ACC2054 MTS – Tutorial 4

Question 1
Determine the deductibility of the following expenses:
(a) Abang Adik Sdn Bhd provided a family day trip for its employees to Pulau
Kapas, Terengganu to foster family values among its employees. The total
cost incurred amounted to RM100,000 comprising cost of travel totaling
RM40,000 and cost of food, drinks and accommodation totaling RM60,000.

Fully deductible. Travel covered under S18(b). rest under S18(a).

Under proviso 8, employee travel only claim maximum once a year.
S18 just gives definition

Both deductions allowed

1) Cost of leave passage by virtue of proviso (viii) paragrapgh 39(1)(l) of the
ITA
2) The rest by virtue of proviso (i) paragraph 39(1)(l) of the ITA

(b) Tanjong Auto Service carrying on a car servicing business provides light
refreshments such as tea, coffee, sandwiches to its customers while waiting
for their cars to be serviced. The customers are not charged for the light
refreshments provided.

50% deductible. WRONG

Entertainment expense incurred on light refreshments is allowed a deduction
since it is related wholly to sales arising from the business. Proviso (vii)

(c) Fariz owns a Proton Wira BHD888 for private use. In 2018, he obtained a taxi
licence and converts his private car into taxi. By doing so, he incurred
RM1,200 as fees paid to Road Transport Department for permitting the use of
his Wira as a taxi vehicle.

Not deductible – capital.

Not an allowable expense as there is an enduring benefit asset has been
created. It is an initial expense

(d) Zealous Sdn Bhd incurred RM160,000 as retrenchment payments to four

employees because the company has decided to close down the distribution
centre in Kuala Kedah as it was operating at a loss.

??? Basically no as you have no income-generating activity, so capital in

nature.
Conversely, if when you stop production, but the next 3 months still got
expenses related to liquidation; it will be treated as capital also as you have
no income-generating activity
Next eg: if the case was that the business was just downsizing and you were
sacking a few people, it can be argued to be revenue in nature.
ACC2054 MTS – Tutorial 4

(e) The cost of replacing uniforms of waiters and waitresses employed by

Delicious Pizza Berhad.

Fully deductible S33(1)(c) [replacement or renewal for items, which have a

short span of life (usually less than 2 years) – treated as revenue]
The job requires the waiters to wear special uniforms. Since clothing is for the
purpose of the business of the employer and strictly, there is no advantage or
benefit to employees who have to wear them. The cost of replacing the
uniforms is revenue expense and would be tax deductible, being expenses
incurred wholly and exclusively incurred for the production of gross income

Question 2 (Ex. 14.9 – CKF page 236)

Meredith, the general manager of Quick Action Sdn Bh, has been associated with
the company since its incorporation and had been involved in its business
development. In recent years, the company has suffered serious setbacks in its
trade. As part of its reorganization, the board of directors decided that the general
manager should retire.
On her retirement, Meredith was paid a gratuity of RM200,000. She was also
provided with an annual pension of RM12,000 for ten years. In relation to the
pension, an agreement was signed stating that the payment was being made on
condition that Meredith refrains from any employment in direct competition with the
company and that she would not disclose any information relating to the company.
State with reasons, whether Quick Action Sdn Bhd, can claim the gratuity and
pensions as deductible expenses

A: Pension capitalised as it’s a form of restrictive covenant, passes the “enduring

benefit test. Gratuity can be thought of as salary so revenue??

Payments made to get rid of an unsatisfactory director were held to be allowable

(Mitchell v B W Noble Ltd). Hence the gratuity of 200k would be deductible
However to receive the pension of 12k for ten years, Meredith is refrained from being
involved in any employment in direct competition with the company. In this case, the
company has put a restriction against competition and non-disclosure of any
information relating to the company. Hence the pension is capital in nature and is
NOT an allowable expense.
However, if there is no restrictive covenant imposed, the pension would be an
allowable expense
ACC2054 MTS – Tutorial 4

Question 3

Sentosa, a private nursing home, incurred the following expenditure for the year
ended 31 December 2019:
RM
Rental of premises 60,000
Purchase of chairs and tables 4,500
Foodstuff, writing materials and other supplies 27,000
Salary to the sole proprietor of Sentosa 36,000
Utilities, maintenance and upkeep of premises 16,300
Training of helpers and assistants 3,800
Advertisements and marketing 4,730

Required
Briefly explain whether each item of expenditure is or is not deductible in arriving at
the adjusted income of the nursing home for the year of assessment 2019.

Rental of premises (Revenue)

Purchase of chairs and tables (Not – capital)
Foodstuff, writing materials and other supplies (Revenue)
Salary to the sole proprietor of Sentosa (???)
Utilities, maintenance and upkeep of premises (Revenue provided does not bring
improvement to premise)
Training of helpers and assistants (Not- capital)
Advertisements and marketing (???)