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MICPA EXAMINATION


NOVEMBER 2004

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 2004 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.



ALL RIGHTS RESERVED : NO PART OF THIS PUBLICATION MAY BE TRANSMITTED IN ANY FORM OR BY ANY MEANS, ELECTRONIC, MECHANICAL PHOTOCOPYING, RECORDING OR OTHERWISE, WITHOUT THE PRIOR PERMISSION OF THE MACPA STUDENTS SOCIETY.


THE MALAYSIAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

(INSTITUT AKAUNTAN AWAM BERTAULIAH MALAYSIA)

NOVEMBER 2004




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.
6. After the instruction to stop writing at the end of the paper, you will be given five minutes to assemble your answers. Fasten your answer sheets to the respective folders provided using the tags.
7. The answer folders and examination stationery, used or unused, must not be removed from the Examination Hall.


DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO

ADVANCED TAXATION

(Answer ALL questions)


Question 1
Kitchen Ware Sdn Bhd has been in the business of manufacturing kitchen utensils for both the local and export markets since 1999.
The company prepares its accounts to June 30 annually. The company has been investing in plant and machinery since 2003 as part of its three-year expansion and modernisation project to increase its production to meet its increased export demand.
The company’s profit and loss account for the year ended June 30, 2004 is as follows:

Note RM’000 RM’000

Sales 1 52,210

Less: Cost of sales

Opening stock 4,250

Cost of goods manufactured 2 35,700

---------

39,950


Closing stock 3,500

--------- 36,450

----------

Gross profit 15,760

Less: Selling and distribution expenses

Remuneration 3 3,100

Packing materials 750

Carriage inwards/outwards 4 1,120

Water and electricity 50

Travelling expenses 5 1,880

Advertisement 6 780

Publicity 6 450

Entertainment 7 550

---------

8,680

---------



Administrative expenses

Salaries and allowances 8 1,100

Depreciation 2 120

Gifts and donations 9 90

Legal and professional fees 10 200

Trademark registration (new product) 23

Insurance, maintenance and utilities 11 250

Miscellaneous expenses 12 120 Bad debts 27

---------

1,930


---------

Financial expenses

Interest expense 13 200

Foreign exchange loss 14 400

---------

600


---------

11,210


---------

4,550


Note RM’000 RM’000

Add: Other income

Interest income l5 180

Dividend income 16 200

Loss on disposal of fixed asset 17 (110)

Unrealised foreign exchange gain 20

-------- 290

--------


Profit before taxation 4,840

=====


Notes


  1. 90% of the company’s sales were export sales.




  1. Total depreciation of RM980,000 was charged for the financial year. RM120,000 relating to office equipment was charged to administrative expenses whereas the balance relating to plant and machinery was charged to cost of goods manufactured.

3. Remuneration included a provision for staff retirement benefits of RM50,000. The group accountant was paid a retirement benefit when he retired on May 1, 2004.


4. Included in carriage inwards was a fine of RM3,800 in respect of illegal disposal of waste.
5. Mr Lai, the company’s marketing director had to spend 3 days in Japan and 5 days in Hong Kong to negotiate and conclude contracts. The travelling expenses incurred by Mr Lai are as follows:

Japan Hong Kong

RM RM

Air fare 4,800 2,400



Accommodation 1,440 1,600

Food 750 700

-------- --------

6,990 4,700

===== =====

6. Advertisement and publicity costs have increased substantially due to advertisement and publicity campaigns carried out in Japan and Malaysia, amounting to RM520,000 and RM230,000 respectively. The company is the registered owner of its kitchen ware brand.

7. Mr Lam, the accountant, confirmed that 70% of this year’s entertainment expenses were incurred on entertaining customers to secure sales whereas 20% was on staff entertainment. The balance of the entertainment expenses were incurred by the managing director for his political party which had no business relationship with the company.
8. Included in salaries and allowances was the salary of a handicapped employee amounting to RM22,000.


