Section 33(1) of the Income Tax Act 1967 allows a deduction for outgoings and expenses wholly and exclusively incurred during the basis period in the production of gross income from a source. Four elements must all hold: it is an outgoing or expense, it was incurred in that period, it was wholly and exclusively for that purpose, and the purpose was producing gross income from that particular source. Even then, section 39(1) can still prohibit the deduction.
- Section 33(1) is a single composite test, not a list — the statutory examples in s.33(1)(a) to (d) are introduced by the word including and are not exhaustive
- Section 39(1)(b) restates the same words as a prohibition, and s.39(2) declares that s.33 is not an express provision overriding s.39 except for the expenses in s.33(1)(a) to (d)
- The deduction attaches to a source — an expense that produces income for a different source, or a future source, fails
- Capital expenditure fails on the enduring-benefit ground, and payments to escape an obligation so a better product can be sold are usually treated as capital
- An expense that is legally somebody else's liability is not your expense, however commercially real the payment is
- Losses are deductible only where they are incidental to the business actually carried on
- Under paragraph 13 of Schedule 5, the taxpayer carries the onus of proof on appeal — most reported failures are documentary, not conceptual
Who this applies to: Malaysian company directors, finance managers, tax agents and sole proprietors deciding whether a borderline business expense can be claimed in the tax computation.
On this page
Every guide to Malaysian business deductions publishes a list. Rent, yes. Salaries, yes. Entertainment, half. The list is fine until the day an expense arrives that is not on it — a payment to a state government to be released from an obligation, a feasibility study for a project that never happened, service tax the company absorbed rather than passed on — and then the list is worth nothing, because the list was never the law.
The law is one sentence in section 33(1) of the Income Tax Act 1967, and a second sentence in section 39 that quietly overrides it. Learn how those two interact and you can decide the items no list covers.
What does section 33(1) actually require?
Section 33(1) says the adjusted income of a person from a source for the basis period for a year of assessment is the gross income from that source, less
all outgoings and expenses wholly and exclusively incurred during that period by that person in the production of gross income from that source
Four elements, all of which must hold:
| Element | What it asks | Where it fails in practice |
|---|---|---|
| Outgoings and expenses | Is this revenue expenditure at all? | Capital expenditure, provisions not yet incurred |
| Incurred during that period | Did the liability crystallise in this basis period? | Accruals with no underlying obligation |
| Wholly and exclusively | Was the entire amount laid out for one purpose only? | Mixed personal and business purpose |
| In the production of gross income from that source | Which source? | Expenses that build a new source |
The paragraphs that follow — s.33(1)(a) interest, (b) rent, (c) repairs, (d) such other deductions as may be prescribed — are introduced by the word including. They are illustrations, not a closed list. Most competitor pages present them as though they were the deductible categories. They are not: an expense that satisfies the opening words is deductible whether or not it resembles anything in (a) to (d).
Why wholly and exclusively is not the whole test
Section 39(1) opens with the words subject to any express provision of this Act, then prohibits nineteen categories of deduction. The first trap is that s.39(1)(b) restates the s.33 formula as a prohibition — no deduction for
any disbursements or expenses not being money wholly and exclusively laid out or expended for the purpose of producing the gross income
Note that the wording is not identical. Section 33 says in the production of gross income; s.39(1)(b) says for the purpose of producing the gross income. Assessments are routinely raised under both limbs together, and taxpayers who argue only the s.33 point find the assessment upheld on the s.39 point.
The second trap is subsection 39(2), which almost nobody writes about. It declares that section 33, except in so far as it relates to expenses of the kind specified in paragraphs 33(1)(a) to (d), is not an express provision of the Act within the meaning of section 39. Read that with the opening words of s.39(1) and the architecture becomes clear:
- For interest, rent, repairs and prescribed deductions, s.33 operates as an express provision.
- For everything else, s.39 wins. Passing the s.33 test does not save an expense that s.39 prohibits.
That is why entertainment can be wholly and exclusively incurred and still be halved, and why a payment can be entirely commercial and still be denied because withholding tax was not remitted.
Which source produced the income?
The deduction is not against your profits. It is against the gross income from that source. Two consequences follow.
A cost that builds a new source cannot be deducted against the old one. In an appeal decided by the Special Commissioners in September 2025 (reported by LHDN as IESB v DGIR), a developer paid the Pulau Pinang state government to be released from the obligation to build and sell low-cost units, and instead built commercial units. The DGIR treated the payment as capital: the taxpayer had abandoned its original source of income and created a new one, and the exemption conferred an enduring benefit. The appeal was dismissed.
