THE date of incorporation of a company is commonly misinterpreted to be synonymous with the commencement of the business for income tax purposes.
Once the business has been established to have commenced for income tax purposes, the business will be able to claim deduction on the expenses incurred in the production of the business income.
Until the commencement date, all expenditure will not be tax deductible except for certain types of eligible capital expenditure which will be accumulated and claimed once the business has commenced.
There are special provisions in the income tax law that allow certain pre-commencement expenditure – relating to incorporation expenses, qualifying training expenses and certain expenditures incurred overseas – to be given tax deductions. These are exceptions and the amounts allowed are relatively small.
There is no specific law that dictates when a business has commenced, and it is all a question of facts which then must be determined from the existing body of case laws both locally and overseas.
The general considerations
Generally, any business is regarded to have commenced on the day when it started its operations which generates income. In a normal trading business, once the people, premises and goods are available, whether physically or online, for sale, then the business has commenced.
In manufacturing, the business would have commenced when the factory is ready to produce, raw materials are available for production and the finished goods are available for sale.
In the case of a hotel, the commencement would be when the hotel is opened to the public. Certain industries such as construction and property development are guided by specific public rulings issued by the Inland Revenue Board.
In the case of construction, the date the first contract is secured, or first letter of award is offered, or possession of the construction site is obtained, or the commencement of an activity which constitutes part of a series of activities that are actively carried out in the course of a construction contract business.
For property developers, the commencement date would be when you purchase the property for development and start carrying out operations relating to property development (e.g. applying for permission from the authorities).
There are certain industries such as plantations, high technology or complex manufacturing which require a longer gestation period before the revenues start coming into the business.
However, the initial activities are crucial, integral and part of a series of activities that must be undertaken in stages to ultimately generate the revenues. Each of these stages constitutes business operation of a complex business.
For example, in the plantation sector, you need to incur expenditure in planting, fertilising and maintaining the plants before they generate the fruits in the palm oil industry, or latex in the rubber industry. This normally takes many years before revenues are generated. But the business would have commenced from the time the saplings were sowed.
Similarly in complex industries which a long gestation period, commencement would begin from the time the research and development started with the intention of producing the ultimate product. This is common in the pharmaceutical industry and the IT industry.
The other ancillary factors to justify the commencement date are to ensure the business has complied with various regulatory requirements, and there is proof of registration with Employees Provident Fund, Social Security Organisation, land authorities, licence from various authorities.
It is important to distinguish the activities supporting the commencement of the business and activities that are preparatory to the commencement of the trade.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
