SUGGESTED ANSWERS TAX667 - JUNE 2016

Answer 1(i)
Computation of chargeable income of the deceased and the income tax payable of the
executor for the year of assessment 2015.

Deceased Executor
(R/D) (R)
RM RM
Business income (Malaysia)
Adjusted income 500,000
(+) Balancing charge 150,000
(-) capital allowances 160,000
Statutory income 490,000 245,000 245,000
Business income (Australia)
Statutory income (exempted) NIL

Dividend income (single tier –exempted) NIL

Interest income 15,000
Rental income (Malaysia)
Jan – May 10,000
June 5,000
15,000 7,500 7,500
Rental (Singapore) –exempted NIL
Royalty income 30,000
(-) exemption (20,000) 10,000

Aggregate income (AI) 262,500 267,500
(-) Annuity payable (18,000) 
(-) Approved donation (restricted to 7% of AI)  (5,000) 
(-) Distribution of income (not deductible) - -
(-) Executor’s remuneration (not deductible) - -
Total income 262,500 244,500
(-) self relief (9,000)  (9,000) 
(-) wife relief (3,000) 
(-) Child relief (6,000) 
Chargeable income 244,500 235,500
Tax charge Scale rate
On the 1st RM150,000 23,900
On the next RM85,500@24% 20,520
Income tax payable 44,420

(24x ½ mark = 12 marks)

(ii) The annuity income received by Encik Alif’s sister is taxable under Section 4e of ITA
1967 whereas the distribution of income to Hisham is treated as a gift and not taxable
under the Income Tax Act 1967.
(3x 1 mark = 3 marks)
(Total: 15 marks)

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SUGGESTED ANSWERS TAX667 - JUNE 2016

Answer 2

(i) Calculation of income tax payable of Grand Holdings Sdn Bhd for the year of
assessment 2015

RM
Sec 4c:Dividend (exempt) NIL
Sec 4c: Interest 30,000
Sec 4c: Interest (exempt) NIL
Sec 4d: Rental 55,000
Sec 4f: Management service fees 40,000
Aggregate income 125,000
Less: Permitted expenses (note) (4,762) 
Total income 120,238

Note:
The amount of permitted expenses:
RM
Director’s fees 25,000
Salaries and allowances 17,000
Management fees 6,000
Audit fees 5,000
A 53,000

Gross investment income chargeable to tax:

RM
Interest 30,000
Rental 55,000
Distribution of income from real estate investment trust (REIT) 30,000
B 115,000

Aggregate of gross income from investment (whether exempt or not), rental and
gains from realisation of investment:
RM
Dividend (single tier) 45,000
Interest 30,000
Interest (tax exempt) 10,000
Rental 55,000
Distribution of income from real estate investment trust (REIT) 30,000
Gains from realisation of investments 150,000
C 320,000

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SUGGESTED ANSWERS TAX667 - JUNE 2016

The amount of permitted expenses determined in accordance with the formula is:

(i) A x B/4C or (ii) 5% x gross investment income

= 53,000 x 115,000 5% x 115,000
------------ = 5,750
4 x 320,000

= 4,762

The lower amount RM4,762 is taken to be the allowable permitted expenses.

(22x ½ mark = 11 marks)

(ii) Comparison between unlisted IHC and listed IHC with respect to the management
services fees income:

Unlisted IHC Listed IHC

Management services fees are treated as Management services fees are treated as
other income under Section 4f of ITA business income under Section 4a of ITA
1967 1967

(4 marks)
(Total: 15 marks)

Answer 3 (i)
Encik Daniel
Capital Statement as at 31 December
2013 2014
Assets RM RM
Capital 160,000 170,000
Balance in Profit & Loss A/c 230,000 310,000
Shares 80,000 NIL
Land - 115,000
Motor vehicle 40,000 NIL
Apartment 280,000 280,000
Loan to Nick 8,700 5,100
Current account - 65,000
Savings account 15,000 19,200
Fixed deposits 45,000 50,000
Total assets 858,700 1,014,300
Liabilities
Outstanding loan balances (Land) 55,000
Outstanding loan balances (Apartment) 201,000 169,000
Bank overdraft (current account) 20,000 -
Net assets 637,700 790,300
Less: net assets brought forward 637,700
Increase in net assets 152,600

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 SUGGESTED ANSWERS TAX667 - JUNE 2016

Add: non-business expenses and capital loss

Loss on disposal of shares 5,000
Loss on disposal of Motor vehicle 6,000
Contribution to unapproved institution 10,000
Interest on loan (apartment) 14,000
Income tax 30,000
Miscellaneous expenses 15,000
Personal and private expenses 60,500
Apparent income 293,100
Declared income 200,000
Under declared income 93,100

30x ½ mark = 15 marks

(ii) Any two procedures conducted during examination of taxpayer’s records:

1. During the course of an audit, the audit officer should be allowed to examine all business
records and to inspect stock and equipment physically for verification of the claims
made. Records pertaining to the years of assessment which are already time barred will
not be examined.

2. In certain circumstances, there may be a need to examine records other than business
records where it involves the audit of sole proprietorships and partnerships.

3. The audit officer will not search for or take possession of any record. Examination of
records will only be carried out at the taxpayer’s business premises. If it is deemed
necessary, the audit officer should be allowed to make copies of relevant documents.
4. However, under circumstances where the work place provided by the taxpayer is not
suitable or conducive to carry out the audit or where copier facility is not available, the
audit officers, with the consent of the taxpayer, may obtain records for examination at
the IRBM’s office. In such a case, the documents will be returned to the taxpayer once
the examination is done.

