Malaysian Institute of Accountants

The Association of Chartered Certified Accountants

Module D Certificate Stage

MIA examinations in collaboration with ACCA

Tax Framework (Malaysia)

June 2000
Question Paper Time allowed This paper is divided into two sections Section A Section B ALL THREE questions are compulsory and MUST be answered THREE questions ONLY to be answered 3 hours

Tax rates and tables are on page 3

paper 7(M)

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The following tax rates and allowances are to be used when answering the questions. Rate of Income Tax (a) Company (b) Resident individual Chargeable income RM 0 2,500 2,501 5,000 5,001 10,000 10,001 20,000 20,001 35,000 35,001 50,000 50,001 70,000 70,001 100,000 100,001 150,000 Remainder 28%

Rate 0% 2% 4% 6% 10% 16% 21% 26% 29% 30%

Cumulative Tax RM 0 50 250 850 2,350 4,750 8,950 16,750 31,250

Personal Allowances Self Fees for education Medical costs for serious diseases (self, wife or child) Medical expenses for parents Basic support equipment Wife Children basic Life insurance premium, contributions to Employees Provident Fund and other obligatory contributions to other approved schemes Education/medical insurance premiums Tax rebate RM 5,000 2,000 5,000 5,000 5,000 3,000 800

maximum maximum maximum maximum each

5,000 maximum 2,000 maximum 110 + 60 for wife

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Section A ALL THREE questions are compulsory and MUST be attempted 1 Playhouse Sdn Bhd is engaged in the manufacture of toys for domestic and overseas markets. Its profits and loss account for the year ended 31 March 2000 is as follows: Note Rm000 Rm000 Turnover 53,090 Add: Gain from disposal of shares 1 122 Dividend (net) 2 118 Less: Cost of sales Less: Remuneration Repairs & maintenance Interest on hire purchase Motor vehicles expenses Entertainment Donation Training & consultancy Miscellaneous expenses Foreign exchange gain (realised) Freight & insurance Bad & doubtful debts Depreciation Advertising 3 4 5 1,300 511 7 378 200 37 274 40 (38) 980 1,833 1,090 592 7,204 Net profit before taxation Taxation Net profit after taxation Notes: (1) Shares held in a listed company for the past ten years were disposed of during the year. (2) All dividend income is net of tax except for a tax exempt dividend of Rm46,000 from a pioneer company. (3) Cost of sales includes: (i) An amount of Rm6,000 written-off in respect of 100 units of a product which were destroyed as they were found to contain materials harmful to health. 8,126 2,340 5,786 53,330 38,000 15,330

6 7 8 9 10 11 12

(ii) A provision of Rm4,000 for the foreign exchange loss which the company expects to incur when paying for raw materials purchased. (iii) On a festive day the company gave away toys costing Rm10,000 (market value Rm12,000) as prizes to children at a nearby orphanage. (4) Remuneration This includes the remuneration of Rm108,000 paid to three physically disabled employees and a sum of Rm43,000 embezzled by a director of the company. (5) Included in this figure is an estimated cost of Rm8,000 quoted by the contractor for the repair of the roof over the car porch. It was agreed that the repair work would commence in April 2000. (6) This item is in respect of a sponsorship of television programmes. (7) Donation A cash donation of Rm37,000 was made to a healthcare centre approved by the Ministry of Health. 4

(8) Miscellaneous expenses comprise: Printing of annual reports Leave passages for directors Legal fees incurred on embezzlement Rm000 15 20 5 40 (9) The foreign exchange gain is in respect of toys exported to Europe. (10) Insurance premiums amount to Rm452,000 insured with foreign companies for the export of cargo. (11) Bad & doubtful debts comprise: Bad debts written off of which Rm9,000 is in respect of debts taken over from the vendor when the business was acquired years ago Recovery of debts written off by the vendor Increase in specific provision of which Rm60,000 is non-trade Decrease in general provision of which Rm24,000 is non-trade Rm000

