ADVANCED TAXATION - MICPA
MICPA EXAMINATION
NOVEMBER 2003
Questions,
Unofficial Suggested
Answers and
Examiners’ Reports
ADVANCED STAGE
EXAMINATION
Module C
Advanced Taxation
Published by MACPA STUDENTS SOCIETY
This booklet contains the questions, unofficial suggested answers and examiners’ reports for MODULE C of ADVANCED STAGE EXAMINATION for the November 2003 examination session.
The unofficial suggested answers were prepared by the MACPA Students Society and are not purported to be the official positions of The Malaysian Institute of Certified Public Accountants (MICPA).
While every care has been taken to anticipate and satisfy the examiners’ requirements in the preparation of the suggested answers, these should not be regarded as the only solutions.
Some of the answers set out are considerably more substantial than even the best candidate could achieve in the time available in and examination. It is felt, however, that longer, more detailed answers can be great help for study purposes and that shorter answers would not always be as helpful.
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THE MALAYSIAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
(INSTITUT AKAUNTAN AWAM BERTAULIAH MALAYSIA)
NOVEMBER 2003
Advanced Stage Examination - Module C
ADVANCED TAXATION
1. Time allowed: 3 hours
2. This paper consists of SIX questions totalling 100 marks.
3. Answer ALL questions.
4. Any reference to "the Act" means the Income Tax Act, 1967 (as amended).
5. Workings that support the answer should be submitted with your answer.
DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO
ADVANCED TAXATION
(Answer ALL questions)
Question 1
Trendy Clothes Sdn Bhd is principally engaged in the manufacturing of garments at its factory located in Shah Alam as well as in investment holding.
The company prepares its accounts to June 30 annually. During the year ended June 30, 2002, the company embarked on a 5-year programme to increase its production capacity. The company’s profit and loss account for the year ended June 30, 2002 is as follows:
Note RM’000 RM’000
Sales 1 70,000
Less: Cost of sales
Opening stock 5,500
Cost of goods manufactured 2 46,000
---------
51,500
Closing stock 3 4,500
--------- 47,000
----------
Gross profit 23,000
Less: Selling and distribution expenses
Remuneration 4 3,800
Travelling expenses 5 300
Advertising and promotion 6 500
Provision for doubtful debts 7 1,500
Administration expenses
Salaries and allowances 8 4,000
Depreciation 850
Legal and professional fees 9 400
Insurance, repairs and maintenance 10 700
Miscellaneous (all allowable) 200
Financial expenses
Interest cost 11 600
Foreign exchange loss 12 150
-------- 13,000
---------
10,000
Add: Other income
Interest income 13 35
Dividend income 14 210
Profit on sale of fixed asset 15 30
Profit on sale of quoted shares 16 25
-------- 300
--------
Profit before taxation 10,300
=====
Notes
1. Exports constitute 60% of total sales.
2. Cost of goods manufactured includes:
RM’000
i) Depreciation
Factory building 50
Plant and machinery 450
-------
500
-------
ii) Insurance premium of RM12,000 paid to Ace Insurance Bhd, a company incorporated in Malaysia, for insuring raw materials from Hong Kong.
iii) Research and development expenses
RM’000
Payment for use of services of an approved research
institute 75
Quality control testing 25
Market research expenses 80
Cash contribution to an approved research institute 25
3. Closing stock is arrived at after deduction of provision for stock obsolescence of RM1,500,000.
4. Remuneration includes:
RM’000
Directors’ remuneration and fees 600
Directors’ entertainment allowances (fully expended) 120
Voluntary separation payments to employees 400
Leave passage of managing director 80
5. Travelling expenses include:
Company trip for employees to Pangkor costing RM10,000
Traveling, accommodation and sustenance allowance provided to the managing director and marketing director amounting to RM15,000 and RM12,000 respectively during the 10-day business trip to Italy and France to negotiate sales contracts.
6. Advertising and promotion include:
RM’000
Congratulatory advertisements in newspapers for business associates 30
Staff annual dinner 30
Promotional samples of the company’s products 20
Cash donations to approved institutions 20
Cost of maintaining sales office in France 50
Participation in approved trade fairs overseas 20
Hampers for suppliers annual dinner 50
7. Provision for doubtful debts comprises:
RM’000
Trade debtors – General 500
Specific * 750
Non-trade debtors* 250
--------
1,500
--------
* Legal action has been taken against all specific trade debtors and non-trade debtors
8. Salaries and allowances include:
RM’000
Provision for retirement gratuity 150
Remuneration of disabled employees 35
9. Legal and professional fees comprise:
RM’000
Audit fees – Statutory audit 50
– Special audit for listing purposes 100
Tax filing fees 10
Legal fees on loan facilities for working capital purposes 40
Legal fees on trade debt recovery 30
Legal fees for defending action taken by disgruntled employee 10
Consultancy fees for review of operations for efficiency 90
Fashion design fees paid to Franco Ltd, a company in France for
providing design services (withholding tax obligations not complied) 70
-------
400
-------
10. Insurance, repairs and maintenance include a provision for maintenance of plant and machinery equivalent to 1% of local sales.
