(TAX UPDATE) “I Can Explain to IRB”: Why SMEs Fail to Defend Their Tax Deductions

(TAX UPDATE) “I Can Explain to IRB”: Why SMEs Fail to Defend Their Tax Deductions

“I can explain to IRB.”
Famous last words in a tax audit.

It’s the most dangerous sentence a taxpayer can say.
It sounds confident.
But confidence is not compliance.
Tax law doesn’t recognise good intentions — only documentation, substance, and the Income Tax Act.

Below are three real audit cases showing how quickly things can go wrong and how expensive “I can explain” can be.

Case 1 : Overseas Travel, Zero Overseas Income

A service-based Sdn Bhd claimed large overseas travel expenses.
Destinations included London, Tokyo, and Seoul … all fully charged to the company.
Flights, hotel stays, daily allowances — every receipt was neatly filed.

But the company had no foreign clients, no overseas projects, and no foreign income.

When the tax agent requested supporting documents from meeting invites, contracts, proposals, nothing was produced.
During tax return signing, the director simply said,
“I can explain to IRB.”

That explanation didn’t go far.

The IRB disallowed over RMXXX in travel expenses.
Penalties and additional tax pushed the total liability over RMXXX.

The conclusion?
The travel was personal in nature, not tied to income.

Intent is not enough.
In tax law, no income = no deduction.

Case 2 : Staff Refreshments Higher Than Staff Salaries

In another case, a Sdn Bhd’s audited accounts showed “staff refreshment” expenses that were double its total staff salaries.

A review of the records revealed fridges stocked with Norway salmon, Japanese wagyu, and imported champagne.

When the tax agent raised questions, the boss replied,
“I can explain to IRB!”

But there were no staff claims, no pantry logs, and no headcount that justified the spending.
Many payments were labelled vaguely as “staff refreshment” or “staff lunch.”

The IRB disallowed most of the claims and issued penalties for filing an incorrect return.

In tax, when spending exceeds logic, scrutiny follows.
Excessive claims raise red flags, always.

Case 3 : Motor Vehicle Upkeep for 5 Luxury Cars

Another company claimed RMXXX in vehicle maintenance expenses.

The director personally owned five luxury cars: a BMW, Mercedes, Porsche, Lexus, and Alphard — all under his name.

When the tax agent asked, “Were these used for business?” the director confidently replied,

“I can explain to IRB,” and walked off.

There were no vehicle logbooks, no mileage records, and no Benefit-in-Kind (BIK) declared in the director’s payroll.

The IRB disallowed the full claim.
Without commercial use or proper documentation, personal vehicles are not deductible.

Luxury cannot hide behind “business use.”
Private benefit = no deduction.

The Lesson : Tax Is Not a Storytelling Contest

In all three cases, the companies believed they could talk their way through the audit.
But without proof, explanation becomes speculation.

Section 33(1) of the Income Tax Act 1967 is crystal clear : Only expenses wholly and exclusively incurred to generate business income are tax deductible.

Tax agents don’t assess intention.
They assess documentation, compliance, and market standards.

If you claim it, you must prove it.
If you enjoy it, you can’t deduct it.
If it doesn’t relate to income, don’t include it.

Final Word

Before you say, “I can explain to IRB,”
Ask yourself this : Can I prove it? On paper? With valid documents? Within market norms?

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