What Does "Disallowed Claim" Mean?
- Chow Ping
- 2 days ago
- 3 min read
You claimed a tax deduction for a business expense. LHDN said no.
That's what a disallowed claim is, in a nutshell.
Disallowed claims happen more often than you'd think. In fact, LHDN recently reminded business owners to exercise due diligence when declaring expenses in their tax returns.
Every expense you deduct from your business income has to pass one test: was it wholly and exclusively incurred in the production of income? Only if yes can it be considered a business expense.
This comes straight from Section 33 of the Income Tax Act 1967, and it's how LHDN decides what you can claim and what you can't.
If an expense fails that test, even partially, it becomes a candidate for disallowance.
And this part might surprise you: there's an entire section of the law, Section 39, dedicated specifically to expenses you're not allowed to deduct! More on Section 39 later.
The most common reasons a claim gets disallowed
1. It wasn't wholly for business
If you use something for both business and personal purposes, like your phone, your car, or your home internet, you can only claim the business portion.
Claim the whole bill, and LHDN can disallow the personal share, or the entire claim if there's no clear split.
2. It's actually capital expenditure in disguise
Renovating your office, upgrading equipment, or "repairing" something in a way that improves it beyond its original condition, all of these get reclassified as capital expenditure.
And capital expenditure falls under capital allowances instead, which work on a completely different timeline.
Costs of acquiring, improving, or altering assets, the first coat of paint on new premises, licensing and registration fees, even legal fees for a bank loan or premises acquisition, all could be disallowed.
3. It's specifically named in Section 39 as prohibited
Some expenses are disallowed no matter how you frame them. They include, but are not limited to:
Fines and penalties, even ones related to your business
Non-approved donations (only donations to LHDN-approved organisations count)
Employees' leave passages
Lease rentals on passenger cars exceeding RM50,000, or RM100,000 for vehicles costing RM150,000 or less that haven't been used prior to the rental
Employer contributions to unapproved pension, provident, or savings schemes
Employer contributions to approved schemes that exceed 19% of an employee's remuneration
4. It's entertainment that doesn't meet the rules
Entertainment for potential customers is fully disallowed, no exceptions. Entertainment for existing customers or suppliers is only 50% allowable.
Claim more than that, or claim entertainment for someone who was never actually a client, and LHDN will disallow the excess.
5. No proper documentation
Sometimes the expense itself is completely legitimate. The problem is you can't prove it. Without a receipt, a record of who you were with, and clear business purpose noted down, LHDN has no reason to accept your word for it.
What happens when a claim gets disallowed
It gets added back to your chargeable income, which means you now owe tax on that money. Depending on the amount and how it looks, you may also face penalties, or in more serious cases, further scrutiny into your other filings.
How to avoid getting your claims disallowed
Run every expense through the "wholly and exclusively" test before you file your taxes
Separate personal and business spending at the point of purchase
If you're not sure whether a cost is a repair or an upgrade, ask before you claim it as a deduction
Keep your documentation as you go. Eg. receipt with a quick note on who you were with and why
Want a piece of mind that your claims won't be disallowed? Let us handle them for you.
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