CONFIDENTIAL 1 AC/DEC 2018/TAX667

UNIVERSITI TEKNOLOGI MARA

FINAL EXAMINATION
ANSWER SCHEME

COURSE : ADVANCED TAXATION

COURSE CODE : TAX667
EXAMINATION : DECEMBER 2018

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SOLUTION 1

Solution 1 (a)

Deceased Executor
8/12 (R/D) 4/12 (R)

Sec 4(a) RM RM RM
Business income:
Adjusted income 95,000 
Add: B.Charge 5,000 
Less: CA (19,000) 
Stat. Business income 81,000 54,000  27,000 
Sec 4(c )
Dividend: single tier (exempt) Nil  -
Interest income: (Public Bank) 4,000 
(taxable for resident person)
Dividend (Australia) (exempt) - Nil
Sec 4(d)
Net Rental income 12,000 8,000 4,000
Aggregate income 62,000 35,000
Less:
Annuity payable 1,800 X 4m - (7,200) 
Approved donations: 4k @ 7% x (4,000)  -
[restricted to 7% of AI]  62K = 4,340
WIL
TOTAL INCOME 58,000 27,800
Less: Reliefs
Self/ special (9,000)  (9,000) 
Wife (4,000)  -
Child- Amina (16 yrs) (2,000) -
- Fauziah (Not entitle-married) Nil

CHARGEABLE INCOME 43,000 18,800

TAX RATE Scale rate
On the 1st RM10,000 50.00
On the next RM8,800 @ 1% 88.00
Tax payable 138.00

22 x ½ mark = 11 marks

b) If Rahimi was not domicile in Malaysia at the time of his death, the income tax liability of
the executor will be higher because:
i) The executor will not entitle to the special relief of RM9,000. 
ii) The executor will be taxed based on flat rate 24%.
(4 x 1 mark = 4 marks)
(Total: 15 marks)

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SOLUTION 2

A. (a) Common expenses and common capital allowances

Sources Common Expenses Common CA

of Income
Interest = 0/ 800,000 x 160,000 = 0/ 800,000 x 90,000
= Nil √ = Nil √
Dividend = 450,000/ 800,000 x 160,000 = 450,000/ 800,000 x 90,000
= 90,000 √ = 50,625 √
Rental = 280,000/ 800,000 x 160,000 = 280,000/ 800,000 x 90,000
= 56,000 √ = 31,500 √
Mgt Fees = 70,000/ 800,000 x 160,000 = 70,000/ 800,000 x 90,000
= 14,000 √ = 7,875 √
(8√ x ½ = 4 marks)

(b) Sec 4(a) – Listed IHC

RM RM
Interest Inc Nil
Less: D. E (95,000 disregarded) √ Nil
: C. E Nil
Adjusted Income Nil
Less: CA √ Nil
Statutory Income Nil Nil
Dividend Income (exempted) Nil
Less: D. E (122,000 disregarded) √ Nil
: C. E (90,000 disregarded) √OF Nil
Adjusted Income Nil
Less: CA (50,625 disregarded) √OF Nil
Statutory Income Nil Nil
Rental Income 280,000
Less: D. E √ (80,000)
: C. E √OF (56,000)
Adjusted Income 144,000
Less: CA √OF (31,500)
Statutory Income 112,500 112,500
Management Fees 70,000
Less: D. E (30,000 loss) √ (70,000)
: C. E (14,000 loss) √OF Nil
ADJUSTED INCOME Nil
Less: CA (7,875) √OF Nil
Statutory Income Nil Nil
Aggregate Income 112,500√
Less: CY Business Loss (30K + 14k) (44,000)

Total/ Chargeable Income 68,500

(12√ x ½ = 6 marks)
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Source of Income Year of Year of Year of