11. Interest cost comprises:
RM’000
Hire purchase interest on company vehicles 50
Interest on finance lease# on machinery (the principal element
of the lease payment for the year is RM900,000) 100
Interest on term loan of RM3,000,000, of which RM2,000,000 was
used to acquire a subsidiary, Best Trends Sdn Bhd during the year 300
Interest on revolving credit facilities for trade purposes 150
-------
600
-------
# The lease is not regarded as a deemed sale under the Income Tax Leasing Regulations, 1986
12. Foreign exchange loss comprises:
RM’000
Foreign exchange gain on settlement of trade debts (100)
Foreign exchange loss on payment for purchase of
plant and machinery costing RM900,000 320
Foreign exchange gain arising from translation of debts
owing to suppliers of raw materials at year-end (70)
-------
150
--------
13. Interest income comprises overdue interest on late payments by trade debtors
14. Dividend income comprises gross dividends from Best Trends Sdn Bhd.
15. Profit on sale of fixed asset is arrived at as follows:
RM’000
Mercedes Benz E230 car used by managing director
(acquired on May 31, 2000)
Original cost 300
Accumulated depreciation 180
------
Net book value 120
Sales proceeds (disposed of on June 15, 2002) 150
------
Profit on sale 30
------
16. The quoted shares sold have been held as long term investment.
17. Other information
(a) Balances in provision accounts
30.6.2001 30.6.2002
RM’000 RM’000
Provision for stock obsolescence 1,000 900
Provision for retirement gratuity 300 200
Provision for doubtful debts
Trade debtors
- General 400 500
- Specific 700 600
Non-trade debtors 250 350
(b) Fixed assets
Qualifying Residual Capital
expenditure expenditure allowance
as at 1.7.2001 as at 1.7.2001 rate
RM’000 RM’000 %
Factory building 5,000 4,000 3
Plant and machinery 3,000 1,800 20
Motor vehicle – cars 350 120 16
Office equipment and furniture 300 180 10
Additions:
(i) Plant and machinery on hire-purchase
RM’000
Acquired on August 15, 2001
Cash price 4,600
Down payment 1,000
--------
Hire-purchase loan 3,600
--------
Monthly instalment (36 instalments
commencing September 1, 2001) 120
(ii) Plant and machinery, acquired on
July 15, 2001, by cash 900
(iii) Land and factory building
RM’000 Date incurred
Land 500 July 10, 2001
Legal fees
- agreement for purchase of land 10 July 21, 2001
- agreement with building contractor 20 July 31, 2001
Stamp duty on purchase of land 9 Aug 20, 2001
Consultant fees on building plans 20 Aug 30, 2001
Construction costs 960 May 15, 2002
The factory building was completed on June 10, 2002 and was in use from June 20, 2002. 15% of the total floor space of the factory building is being used as an office.
(c) Reinvestment allowance
The company has unabsorbed reinvestment allowance brought forward from the year of assessment 2001 of RM1,700,000.
Required:
Compute the chargeable income of Trendy Clothes Sdn Bhd for the year of assessment 2002, showing all relevant tax adjustments.
(20 marks)
Question 2
a) (i) State the due date for the submission of the tax return for a year of assessment, under the self-assessment regime by:
• an individual;
• a co-operative society.
(2 marks)
(ii) Mr Tan has prepared the accounts for his business for the following periods:
October 1, 2000 to September 30, 2001
October 1, 2001 to March 31, 2002
Determine the basis period for the business for the year of assessment 2002.
(1 mark)
(iii) Mr Lee has prepared the accounts for his business for the following periods:
April 1, 2001 to March 31, 2002
April 1, 2002 to March 31, 2003
Determine the basis period for the business for the year of assessment 2003.
(1 mark)
(iv) State FOUR criteria used by the Inland Revenue Board in selecting a taxpayer for a tax audit.
(2 marks)
(b) Encik Ramli has been carrying on the sole proprietorship business of “Ramli Mini Market” for the past 12 years in Shah Alam. He has been submitting annual tax returns to the Inland Revenue Board (IRB) together with his accounts.