The same reasoning had already produced the same result in an earlier Selangor appeal (SUSB v DGIR, 31 March 2023), where contribution payments to Lembaga Perumahan dan Hartanah Selangor bought an exemption from building low-cost and medium-cost housing. The DGIR argued, and the Special Commissioners accepted, that the payment was caught by s.39(1)(b) and was capital in nature — it was made to produce a higher income from higher-cost houses, not to produce the income of the source against which it was claimed.
Pre-commencement is the extreme case of the same rule. Before a business begins, there is no source producing gross income, so nothing can be wholly and exclusively incurred in the production of it. Public Ruling No. 11/2013 sets out the narrow statutory exceptions — incorporation expenses, approved training, pre-commencement employee recruitment, franchise fees, and pre-operational expenditure for an approved venture outside Malaysia — each of which exists only because a specific provision or gazetted rule creates it.
Revenue or capital? The enduring benefit line
The classic formulation is not in the Act; it comes from the case law and is applied through the Public Rulings. Public Ruling No. 6/2006 states the principle for legal and professional expenses in one line worth memorising:
deductible where incurred in the maintenance of trade rights or trade facilities, existing or alleged to exist, and not deductible, as being of a capital nature, where incurred for the purpose of acquiring new rights or facilities
The ruling then does something unusually useful — it applies that line to about forty specific fee types. Defending your title to an asset you already own: deductible. Obtaining a new lease: not deductible. Renewing an existing lease: deductible. Letting a property for the first time: not deductible. Defending a claim that you broke a trading contract: deductible, unless the breach was deliberate and dishonest. Defending a criminal prosecution: not deductible.
The ruling also warns that deductibility does not depend on winning. An expense incurred to maintain an alleged trade right is deductible whether or not the action succeeds.
Feasibility studies sit precisely on the line, and Malaysian courts have not been generous. In Syarikat Sesco Berhad v KPHDN (High Court, Shah Alam, 15 February 2024) an electricity utility claimed consultancy fees for studies exploring hydroelectric sites and dams. The taxpayer argued the studies were ordinary business practice for a going concern that had to meet continuing demand. The DGIR argued the expenditure related to assets and was capital, and that the utility was not even the party liable to pay under the agreement. The High Court dismissed the appeal.
Whose expense is it?
This is the test that catches sophisticated taxpayers, because the money genuinely left the company.
In Tune Talk Sdn Bhd v DGIR (High Court, Kuala Lumpur, 30 October 2025) a telecommunications operator claimed a deduction for service tax of RM2,120,921 paid to Customs for YA2015, on the basis that it had absorbed the tax rather than passing it on. The DGIR’s answer was structural: under the service tax legislation the liability to pay lay on the customer, not on the provider. Absorbing somebody else’s tax does not convert it into your expense incurred in the production of your gross income. The High Court upheld the Special Commissioners and dismissed the appeal with costs.
The same question decided Syarikat Sesco on an alternative ground — the duty to pay under the feasibility study agreement lay with a different company in the group.
Before claiming any large third-party payment, ask who was legally obliged to make it. If the answer is not your company, the deduction is fragile no matter how commercially necessary the payment was.
Is the loss incidental to the business?
Public Ruling No. 4/2012 accepts that loss of cash caused by theft or embezzlement by an employee is allowable, because it arises directly from the necessity of delegating certain duties of the business to an employee. The words incidental to the business carried on are load-bearing.
In KYH v DGIR (Special Commissioners, 10 January 2025) the administrator of a deceased sole proprietor’s estate — a legal practice — claimed the amounts paid back into the firm’s Client’s Account to make good money siphoned by a former employee, plus the interest on the loan taken to fund it. The DGIR argued the money in the Client’s Account belonged to clients and was never the firm’s business income; only fees transferred to the Office Account are business receipts, so replacing client money is not an expense incurred in producing income. The Special Commissioners nonetheless found for the taxpayer and set the assessments aside.
Compare SDBB v KPHDN (Special Commissioners, 22 October 2024), where a financier was ordered by the Federal Court to pay over RM10.4 million to a sub-contractor after misdirecting progress payments. The DGIR’s case was squarely under s.39(1)(b): the recipient was not a debtor of the taxpayer and generated no income for it. The Special Commissioners allowed the appeal, treating the payment as arising in and incidental to the taxpayer’s banking business.
Two lessons. First, a payment forced on you by litigation can still be deductible if the underlying transaction was an ordinary incident of your trade. Second, this is the least predictable corner of s.33 — outcomes have gone both ways at first instance, and both decisions remained open to appeal.
What about a payment that is commercially unavoidable but reputationally ugly?
