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Question 1(b)

(i) According to ITLR 1986: Regulation 4, the asset is a special purpose asset under the
circumstances of deemed a sale agreement. In accordance with Proviso (iv): Special
Purpose Asset, a special purpose asset is custom made and cannot be used by another
user without being subject to major significant alterations. It is structurally
incorporated into a building or structure and cannot be removed without partly or
wholly damaging or destroying the building or structure.

MK Sdn Bhd leased out the office building with a centralized air conditioning system.
Obviously, a centralized air conditioning system is installed on a building and it
cannot be removed without partly or wholly damaging or destroying the building or
structure. Therefore, it fulfills the conditions in Proviso (iv) and it is a special purpose
asset.

The tax implications for the lessor are similar to hire purchase. The interest portion is
taxable and is treated as non-leasing biz income. If the arrangement is similar to sales,
the gross receipt is taxable (on accrued basis). The cost of the asset sold is
deductible. However, lessor is not entitled for capital allowance on leased assets since
he is not the owner of the asset.

In the perspective of lessee, interest expense is tax deductible on lessee if the asset is
used in the business which satisfy S33(1). Lessee is entitled for capital allowance on
capital portion (QPE) incurred. He is deemed owner of the asset since it is deemed a
sale.

(ii) MK Sdn Bhd leased out machinery. According to the lease agreement, MK Sdn Bhd
has only the right to use the asset and there is no other right or option on the leased
asset. So it is a true lease transaction which is a leasing business.

In the position of lessor, the gross lease rental receipt is taxable and the lessor is
entitled for capital allowance. Subsequently, disposal of the asset may result in
balancing adjustment.

The tax implication for lessee is the lease payments are deductible on incurred basis
if the leased asset is used in the business. However, lessee is not entitled for capital
allowance as he is not the owner of the asset.
(iii)

Computation of Statutory Income for The Year of Assessment 2015


RM RM
Leases
Centralised Air Conditioning
- Principal 250,000
- Interest 20,000 270,000
Machinery
- Principal 88,000
Adjusted Income 358,000
Less:
- Common Expenses 36,000
- Capital Allowance 20,000 56,000
Statutory Income 302,000