He is being investigated by the IRB for under-declaring his income and has been issued a notice to furnish a capital statement for the years 1999 to 2001. Encik Ramli has requested you, as his tax adviser, to prepare the capital statement based on the following information in respect of his assets and liabilities:
1) A double storey bungalow located in Shah Alam was bought in 1990 at a cost of RM500,000. It has a market value of RM1,000,000, RM1,100,000 and RM1,200,000 in 1999, 2000 and 2001 respectively.
2) A single storey terrace house located in Klang was inherited from his father in 1981. The house was bought by his father in 1970 for RM10,000. The house was sold in 2000 for RM150,000.
3) A Mercedes Benz car was bought in 1999 for RM400,000. This was financed by a downpayment of RM100,000 and a 3-year hire purchase loan of RM300,000. The outstanding loan balance as at the end of 1999, 2000 and 2001 amounted to RM250,000, RM150,000 and RM50,000 respectively.
4) A Honda Civic car was bought for RM50,000 in 1995.
5) Savings accounts balances as at December 31, 2001:
RM
Malayan Banking – wife 80,000
RHB Bank – son 20,000
6) Cash in hand as at the end of 1999, 2000 and 2001 was estimated at RM5,000.
7) Cost of jewellery belonging to his wife as at the end of 1999, 2000 and 2001 was estimated as RM50,000.
8) Cost of investment in quoted shares:
RM
December 31, 1999 200,000
December 31, 2000 900,000
December 31, 2001 1,500,000
9) On August 15, 1999, Encik Ramli gave an interest-free loan of RM50,000 to his brother-in-law. However, the brother-in-law could not repay the loan and the amount was fully written off in 2001.
10) Encik Ramli has three children, two of whom are studying in Australia. He estimates that he spent about RM100,000 per child per year on overseas education. The other child is studying in Malaysia at a cost of about RM20,000 a year.
11) Encik Ramli has declared income of RM200,000, RM250,000 and RM300,000 for the years of assessment 2000 (preceding year basis), 2000 (current year basis) and 2001 respectively, and paid income taxes of RM40,000 (in 2000) and RM50,000 (in 2001). His wife had no income for the respective years of assessment.
12) Encik Ramli’s monthly household expenses were estimated to be RM10,000 per month in 1999, RM12,000 per month in 2000 and RM15,000 per month in 2001.
13) Ramli Mini Market started with a capital of RM20,000 and the balance of the profit and loss account submitted to the IRB was RM50,000, RM60,000 and RM80,000 as at December 31, 1999, December 31, 2000 and December 31, 2001 respectively. The drawings account balance was RM45,000, RM50,000 and 70,000 as at December 31, 1999, December 31, 2000 and December 31, 2001 respectively.
Required:
Prepare Encik Ramli’s capital statements (statements of assets and liabilities) as at the end of the years 1999 to 2001 and determine his additional income, if any, for the years 2000 and 2001.
(9 marks)
(Total: 15 marks)
Question 3
The existing group structure of the M X Group of companies (made up of M X Holdings Sdn Bhd (MXH) and its wholly-owned subsidiaries) is as follows:
[pic]
MXH is principally an investment holding company providing management support services to its subsidiaries. The shareholders of MXH are members of the Mohammad family. All investments in subsidiaries were made prior to obtaining any bank borrowings and the Inland Revenue Board (IRB) has agreed that interest restriction is not applicable to these investments. MXH has substantial bank borrowings, which are on-lent to the subsidiaries. In the past, management fees charged by MXH to its subsidiaries were insufficient to recover the costs incurred in providing the management services.
MXH paid substantial borrowing costs to the banks and the interest charged to its subsidiaries were insufficient to recover the interest costs incurred. It is also the Group’s policy that a loss making subsidiary will not be charged any interest costs until the subsidiary is making profit.
The MX Group has a diversified business portfolio ranging from food industry, plantation, manufacturing to property development. The Group also owns a profitable food operation in the United Kingdom (UK) that is carried out through a UK company, MXUK. MXUK has for the past five years been paying a final annual dividend of RM600,000 to MXP. MXUK is expected to be able to sustain its dividend payment to MXP for the next 2 years.
MXD is a profitable property development company.
MXP owns three plots of rubber plantation land in Kedah, Selangor and Johor. All the plots have been acquired for more than 10 years by MXP, which has never disposed of any land previously. MXP has been deriving income from the sale of latex from all these three estates. Due to the ageing trees and poor quality of latex from the Selangor estate, MXP intends to develop the Selangor land into a housing project whilst retaining the other two estates for their plantation income.