DGIR v Tahora Trading Sdn Bhd (High Court, Kuching, 3 December 2025) is the cleanest illustration of purpose being decided on evidence rather than labels. A logging contractor paid RM87,210 in YA2009 to longhouse Tuai Rumah, Penghulu and committee members to negotiate with natives whose blockades had halted operations.
The DGIR characterised the payments as protection money, pointing to the taxpayer’s own general ledger, which described them as compensation to native, to requests for wang saguhati, to mismatches between agreement amounts and amounts actually paid, and to the absence of evidence that services were performed. The taxpayer characterised them as commercial expediency to resume operations and generate income.
The Special Commissioners found for the taxpayer, and the High Court dismissed the DGIR’s appeal. What decided it was not the moral character of the payment but whether the evidence supported the stated purpose — and the appellate court declined to disturb the Special Commissioners’ findings of fact.
The practical inversion of that case is VTL & Ors v KPHDN (Special Commissioners, 24 June 2026), where partners in a shipping and tugboat partnership claimed accounting management fees, IT server subscriptions and GST consulting fees. The expenses were the kind of thing anyone would assume deductible. They were disallowed because the documents did not detail the purpose and scope of the services, some amounts were excessive against market value, and some had the character of capital. Penalties under s.113(2) were upheld.
The marginal expenses, decided
| Expense | Treatment | Why |
|---|---|---|
| Statutory audit fee | Deductible | Specific gazetted rule; PR 6/2006 para 5.3 |
| Secretarial fee, tax return preparation | Not deductible under general principles | PR 6/2006 paras 6.3 and 6.4 — allowed only by P.U.(A) 162/2020, capped at RM15,000 per YA combined across both fees |
| Legal fee to renew an existing lease | Deductible | Maintaining an existing trade facility |
| Legal fee to obtain a new lease | Not deductible | Acquiring a new right |
| Legal fee, first letting of a property | Not deductible | The source did not yet exist |
| Cost of appealing a tax assessment | Not deductible | Relates to income already earned |
| Defending a negligence claim against a professional | Deductible | Ordinary incident of the trade |
| Defending a criminal prosecution | Not deductible | Not incurred in producing income |
| Feasibility study on a new site or asset | Usually capital | Syarikat Sesco; asset-related |
| Payment to be released from a development obligation | Capital | IESB, SUSB — enduring benefit, new source |
| Tax legally borne by your customer | Not deductible | Tune Talk — not your expense |
| Employee embezzlement of business funds | Deductible | PR 4/2012 — incidental to the business |
Common mistakes
Treating s.33(1)(a) to (d) as the list of deductible expenses. They are examples introduced by including. The operative words are the ones before them.
Assuming that passing s.33 ends the enquiry. Section 39(2) means s.39 prevails over s.33 for everything outside paragraphs 33(1)(a) to (d). Run both tests, in that order, every time.
Claiming an expense against the wrong source. Rental income under s.4(d) and business income under s.4(a) are different sources with different expense pools. So are two separate businesses of the same company.
Relying on commercial necessity as the argument. Necessity is not the statutory test. Purpose is. Tune Talk absorbed a real cost for a real commercial reason and lost anyway.
Booking the expense correctly and describing it badly. In Tahora, the taxpayer’s own ledger narrative was the DGIR’s best evidence against it. Your general ledger descriptions, board minutes and agreements are the record on which purpose will be judged years later.
Leaving the documentation to the audit. Paragraph 13 of Schedule 5 puts the onus of proof on you. VTL lost expenses that were almost certainly genuine because the scope of the services was never documented.
Assuming a deduction survives a change in law. The Public Rulings cited here date from 2006 to 2013 and were written against the Act as it then stood. Read them alongside the current reprint, not instead of it. Sections 33 and 39 themselves are stable: neither was amended by Finance Act 2024 (Act 862) or Finance Act 2025 (Act 874), so the 21 May 2024 reprint used here remains the operative text. Note also that Public Ruling No. 6/2006 stays current on the LHDN index, though LHDN has published a draft replacement ruling on legal and professional expenses that is not yet in force.
What’s next
Work through section 39(1) paragraph by paragraph before you finalise a computation — that is where the expenses that pass this test still die. If the expense bought something that lasts, it is not a s.33 question at all but a Schedule 3 question, and the capital allowance rules decide how much relief you get and over how long. If it involved food, drink or hospitality, the entertainment provisos decide whether you keep half or all of it. And if the payment went to a non-resident, check the withholding position before anything else — an unremitted deduction of tax turns a perfectly good expense into a permanent add-back.
What does wholly and exclusively mean in Malaysian tax law?
