Pre-trading expenses
A business may incur certain pre-trading expenses in advance of actually commencing trade. The following pre-trading expenses are allowed to be deducted (i) staff training, (ii) Salaries, (iii) Advertising. This pre-trading expenditure shall still be deductible if it is, (a) is incurred not more than eighteen months before the start of the trading activity and (b) the expenditure would have been deductible had it been incurred after the trading has commenced. Such expenditure as may be prescribed shall be treated as incurred on the day on which the trading activity has commenced.
Definition of industrial premises or structures: Generally industrial premises or structures refer to an asset used for carrying on the business and is not considered to be stock in trade. Industrial Property means property used in the extraction, production, distribution, and changing the form of raw materials or assembling components and parts, packing and warehousing, and shipping of the finished products. Such industrial building and structures would be owned and employed by a business in the production of the trading income.
Initial Capital Allowances: Generally Initial allowances are fixed at the rate of 10% based on the original cost of the asset at the time when the capital expenditure is incurred. From basis year 2001 only initial allowances in respect of industrial buildings or structures may be claimed.
Mixed Use Assets, used only partly in the production of income: any balance allowance for an asset that is not fully used for business purposes, will only be allowable to the extent of the business use.
Definition of plant and Machinery for capital allowances: For most businesses, the main type of capital allowance is for plant and machinery. To claim these allowances you must be carrying out a qualifying activity and incurring qualifying expenditure. Generally plant and machinery is used for the carrying on of the business, and is not stock in trade. Such a plant and machinery would be owned and employed in the production of trading income.
(d) Repairs: The costs incurred to bring an asset back to an earlier condition or to keep the asset operating at its present condition.
(e) Bad Debts: Bad debts which are approved by the Commissioner for Revenue can be deducted for tax purposes.
(f) Pension contributions: Sums contributed by an employer to a pension fund, saving, duly approved by the commissioner may also be deducted for tax purposes.
(g) Wear and Tear of Plant and Machinery: Wear and Tear or Capital allowances are the substitute of accounting depreciation and they represent a tax deductible allowance for the wear and tear of assets used in the business.
General Rule capital allowances: This implies that only capital allowances on assets which are used in the business activity are allowed. A business may not claim capital allowances on assets which are not used in his business activity and which are not used to produce the income which is chargeable to tax.
(h) Trading Losses from previous years: When a taxpayer's deductions in a year are more than their trading income for the year, it may create a trading loss that may be carried over to a subsequent tax year. A Net Operating Loss can be used to reduce your taxable income in another year. The Malta Income Tax Act does not make any restrictions on the period over which the losses may be carry forward, with some exceptions for certain activities.
Donations
Donations are generally not tax deductible from the income of taxpayers in arriving at their taxable profits. These Donations are treated as being voluntary and are added back to the accounting profit before the amount of chargeable income is calculated in terms of Article 26 of the Income Tax Act. Donations of more than Eur2,000 per year paid to the Malta Community Chest Fund (MCCF) are however allowed and deductible, this through a specific exception to this rule, which exception is extended or not each year.
Lease payments for motor vehicles
Such deductions are restricted for tax purposes in the case of non-commercial motor vehicles and are therefore added back to the accounting profit for tax purposes.
Bad Debts
A Bad debt expense is generally referring to a sales invoice which is not recoverable. Only bad debts which are approved by the Commissioner for Revenue can be deducted for tax purposes.
Deductions disallowed by the Income Tax Act
Disallowable expenses are expenses that are not incurred "wholly and exclusively" for business and trade purposes. Article 26 of the Malta Income Tax Act provides a list of expenses which cannot be deducted Including (a) Any loss, diminution, exhaustion or withdrawal of capital, any sum employed as capital or any expenditure for a capital nature save as provided in article 14 and 23, (b) The cost of any improvements, (C) Rent of any premises or part of any premises not incurred for the purpose of producing income, (d) Any payments of a voluntary nature.
(l) Promotion of a trade: Trade promotion means marketing efforts made for increasing the demand for the products of the business. Any expenditure incurred by a person in a trade, business, profession or vocation for the purpose of promoting that trade, business, profession or vocation, including (i) Market research and obtaining market information, (ii) Advertising, (iii) Publicity, (iv) Participating in fairs and exhibitions.
(n) Expenses for childcare facilities: Payments by an employer to a licensed or registered childcare centre as fees in respect of childcare services for the children of his employees. The tax deductibility is subject to a maximum capping per year.
Depreciation and Capital allowances
Depreciation is represents the use of the asset over its useful economic life. That is an asset loses value over time until the value of that asset becomes zero, or the value reaches the asset’s residual value, that is the value the asset would have when it is fully depreciated. Capital allowances are the tax equivalent of accounting depreciation, and these follow the rates as prescribed in the Income Tax Act. We add back Depreciation to the accounting profit for Malta tax purposes, and deduct instead the Capital Allowances.
(i) Expenditure on Scientific Research : Capital expenses incurred on scientific research related to the business of the shall be allowed as a deduction in the year in which they are incurred.
Assets which are replaced: comparing the current value of the asset to the cost of repair or replacement, to determine the calculation of the balancing charge or allowance.