MXC operates a catering and restaurant business, which due to the poor location of two of its three restaurants and unattractive cuisine, is currently incurring substantial losses. MXC has unabsorbed losses brought forward of RM820,000 and unabsorbed capital allowances brought forward of RM57,800 from year of assessment 2002.
MXR operates a limited catering services and restaurant business in the upmarket location of Bangsar and Ampang in Kuala Lumpur, specialising in Italian cuisine. MXR is a profitable company.
MXRG, a rubber glove manufacturer, has substantial unabsorbed tax losses and capital allowances.
MXRC, a profitable rubber cap manufacturer, plans to modernise and improve its existing plant by replacing it with new and more efficient plant.
Required:
Advise how the MX Group of companies could be restructured so as to achieve greater tax efficiency. State whether any relief under the Stamp Act 1949 and Real Property Gains Tax Act 1976 would be available based on your recommendations.
(15 marks)
Question 4
a) The statement of income and expenditure of Super Fund, a unit trust, for the year ended December 31, 2002 is as follows:
RM’000 RM’000
Gross dividends (non tax-exempt) 800
Dividends (tax exempt) 200
Interest income from bank 200
Profit on sale of quoted investments 2,400
Accretion of discounts 120
Other income 300
-------- 4,020
Less: Expenses
Audit fees 15
Fund manager’s fee 1,500
Legal fees 200
Trustee’s fee 130
Tax filing fees 5
Maintenance of register of unit holders 80
-------- 1,930
----------
Excess of income over expenditure 2,090
======
Required:
Compute the chargeable income of Super Fund for the year of assessment 2002.
(6 marks)
(b) MaxiLife Insurance Bhd, a Malaysian resident company, carries on life and general insurance businesses. The following information has been extracted from its accounts for the year ended December 31, 2002.
Life Insurance General Insurance
Life fund Shareholders’ fund
RM,000 RM,000 RM,000
Gross premiums 20,000 - 7,000
Rental income 300 - 700
Dividend income (gross) 2,000 - 1,000
Gross proceeds from sale
of shares - 1,000 500
Gross proceeds from sale
of building - 15,000 -
Net claims incurred - - 2,000
Management expenses 700 - 500
Commissions paid 300 - 100
Cost of shares sold - 600 200
Cost of building sold - 8,000 -
Reserve for unexpired risks as at
December 31, 2001 - - 1,300
Actuarial surplus transferred
from life fund - 2,000 -
Other relevant information is as follows:
Marine, aviation Fire, motor and
and transit policies other policies
RM,000 RM,000
(1) Premiums
Gross premiums 4,000 3,000
Reinsurance premiums in Malaysia 700 600
Reinsurance premiums outside Malaysia 120 -
(2) Reserve for unexpired risks as at
December 31, 2002 per accounts 890 900
(3) Total capital allowances for the year of assessment 2002 in respect of the general insurance business amounted to RM600,000.
(4) Reserve for unexpired risks as at December 31, 2001 for tax purposes is RM1,200,000.
Required:
Compute the tax payable by MaxiLife Insurance Bhd for the year of assessment 2002.
(9 marks)
(Total: 15 marks)
Question 5
(a) The managing director of Golden Prop Sdn Bhd (GP) called for a meeting to discuss with you several transactions that the GP Group of companies have entered into. You were advised of the following transactions:
i) On March 1, 2003, GP acquired for a consideration of RM600,000 the entire shareholding of Not Hing Left Sdn Bhd (NHL), which has long ceased its manufacturing activities. NHL has sold all its assets except for the land and building, on which GP intends to construct a shopping mall. The current valuation of the land and building is RM600,000. The management of NHL has confirmed that the land and building was acquired 5 years ago for RM100,000 at which time the value of the tangible assets of the company (excluding the land and building) was RM120,000.
ii) GP advised that its subsidiary, GP Subco Sdn Bhd (GPS), a property investment company, has acquired a property from another subsidiary, GP Land Sdn Bhd (GPL) in September 2002 for RM330,000. GPL originally acquired the property for RM250,000 in January 2000. GPL has obtained relief under paragraph 17(1)(a), Schedule 2 to the Real Property Gains Tax Act 1976, for the transfer of the property to GPS. GPS sold the property for RM270,000.
iii) GPS also sold another property which it had acquired in February 1999 for RM300,000. The property is currently in a dilapidated state. The sale and purchase agreement, which is dated January 2, 2003, provides that GPS is responsible for ensuring that all repairs and maintenance to the property are carried out within 3 months of the date of the agreement. The sale consideration would be based on the market value of the repaired property, which is estimated to be RM750,000.