5. The documents and records to be taken back will be listed and the taxpayer may check
the documents and records and make a copy of the list, if necessary.

6. Where records and books of accounts are kept in electronic form, hard copies of such
records should be made available for examination. If at the time of the audit visit, the
taxpayer is unable to provide the hard copies for examination, the taxpayer should
facilitate and assist the audit officers to access the computer system and copy the
electronic records onto tapes, disks or diskettes.

(Any two procedures @ 2.5 marks each = 5 marks)

(Total: 20 marks)

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SUGGESTED ANSWERS TAX667 - JUNE 2016

Answer 4
(i) Suasa Manufacturing Sdn Bhd
Computation of statutory income for the year of assessment 2015
Add Less
RM RM
Profit before tax 1,384,000
Less: Income not under S4(a)
Rental 60,000

Add: Disallowable expenses

Insurance premium for exported cargo Nil
Amortization of goodwill 30,000
Depreciation 120,000
Donations 1,987,000
Interest 12,000
Zakat 49,000
Registration of new trade mark 60,000
Profit on sale of van 29,000
General provision for doubtful debts 30,000
Employees remuneration 30,000
3,672,000 119,000

Adjusted income 3,553,000

Add: balancing charge 3,000
3,556,000
Less: capital allowances (50,000+76,000) (126,000) 
Statutory income 3,430,000
16x ½ mark = 8 marks

(ii) Five (5) tax planning strategies for Suasa Manufacturing Sdn Bhd:

1 The company could purchase insurance policy from companies incorporated in Malaysia.
This expense will be entitled to double deductions.

2 The company could employ more disabled employees because their remuneration will be
given double deductions.

3 The company could donate more cash to approved institutions. This donation can be
deducted against the aggregate income of the company but the amount is restricted to
10% of the aggregate income. However, donation in kind is not allowed for deductions.

4 The company could provide for specific doubtful debt rather than general provision
because only the specific provision is allowed for tax purposes.

5. The company could incur more specific expenses under Section 34 of ITA 1967 such as
provision of any equipment or renovation of premises necessary to assist any disabled
employees. The expenses can be deducted against the gross income in arriving at the
adjusted income.

(each point @ 2 marks each = 10 marks or any relevant answers)

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SUGGESTED ANSWERS TAX667 - JUNE 2016

(iii) Hire purchase method

The company will be able to claim the capital allowance because it will be
considered as the owner of the asset. However, the amount of capital allowance
claim is based on the deposit and instalment paid. It would take a longer time to fully
claim the capital allowances because it is based on prescribed rate provided by the
IRB. 

Leasing method
Suasa is not able to claim capital allowances on the leased motor car because the
company is not the owner of the asset. However, the company is entitled to claim
the full leasing charges in the year of assessment subject to certain conditions
(applicable to motor car)
(6 marks)

(iv) The Cost Plus Method would be the most suitable TP method because the
products manufactured by Suasa are customized and no product comparable
available. The transaction is between associated companies. The focus of this
method is on the cost of manufacturing the products.

The Cost Plus method determine an arm’s-length range of prices for a transaction by
identifying the costs incurred by the vendor of the goods or services in a controlled
transaction and then adding an arm’s-length mark-up to that cost base. The mark-
up should be comparable to what a third party would earn if it performed comparable
functions, bore comparable risks, owned the same assets and operated in
comparable market conditions. 
This method is often use sales of goods from manufacturing entities to related party
distributor. 
(6 marks)
(Total: 30 marks)

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 SUGGESTED ANSWERS TAX667 - JUNE 2016

Answer 5
i) Determination of total income for the year of assessment 2015
RM’000
Net profit before taxation 17,785
Interest income (200) 
Realised loss on sale of quoted shares 1,500
Dividend income (single tier) (150) 
Manager’s salary Nil
Trustee’s fee 100
Professional fee Nil
Telephone and stationery Nil
Provision for unrealized loss written back (2,000) 
Revaluation surplus (5,000) 
Interest expense Nil
Adjusted income 12,035
Add: interest income (para 35, Sch 6) Exempt
Dividend income (single tier) Exempt
Total income 12,035

(14 x ½ mark = 7 marks)

ii) Income tax treatment of the following item:

(a) Net rental income

The net rental income is treated as Section 4a business income. The operating expenses
is allowable for deduction but subject to certain restriction. The expenses should not
exceed the gross rental income. Any excess of expenses over the income cannot be
deducted against the aggregate income nor be carried forward to future years. 

(b) Interest income

Interest income is not considered as business income. Thus in arriving at adjusted

income, the amount should be deducted. However, this income is exempted and
will not be included in the total income calculation.

(c) Dividend income

Dividend income is chargeable  under Section 4c of ITA1967 and not as business
income. However, with the introduction of single tier system from YA2008, the
dividend income is now exempted from income tax.

(d) Manager’s salary and trustee’s fee

As rental income is treated as business source of a REIT/PTF, the manager’s salary

is deductible because it is incurred wholly and exclusively in the production of gross
income. However, the trustee fee is not an allowable expense because it is not
incurred wholly and exclusively in the production of gross income.

(20x ½ mark = 10 marks)

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SUGGESTED ANSWERS TAX667 - JUNE 2016

iii) If BT Property Trust distributes RM10,000,000 of its total income to the unit holders,
the whole amount of total income will be chargeable to income tax. 

However, if BT Property Trust distributes RM11,500,000 of its total income to the unit
holders, then the company will be exempted from income tax because the
distribution exceed 90% of the total income (11,500/12,035 = 95.6% OF).

(6x ½ mark = 3 marks)

(Total: 20 marks)

END OF SOLUTION