  1. Gifts amounting to RM70,000 were given away to customers whose purchases exceeded RM1,500. The company made a donation of RM20,000 to an approved charity during the year.

10. Legal fees were all incurred for recovery of trade debts. The professional fees of RM50,500 were paid to a Malaysian consultant to seek his advice on the acquisition of an Australian company.

11. Included in insurance expense was marine insurance of RM4,500 paid to a Malaysian insurance company for goods exported to Japan and Hong Kong.

12. Included in miscellaneous expenses was a late tax filing penalty imposed by the Inland Revenue Board of RM6,500.




  1. The interest expense related to a RM3 million loan obtained by the company to finance the acquisition of an Australian unit trust.




  1. Foreign exchange loss comprises:

RM’000

Foreign exchange gain on trade debts 150

Foreign exchange loss arising from investment

in the Australian unit trust (550)

---------

(400)


---------

  1. Interest income comprises:

RM’000

Interest charged on late payment of trade debts 20

Fixed deposit interest 160

----------

180

----------



  1. Gross dividend income comprises dividends derived from:

RM’000

Malaysian investments 100

Australian unit trust 100

----------

200

----------



  1. Loss on disposal of machinery acquired on April 10, 1999

(Applicable capital allowance rate was 20%) RM’000
Original cost 600

Accumulated depreciation (360)

---------

Net book value 240

Sale proceeds (disposed of on May 7, 2004) 130

----------

Loss on disposal (110)

----------

18. Other information


  1. Balances in provision accounts As at As at

30.6.2003 30.6.2004

RM’000 RM’000

Specific provision for bad debts 25 42

Provision for stock obsolescence 30 45

Provision for staff retirement benefits 250 180
Included in cost of goods manufactured was provision for stock obsolescence of RM15,000.
As one of its debtors had been declared a bankrupt, the company decided to write off the debt of RM10,000 for which a specific provision had been made last year. Of the specific debts of RM27,000, all were related to sales of kitchen ware except for RM7,000, which was related to a loan given to the managing director’s cousin.



  1. Fixed assets

Qualifying Residual Capital

cost expenditure allowance

as at 30.6.2004 as at 30.6.2004 rate

RM’000 RM’000 %


Factory building 1,500 1,140 3

Plant and machinery 1,200 240 20

Motor vehicle – cars 360 144 20

Office equipment & furniture 240 152 10


Fixed assets additions:

As part of its expansion programme, the company incurred RM400,000 on plant and machinery.


The company acquired a second hand car for RM120,000 for its marketing director.
(iii) The company has unabsorbed capital allowances of RM64,000 brought forward from the year of assessment 2003.

Required:
Compute the chargeable income of Kitchen Ware Sdn Bhd for the year of assessment 2004, showing all relevant tax adjustments.
(20 marks)
Question 2


  1. Able Sdn Bhd (Able) entered into an agreement on August 25, 2003 with its main competitor, Kane Sdn Bhd (Kane) under which Able agreed to pay Kane RM1 million annually over a period of 5 years if Kane closed down its manufacturing business and obtained its supply of materials for a period of 5 years from Able at a pre-agreed price.

Able subsequently sub-contracted the supply contract to Bon Sdn Bhd (Bon) in exchange for amounts payable by Bon based on the volume of materials supplied by Bon to Kane.


Required:
State your arguments for and against :

  1. the deductibility of the payment made by Able to Kane; and

  2. the taxability of the receipts by Able from Bon.

(5 marks)


  1. Edar Sdn Bhd (Edar) was granted sole distributorship rights to sell Wigley Ltd’s widgets in Malaysia. Edar has other distributorship rights apart from the rights granted by Wigley Ltd.

Three years later, Wigley Ltd agreed to pay a lump sum compensation of RM2 million to Edar to allow Wigley Ltd to appoint other additional agents in Malaysia.


Required:
State the arguments for and against the taxability of the compensation received by Edar.
(5 marks)


  1. Pindah Sdn Bhd (Pindah), an existing manufacturing company, is proposing to construct a new factory at a different site currently occupied by squatters. In order to proceed with the construction, Pindah paid compensation to the squatters to vacate the land.