Required:
State the real property gains tax implications, if any, and compute the relevant real property gains tax liability arising from the above transactions. Give reasons for your answer.
(10 marks)
(b) Contract Co Sdn Bhd is proposing to make the following payments to its non-resident suppliers:
i) Retainer fee payment to a UK legal firm for services rendered for the year ended December 31, 2002. Contract Co confirmed that no personnel from the UK legal firm came to Malaysia during the entire year.
ii) Technical service fee payment to a company (resident in Thailand) for services rendered from September 1 to December 31, 2002. The Thai company’s personnel were in Malaysia for the whole month of September 2002, after which the project services were rendered entirely outside Malaysia.
iii) Contract payments to the Malaysian branch of a Japanese company for the installation and commissioning of its new plant. The contract payments were for the supply of plant as well as services rendered for the 6 months to November 30, 2002.
iv) Payment to an unrelated Singapore company for inspection services rendered entirely in Singapore for the 3 months to March 31, 2002.
Required:
Advise Contract Co Sdn Bhd on the withholding tax implications arising from the above payments.
(10 marks)
(Total: 20 marks)
Question 6
(a) Eastern Press Sdn Bhd (EPSB), a publishing company, has employed both Mr Lim and Encik Faizal as directors for many years. EPSB was not satisfied with the performance of Mr Lim and decided to dismiss him in 2002. EPSB paid a compensation of RM100,000 to Mr Lim. Subsequently, Encik Faizal gave notice to EPSB in 2002 to retire. EPSB then entered into an agreement with Encik Faizal shortly before his retirement. Under the agreement, EPSB would pay Encik Faizal a sum of RM500,000 on his retirement in consideration of his acceptance of a restrictive covenant whereby he will not carry on any publishing business in any part of Malaysia without EPSB’s consent. Prior to his retirement, Encik Faizal was provided with a car, accommodation and leave passage. In 2002, EPSB incurred maintenance expenditure of RM60,000 on the car, one-third of which was attributed to Encik Faizal’s private and personal usage. The amount incurred by EPSB on accommodation and leave passage was RM120,000 and RM20,000 respectively.
Required:
Advise EPSB, with reasons, as to whether the expenditure incurred by EPSB on Mr Lim and Encik Faizal in 2002 are tax deductible.
(5 marks)
b) Mr Mohan Singh was a partner of the legal firm Abdul Rahman, MS and Partners (the firm). In January 2002, the firm proposed to merge with another firm but Mr Mohan objected to the merger. The continuing partners of the firm then negotiated with Mr Mohan and entered into a settlement agreement with him. Under the terms of the agreement, Mr Mohan agreed to:
• cease as a partner of the firm;
• lose all rights in the firm;
• waive all rights to challenge the merger; and
• refrain from taking any legal action in respect of the merger.
The firm agreed to pay a consideration of RM1 million to Mr Mohan. The consideration was computed by reference to the work-in-progress and profit of the firm and is to be paid by 24 equal instalments. It is also stated in the settlement agreement that the payment should be recorded in the books of the merged firm as a consultancy fee.
Required:
Advise, with reasons, whether the consideration of RM1 million received by Mr Mohan is taxable.
(5 marks)
c) Rubber Wood (M) Sdn Bhd (RWSB) is a manufacturer of rubber wood furniture. In January 2000, RWSB decided to cease its operations as its business was badly affected by the global economic downturn. RWSB resumed its operations in January 2001 as it expected an increase in the demand for furniture. During the period from January 2000 and December 2000, RWSB had expended a total amount of RM100,000 in maintaining its factory and plant and machinery in good condition.
In January 2002, RWSB encountered severe cash flow problems and commenced a cost cutting exercise involving the retrenchment of 10 employees and the payment of retrenchment benefits amounting to RM200,000. RWSB is now considering the option of ceasing its operations permanently before the end of 2003. Under the collective agreement with its employees, RWSB is obliged to pay RM300,000 to its staff as retrenchment benefits.
Required:
Advise, with reasons, as to whether RWSB is eligible for deduction in respect of the three payments.
