Expenses That Cannot Be Deducted (s.39): Fines, Personal & Capital

Introduction

Not all business expenses can be deducted from gross income. Section 39 of the Income Tax Act 1967 (ITA 1967) lists expenses that are not allowed as deductions — including personal, capital, and fines/penalties.

This article explains the list of prohibitions in s.39(1) with practical examples, plus s.39(1A) (failure to furnish information) and the relationship with capital allowances. It is the other side of the general deduction principle under s.33 — read both together.

General principle — s.33 read together with s.39

Business expense deductions are under s.33(1): expenses incurred "wholly and exclusively" in producing gross income. Section 39 acts as a prohibition: even if an expense appears business-related, if it falls within s.39(1), no deduction is allowed.

Source: ITA 1967, s.33 & s.39 (R1); HASiL — Frequently Asked Questions (Companies) (R3).

Basic prohibitions in s.39(1) — (a), (b), (c)

In determining adjusted income, no deduction is allowed for:

• (a) domestic/private expenses;
• (b) disbursements/expenses not wholly and exclusively incurred in producing gross income;
• (c) capital withdrawn or amounts used/intended to be used as capital.

Source: ITA 1967, s.39(1)(a)–(c) (R1).

Fines, penalties & appeal costs — official examples in s.39(1)(b)

Official examples listed in HASiL's Individual Appendix under s.39(1)(b) include:

• expenses before a business begins / for closing down a business;
• litigation related to acquiring assets / personal matters;
• donations;
• fines for offences against the law, including income tax penalties and appeal expenses;
• gifts (except to employees);
• club membership;
• loan repayments / agency agreements;
• purchase of assets.

Source: HASiL — Individual Appendix 2025 (R2).

Other prohibited items in s.39(1) — (d) to (r)

• (d) payments to pension/savings/widows/orphans funds that are not approved schemes;
• (e) expenses eligible for mining/agriculture/forestry/prospecting (Schedules 2–4);
• (f/i/j/q) interest/royalty/contract/public entertainer payments to parties subject to withholding tax without complying with s.109/107A/109B/109F/109A;
• (k) rent for non-commercial vehicles exceeding RM50,000 (RM100,000 for new vehicles worth ≤RM150,000, with a maximum aggregate of RM50,000/RM100,000);
• (l) 50% of entertainment expenses (with certain exceptions, including entertainment for employees, export promotion, product samples, promotional gifts, public culture/sports);
• (m) employees' leave passage expenses within/outside Malaysia;
• (n) remuneration of LLP partners not stated in the LLP agreement;
• (o/p) creditable/unpaid GST input/output;
• (r) payments by residents to Labuan entities.

Source: ITA 1967, s.39(1)(d)–(r) (R1).

s.39(1A) — failure to furnish information under s.81

If a person required under s.81 to give information fails to do so, the deduction for the claim concerned is not allowed (s.39(1A)).

Source: ITA 1967, s.39(1A) (R1).

s.39(2) — s.33 and s.39 read together

s.39(2) provides that s.33 (except the types of expenses in (1)(a)–(d)) is not an express provision for the purposes of s.39 — that is, s.33 and s.39 must be read together.

Source: ITA 1967, s.39(2) (R1); HASiL — Frequently Asked Questions (Companies) (R3).

Capital allowances — in place of depreciation

Capital expenditure / asset depreciation cannot be deducted at all in determining adjusted income, but a deduction is given in the form of Capital Allowances under Schedule 3 instead, for assets used in the business.

Source: HASiL — Frequently Asked Questions (Companies) (R3).

this item still awaits official confirmation from HASiL — check again with HASiL before deciding. notes from research

Frequently Asked Questions (FAQ)

Q. Can I deduct a traffic fine on a company vehicle? A. Fines for offences against the law are listed as an example under s.39(1)(b) — not allowed as a deduction. The specific treatment of tax penalties directly related to business transactions has not been confirmed — this item still awaits official confirmation from HASiL — check again with HASiL before deciding.

Q. Can I deduct personal expenses such as daily meals? A. No — domestic/private expenses are prohibited under s.39(1)(a).

Q. What about buying business assets? A. Capital expenses are not deducted directly (s.39(1)(c)), but you may be eligible to claim Capital Allowances under Schedule 3 instead.

Q. Are all entertainment expenses deductible? A. No — only 50% of entertainment expenses is allowed, with certain exceptions (including entertainment for employees, export promotion, product samples, promotional gifts, public culture/sports). Full exception rates/amounts — this item still awaits official confirmation from HASiL — check again with HASiL before deciding.

Q. What happens if I fail to give information to HASiL? A. If you are required to give information under s.81 and fail to do so, the deduction for the claim concerned is not allowed (s.39(1A)).

Glossary

• Disbursement — a payment/expense that is incurred and paid out.
• Adjusted income — aggregate income after allowable deductions.
• Wholly and exclusively — "kesemua dan semata-mata" (s.33(1)).
• Capital Allowances — deductions under Schedule 3 in place of depreciation.
• LLP (PLT) — Limited Liability Partnership.
• YA — Year of Assessment.