During construction, the owner of a neighbouring building commenced legal proceedings to stop the construction on the grounds that the construction would cause damage to his property. Pindah agreed to settle the case out-of-court and paid compensation to the neighbour.


Required:
State, with reasons, whether the payments made by Pindah qualify for deduction as a revenue expense or otherwise under the Act.

(5 marks)

(Total: 15 marks)
Question 3
Kuala Lumpur International Insurance Berhad is an insurance company carrying on both life and general insurance businesses. The company prepares its accounts annually to September 30. An extract of its financial statement for the year ended September 30, 2003 is set out below.
General Life Shareholders’

Insurance Fund Fund

RM’000 RM’000 RM’000
Gross premiums 12,000 360,000 -

Reinsurance premiums

(to Malaysian companies) (3,000) (10,000) -

Reinsurance premiums

(to non-Malaysian companies) (4,000) (15,000) -

Net claims incurred (2,500) (150,000) -

Commissions (2,200) (80,000) -

Management expenses (see Note 3) (5,000) (40,000) (200)

Investment income (see Note 4) 9,400 105,500 10,300

Gross proceeds from investments sold 25,000 117,000 50,400

Cost of investments sold (31,000) (60,000) (25,700)

Actuarial surplus transferred from

Life Fund to Shareholders’ Fund - (70,000) 70,000

Notes

General Life Shareholders’

Insurance Fund Fund

RM’000 RM’000 M’000


1. Capital allowances for the year 500 5,000 100

2. Reserve for unexpired risks as at :

30.9.2002 3,000

30.9.2003 2,000

3. Management expenses include :

Depreciation of fixed assets 400 4,000 10

Entertainment 100 1,000 -

4. Investment income comprises :

Interest income 6,600 40,500 500

Rental income 2,800 35,000 9,800

Malaysian gross dividend income (non-exempt) - 30.000 -

5. The section 108 tax credit brought forward (new account) amounts to RM106,000,210

6. The company did not pay any tax instalments in respect of the years of assessment 2003 and 2004.


Required:


          1. Compute the tax liability of the company. Show all relevant workings.




          1. Compute the section 108 balance of the company as at the date of filing of the tax return (i.e. April 30, 2004).

(15 marks)

Question 4
(a) Aktif Abroad Ltd (AAL US), a multinational company resident in the USA with subsidiaries in Australia (AAL Australia) and England (AAL England), is involved in the manufacturing and marketing of buttons. AAL US is proposing to market and sell its products in Malaysia and is exploring the different ways in which it can operate in Malaysia.
Required:


  1. State any THREE factors which could indicate that AAL US is trading in Malaysia.

  2. State any THREE activities which may be undertaken by AAL Australia in Malaysia without giving rise to a permanent establishment in Malaysia.

  3. State the circumstances under which the appointment of a Malaysian agent (by AAL England) would result in AAL England having a permanent establishment in Malaysia.

(10 marks)
(b) (i) State any FIVE criteria used by the Inland Revenue Board (IRB) in selecting a taxpayer for an audit.

(5 marks)


(ii) Mega Bhd is being investigated by the IRB. The board of directors of the company has requested you to advise them on the powers of the Director General under the Act.
State FIVE of the powers that the Director General may invoke to undertake tax investigation of the company.

(5 marks)

(Total: 20 marks)

Question 5
Mr A and Mr B are the shareholders of Xenon Sdn Bhd (XSB) whilst Mr C and Mr D are the shareholders of Yuga Sdn Bhd (YSB). They received an offer from a public listed company to acquire the shares held by them in their respective companies or the plantation lands owned by XSB and YSB at the following prices:
Shares

 Purchase of shares in XSB RM10 million



  • Purchase of shares in YSB RM50 million


Plantation land

  • Land in XSB RM15 million

  • Land in YSB RM60 million

The sale and purchase agreement is targeted for execution on December 1, 2004.