(5 marks)
(Total: 15 marks)
NOVEMBER 2003 EXAMINATIONS
SUGGESTED ANSWERS
ADVANCED TAXATION
Question 1
Trendy Clothes Sdn Bhd
Year of Assessment 2002
Note RM’000 RM’000
Profit before taxation 10,300
Add/(Less)
Depreciation (850 + 500) 1,350
Double deduction of insurance premium (12)
Double deduction of R & D expenses (75 + 25) (100)
Provision for stock obsolescence 1,500
Obsolete stock written off against
provision account 1 (1,600)
Double deduction of export promotion expenses
- Travelling, accommodation & sustenance
allowance (RM200 x 10 x 2) (4)
- Cost of maintaining sales office in France (50)
- Participation in approved trade fairs overseas (20)
Directors’ entertainment allowances 120
Leave passage of Managing Director 80
Cash donations to approved institutions 20
Congratulatory advertisements in newspapers 30
Hampers for suppliers’ annual dinner 50
Provision for doubtful debts 2 350
Provision for retirement gratuity 3 150
Gratuity paid 3 (250)
Remuneration of disabled employees (35)
Audit fees – special audit 100
Legal fees on loan facilities for working capital 40
Design fees (withholding tax obligations not
complied) 70
Provision for maintenance of plant & machinery
(1% x 70,000 x 40%) 280
Principal repayment of leased machinery (900)
Interest restriction (2,000/3,000 x 300) 200
Foreign exchange loss on purchase of
plant & machinery 320
Foreign exchange gain on translation of trade
debts (unrealised) (70)
Dividend income (210)
Profit on disposal of fixed asset (30)
Profit on sale of quoted shares (25) 1,354
--------- ----------
Adjusted income 11,654
Add: Balancing charge 4 1
Less: Capital allowances 5 (2,227)
----------
Statutory business income 9,428
Less: Reinvestment allowance utilised 6 (4,142)
----------
5,286
Add: Dividend income from Best Trends Sdn Bhd (gross) 210
Less: Attributable interest expense (2,000/3,000) x 300 (200) 10
-------- ----------
Aggregate income 5,296
Less: Donations to approved institutions (20)
----------
Chargeable income 5,276
----------
Notes:
1. Provision for stock obsolescence Add/(less)
Opening balance 1,000
Add: Provision for the year 1,500 1,500
----------
2,500
Less: Provision written off (1,600) (1,600)
----------
Closing balance 900
----------
2. Provision for doubtful debts
Trade debtors Other Total Add/
General Specific debtors (less)
Opening balance 400 700 250 1,350
Add: Provision for the year 500 750 250 1,500 750
_______________________ _______
900 1,450 500 2,850
Less: Provision written off (400) (850) (150) (1,400) (400)
_______________________ __________
Closing balance 500 600 350 1,450 350
_______________________ _____________
3. Provision for retirement gratuity
Opening balance 300
Add: Provision for the year 150 150
______
450
Less: Gratuity paid (250) (250)
______
Closing balance 200
______
4. Balancing charge
Qualifying cost of car (original cost 300,000) 50
Less: Capital allowance claimed for –
YA 2000 (cyb) (initial allowance – 20%) (10)
(annual allowance – 16%) (8)
YA 2001 (annual allowance – 16%) (8)
_______
24
Less: Sales proceeds (150,000 x 50,000/300,000) (25)
_______
Balancing charge 1
_______
5. Capital allowance QE IA AA Total Rate
RM RM RM RM %
‘000 ‘000 ‘000 ‘000
Existing assets:
Factory building 5,000 150 150 3
Plant & machinery 3,000 600 600 20
Motor vehicle cars 350-50=300 48 48 16
Office equipment & furniture 300 30 30 10
New assets:
Plant & machinery (cash) 1,220 244 244 488 20
- see below
Factory building 850 85 26 111 3
- see below
Plant & machinery (principal rept) 20
- see below 2000 400 400 800
______________ _____
729 1,498 2,227
______________ _____
6. Reinvestment allowance
RM’000
(i) Plant & machinery (cash) 900
Foreign exchange loss 320
______
1,220
(ii) Factory building RM’000
Legal fees – agreement with building contractor 20
Consultant fees & building plans 20
Construction costs 960
________
1,000
Less: 15% - used as office (150)
________
Qualifying building expenditure 850
(iii) Capital repayment of plant & machinery RM’000
Downpayment 1,000
Instalments [(3,600/36) x 10] 1,000
________
2,000
______
4,070
______
RA at 60% thereof 2,442
RA brought forward from YA 2001 1,700
______
RA available for utilisation 4,142
______
Question 2
(a) (i) Individual – not later than 30 April in the year following that year of assessment.
Co-operative society – within 6 months from the close of the accounts.
(ii) Basis period for year of assessment (YA) 2002 is October 1, 2001 to September 30, 2002.