600 (13) 1,420 (174) 1,833

(12) Included in this amount is the medical costs amounting to Rm30,000 under a court order awarded against the company for health injury suffered by a consumer. (13) Capital allowances on factory machinery are as follows: Brought forward from previous years Year of assessment 2000 (current year basis) (14) Information on motor vehicles: (i) On 10 December 1999 the company sold a station wagon for Rm28,000. The vehicle was purchased on 12 May 1998 for Rm40,000. Capital allowances were deemed to be claimed. Rm000 29 800

(ii) On 5 May 1999 the company purchased a van under a hire purchase agreement as follows: Deposit of Rm15,000 paid on 5 May 1999 Loan amount Rm40,000 repayable at Rm1,700 for 40 months commencing on 5 June 1999. Included in the monthly installment is interest of Rm700. (iii) A car for the managing director which cost Rm190,000 was purchased on 9 October 1999. Use the rate of 20% for initial allowance and annual allowance. Required: (a) Compute the tax payable by Playhouse Sdn Bhd for the year of assessment 2000. Every item mentioned in the notes to the accounts must be listed in your computation, indicating it with Nil where no adjustment is necessary. (17 marks) (b) Explain your treatment of the items mentioned in each of the notes EXCEPT notes 13 and 14. (11 marks) (28 marks)

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(a) The following will apply to Mr Too and his wife Amy in the year 2000. Mr Too Mr Too whose wife Joan died on 2 January 2000 married Amy, a divorcee, on 6 May 2000. They submitted the following tax return for the year of assessment 2000. Mr Toos deceased wife had no sources of income. Mr Too was a partner of a legal firm. The allocation from the partnership applicable to him for the year ended 31 March 2000 was as follows: Rm 120,000 10,000 (15,000) 1,000 400 16,000 1,440

Salary Interest on capital Divisible loss (his share) Capital allowance (his share) Approved donation by the partnership (his share) Income from non-partnership sources: Rental income (adjusted) Dividend (net of tax) Mr Too claimed the appropriate reliefs in respect of the following: Relief in respect of his deceased wife Life insurance premium on his life Life insurance premium on the life of Amy (policy commenced on 1 June 2000) Necessary support equipment for his mother Maintaining his children: The first child aged 22, unmarried, studied at Universiti Malaya (cost of maintenance Rm6,000) The second child, aged nineteen, unmarried, who was disabled

4,800 300 5,500

Amy Amy was employed as a marketing executive with HiStyle Sdn Bhd from 1 July 1990 to 31 May 2000. During the period of her employment she made contributions to the HiStyle provident scheme which was not approved by the Inland Revenue Board. Upon cessation of her employment she received a lump sum payment of Rm93,000 from the scheme made up as follows: Rm Companys contributions 62,000 Amys contributions 28,000 Interest 3,000 Amy obtained a car loan from a financial institution. Interest for the period 1 January 2000 to 31 May 2000 amounted to Rm4,000 of which Rm2,500 was subsidised by HiStyle. HiStyle provided her with corporate membership of a golf club. The subscription for the period 1 January 2000 to 31 May 2000 was Rm800. HiStyle provided a house for Amy. The annual value of the house was Rm48,000 and the value of the furnishings was Rm140 per month as per the Inland Revenue Board guidelines. Amy was provided with the house until the last day of her employment. Amys remuneration for the period 1 January 2000 to 31 May 2000 was as follows: Rm Salary 7,000 per month Travelling allowance 1,000 per month Bonus 17,500

Rm Other receipts were: Alimony payment from her ex-husband from January to April 2000. Lottery win Interest on a fixed deposit of Rm80,000 for three months from 10 January 2000 with Bank Simpanan Nasional

22,500 10,000 1,000

Amy claimed the appropriate reliefs in respect of the following expenses: Travelling expenses of Rm4,300 incurred for business trips and Rm1,500 in respect of travelling from home to office. Employees Provident Fund contributions 6,325

Child relief for her son, Jim from her previous marriage. He was twenty years old, unmarried, and studied full time at a university in Australia. Amy incurred Rm2,000 which covered 20% of the expenses on his education and maintenance. Her ex-husband contributed Rm8,000 of the expenses and claimed child relief. Medical expenses of Rm4,200 incurred in respect of her father. Amy did not elect for joint assessment. Required: Compute the tax payable for the year of assessment 2000 by: (i) Mr Too; (ii) Amy (State the reason for not including any item in your computation.) (10 marks) (13 marks)