XSB was incorporated on March 30, 1998 and has been involved in the cultivation of oil palm for the past 4 years. The movement of its issued and paid-up capital is as follows:

Date of allotment



No. of shares

allotted

Consideration


Total issued &

paid-up capital









RM‘000

RM‘000

March 30, 1998

1,000

1

1

May 15, 1999

99,000

99

99

September 2, 2003

400,000

400

400

All the shares were equally allotted to Mr A and Mr B. XSB became a real property company (RPC) when it acquired the plantation land on December 12, 1999 for RM1 million and thereafter incurred development expenditure of RM5 million.


YSB was incorporated on May 8, 1998 and has been involved in the cultivation of oil palm for the past 5 years. The movement of its issued and paid-up capital is as follows:

Date of allotment



No. of shares

allotted

Consideration


Total issued &

paid-up capital









RM‘000

RM‘000

May 8, 1998

2,000

2

2

June 28, 2000

4,998,000

4,998

4,998

All the shares were equally allotted to Mr C and Mr D. YSB became a RPC when it acquired the plantation land for RM2 million on July 29, 2000 and thereafter incurred development expenditure of RM18 million.


Required:
Compute:

(a) The real property gains tax (RPGT) payable by the shareholders of XSB and YSB on the disposal of their shares in the companies; and

(12 marks)

(b) The RPGT payable by XSB and YSB on the disposal of their plantation land.

(3 marks)

(Total: 15 marks)



Question 6
The existing group structure of Tenaga Holdings Sdn Bhd (TH) and its subsidiaries (TH Group of Companies) is as follows:

Tenaga Holdings Sdn Bhd

(TH)


100%


Tenaga Marketing Tenaga Southern Tenaga Development

Sdn Bhd (TM) Sdn Bhd (TS) Sdn Bhd (TD)


100% 100%



Tenaga Pipes Tenaga Northom

Sdn Bhd (TP) Sdn Bhd (TN)




51%


Tenaga China

(TC)


TH is an investment holding company providing management support services to its subsidiaries without charging any service fees. The shareholders of TH are Mr Lee and his wife. TH does not have any external borrowings as it has substantial cash reserves.
TM is a profitable marketing company trading in steel pipes.
TP has carried on a highly profitable steel pipes manufacturing business in Trengganu since 2001. TP now plans to embark on an expansion project to meet the increasing demand for its products. The new plant would cost about RM50 million and TP proposes to borrow RM30 million from TH at an interest rate of 5% per annum whilst the remaining RM20 million would be financed by operating leases to be obtained from a leasing company. TP has a substantial amount of unabsorbed capital allowances.
TS operates a profitable supermarket chain in the southern region of Malaysia.
TN operates a supermarket chain in the northern region. Due to the stiff competition from other supermarkets in the region, TN has been incurring substantial losses from its operations. TN also has substantial unabsorbed capital allowances brought forward from the year of assessment 2003.
TC is a highly profitable trading company in China. It has been distributing substantial dividends to TN.
TD is a profitable property development company. Mr Lee plans to inject a piece of rubber estate land into TD for development. Mr Lee acquired the land 20 years ago and he proposes to dispose of the land to TD at cost.
Required:
Advise how the TH Group of Companies could re-organise itself to achieve greater Malaysian income tax efficiency.

(15 marks)


NOVEMBER 2004 EXAMINATION

SUGGESTED ANSWERS
ADVANCED TAXATION
Question 1

Kitchen Ware Sdn Bhd



Chargeable Income for YA 2004

RM RM

Profit before taxation 4,840,000

Add/(Less)

Depreciation 980,000

Provision for staff retirement 50,000

Group Accountant Retirement Benefit [250 + 50 – 180] 120,000

Fine 3,800

Double deduction of export promotion expenses:

