Why some of the finance cost couldn't be deducted?

eKTP 145

Main Factor on Tax Deduction of Finance Cost in LHDN Perspective

The COVID-19 outbreak has affected businesses in every possible manner especially their cash flow. 

Therefore, companies may obtain a loan from the bank to keep business survive from an economic crisis.

Finance costs will be incurred when you apply for a loan from a bank. 

What kind of finance costs charged by the bank? How do income tax officers determine their tax treatment? What if I refinance my existing loan?

The main factor is the "nature" of the loan.

Case study - Rakyat Berjaya Sdn Bhd and KPHDN.

The taxpayer was in the business of extraction and sale of timber logs.

In 1992, the Company obtained a second loan to finance working capital requirements and to pay off its first loan. The purpose of the first loan is to pay the royalty for timber rights in its business.

In IRB perspective, the settlement of debt is not in the production of income. However, the taxpayer argued that the repayment of business debt was an essential part of the business. 

So, what’s the court decision?

The court held that since interest payments on the first loan were deductible because it falls within the provisions of Section 33 (1) of ITA 1967, the second loan should be considered as a replacement or refinancing loan. 

As a result, interest payments on the second loan would also be deductible for income tax purposes. 

Let's have a quick recap on what we learnt today?

  1. Interest expense is deductible as long as it is for business purpose

  2. Borrowing cost is tax-deductible when it was revenue purpose and if capital in nature will be not claimable in tax. 

Hope this video can help you understand more about the refinance costs and thanks for spending time with us, have a nice day.

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