Advanced taxation
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- NOVEMBER 2004
- DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO
- EXAMINERS’ REPORT
- Question 2
- Question 3
- Question 4
MICPA EXAMINATIONNOVEMBER 2004 Questions, Unofficial Suggested Answers and Examiners’ Reports
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.
THE MALAYSIAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (INSTITUT AKAUNTAN AWAM BERTAULIAH MALAYSIA) NOVEMBER 2004Advanced Stage Examination - Module CADVANCED 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 SOADVANCED 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
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.
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.
RM’000 Foreign exchange gain on trade debts 150 Foreign exchange loss arising from investment in the Australian unit trust (550) --------- (400)
---------
RM’000 Interest charged on late payment of trade debts 20 Fixed deposit interest 160 ---------- 180 ----------
RM’000 Malaysian investments 100 Australian unit trust 100 ---------- 200 ----------
(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
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
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
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 :
(5 marks)
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)
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)
Insurance Fund Fund RM’000 RM’000 RM’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
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.
(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:
(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)
Purchase of shares in XSB RM10 million
Plantation land
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:
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:
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%
 
T 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 =========
Description of asset Rate Qualifying TWDV Initial Annual Expenditure Allowance Allowance RM RM RM
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
Cost 600,000 Less: YA2000 to 2003 (IA and AA) 600,000 ----------- Residual expenditure NIL Sale proceeds 130,000 ----------- Balancing charge 130,000 =======
(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.
(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
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 =======
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 ==========
(ii) Use of facilities solely for the purpose of storage, display or delivery of goods.
(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).
(b)
Selection through risk analysis.
(ii) Powers of the Director General in undertaking an investigation would include the following:
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 -------------
Therefore, RPGT at 30% 2,052,000 ------------- Total RPGT payable 2,097,000 ========
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 ---------------
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:
THE MALAYSIAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (INSTITUT AKAUNTAN AWAM BERTAULIAH MALAYSIA) EXAMINERS’ REPORTNOVEMBER 2004 EXAMINATION ADVANCED TAXATION Question 1Subject 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 2Subject 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 3Subject 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 4Subject 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. Yüklə 96,87 Kb. Dostları ilə paylaş:
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