Japan – Accommodation and sustenance allowance

[RM300 x 3 + RM150 x 3] + airfare 4,800 6,150

Hong Kong – Accommodation and sustenance allowance

[RM300 x 5 + RM700] + airfare 2,400 4,600

Advertisement (double deduction) 520,000

Publicity in M’sia – brand name advertising (double deduction) 230,000

Entertainment 55,000

Handicapped employee 22,000

Gifts & donations 20,000

Professional fees 50,500

Trademark registration 23,000

Marine insurance (double deduction) 4,500

Late tax filing penalty 6,500

Interest restriction 200,000

Foreign exchange loss 550,000

Fixed deposit interest 160,000

Dividend 200,000

Loss on disposal of fixed asset 110,000

Unrealised foreign exchange gain 20,000

Specific provision: non trade debt 7,000

Provision for stock obsolescence 15,000

-------------- -------------

6,910,800 1,287,250

(1,287,250)

---------------

Adjusted business income 5,623,550

Add: Balancing charge (see note 2) 130,000

--------------

5,753,550

Less: Schedule 3 allowances (see note 1) 505,000

--------------

Statutory business income 5,248,550

Less: Reinvestment allowance (see note 1) 240,000

--------------

5,008,550

Fixed deposit interest 160,000

Dividends 100,000

--------------

5,268,550

Less: Approved donation 20,000

--------------

Total/Chargeable income 5,248,550

=========

Notes


  1. Capital Allowances

Description of asset Rate Qualifying TWDV Initial Annual Expenditure Allowance Allowance

RM RM RM
Factory 3% 1,500,000 1,140,000 - 45,000

Plant & machinery 20% 600,000 * 240,000 @ - 120,000

Motor vehicle 20% 360,000 144,000 - 72,000

Office equipment &

furniture 10% 240,000 152,000 - 24,000

Plant & Machinery 20% 400,000 400,000 80,000 80,000

Motor vehicles 20% 50,000 50,000 10,000 10,000

---------- ----------

90,000 351,000

---------- ----------

Schedule 3 allowances

Initial allowance 90,000

Annual allowance 351,000

Unabsorbed schedule 3 allowance b/f 64,000

-----------

505,000


======

* RM1,200,000 – RM600,000 = RM600,000

@ RM240,000 – RMNil = RM240,000
Reinvestment allowance – 60% of RM400,000 = RM240,000
2. Machinery sold RM

Cost 600,000

Less: YA2000 to 2003 (IA and AA) 600,000

-----------

Residual expenditure NIL

Sale proceeds 130,000

-----------

Balancing charge 130,000

=======

Question 2
(a) The RM 1 million payment by Able to Kane would be a revenue (deductible) payment because it was paid in order to obtain orders from a customer and are closely linked to Able’s operations. Able has thus obtained a trading contract for 5 years.
On the other hand, the payment could be a capital payment because it was in respect of the extinction of a competitors’ manufacturing arm and thus increases the total market share of Able. Able thus acquired rights to the customers of the competitor for 5 years.
The payment by Bon to Able would be a capital receipt to Able on the ground that it was a payment for a right to supply goods for 5 years.
Alternatively, the receipt could be of a revenue nature on the grounds that it is an ordinary commission payment or that the payment is linked to the volume of materials.

(b) The compensation is taxable if:

1. The distributorship agency did not form the entire framework of Edar’s trade and therefore would not be treated as a fixed capital asset of the trade. The change did not impact the entire structure of the recipient’s profit making apparatus.
2. The compensation and variation to the distributorship agreement is just an exploitation of an existing asset represented by the main distribution agreement. Therefore, the distribution right is merely diluted as opposed to being a partial realization or surrender of the asset. It does not represent the loss of an enduring asset.
On the other hand, the compensation would not be taxable if the agency formed a substantial part of Edar’s trade and the variation significantly impacted the structure of Edar’s profit making apparatus.

(c) The payment would not be a revenue expenditure but can be capitalized and taken as part of the cost of acquisition of the asset. It would be deductible if an IBA claim is made.


