Answers

0JDMIX

Certificate Examination Paper 7(M) Tax Framework (Malaysia) 1 Easi Sdn Bhd Year of Assessment 2000 (Basis period 1.7.1999 to 30.6.2000) Note Profit before taxation Compensation for machine Compensation for general damages Stock general provision RM92,000 x 8/92 Provision for warranty claims RM42,000 25,000 Salary for disabled employee (RM48,000 + 4,000) Bonus restriction production workers EPF restriction for staff EPF restriction on bonus Export credit insurance (additional deduction) Equipment for disabled employee Replacement of alarm system Hire of van Lease rentals of car Payment to approved research company Goodwill payment Scholarship to employees children Leave passages Legal fees New logo Bad debts written off General provision c/d General provision b/d Foreign exchange gain (unrealised) Foreign exchange loss on loan repayment Subscriptions Depreciation Interest RM000 + 10,121 RM000 1,100 8 17 2 2 2 2 52 50 26 6 192 3 3 4 4 5 5 6 6 7 7 199 10 808 33 131 4 19 10 8 24 974 122 11,622 (2,292) Adjusted income Add: Balancing charge Less: Capital allowances 829 + 620 Statutory income Add: Interest income Total/chargeable income 9 9,330 560 (1,449) 8,441 122 8,563 2,292

Answers and Marking Scheme Marks

0D MAA Paper 7(M)

1 1

1 1 1 1 1 1 1

8 8

Notes: 1 Compensation receipt for the destruction of the machine is capital in nature as it relates to the destruction of an asset of an enduring nature therefore not taxable. Compensation receipt for general damages constitutes revenue income as it relates to the day-to-day operations of the company therefore taxable but no adjustment necessary. 2 Salary and bonus for the disabled employee qualify for double deduction. Deduction for bonus is restricted to two twelfths of the workers wages i.e. add back RM1,200,000 x 1/12 x = 50,000 Deduction for EPF contributions is restricted to 19% of the employees remuneration i.e. add back (RM2,400,000 + 200,000) x 1% = 26,000. EPF contributions in respect of restricted bonus is also disallowed and therefore added back RM6,000 i.e. 12% x RM50,000. Equipment for the disabled employee is specifically allowed under the Income Tax Act, 1967 therefore no adjustment necessary. The computerised system is an improvement over the replaced equipment therefore capital in nature and added back.

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0DMAA Paper 7(M)

Hire of van is an expense incurred wholly and exclusively in the production of income, therefore deductible but no adjustment necessary. Lease rentals of the car are restricted to RM50,000 as follows: YA99 2 months x 3,000 6,000 YA2000 (py) 12 months x 3,000 36,000 YA2000 (cy) 6 months x 3,000 18,000 Total Restricted to Add back 60,000 50,000 10,000

Marks

Payment for services of an unrelated approved research company qualifies for double deduction as long as it is revenue in nature. Compensation payment to customers constitute revenue expenditure as it relates to the day-to-day operations of the company therefore deductible but no adjustment necessary. Scholarships to employees children are staff amenities therefore revenue expense so no adjustment necessary. Leave passages are specifically disallowed under the Income Tax Act,1967. Legal costs incurred in preserving the companys assets and preventing disruption to operations are revenue expenditure and therefore deductible so no adjustment necessary. Fees to designer of a new logo is expenditure that brings an enduring benefit therefore capital in nature. Foreign exchange gain though revenue in nature is unrealised therefore not taxable. Loss on loan repayment is not deductible as it is a capital loss. However, the loss on the interest portion is revenue in nature therefore allowed. Balancing charge is arrived at as follows: Machine damaged by developer Residual expenditure as at 1.7.1999 YA 2000 (cy basis) Compensation or market value whichever the greater Balancing charge restricted to actual allowances granted RM000 440 1,100 660 560

6 7

0DMAB Paper 7(M)

Mr Mui RM Employment with Hong Kong company (1.1.2000 to 28.2.2000) Employment exercised in Malaysia therefore income is derived from Malaysia Salary (RM20,000 x 2 ) Compensation for loss of employment RM200,000 (RM4,000 x 2 years) 40,000 192,000 232,000 Employment with Healthline Sdn Bhd (1.4.2000 to 31.12.2000) Section 13(1)(a) Salary Car allowance Maid RM600 x 9 1

135,000 18,000 5,400 158,400

Section 13(1)(b) Furnishings RM3,360 x 9/12 Television RM7,000/7 years x 9/12 School fees Leave passage (RM4,500 3,000)