It means the whole of the expense must have been laid out for one purpose only, that purpose being the production of gross income from the source against which it is claimed. Wholly goes to amount and exclusively goes to purpose. Where an expense has a genuine dual purpose the statute gives no general power of apportionment, which is why mixed-purpose expenses are so often disallowed outright.
If an expense is wholly and exclusively incurred, is it automatically deductible?
No. Section 39(1) prohibits specific deductions notwithstanding s.33, and subsection 39(2) declares that s.33 is not an express provision of the Act within the meaning of s.39 except in so far as it relates to expenses of the kind specified in paragraphs 33(1)(a) to (d). Entertainment, motor vehicle rentals above the cap, and payments where withholding tax was not remitted all pass s.33 and still fail.
Are secretarial fees and tax filing fees deductible?
Not under the general principle. Public Ruling No. 6/2006 lists secretarial fees, annual general meeting expenses and the cost of preparing tax returns among the non-deductible legal and professional expenses. They are deductible only because a separate gazetted rule allows it — the Income Tax (Deduction for Expenses in relation to Secretarial Fee and Tax Filing Fee) Rules 2020 [P.U.(A) 162/2020], which cap the claim at RM15,000 per year of assessment combined across both fee types. The Amendment Rules 2021 [P.U.(A) 471/2021] left the RM15,000 combined cap unchanged but moved the deduction to an incurred (rather than paid) basis from YA 2022.
Can I deduct expenses incurred before my business started trading?
Generally no, because there is no source producing gross income yet, so the s.33(1) test cannot be satisfied. Specific reliefs exist for defined categories — incorporation expenses, approved training, employee recruitment and certain franchise fees — each with its own gazetted rule. Public Ruling No. 11/2013 sets out the categories and their conditions.
Is money stolen by an employee deductible?
It depends on whether the loss is incidental to the business. Public Ruling No. 4/2012 accepts that loss of cash through theft or embezzlement by an employee is allowable because it arises from the necessity of delegating duties. The Special Commissioners have applied that principle strictly to the business actually carried on, and losses of money that never belonged to the business have been contested on exactly that ground.
Who has to prove that an expense is deductible?
The taxpayer. Paragraph 13 of Schedule 5 to the Income Tax Act 1967 places the onus of proving that an assessment is excessive or erroneous on the appellant. In practice this means invoices, agreements, payment vouchers and evidence that the service was actually delivered — several reported appeals have failed purely because the scope and purpose of the expense could not be documented.
Sources
- Income Tax Act 1967 (Act 53), reprint as at 21 May 2024 — LHDN
- Public Ruling No. 6/2006 — Tax Treatment of Legal and Professional Expenses — LHDN
- Public Ruling No. 11/2013 — Pre-Operational Business Expenditure — LHDN
- Public Ruling No. 4/2012 — Deduction For Loss Of Cash And Treatment of Recoveries — LHDN
- Tune Talk Sdn Bhd v Director General of Inland Revenue — case report — LHDN
- Director General of Inland Revenue v Tahora Trading Sdn Bhd — case report — LHDN
- Syarikat Sesco Berhad v Ketua Pengarah Hasil Dalam Negeri — case report — LHDN
- SUSB v Director General of Inland Revenue — case report on ss.33(1) and 39(1)(b) — LHDN
- Finance Act 2025 (Act 874) — Chapter II arrangement of sections (amends ITA ss.6,15C,46,49,50,54C,65C,65D,65F,76A,107C,111,Sch1,Sch6; does not touch s.33 or s.39) — Laws of Malaysia, gazetted 31 Dec 2025 (hosted copy)
- Finance Act 2024 (Act 862) — Chapter II arrangement of sections (amends ITA ss.6,15C,34,44,45A,46,46B,47,48,49,107C,108,Sch1,Sch6; does not touch s.33 or s.39) — Laws of Malaysia, gazetted 31 Dec 2024 (hosted copy)
- Public Rulings index — No. 6/2006 Tax Treatment of Legal and Professional Expenses listed as current, not superseded — LHDN
- Tax Deduction of Secretarial Fees and Tax Filing Fees — P.U.(A) 162/2020 (RM15,000 combined cap per YA) and P.U.(A) 471/2021 (incurred basis from YA 2022, cap unchanged) — CCS & Co PLT (reproducing gazette text)
- Amended guidelines on deductions for secretarial and tax filing fees — P.U.(A) 162/2020, RM15,000 combined cap per YA, effective YA 2020 — EY Malaysia
Change history
| Version | Date | Change | By |
|---|---|---|---|
| 01.00 | 14 Aug 2026 | Approved and published. | — |