Applying the principle outlined in Southern v Borax Consolidated Ltd, the payment is deductible. The principle states that where a sum of money is laid out for the acquisition or the improvement of a fixed capital asset, it is attributable to capital. But if no alteration is made to the fixed capital asset by the payment, then it is properly attributable to revenue being in substance a matter of maintenance of the capital structure or the capital asset of the Company.
Here the compensation payment is made to maintain/defend a capital asset of the company (i.e. the factory) and thus, it is a deductible expense.


Question 3
Kuala Lumpur International Insurance Bhd

Tax Computation for Year of Assessment 2003
General Shareholders’

Insurance Life Fund Fund

RM’000 RM’000 RM’000
Gross premiums 12,000

Less : Reinsurance in Malaysia (3,000)

Less : Reinsurance outside Malaysia (4,000)

Add : 5% of insurance outside Malaysia

disallowed (RM4,000 x 5%) 200

Less : Claims incurred (2,500)

Less : Commissions paid (2,200)

Less : Management expenses deductible (5,000)

Add : Disallowed depreciation of fixed assets 400

Add : Disallowed entertainment 100

Add : Reserve for unexpired risks at 30.9.2002 3,000

Less : Reserve for unexpired risks at 30.9.2003 (2,000)

Add : Investment income – interest 6,600 40,500 500

Add : Investment income – rental 2,800 35,000 9,800

Add : Investment income – dividend - 30,000

Add : Gross proceeds from investments sold 25,000 117,000 50,400

Less : Cost of investments sold (31,000) (60,000) (25,700)

Add : Actuarial surplus transferred 70,000

------------ ----------- ------------

Adjusted income 400 162,500 105,000

Less : Capital Allowances (400) (5,000) -

------------ ----------- ------------

Statutory income/Chargeable income - 157,500 105,000

======= ======= =======



Tax payable
Tax liability @ 28% 0

=======


Tax liability @ 8% 12,600

Less : Section 110 relief (RM30,000 x 28%) (8,400)

------------

4,200


======= ------------

Tax liability @ 28% 29,400

=======
Section 108 balance RM
Balance b/f 106,000,210

Add : Tax paid by General Insurance -

Add : Tax paid by Shareholders’ Fund 29,400,000

Tax paid by Life Fund not considered -

-----------------

Balance c/f 135,400,210

==========

Question 4
(a)
(i)  Conclusion of sales contracts in Malaysia.


  • Whether the ownership of goods passes in Malaysia.

  • If stocks of goods are maintained in Malaysia.

  • Proceeds of sales are received in Malaysia.

(ii)  Use of facilities solely for the purpose of storage, display or delivery of goods.



  • Maintenance of stock of goods solely for the purpose of storage, display or delivery.

  • Maintenance of a fixed place of operation solely for purchasing goods or collecting information.

  • Maintenance of a fixed place of business for the purpose of undertaking preparatory or auxiliary activities such as advertising, market research etc.

  • Appointing an independent agent to market its product.

(iii)  Where the agent has and habitually exercises in Malaysia an authority to conclude contracts in the name of AAL England (unless his activities are limited to the purchase of goods).



  • Where the agent maintains in Malaysia a stock of goods belonging to AAL England from which he regularly fills orders on behalf of AAL England.

  • Where the agent does not carry on business as an agent of independent status.

(b)
(i) Criteria for selecting a taxpayer for an audit by the IRB would include the following:


 Selection through risk analysis.

  • Manual checking of return forms.

  • Examination of third party records, normally arising from audit or investigation of other taxpayers.

  • Previous records of return form compliance.

  • Selection based on specific issues peculiar to a particular group of taxpayers.

  • Selection based on specific industries.

  • Selection based on locality.

(ii) Powers of the Director General in undertaking an investigation would include the following:




  1. Require taxpayer or any other person to attend personally before the Director General;




  1. Produce for examination all books, accounts, returns and other documents which the Director General deems necessary;




  1. Require taxpayer or any other person to provide in writing such information or particulars which the Director General deems necessary;




  1. Full and free access to all lands, building and places;




  1. Full and free access to all books and other documents, and search such lands, buildings and places, and inspect, copy or make extracts from any such books or documents without making any payment;




  1. Take possession of any books or documents to which he has access;




  1. Call for statement of bank accounts, loan accounts, all assets, all sources of income, etc;




  1. Call for information or particulars in the possession of any person;




  1. Require any person to furnish within a reasonable time fuller or further returns respecting any matter as to which a return is required by or under the Act.




