Which business expenses are tax-deductible under the ITA 1967?

For any Malaysian company or sole proprietor, the difference between a deductible and a non-deductible expense decides your tax bill. The rule lives in two sections of the Income Tax Act 1967 (Act 53). Section 33(1) sets the general test for what you can deduct; Section 39 lists the specific things you cannot, even when they would otherwise pass Section 33. Get the interaction right and you claim everything you are entitled to; get it wrong and an LHDN (HASiL) audit can disallow the expense, raise the tax, and add a penalty. The official text of the Act is published by the Inland Revenue Board on its legislation (Act) page. Carriera is a compliance-focused recruitment and training partner — our Academy runs HRD Corp-claimable tax programmes — so this is the same framework we use to keep finance teams audit-ready.

What is the basic test for a deductible business expense?

An expense is deductible under Section 33(1) of the Income Tax Act 1967 only if it is wholly and exclusively incurred in the production of gross income from that source. In practice, tax advisers break this into a three-part test, summarised by Azmi & Associates' guide to Section 33:

The phrase “wholly and exclusively” does heavy lifting. The courts have long held that if an expense serves a meaningful private or non-business purpose alongside the business one, the whole deduction can fail. The interpretation of Section 33(1) was tested in the Malaysian courts in Ketua Pengarah Hasil Dalam Negeri v GCSB, discussed in HASiL's own published commentary alongside the Act on the Inland Revenue Board legislation portal. The practical takeaway: document the business reason for every cost. See our glossary for plain-language definitions of these tax terms.

What is the difference between Section 33 and Section 39?

Section 33(1) allows; Section 39 disallows. Even an expense that is genuinely wholly and exclusively incurred can be blocked because Section 39(1) names it as non-deductible. The table below contrasts typical allowable revenue expenses with the headline disallowed categories under Section 39(1), whose paragraph letters are reproduced from the text of Section 39 of the Income Tax Act 1967.

Two traps catch businesses most often. First, capital dressed as revenue: buying a machine or a company car is capital (s.39(1)(c)) and is relieved through capital allowances under Schedule 3, not deducted in full. Second, withholding tax: if you pay a foreign vendor interest, royalty, technical or contract fees and fail to deduct and remit the withholding tax, the whole payment is disallowed under s.39(1)(f), (i) or (j) — a costly, avoidable error.

Are entertainment expenses deductible in Malaysia?

By default, only 50% of entertainment expenses are deductible under Section 39(1)(l) of the Income Tax Act 1967. The other half is added back. A full 100% deduction is allowed only if the entertainment falls within one of the provisos to s.39(1)(l). The authoritative guidance is LHDN Public Ruling No. 4/2015, “Entertainment Expense” (issued 29 July 2015), listed on the Inland Revenue Board's Public Rulings page.

Allowed at 100% — the main provisos to s.39(1)(l), reproduced from the Act:

• (i) Entertainment provided to your own employees (e.g. an annual dinner, staff refreshments) — unless it is incidental to entertaining others.
• (ii) Entertainment provided by a business whose trade is the provision of entertainment (a restaurant or events company entertaining as its actual business).
• (iii) Promotional gifts at foreign / international trade fairs held to promote exports from Malaysia.
• (iv) Promotional samples of the company's products.
• (v) Entertainment for a cultural or sporting event open to the public, wholly to promote the business.
• (vi) Promotional gifts within Malaysia consisting of articles that carry the business logo or advertisement.

Restricted to 50% — anything that does not fit a proviso, including client lunches and dinners, festive hampers, gifts without a business logo, entertainment of suppliers, and cash sponsorships of a customer's function. A useful rule of thumb from PR 4/2015: a gift with your logo is 100%; the same gift without your logo is 50%. Always verify a borderline item against the live ruling before you claim — the categories above are the statutory ones, not an exhaustive interpretation.

Are repairs, salaries and legal fees deductible?

Mostly yes — these are classic revenue costs. Salaries, EPF, SOCSO and EIS for employees are deductible because they are incurred in producing income. Repairs and renewals are deductible where they restore an asset to its original condition; a cost that improves or enlarges the asset is capital and is not deductible as a repair. Most audit, accounting and routine legal-professional fees tied to running the business are allowed, while legal fees on acquiring a capital asset or raising capital are not. The Inland Revenue Board issues separate Public Rulings on repairs and on legal/professional expenses via its Public Rulings library.

Watch the timing point too: expenses incurred before a business begins to produce income (pure pre-commencement or set-up costs) generally fail the Section 33(1) link to gross income and are not deductible as ordinary expenses. And remember that closely connected obligations — like e-Invoicing and accurate record-keeping — now underpin every deduction; see our e-Invoice employer guide for how that affects your documentation.

What records prove an expense is deductible?

The burden is on the taxpayer: if LHDN queries a deduction, you must show the expense was wholly and exclusively incurred. That is won or lost on documentation, not argument. Use this checklist for every material expense — it is the same one we apply when preparing finance teams for an audit. (For a fuller walk-through, see our LHDN audit-readiness guide.)

• Tax invoice or receipt — an original, valid document in the business's name (and, from the e-Invoice era, a validated e-Invoice where required).
• Proof of payment — bank transfer, cheque or card record matching the invoice amount and date.
• Business purpose — a short note of why the cost was incurred and how it relates to producing income.
• For entertainment — record the date, the persons entertained, their company, the occasion, and whether a proviso (100%) applies; this is what decides 50% vs 100%.
• Capital vs revenue note — for repairs and big-ticket items, document why it is a repair (revenue) and not an improvement (capital).
• Withholding-tax evidence — for payments to non-residents, keep the CP37 / withholding remittance to protect the deduction under s.39(1)(f),(i),(j).
• Retention — keep records for 7 years, the period the Income Tax Act 1967 requires business records to be kept.

How do I make sure my team applies this correctly?

The rules are stable, but applying them — capital versus revenue, the 50/100 entertainment split, withholding-tax traps — is where money is lost or saved at every closing. Equipping your finance and accounts team to read Section 33 and Section 39 correctly typically pays for itself in a single avoided disallowance or penalty. Because this is employer-funded skills development, it can be HRD-Corp-claimable: under the PSMB Act 2001, registered employers pay a training levy that can be used (via SBL-Khas) to fund approved courses — verify the current rate on official guidance and with HRD Corp before claiming.

Carriera Academy is an HRD Corp Approved Training Provider, and tax is one of our core programme themes — SST, the ITA 1967, e-Invoice and LHDN audits. Our practical workshop, Practical Guide to Business Expenses under the ITA 1967, walks accounts staff through real worked examples of Section 33, Section 39 and the entertainment rules. Browse all live dates on our training page or read more about HRD Corp-claimable corporate training.

This guide is general information, not tax or legal advice. For the binding text, refer to the Income Tax Act 1967 (Act 53), the relevant LHDN Public Rulings, and the Inland Revenue Board (HASiL). Confirm any figure or category against the live source before relying on it. Updated 18 June 2026.