(b) After their divorce Amys ex-husband, Mr Tan married Dolly during the year 2000. Dolly will not elect for joint asessment in respect of her income for the year 2000. Mr Tan will make a claim for the following in his tax return: The alimony payment of Rm22,500; Child relief in respect of the expenses of Rm8,000 incurred by him as mentioned earlier. Required: State, with reasons, whether or not and to what extent, you would allow Mr Tans claims (3 marks) (26 marks)

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(a) Encik Yusof who is engaged in cosmetics trading, has made up his accounts to 30 June for many years. Required: (i) State the basis period of Encik Yusof in respect of his business income for the year of assessment 2000; (1 mark) (ii) When, and in what amounts would Encik Yusof be required to pay tax by instalments on his business income for the year of assessment 2000? (2 marks)

(b) Image Sdn Bhd has a nine-month fixed deposit of Rm30,000 with a licensed bank at 4% interest per annum. The deposit will mature on 28 February 2001. Required: Compute the interest income of Image Sdn Bhd for the relevant year(s) of assessment and state the earliest date on which assessment(s) can be made. (4 marks)

(c) Encik Jackson Ho commenced employment on 1 May 2000 at a net salary of Rm5,000 per month after deduction of tax under the Schedular Tax Deduction (STD). Required: Explain whether or not Encik Ho is required to notify the Inland Revenue Board of his chargeability to tax in respect of his income for the year 2000. If so, by what date must he notify the IRB? (2 marks)

(d) Mr Yen, a Hong Kong national, left Malaysia on 1 January 2000. His periods of stay in Malaysia were as follows: Year 1997 1998 In Malaysia 16.11.97 to 31.12.97 1.1.98 to 9.2.98 22.2.98 to 30.4.98 4.5.98 to 1.7.98 21.9.98 to 30.11.98 Days 46 40 68 59 71

He was in Hong Kong twice for social visits from 10.2.98 to 21.2.98 (12 days) and again from 1.5.98 to 3.5.98 (3 days). 1999 2000 Required: Determine the residence status of Mr Yen for each of the years and support your answer with reasons or the relevant sub-section number. (4 marks) (13 marks) 1.6.99 to 31.12.99 214

On 1 January he departed Malaysia at 1350 hours.

Section B THREE questions ONLY to be attempted 4 (a) Lanno Sdn Bhd, a manufacturing company, purchased a factory on 10 March 1995 and incurred expenditure as follows: Purchase price (including land cost Rm445,000) Stamp duties Legal fees Total Rm000 2,000 45 10 2,055

The vendor company, a manufacturer, had used the factory for the purpose of their business up to 20 February 1995. The vendors residual expenditure as at 31 December 1994 was Rm1,020,000. The factory was constructed in 1984 at a cost of Rm15 million. It was brought into use in November 1984 and capital allowances were claimed for each year. On 1 July 1998 Lanno transferred the factory to its wholly owned subsidiary, Soonlee Sdn Bhd, for Rm12million (excluding land cost). The market value at the time of transfer has been Rm11 million for the building and Rm05 million for the land. Soonlee was engaged in the business of hiring storage space to the public and the building was used as a warehouse for the purposes of its business. The financial year end of each company is 31 December. Required: Using preceding year basis in each case: (i) Compute the qualifying building expenditure and industrial building allowances of Lanno Sdn Bhd for the relevant years of assessment; (6 marks) (ii) Determine the qualifying building expenditure and the industrial building allowance(s) of Soonlee Sdn Bhd for the year of assessment 1999. (1 mark) (b) Miss Goh is considering buying a shop lot advertised in the newspaper. She has heard that sometimes the acquirer could be assessed to real property gains tax and be required to pay the tax. She seeks your clarification on this matter. Required: (i) In what circumstances may the Director General make an assessment on the acquirer of a chargeable asset under the Real Property Gains Tax Act, 1976? (3 marks) (ii) For the purposes of the Real Property Gains Tax Act how would an assessment made on the acquirer differ from that made on the disposer? (1 mark) (11 marks)