  1. Require any person carrying on a business to provide a translation in the national language of the books, accounts or records kept in a language other than the national language.



Question 5

(a) Disposal of shares of XSB by Mr A and Mr B


XSB became a real property company (RPC) on 12.12.1999 when it acquired the plantation land for a consideration of RM1,000,000. Therefore, the 100,000 paid-up shares on that day became RPC shares on 12.12.1999 and these shares are deemed acquired at this date [para 34A(2)(a), Sch 2, RPGT Act, 1976].
1st tranche of 100,000 shares

Mr A and Mr B

RM
Disposal price of 100,000 shares on December 1, 2004 2,000,000

RM10,000,000 x 100,000/500,000


Less: Acquisition price on 12.12.99

100,000/100,000 x RM1,000,000

(para 34A(3)(a), Sch 2, RPGT Act) 1,000,000

-------------

Chargeable gain 1,000,000

Less: Sch 4(2) exemption 100,000

-------------

900,000


-------------
Disposal in the 5th year after acquisition date

Therefore, RPGT at 5% 45,000

=======

2nd tranche of 400,000 shares



Mr A and Mr B

RM
Disposal price of 400,000 shares on December 1, 2004 8,000,000

RM10,000,000 x 400,000/500,000


Less: Acquisition price on 2.9.2003

- consideration paid for the shares

(para 34A(3)(b), Sch 2, RPGT Act) 400,000

-------------

Chargeable gain 7,600,000

Less: Sch 4(2) exemption 760,000

-------------

6,840,000

-------------
Disposal within 2 years after acquisition date

Therefore, RPGT at 30% 2,052,000

-------------

Total RPGT payable 2,097,000

========
Disposal of YSB shares by Mr C and Mr D
YSB became a real property company (RPC) on 29.7.2000 when it acquired the plantation land for a consideration of RM2,000,000. Therefore, the 5,000,000 shares became RPC shares on that date and these shares are deemed acquired at that date [para 34A(2)(a), Sch 2, RPGT Act, 1976].
Mr C and Mr D

RM
Disposal price of 5,000,000 shares on December 1, 2004 50,000,000

RM50,000,000 x 5,000,000/5,000,000


Less: Acquisition price on 29.7.2000

5,000,000/5,000,000 x RM2,000,000

(para 34A(3)(a), Sch 2, RPGT Act) 2,000,000

---------------

Chargeable gain 48,000,000

Less: Sch 4(2) exemption 4,800,000

---------------

43,200,000

---------------
Disposal in the 5th year after acquisition date

Therefore, RPGT at 5% 2,160,000

=========

(b) Disposal of plantation land by XSB


Disposal price of land on December 1, 2004 15,000,000

Less: Land and plantation development expenditure

(1,000,000 + 5,000,000) 6,000,000

(land acquired on 12.12.99)

---------------

Chargeable gain 9,000,000

---------------

Disposal in the 5th year after acquisition date

Therefore, RPGT at 5% thereon 450,000

=========


Disposal of plantation land by YSB
Disposal price of land on December 1, 2004 60,000,000

Less: Land and plantation development expenditure

(2,000,000 + 18,000,000) 20,000,000

(land acquired on 29.7.2000)

---------------

Chargeable gain 40,000,000

---------------

Disposal in the 5th year after acquisition date

Therefore, RPGT at 5% thereon 2,000,000

=========



Question 6
TH Group of companies could be re-organised more efficiently for income tax purposes by taking the following steps:


  • TH should charge management fees on a cost-plus basis for the services provided to all its subsidiaries so that it would obtain a deduction on its own expenditure incurred for the provision of such services. TH would thus have a business source and would be able to claim a deduction of all its revenue expenses against the management fee income. Otherwise, TH would remain an investment holding company under Section 60F.




