Commencement of Business Operations in Malaysia
In Malaysia, determining when a business has “commenced operations” is crucial for tax purposes. The date of commencement affects the deductibility of expenses, eligibility for capital allowances and the basis period for the first Year of Assessment (“YA”) and the timing of estimated tax obligations. The Income Tax Act, 1967 (“the Act”) does not define a fixed statutory date for business commencement. Instead, the determination is based on the facts and circumstances of each business, focusing on the point when it begins its core income-producing activities. Accurately establishing this date is essential for proper tax compliance and to avoid potential disputes with the Inland Revenue Board of Malaysia (“IRBM”).
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What Commencement of Business Means in Practice
For tax purposes, a business is regarded as having commenced when it begins carrying out activities that are directly related to the production of income. This is different from preparatory steps such as incorporation, hiring staff, renting premises, purchasing equipment or signing preliminary agreements. While these are essential for establishing a business, they do not in themselves constitute the start of income-generating operations.
The determination of commencement depends on the nature of the business and is ultimately a question of fact. Common industry indicators include:
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Trading or retail businesses – When people, premises and goods are available for sale, whether physically or online.
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Manufacturing businesses – When the factory is operational, machinery is ready for use, raw materials are available and production can commence.
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Service businesses – When the first service can be rendered or when substantive income-producing activities begin.
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Hotel and hospitality businesses – When the establishment is open to the public and able to accept guests.
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Investment holding companies – When the first investment is made, such as placing a fixed deposit or acquiring shares.
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Agriculture businesses – The first planting of seedlings or purchasing of animal livestock
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Construction companies – When the first contract is secured, first letter of award is offered, possession of site is obtained or when the company begins carrying out activities forming part of a series of construction operations.
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Property developers – When development activities begin, including the acquisition of property for development or carrying out activities related to the development of property (e.g. applying for permission from the authorities).
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Across all business types, commencement occurs when the company is ready and able to carry out income-producing activities, even if revenue has not yet been generated.
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Tax and Compliance Implications
The date of commencement of business operations determines when a company may begin recognising deductible expenses, claiming capital allowances, establishing its basis period and fulfilling statutory tax obligations. The key implications are as follows:
Deductibility of Expenses
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Revenue expenses are deductible only from the date business operations commence.
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Expenses must be wholly and exclusively incurred in producing gross income.
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Pre-commencement expenses are generally not deductible, except for certain deductions provided under the Act (e.g. incorporation expenses, qualifying training expenses, recruitment expenses etc.).
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Capital Allowances
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Qualifying capital expenditure incurred prior to commencement is deemed to be incurred on the date the business commences operations, in accordance with Para 55, Schedule 3 of the Act.
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Initial allowances are claimable in the first YA in which the business is regarded as having commenced.
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Pre-commencement capital expenditure is not disallowed; the claim is simply deferred until operations begin.
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Expenditure on plant and machinery is treated as incurred when the asset becomes capable of being used for business purposes, even if acquired earlier.
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Basis Period for the First YA
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The basis period for the first YA starts from the actual commencement date to the end of the financial year.
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An incorrect commencement date may result in misalignment of income recognition, incorrect expense deductions or disallowed claims.
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Estimated Tax Obligations
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Form CP204 must be submitted within three months from the commencement date.
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An incorrect determination of the commencement date may result in late filing, inaccurate estimates or penalties for non-compliance.
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Conclusion
Determining the correct date of commencement of business operations is fundamental for accurate tax compliance in Malaysia. It affects the deductibility of expenses, eligibility for capital allowances, the basis period for the first YA, and the timely submission of estimated tax. Businesses should carefully assess and document the start of income-producing activities to ensure compliance with the Act and avoid potential disputes with the IRBM.
For further information, please visit the official website of the Inland Revenue Board of Malaysia at
https://www.hasil.gov.my/en
KAIZEN Group, together with its associate firms in Malaysia, can help the clients to perform these compliances formalities so as to maintain the Malaysia company in good standing. Please call and talk to our professional accountants in Kaizen for further clarification.
KNOWLEDGE