[Special provision relating to Section 21(3) – Notwithstanding subsection 21(3) of the principal Act, where a person, other than a company, trust body or co-operative society, has made up the accounts of his business for a period of 12 months ending on a day other than December 31 in the basis year 2001, and there is a failure to make up accounts of that business ending on a corresponding day in the following basis year, the period which begins on the day after the end of that 12 months period to that corresponding day shall constitute for that business of that person the basis period for the year of assessment 2002].
(iii) Basis period for YA 2003 is April 1, 2002 to December 31, 2003
[Subject to subsection (3), where a person has made up the accounts of his business for a period of 12 months ending on a day other 31 December in the basis year 2003, the period which begins from the first day of that accounting period to 31 December, 2003 shall constitute for that business of that person the basis period for the year of assessment 2003].
iv) Criteria of selection for an audit by the IRB would include the following:
i) Selection through risk analysis
ii) Manual checking of return forms
iii) Examination of third party records, normally arising from audit or investigation of other taxpayers
iv) Previous records of return form compliance
v) Selection based on specific issues peculiar to a particular group of taxpayers
vi) Selection based on locality
(b) Encik Ramli – Capital Statements
As at December 31 each year 1999 2000 2001
RM’000 RM’000 RM’000
1. Sole proprietorship business
Ramli Mini Market
Capital 20 20 20
Balance of Profit & Loss account 50 60 80
Less: Drawings (45) (50) (70)
2. Land & property
(a) Double storey bungalow, at cost 500 500 500
(b) Single storey terrace house, at cost (inherit) - - -
3. Private bank accounts – savings accounts
a) Malayan Banking – wife - - 80
b) RHB Bank – son - - 20
4. Investment in quoted shares, at cost 200 900 1,500
5. Loan to brother-in-law 50 50 -
6. Cash in hand 5 5 5
7. Motor car, at cost
(a) Mercedes Benz 400 400 400
(b) Honda Civic 50 50 50
8. Jewellery 50 50 50
9. Loans taken
Hire purchase loan –Mercedes Benz (250) (150) (50)
_________________________
1,030 1,835 2,585
Net assets brought forward - (1,030) (1,835)
_________________________
Net assets for the year 805 750
Add: Living expenses 144 180
Overseas education expenses (2 children) 200 200
Local education expenses (1 child) 20 20
Income tax paid 40 50
Loan to brother-in-law written off (capital loss) - 50
Less: Capital gains
Gain on sale of single terrace house
(150,000 – 10,000) (140) -
_________________________
1,069 1,250
Less: Declared income (250) (300)
_________________________
Additional income 819 950
_________________________
Question 3
1 (a)
(i) Foreign source income (e.g. dividends) derived from sources outside Malaysia by a resident company (other than a company in the banking, insurance, sea and air transportation business) is exempt from tax. Hence, dividends from MXUK are exempt from tax in the hands of MXP. MXP can on-pay these tax exempt dividends to two additional tiers of shareholders without further tax. Under the existing structure, tax exempt dividends from MXUK are not taxable up the level of the shareholders of MXH. There is no dividend trap due to the 2 tier structure.
ii) Since MXC has substantial unabsorbed business losses carried forward, MXR’s profitable business could be transferred to MXC so as to maximize the utilization of the losses and capital allowance. As both MXC and MXR are in the same business of catering and restaurant, the business taken over by MXC can be held to be the same source.
iii) MXP should transfer the Selangor land for housing development to MXD or a newly incorporated company at current market value. Since the land was acquired more than 10 years ago, and MXP’s business is that of operating a plantation and MXP has no previous history of dealing in land, the sale of land (which is a fixed asset) from MXP to MXD or the newly formed company should not be subject to income tax but to real property gains tax. Since the land has been held by MXP for more than 5 years from acquisition date, the gain would be taxed at the rate of 5%.
The disposal price at market value by MXP would constitute the cost price to MXD or the newly formed company so that when the land is developed and the housing units are sold, MXD would be able to deduct this cost (at market value) in arriving at its development profits.
iv) The replacement of plant in MXRC should be undertaken by MXRG only after the transfer of the rubber cap business from MXRC such that it could claim reinvestment allowance (RA) for the modernization and diversification of projects into another rubber product business. MXRG should also be able to claim RA on the existing assets of MXRC based on the tax written down value. The tax benefit of RA granted could be passed to the Mohammad family in the form of tax exempt dividends due to the 2 tier structure. In addition, the unabsorbed losses and capital allowances (CAs) of the rubber glove business can be used to shelter the profit of the rubber cap business as arguably a case could be made that it is the same business source.
v) MXH should charge management fees and interest to its fellow subsidiaries based on a cost plus basis. This would ensure that it would obtain a deduction on the expenditure incurred for the provision of such services. If insufficient fees are charged to the subsidiaries, MXH would have an adjusted business loss which may be disallowed by the Inland Revenue Board (IRB) for set off against the dividend and interest income. The reason is that the provision of management services should not generally result in a tax loss position since management fees charged are intended to recover the costs for providing such services and make a reasonable profit in providing those services.