  • TP would be eligible for reinvestment allowance (RA) for its expansion project. In order to maximise the RA incentive, TP should not finance the project by way of leasing as the lease rental paid would be treated as revenue expenditure and would not be eligible for RA. Instead, TP should finance the project by way of hire-purchase or an outright purchase which would mean that it should obtain a bank loan.




  • Transfer the investment in TP to TH so that the 2-tier structure would enable the Mr and Mrs Lee to receive tax-free dividends from the RA incentive enjoyed by TP for its expansion project.




  • TP’s profits would be sheltered from tax by the substantial unabsorbed capital allowances (CAs) and the RA from the expansion project. The proposed interest charged by TH on the RM30 million loan would have the effect of reducing TP’s taxable profit, thereby delaying the full utilisation of TP’s unabsorbed CAs and RA. In addition, TH would be subject to tax on the interest so received. As such, TH should not charge any interest on the loan i.e. provide an interest-free loan since TH has a substantial cash reserve and does not have any external borrowings. Alternatively, TH could take up shares in TP for cash.




    • Could consider setting up a new company to undertake the expansion project especially of such a project could qualify for incentives like pioneer status or investment tax allowance.




  • Transfer the investment in TC to TS or TH to fall within the 2-tier structure. This would enable tax-exempt offshore dividends to be passed on to Mr and Mrs Lee without any dividend trap.




  • Transfer (with the appropriate commercial rationale) the business operations of TS to TN such that the profit derived by TS could be sheltered by the unabsorbed capital allowances and losses incurred by TN. TN would be considered to be carrying on one business source i.e. would have expended its business.




  • Transfer the rubber plantation land to TD based on its prevailing market price. This would increase the cost base of the land for TD whilst Mr Lee will not be subject to real property gains tax for the transfer as he already owned the land for more than 5 years.

THE MALAYSIAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS



(INSTITUT AKAUNTAN AWAM BERTAULIAH MALAYSIA)

EXAMINERS’ REPORT


NOVEMBER 2004 EXAMINATION
ADVANCED TAXATION

Question 1

Subject matters examined: Computation of a company’s chargeable income with tax adjustments.



On the whole, this question was well attempted. However, most candidates did not know the restriction on capital allowance for expensive cars.


Question 2

Subject matters examined: Deductibility of payment / expenses; taxability of receipts.


The overall performance in this question was quite poor. Most of the candidates were unable to relate the facts in each case to its tax implication and the relevant tax principles.


Question 3


Subject matters examined: Computation of the tax liability and section 108 balance of an insurance company involved in life and general insurance businesses.
On the whole, this question was fairly well attempted. However, the following common errors were noted from candidates’ answers:
(a) Candidates were unaware that tax paid for the life fund is not taken into account in the section 108 account.
(b) Capital allowance was claimed for the life fund.
(c) Some candidates took into account gross premium and other expenses in the tax computation for the life fund and shareholders’ fund.
(d) Most candidates were not aware that tax paid at the date of filing the tax return is credited to the section 108 account. They provided for the section 108 balance as at September 30, 2003 instead of April 30, 2004.

Question 4

Subject matters examined: The concept of permanent establishment; criteria for selection of cases for tax audit and powers of the Director General of Inland Revenue in tax investigation.


Most of the candidates displayed poor knowledge of the concept of permanent establishment.

Question 5
Subject matters examined: Real Property Gain Tax (RPGT) on disposal of shares and land.
The following weaknesses were observed from candidates’ answers:
(a) Setting-off Schedule 4(2) exemption from the chargeable gain, i.e. not from the RPGT payable;
(b) No Schedule 4(2) exemption for companies.

Question 6
Subject matters examined: Tax planning
Candidates encountered difficulty in determining the method of financing TP’s expansion project to maximise its profits as well as avoiding the use of operating leases.


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