(Malaysia) assessment 2016 assessment assessment 2018
(RM) 2017 (RM) (RM)
Business - - 60,000
Rent (non business) 48,000 48,000 24,000
Dividend 20,000 - -
Interest 10,000 10,000 26.000
Total gross Income 78,000 58,000 110,000
% of income from 78,000 /78,000√√ 58000/58,000√√ 50,000/110,000√√
holding of investment
100% 100% 45%
IHC or not IHC√ IHC√ No√, because main
activity is selling
phone√

(10 √ x ½ = 5 marks)
(Total: 15 marks)

SOLUTION 3

A. Computation of Unreported Income of Encik Sukdev for the YA 2017

Capital Statement
YA 2016 2017
Assets as at 31 December: RM RM
Business - Capital 1,000,000  1100,000 
- Profit and Loss 700,500  920,500 
Loan to his sister 70,000  70,000 

Investment portfolio – quoted shares 640,500  430,500 

Maybank shares - 42,500 
MAS shares - 51,500 
Shah Alam house 600,000  nil
SD house 850,000  850,000 
BMW car 500,000 
Fixed deposit 90,000  390,000 
Current account 120,150  -
Car for 2nd son - 50,000 
Total Assets 4,071,150 4,405,000
Liabilities as 31 December:
Loan from his brother (150k-90k) 60,000  nil
Housing loans - SD house 510,000  450,000 

Loan- BMW 200,000 

Current account - 23,550 
Total Liabilities 570,000 873550

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_______
Net Asset as at 31 December 3,501,150 3,531,450
Net Asset as at 1 January (3,501,150)
Increase/(Decrease) in Net Asset 30,300
Adjustments:
Add: Non-business expenses &
capital loss
Loan interest –SD House 51,000 
Daughter education fee 60,000 
Income tax 35,120 
Gifts - Shah Alam House 600,000 
- to parent 20,000 

Less: Capital receipts

Gain on sale of shares (780k-210k) (570,000) 
Apparent Income 226,420
Reported Income (40,100)
Unreported Income  186,320

(30 / X ½ = 15 marks)

B. A taxpayer who is selected for an audit will be notified by IRBM through a letter of
notification of audit. The period between the date of notification of audit and the audit visit is
14 days.√√ However, with the agreement of the taxpayer, a shorter period of notification
may be fixed by IRBM.√ A letter confirming the visit is usually preceded by a phone call.√
A taxpayer may also request for the audit visit to be deferred due to unavoidable
circumstances and reasonable grounds. √

Other than the intended date of the visit, the letter will indicate the records that
should be made available for audit,√√ the years of assessment to be audited √ and the
names of audit officers who will conduct the audit √ as well as the expected time
frame required for the audit visit. √ A taxpayer may contact the Branch Audit Manager or
Branch Director of IRBM for the purpose of confirming the audit visit.
(10 √ x 1/2 = 5 marks)
(Total: 20 marks)
Question 4 a

Item 1
Cash donation is not allowed for deduction in arriving adjusted income from business. It is
allowed to set off against the aggregate income which will reduce the total income of the
company. However, the cash donation is restricted to 10% of aggregate income. 

Item 2
Allowances for two electrical engineering students are not deductible as the students are
not residents for tax purposes.
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Item 3
Promotion expenses of RM50,000 is not deductible as the promotional gifts were without
company’s logo.
(7 x 1 = 7 marks)

Question 4 b – Group Relief Loss

Agus Zain
RM RM
Aggregate income 620,000 235,000
Less: Current year losses (c/f: 265k) (235,000)
Approved donation (restricted to 10% of AI) (62,000)
Defined Aggregate income 558,000
Group Relief Loss (265,000 x 70% ) (185,500)
Total/Chargeable income 372,500 Nil
Tax Payable (24% x 372,500) 89,400
(10 x 1 = 10 marks)

Question 4 c

i. Current year losses can be set off against the aggregate income while unabsorbed
business losses brought forward can be set off against the aggregate of the statutory
income from all business sources Thus reducing the tax liability of Agus.
However, unabsorbed capital allowances suffered by the discontinue operation will
be treated as permanent loss as capital allowances must be set off against the
same business source. 

ii. Compensation paid to employees during or after the cessation of business is not
allowable to be deducted against the gross income. .
(7 x 1 = 7 marks)

Question 4 d

The most appropriate method is Resale price method (RPM) because Agus has acquired a
product from an associated enterprise (Zain) and resold to independent distributor
(Enlina).The resale price method focuses on the gross profit margin obtained by the
distributor.