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(a) Eng Lee owns a shop house which is used as a sundry shop. He has an arrangement with Kiat Ho and Lian Soon as follows: Eng Lee is entitled to Rm2,000 per month plus a further sum of Rm6,000 at the close of the accounting year if the gross revenue exceeds Rm100,000. Kiat Ho provided a loan of Rm50,000 for working capital and is entitled to interest on this at the rate of 3% per annum and also to 10% of the shop takings. Lian Soon manages the business and receives a fixed salary and the entire net profit.

Required: Does a partnership exist in the above scenario? Give reasons to support your answer. (7 marks)

(b) At what point is sales tax levied on a licensed manufacturer in respect of goods manufactured by him? (4 marks) (11 marks)

(a) Mr Lee, the owner of a chain of hotels in Korea, has a proposal to open hotels in Penang (50 rooms), Langkawi (60 rooms) and Sarawak (20 rooms). He seeks your clarification regarding the Service Tax Act, 1975. Required: Explain whether or not Mr Lees proposed operations are liable to service tax. (4 marks)

(b) State whether the following items provided by a licensed hotel are taxable under the Service Tax Act: (i) (ii) room charges for sleeping accommodation; ballroom charges for staging cultural shows;

(iii) charges for conference rooms; (iv) (v) (vi) handicrafts; tobacco; drinks;

(vii) foods; (viii) cover charge; (ix) parking fees; (x) souvenirs. (5 marks)

(c) On its 10th anniversary a licensed hotel provided free foods and drinks in its coffee house to handicapped children. The cost of the foods and drinks was Rm800; the market value was Rm1,100. Required: Determine whether service tax is payable, and if so, why and how much. (2 marks) (11 marks)

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(a) State briefly the principles derived from case law in regard to the taxability or otherwise of money received under an agreement to communicate know-how. (8 marks)

(b) Hill Bhd, a foreign company whose control and management is exercised in Malaysia, has an agreement with a company in Japan whereby Hill Bhd is required to pay a royalty at the rate of 8% of annual turnover for the use of a design used in the manufacture of rice cookers. In 2000 Hill Bhd made a royalty payment of Rm700,000, of which Rm200,000 is in respect of the annual turnover of its branch in Thailand. This was debited to the branch account and only Rm500,000 was charged as an expense against the income generated in Malaysia. Required: State, with reason(s) and to what extent, the Japanese company is subject to Malaysian tax. (Ignore the terms of any Double Taxation Agreement) (3 marks) (11 marks)

(a) (i) A company resident in Malaysia carried on a consultancy business in Malaysia and reported a revenue of Rm2 million. This included consultancy fees of Rm100,000 earned by the company in Africa and remitted back to Malaysia. Required: Explain how the company is chargeable to tax under the Income Tax Act, 1967 in regard to the income mentioned in the scenario. (Ignore any double taxation agreement) (2 marks) (ii) Mr Koo, a Hong Kong citizen and resident in Malaysia has the following sources of income: Rm200,000 earned from designing a logo for a Malaysian company; Rental income of Rm10,000 from a property in Hong Kong remitted to Malaysia; A dividend of Rm5,000 from a Hong Kong company credited to his bank account in Hong Kong.

Required: State with reasons whether or not these sources of income are chargeable to Malaysian tax. (3 marks) (b) Linefo Sdn Bhd, a company resident in Malaysia, paid a dividend of Rm360,000 to its holding company on 15 April 2000 without deduction of tax at source. Linefos tax chargeable for the year of assessment 2000 (current year basis) is Rm120,000 and its Section 108 account as at 1.1.2000 is Rm5,000. The financial year end of the two companies is 31 March. Required: (i) Show how the failure to deduct tax at source has affected the tax computation of the holding company; (2 marks) (ii) Compute the Section 108 balance of Linefo Sdn Bhd as at 1.1.2001. (4 marks) (11 marks) End of Question Paper

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