Although MXC and MXRG may be incurring losses, the increased losses of MXC and MXRG arising from the management fees and interest charged can be used to shelter future taxable profits of MXC and MXRG.
vi) Real Property Gains Tax (RPGT) exemption under Para 17(1)(a) of Schedule 2 of the RPGT Act would only be available where the consideration for the transfer will be satisfied in the form of at least 75% shares of the transferee company and greater efficiency in operation must be demonstrated by the transfer of the land. No exemption is available for RPGT under Para 17(1)(b) as the reorganization was not in compliance with the government policy on capital participation as the MX Group is already in compliance with such a policy.
Relief from stamp duty should be available under Section 15A because the property transfers are between associated companies and MXP and MXD will not cease to be associated in the future.
Question 4
(a) Super Fund
RM’000 RM’000
Dividend income 800
Other income 300
______
1,100
Less: Portion of permitted expenses
Audit fee 15
Fund manager’s fee 1,500
Tax filing fees 5
Maintenance of register of unitholders 80
______
Allowable permitted expenses 1,600
______
(i) 1,600 X (800 + 300) = 113 OR
_________
4 (3,900)
(ii) 10% of 1,600 (minimum) 160
____
Chargeable income 940
____
(b) MaxiLife Insurance Bhd
Life Shareholder’s General
Fund Fund Insurance
RM’000 RM’000 RM’000
Gross premiums - - 7,000
Add:
Rental income 300 - 700
Dividend income (gross) 2,000 - 1,000
Sale of shares - 1,000 500
Gross proceeds from sale of building - 15,000 -
Actuarial surplus transferred from
life fund - 2,000 -
Reserve for unexpired risks @ 1.1.2002 - - 1,200
---------- ----------- ----------
(A) 2,300 18,000 10,400
====== ======= ======
Less:
Management expenses - - 500
Net claim incurred - - 2,000
Commissions - - 100
Cost of shares sold - 600 200
Cost of building sold - 8,000 -
Reinsurance premium (in Malaysia) - - 1,300
Reinsurance premium
(outside Malaysia 95% x 120) - - 114
Reserve for unexpired risks
@ 31.12.2002
[25% x (4,000k – 700k – 95% x 120k)
+ 900] * - - 1,697
---------- ----------- ----------
(B) - 8,600 5,911
====== ======= ======
Adjusted income (A-B) 2,300 9,400 4,489
Less: Capital allowances (-) (-) (600)
---------- ---------- ---------
Statutory income/ 2,300 9,400 3,889
Chargeable income
====== ====== =====
Tax payable
RM’000
Income tax on life fund RM2,300 @ 8% 184
Income tax on shareholders’ fund 3,721
and general insurance RM13,289 @ 28%
----------
3,905
Less: Section 110 set-off (RM3,000 @ 28%) (840)
----------
Tax payable 3,065
======
* prior to Y/A 2001, the reserve for policies other than marine, aviation and transit policies was determined as 40% x (3,000 – 600) = 960,000.
Question 5
(a)
(i) (»
ÿÿÿÿ|»
xky(»
ÿÿÿÿ˜»
yk |(»
ÿÿÿÿÿÿÿÿzkL
л
ì»
{ko[pic]´»
ÿÿÿÿÿÿÿÿ|k● To determine whether NHL is a real property company (RPC) at the time of acquisition of property:
Defined value of property at date of acquisition must not be more than 75% of total tangible assets.
RM100,000/(RM100,000 + RM120,000 = 45%
NHL is therefore not a RPC.
• No RPGT implications on GP on acquiring NHL shares.
(ii) ● The acquisition date of the property by GPS will be the date of transfer i.e. September 2002.
• The acquisition price remains at RM250,000.
• The RPGT liability would be RM270,000 – RM250,000 = RM20,000 @ 30% = RM6,000.
• The DGIR has the right to withdraw approval for a transfer given under Paragraph 17(a) within 3 years after granting if it appears that the transfer was made for some purpose other than to bring about greater efficiency in operations for the group.
(iii) ÿÿÿÿÿÿÿÿ«kÆLL[pic] ................
................
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