(m) Capital Expenditure on intellectual property: Any expenditure of a capital nature on intellectual property or any intellectual property rights incurred by a person engaged in trade, business, profession or vocation. Such expenditure of a capital nature shall be spread equally over number of years, which shall not be less than a minimum period of three consecutive years, the first year being that in which the said expenditure has been incurred or the year in which the intellectual property or intellectual property rights is/ are first used or employed in producing the income.
Capital allowances for commercial motor vehicles: Capital allowances are permitted at the applicable rates however there are special provisions that need to be considered. Commercial vehicles may be fleet vehicles, company cars, or other vehicles used for the business activity, on these commercial vehicles capital allowances may be claimed.
Annual Capital Allowances: An annual deduction made in respect of the wear and tear of (i) plant and machinery, (ii) Any premises being an industrial building or structure, which are used or employed in the production of the income.
Capital Allowances: Capital allowances are tax allowable deductions in respect of wear and tear of plant and machinery.
Deductions allowed by the Income tax Act
Article 14 (1) of the Income Tax Act lists the expenses which are allowed as a deduction for income tax purposes. These are:
(k) Expenses by a candidate for election: Election expenses may be incurred in the form of money spent, liabilities incurred, donations in kind accepted, or goods and services provided for use during the election. The deduction shall only be allowed in the case of an elected candidate and such deduction shall not exceed the maximum amount of expenditure permissible under the general election act.
Other Relevant considerations
What is Trading Profit and Accounting Profit
Trading profit is defined as being the profit from operations, excluding any financing-related income or expenses. From the Trading profit, there are certain items of expenditure that are deducted from accounting profits, but that are not allowed to be deducted for tax purposes. These deductions are added back to the Accounting profit for tax purposes in line with the Income Tax Act.
Where a person derives income from work carried out on or in relation to immovable property situated in Malta, consisting of : (1) brokerage and professional services, or (2) Construction work, or (3) project management of construction work , or (4) from the granting of loans, or (5) from any from of credit to finance the acquisition, development, construction, refurbishment, renovation of immovable property and any other matter which increases the value of immovable property or any right there on, and such immovable property is owned by a related person. The income derived from work, loans or credit is considered to be separate chargeable income.
Tax related Adjustments
(b) Interest: Interest is the cost of financing the business activity. Interest expense is defined as the charge for the use of someone else's funds, and this expense may be deducted if that interest was paid on capital employed which in turn generates the taxable income.
(c) Rent: Rental expense is the charge incurred for the use of the property or the plant and machinery used in acquiring the taxable income. If the property or the plant and machinery is also used for private purposes, then an apportionment of the rental expense should be made so as to take only the business portion of the expense into consideration.
(j) Expenditure incurred on Patents or patent Rights: Capital Expenditure on patents or patent rights incurred by a person engaged in a trade, business, profession or vocation and proved to satisfaction of the Commissioner for Revenue to have been incurred for the use and benefit of the trade, business, profession or vocation, such expenditure of capital nature shall be spread over the life of patent or patent rights in a reasonable manner to the satisfaction of the Commissioner for Revenue.
Balancing charges and Allowances: When disposing of an asset, a balancing charge or allowance may arise. This occurs when the transfer value of the asset is different than the tax base of the asset. The amount of balancing charge is subject to tax like any other income. A balancing allowance is created when the transfer value of the assets is less than the tax base of the asset being disposed. In such case, the amount of balancing allowance is deducted from the chargeable income of the business.
Relief for trading losses: Trading losses from previous years may be deducted against: (i) Trading profit of the current and subsequent years, (ii) Employment income of the current and subsequent years, and (iii) Capital gains of the current and subsequent years. Therefore if a business has incurred trade losses in a particular year, the business may offset these losses both against any trading profits and capital gains incurred in the future year.
Unrealised Losses/Gains
Unrealised gains or unrealised losses are accounting concepts referring to the impact of variations in the price of an asset or liability in the financial statements before the sale or realisation which would confirm the gain or loss. However for Malta tax purposes the amount of unrealised gain or loss is added back in order to calculate the amount of taxable chargeable income.
(a) Expenses incurred wholly and exclusively incurred in the production of the Income: All expenses which may be deducted must be related to income earning activity of the business. The basic condition for deductibility of expenses is that deductions are allowable only with respect to expenditures that are wholly and exclusively incurred in the production of income. An expense is allowed if it participates in the generation of the taxable income, that is if it is incurred in furtherance of an economic activity. Generally expenses which has a double purpose are not fully allowed for tax purposes.
Wholly and Exclusively incurred in the production of the income
As a general rule for the tax deductibility of expenses is that only the expenditure which is wholly and exclusively incurred in the production of the income is deductible for tax purposes.
Exempt Income
Income which deemed to be exempt should be removed from the calculation of chargeable income. Article 12 of the Income Tax Act lists various types of income which are exempt from taxation.
Provisions
A provision records a liability in the accounts to cover a future liability. Provisions are not allowed for tax purposes and are added back to the accounting profit.
Amortisation of intangible assets
Amortisation is the writing down of an Intangible asset value over its expected useful economic life. Intangible Assets include Licenses, trademarks, Copyrights and Patents.