In this case, Resale price margin can be compared to margins earned by other independent
enterprises (Enlina) performing similar functions, bearing similar risks and employing similar
assets. Agus’ gross profit per unit is RM3 (Selling Price less cost = 15-12). Hence Gross
profit ratio to Agus is 20%. Compare to the other independent party, Enlina Bhd who has a
Gross profit ratio of 25%.

Therefore, using formula, the arm’s length price for the product purchased:
Resale price - (Resale price x resale price margin of ID ) 
= 15 - (15 x 25%)
= 11.25 
(6 x 1 = 6 marks)
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(Total = 30 marks)

SOLUTION 5

a. Interest income earned by REIT which are exempted from tax are:

i. Any savings certificated issued by the government;

ii. Securities or bonds issued or guaranteed by the government;
iii. Debentures, other than convertible loan stock, approved by the Securities
Commission;
iv. Bon Simpanan Malaysia issued by Bank Negara Malaysia;
v. A bank of financial institution licensed under the Banking and Financial Institutions
Act 1989 or Islamic Banking Act 1983;
vi. Bonds and securities issued by Pengurusan Danaharta Nasional Berhad, and
vii. Interest income received from a foreign source and remitted to Malaysia.

(Any 4√ x 1 mark = 4 marks)

b. Tax computation
Pacific-REIT
Tax computation for the year of assessment 2018

RM RM
Net profit before tax 647,750
Less: Non-Business income
Gross dividend income -single tier (40,000) √
Gross dividend income - exempt (18,000) √
Debenture interest (3,000) √
Gains from realisation of securities (29,000) √ (90,000)
557,750
Add: Non allowable expenses
Manager's remuneration Nil
Management fees on maintenance of building Nil √
Interest expense on loan to acquire : real estate Nil √
: shares 7,400 √
Depreciation 55,200 √
Entertainment provided to suppliers (50% x 42,000) 21,000 √
Various other expenses (all deductible) Nil √
Donation to approved institution 4,500 √ 88,100
Adjusted Business income 645,850
Less: Capital allowance (39,980) √

605,870
Statutory Business income

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S4(c )
Dividend income (single tier) Nil
Dividend income (exempt) Nil √
Debenture interest 3,000 √
Aggregate income 608,870
Less: Approved Cash donations (restricted to 10% of
AI) (4,500) √
Total income √ 604,370

(16√ x ½ mark = 8 marks)

Distribution to unit holders = 500,000 / 604,370 = 82.73%

Chargeable Income = 604, 370.
Tax Payable = 24% x 604, 370 = 145,049.

c. Advice:
i. Under Section 109D, Pacific-REIT need to deduct 24% √ tax from the gross
distribution (30% x RM500,000 x 24% = RM36,000) and distributes the net
amount RM114,000 to the non-resident company. The tax deducted has to be
paid to the IRB within one month √ after distributing the dividend. An
account of the details of the recipients has to be accompanied with the remittance
to the tax authorities.

30% x 500k = 150k.

WHT = 24% x 150k = 36k.
Amt distributed to NR Co = 150k-36k = 114k

ii. Failure to deduct the tax and remitted to the tax authorities within one month,
10% penalty √ on the unpaid tax will be imposed and both the tax deducted and
penalty are debts due to the government √.
(4√ x 1 mark = 4 marks)

d. The tax implication on the company:

If Pacific-REIT distributes RM600,000 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 √ (600,000/604,370 = 99% √ OF ).
(4√ x 1 mark = 4 marks)

(Total: 20 marks)

END OF SUGGESTED SOLUTION

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