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IF you are like the average taxpayer, chances are you are often confused by the terms “deduction”, “allowance”, “relief”, or “exemption”.
These words are not given separate meanings in the tax legislation but they all operate to reduce your tax bill. It is helpful to distinguish them and to know the meanings usually attributed to them.
A deduction is an expense or “outgoing” of the taxpayer which he is entitled to take into account in arriving at any particular figure of income.
It is generally a cost of earning income of a particular source, which is deductible in computing the net income from that source.
Deductions allowed in arriving at “income” occur frequently in relation to certain types of income but rarely in relation to some others.
The most frequent deductions encountered are those made against the income received from a trade or business to arrive at the profits, which, by definition, is the balance of income over expenditure.
Whilst this represents the general scheme of how the tax law operates, there are many situations where an expense is specifically treated as not deductible.
Examples are expenses of a capital nature and donations to unapproved charitable bodies. Deductions are not widely permitted for income from personal earnings such as income from one’s employment.
This is because such earnings do not normally involve cost, other than the cost of travelling to and from work and the cost of maintaining the human body and mind in good order.
Nothing may be deducted for these since the test is strict; the expenditure must be “wholly and exclusively incurred” in earning the employment income.
Some items of expenditure may yet qualify, such as travelling incurred by the employee in the course of his duties where the employer does not reimburse the expenses.
The terms “allowance” and “relief” are sometimes used interchangeably and sometimes in different senses.
Generally an allowance is an outgoing, which, when the amount of income has been ascertained, is allowed as an offset against it.
An allowance may be allowed against a particular type of income. Thus allowances on the cost of machinery used in a manufacturing business would be allowed against income from that business.
If a business has made a loss, allowances for losses may be allowed against future or previous income of the source of the business from which the loss occurred.
Allowances may be allowed against an individual taxpayer’s income.
Relief due to an individual
An individual pays no income tax on a part of his income. The extent of that part is determined by the number and extent of various personal relief, which he may be entitled to claim.
Thus the totality of personal relief due establishes the minimum tax threshold. A relief is an offset allowed against the net income but unlike an allowance, does not usually require an expense outlay on the part of the taxpayer.
Most relief is dependent on the personal circumstances of the individual taxpayer. Examples of such relief, which is not dependent on any outlay by the taxpayer can be seen in the table on the bottom left.
An exemption may occur in two ways; first, certain classes of persons are wholly or partially exempt from tax; second, certain types of income are exempt from tax.
Usually the right to an exemption depends on a combination of some particular feature of the income with some particular attribute of the taxpayer. For example, in Budget 2009, the following types of income were granted exemption:
>Travel allowance from home to work up to RM2,400 a year;
>Travel allowance for business purposes up to RM6,000 a year;
>Parking fees or allowance;
>Child care allowance RM2,400 a year;
>Charges for phones, PDAs and Internet subscription;
>Discounted purchase of employer goods up to RM1,000 a year;
>Discounted employer services;
>Interest subsidies on loans up to RM300,000 for housing, cars and education; and
>Expenses on maternity and traditional medicines.
The examples cited do not represent an exhaustive list of the various items of allowances, relief and exemptions but are intended to show the nature of each group of items. Full details of these are available at the official website of the Inland Revenue Board ( www.hasil.gov.my)
>Kang Beng Hoe is executive director of Taxand Malaysia Sdn Bhd