2,520 750 6,000 1,500 169,170

1 1 1

Section 13(1)(c) 30% x RM158,400 = 47,520 or Defined value RM120,000 x 9/12 = 90,000 whichever lower

47,520 216,690

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0D MAB Paper 7(M)

RM Dividend RM2,880 x 100/72 Interest from Thailand received in Malaysia Aggregate income Less: donations Total income Less: personal reliefs: Self First child Second child EPF contributions Chargeable income Tax on RM150,000 Tax on R 285,190 at 29% Less: Section 110 set-off Tax payable RM29,77500 82,70510 112,48010 1,12000 111,36010

RM 4,000 1,000 453,690 1,500 452,190

Marks 1

8,000 800 3,200 5,000 max 17,000 435,190

Reasons for claims denied: (i) No child relief for the third child because the childs total income of RM900 exceeds the relief of RM800. The source of the total income is not relevant. (ii) No relief allowed for the insurance premiums in respect of the child because the policy is on the childs life and not on the lives of the parents. (iii) Rebate for computer is allowed only once in every five years, therefore no rebate allowed this time. Mrs Mui Rental income assessed under Section 4(a) as per IRB guidelines RM + Net loss as per accounts Refundable deposit Penalty for late payment of assessment 150 Depreciation 1,000 Air-conditioning unit 2,400 Improvements to the premises 18,650 22,200 Adjusted rental loss Capital allowance c/f RM720 (RM2,400 x IA20% +AA10%) Employment: Salary 36,000 Bonus 4,000 Gratuity RM12,000/6 years 2,000 Annuity Aggregate income Less: current year loss Total income Less: personal reliefs: Self EPF Approved EPF insurance Premiums on education Chargeable income Tax on 5,000 Tax on 1,900 at 3% Less: rebate (self) Tax payable

RM 39,000 8,000

47,000 (22,200) 24,800 1 1 42,000 5,800 47,800 (24,800) 23,000 1

8,000 4,400 700 3,000 max 16,100 6,900 RM25 57 82 (110) Nil

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0D MAC Paper 7(M)

(a) The prescribed period for furnishing an estimate of tax payable is: not later than 30 days before the beginning of the basis period for a year of assessment. The company can only revise the estimate of tax payable in the sixth month of the basis period for a year of assessment. (b) (i) The tax must be paid by twelve equal instalments on the tenth day of every month beginning from the second month of the basis period i.e. 10 August 2000 to 10 July 2001 at RM20,000 per month.

Marks 1 1 1 1 1 1

(ii) The revised estimate exceeds the instalment payments by RM147,700 i.e. RM247,700 RM100,000 (assuming that 5 instalments of RM20,000 had been paid). This excess will have to be paid in remaining instalments in equal proportion of RM21,100 (RM147,700/7 months) from January to July 2001. (iii) The assessment for the year of assessment 2001 will be deemed to have been made on 20 December 2001, the date the tax return is submitted to the IRB. (iv) The deemed notice of assessment will be deemed to have been served on Superlite on 20 December 2001, the day the tax return is furnished to the IRB. (v) The final tax will be due and payable on the last day of the sixth month after closing of accounts i.e. 31 December 2001. (c) Lins income is taxable under s.4(b) as income from employment whereas Zains income is taxable under s.4(a) as business source income. In terms of deductible expenses the same principle wholly and exclusively incurred in the production of income applies to both sources but deductible expenses for employment source are more restricted than for business source. Also, for the business source capital allowances can be claimed and losses are eligible for relief.

1 1 1 1 1 1 1

0D MBA Paper 7(M)

The facilities available to licensed manufacturers to purchase tax free raw materials are as follows: Ring System Under this system a licensed manufacturer can apply for permission to import raw materials free of sales tax or to purchase them free of sales tax from another licensed manufacturer. Application is to be made in a prescribed form to the Sales Tax Office where the applicant is licensed. Refund System Here a licensed manufacturer can purchase raw materials free of sales tax from a vendor who had paid the sales tax on those goods. The vendor would then apply for a refund of the sales tax paid by him. Credit System This system is for licensed manufacturers who, for one reason or another, are not able to use the above facilities. Under this system credits are given to a licensed manufacturer for tax paid on raw materials used in the manufacture of taxable goods. The sales tax deductions vary according to the categories and rates of sales tax of the goods purchased. In some circumstances a person may apply to acquire taxable goods on behalf of a licensed manufacturer and deliver those goods free of sales tax to the licensed manufacturer. A licensed manufacturer may need another licensed manufacturer to complete the manufacture of his taxable goods. In such a case he can deliver the goods for further manufacture and acquire them back free of sales tax. 2

