the sectors and countries that were once the engines of world economic growth, and that the resulting decrease in demand and supplier credit may be causing much more damage than the banking sector’s new-found aversion to risk.”

According to the survey, the contraction in world trade has affected professionals in Asia-Pacific badly, especially in China. It has also resulted in a loss of confidence among professionals in the region for their Western counterparts.

“Despite this, accountants in emerging markets and the developing world are expecting the global economy to bounce back sooner – with African countries such as Botswana, Zambia, Ghana and Kenya having the most optimistic respondents,” the ACCA says.

The research also shows that hopes of an early recovery are underpinned by trust in governments’ responses to the crisis, with businesses having to play a part too.

Source: ACCA global economic conditions survey findings revealed