[TAX UPDATE] Are Hungry Ghost Praying Expenses Tax Deductible?

[TAX UPDATE] Are Hungry Ghost Praying Expenses Tax Deductible?

Every year, many Chinese Malaysian businesses observe the Hungry Ghost Festival by organising prayer sessions. These ceremonies often include offerings, food, drinks, and other arrangements to mark the occasion.

While the cultural significance is clear, many business owners are less certain about the tax treatment of these expenses.

Are they deductible? Or will they be disallowed by the Inland Revenue Board (IRB)?

This update explains how such expenses are treated under the Income Tax Act 1967, with guidance from relevant Public Rulings.

1. Tax-Deductible Expenses – Section 33(1), Income Tax Act 1967

Section 33(1) states that expenses “wholly and exclusively incurred in the production of income” are deductible. In practice, this includes costs that directly support business operations, employee welfare, or customer relationships.

a) Staff Refreshments

Food, drinks, and other refreshments provided during prayer sessions may qualify as deductible expenses if they are considered part of normal staff welfare. Many companies provide light meals or drinks during festive or cultural occasions as a way to foster goodwill and maintain a positive workplace environment.

The IRB has recognised this in Public Ruling No. 5/2019 (Perquisites from Employment), which confirms that reasonable staff welfare expenses are deductible. If the refreshments are modest and clearly linked to employee welfare, they can be claimed under Section 33(1).

b) Staff Welfare Expenses

Beyond refreshments, certain related costs such as venue setup, tables, chairs, or basic offerings for the staff’s benefit during the prayer ceremony may also be deductible. These are treated as part of staff welfare because they contribute to a harmonious workplace, which supports productivity and business continuity.

2. Non-Deductible Expenses – Section 39(1), Income Tax Act 1967

Section 39(1) specifically disallows certain expenses, regardless of whether they are related to business activities. In the context of Hungry Ghost prayers, some common costs fall under this category.

a) Ceremonial Items

Spending on ceremonial or ritual items for example, papercraft effigies, incense paper, or other religious offerings is not deductible. These are classified as personal or cultural expenses rather than business expenses. They are not considered “wholly and exclusively” for the production of income, and therefore must be excluded from tax deductions.

b) Excessive Expenditure

Even if an expense falls into the deductible category (such as staff refreshments), it may be disallowed if the amount is excessive. For example, a simple buffet lunch for staff would generally be acceptable, but an elaborate banquet could raise concerns. The IRB has the discretion to disallow costs that appear extravagant or disproportionate to the business purpose.

3. Guidance from Public Rulings

Another important reference is Public Ruling No. 4/2015 (Entertainment Expenses). This ruling clarifies that expenses for food and beverages provided to employees during work-related events are deductible, provided they are reasonable.

In practice, the IRB tends to allow modest, work-related welfare expenses, but disallow personal, cultural, or excessive spending. Businesses should therefore assess each expense carefully and keep clear documentation to support its deductibility.

4. Practical Steps for Businesses

To ensure compliance, SMEs should adopt the following practices when recording Hungry Ghost praying expenses:

  1. Segregate the costs clearly

    Keep separate records for staff refreshments and staff welfare expenses (potentially deductible) versus ceremonial items (non-deductible).

  2. Ensure reasonableness

    Document the scale of the event. Modest refreshments or simple setups for staff are usually acceptable. Avoid excessive spending that cannot be justified as necessary for business purposes.

  3. Maintain proper documentation

    Retain receipts, invoices, and internal notes on the purpose of the expenses. Clear evidence will help substantiate claims if queried by the IRB.

  4. Consult professionals

    Given the cultural nature of these expenses, interpretation can vary. Seek advice from a licensed tax agent or advisor to ensure compliance with the Income Tax Act and relevant rulings.

5. Summary

For SMEs, the Hungry Ghost Festival is both a cultural and business consideration. While prayer ceremonies help foster goodwill among staff and customers, not all expenses qualify for tax deduction.

  • Deductible expenses : Reasonable costs for staff refreshments, basic venue arrangements, and welfare-related items under Section 33(1).

  • Non-deductible expenses : Ceremonial items such as incense papers and papercraft offerings, and any expenditure deemed excessive under Section 39(1).

The key is to ensure expenses are reasonable, clearly tied to staff welfare or business operations, and well-documented.

Final Word

In a multicultural business environment like Malaysia, it is natural for companies to observe traditional festivals such as the Hungry Ghost Month. While participating in these practices can enhance staff morale and workplace harmony, businesses should remain mindful of tax compliance.

By applying the principles of Sections 33 and 39, and referring to relevant Public Rulings, SMEs can strike the right balance between cultural respect and tax efficiency.

For further clarity, businesses are encouraged to consult their tax advisors to ensure that their practices remain compliant while reflecting the cultural values important to employees and communities.

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