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0D MBB Paper 7(M)

Blueski Sdn Bhd is in a no gain/no loss situation and therefore no real property gains tax is payable as the transaction falls under paragraph 17(1)(b), Schedule 2 of the Real Property Gains Tax Act, 1976. Greenfield Sdn Bhd, upon reclassification of the land in its accounts from fixed assets to stock-in-trade, is deemed to dispose of the chargeable asset and is therefore subject to real property gains tax as the reclassification falls under paragraph 17(2). Computation of real property gains tax payable by Greenfield is as follows: Consideration paid by Blueski Add: incidental costs of acquisition Less: deposit forfeited Blueskis acquisition price Add: permitted expenses - legal expenses Deemed acquisition price for Greenfield Deemed disposal price (land taken into Greenfields trading stock) Less: deemed acquisition price Excess deemed as chargeable gain Deemed disposed on: 1.8.2000 Deemed acquisition on: 9.7.97 RPGT rate at 15% RPGT payable RM476,000 x 15% = RM71,400 RM 700,000 28,000 728,000 (14,000 ) 714,000 10,000 724,000 1,200,000 724,000 476,000

Marks 2 1

1 1 1

1 2 1 1 1

0D MBc Paper 7(M)

(a) A bonus issue, as confirmed by case law, does not affect the income tax liability of the shareholders or the company. On the part of the shareholders it is not a dividend and therefore there is no income receipt in the hands of the shareholders. On the part of the company, bonus issue transaction merely transfers the companys reserves to its share capital, thereby resulting in an increase in the issued capital of the company. As no dividend was paid by the company s.108 of the Income Tax Act, 1967 does not apply. Case law: CIR v Blott Case law: CIR v Greenwood (b) Shareholders would not be liable to tax on the benefits obtained from taking up the rights issue at a price below the market price. It is a capital transaction whereby they merely acquire additional shares. (c) Kengso Sdn Bhd Tax credit from YA2000 (preceding year basis) Add: tax chargeable for YA2000 (current year basis) Add: basis period 1.4.1999 to 31.3.2000 Less: tax on dividends paid in basis year Less: 1.1.2000 to 31.12.2000 Less: RM400,000 x 28% paid on 7.5.2000 Debt due to the Government Balance carry forward to YA 2001 RM 44,000 56,000 100,000

1 1

112,000 (12,000) Nil

1 1

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0D MBC Paper 7(M)

Marks 7 (a) Service tax chargeable to Mrs Tin Taxable Services Food Room charges RM 200 800 1,000 Service tax at 5% = RM50 Medicine is not a taxable service. Consultancy services are not taxable services. Surgery is not a taxable service. These items are therefore excluded from the computation. (b) (i) Invoice billed to Akitek Din Engineers fees Service tax at 5% Total Invoice billed to client by Akitek Din Architectural services Professional consultancy services Service tax at 5% Disbursements RM 6,000 300 6,300 17,000 3,000 20,000 1,000 21,000 6,300 27,300 (c) Zakari Sdn Bhd is entitled to industrial building allowances during the period of the lease. The rate of annual allowance is 2%. Joo Seng is entitled to industrial building allowances upon the purchase of the building. The rate of annual allowance is the permitted fraction of 1/45 arrived at as follows: 1993 (assuming that current year basis applies all the way through) + 50 2043 2000 43 + 1 = 44 1 1 1

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0D MBE Paper 7(M)

Marks 8 (i) Net loss per partnership accounts: Deduct: Depreciation Entertainment of clients Donations Partners salaries (18,000 + 24,000) Partners interest on capital RM RM 72,000 (48,200) Adjusted loss Add: Partners salaries Partners interest on capital Divisible loss (ii) Computation of total income: Leong RM 18,000 900 (46,690) Nil 1,540 c/f Nil 15,600 15,600 (27,790) Nil Nil Loss RM12,190 c/f Zizi RM 24,000 (20,010) 3,990 660 3,330 1,400 4,730 240 4,490 23,800 42,000 900 42,900 66,700

2,500 1,800 1,000 42,000 900

Salaries Interest on capital Divisible loss Adjusted income from partnership Less: Capital allowances Statutory income from partnership Rental income (adjusted) Dividend income (1,800 less 400) Aggregate income Less: Partnership loss Approved donations RM800 Total income

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