Tax Framework

(Malaysia)

MODULE D CERTIFICATE STAGE JUNE 2001

QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A ALL THREE questions are compulsory and MUST be answered Section B THREE questions ONLY to be answered Tax rates and tables are on pages 2 to 3

Paper 7(M)

Candidates are reminded to apply the current year basis even where questions are set in respect of past years. 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% 1% 3% 5% 9% 15% 20% 25% 28% 29% Personal Allowances

Cumulative Tax RM 0 25 175 675 2,025 4,275 8,275 15,775 29,775

Self Fees for education Medical costs for serious diseases (self, wife or child) Medical expenses for parents Basic support equipment Wife Children Life insurance premiums, contributions to Employees Provident Fund and other obligatory contributions to other approved schemes Approved EPF insurance policy Education/medical insurance premiums Tax rebate

RM 8,000 2,000 maximum 5,000 maximum 5,000 maximum 5,000 maximum 3,000 800 each

5,000 maximum 1,000 maximum 3,000 maximum 110 + 60 for wife

Cost of car when new RM Up to 50,000 50,001 75,000 75,001 100,000 100,001 150,000 150,001 200,000 200,001 250,000 250,001 350,000 350,001 500,000 500,001 and above

Car Benefits Annual value of BIK RM 1,200 2,400 3,600 5,000 7,000 9,000 15,000 21,250 25,000

Fuel per annum RM 600 900 1,200 1,500 1,800 2,100 2,400 2,700 3,000

Fuel Provided Without Motorcar The actual value of fuel provided is treated as a benefit received. Driver Provided The value of the benefit is fixed at RM300 per month.

Real Property Gains Tax Individual Disposal within two years of acquisition date Disposal in the third year after acquisition date Disposal in the fourth year after acquisition date Disposal in the fifth year after acquisition date Disposal in the sixth year after acquisition date and thereafter

Rate of Tax 30% 20% 15% 5% Nil

[P.T.O.

Section A ALL THREE questions are compulsory and MUST be attempted 1 Moveway Sdn Bhd is engaged in the business of providing removal services. Its profit and loss account for the year ended 31 March 2001 is as follows: Sales Fixed deposit interest Less: Salaries and wages Less: Bonus Employees Provident Fund contributions Lease rentals Insurance Motor vehicles expenses Compensation Legal and professional fees Advertisement Bad and doubtful debts Training General expenses Depreciation Entertainment expenses Profit before taxation Taxation Profit after taxation Notes: (1) Salaries and wages This includes a payment of RM16,000 to induce a new employee to join the company and he did so on 1 April 2000. (2) Bonus All staff were paid three months bonus. (3) Employees Provident Fund The company contributed 15% of the employees remuneration. (4) Lease rentals The company leased a car for the managing director at RM4,000 per month for 14 months commencing on 1 February 2000. (5) Insurance This includes a premium of RM9,000 on the life of the managing director. The beneficiaries are the immediate family of the managing director. (6) Motor vehicles expenses This includes RM1,000 gain from the sale of a truck. (7) Compensation comprises: Compensation to clients for goods damaged. Compensation to a mover company for agreeing to close down one of its two branches in Peninsular Malaysia RM 11,000 400,000 411,000 Note RM000 RM000 10,031 34 10,065

1 2 3 4 5 6 7 8 9 10 11 12 13

2,896 720 540 48 145 183 411 26 64 97 72 32 366 37

5,637 4,428 1,199 3,229

(8)

Legal and professional fees comprise: Legal expenses incurred in contending a suit of wrongful dismissal filed by a truck driver Legal costs in connection with a mover companys agreement to close down one of its branches

RM 18,000 8,000 26,000

(9)

Advertisement includes RM10,000 in respect of: As a co-sponsor of a home-ownership campaign the company undertook to provide free home-moving service for the first three winners of the contest for the campaign. The cost of the home-moving in respect of the first two winners amounted to RM7,000. The company made a provision of RM3,000 in respect of the third winner who was expected to move in June 2001. RM (40,000) 78,000 36,000 (12,000) (25,000) 60,000 97,000 Of the bad debts written off, RM4,000 is the amount embezzled by an accounts clerk. Of the amount recovered RM2,000 is in respect of the balance of a personal loan granted to an ex-employee.

(10) Bad and doubtful debts comprise: General provision brought forward General provision carried forward Bad debts written off Bad debts recovered Specific provision brought forward Specific provision carried forward

(11) Training includes the following: A sum of RM39,000 incurred in sending the companys employees to attend courses conducted by the National Productivity Centre (NPC). A letter from the institution certifying such attendance was attached to the tax return. (12) General expenses comprise: Preliminary expenses written off Cost of building a child care centre for employees Cash donation to a cancer foundation (approved by IRB) RM 5,000 23,000 4,000 32,000 (13) Entertainment expenses comprise: Leave passages for senior executives Reimbursement of expenses to executives for entertaining clients RM 28,000 9,000 37,000 (14) The unused capital allowance brought forward from the previous year of assessment amounts to RM380,000. The capital allowance for the year of assessment 2001 is RM315,000 (15) The company has an unabsorbed loss of RM299,000 brought forward from the previous year of assessment. Required: (a) Compute the chargeable income of Moveway Sdn Bhd for the year of assessment 2001. Every item mentioned in the notes to the accounts must be shown in your computation, indicating it with Nil where no adjustment is necessary. (16 marks) Explain your treatment of each of the items mentioned in the notes. (12 marks) (28 marks)

(b)

[P.T.O.

Encik Suhaimi, an employee with an electrical company, commenced two years unpaid study leave on 1 April 2000 to acquire technical skills at Universiti Tenaga Nasional. His income for the year end 31 December 2000 is as follows: RM Remuneration 1 January to 31 January 2,500 Royalty from a postal company for the right to use an original painting 22,000 Dividend (net of tax) 360 Encik Suhaimi incurred expenses and claimed tax reliefs as follows: Employees Provident Fund contributions Employees Provident Fund insurance policy Medical expenses for his father (receipt submitted) Tuition fees Universiti Tenaga Nasional He claimed child relief in respect of: Wife Puan Atika, a general manager of Simi Group Berhad received the following income and benefits in the year 2000: RM Salary 16,000 per month Bonus 32,000 Entertainment allowance 2,500 per month Bills paid by the company Water, electricity and telephone Insurance premiums in respect of a life policy on Puan Atika. Her husband and children are the beneficiaries Reimbursement of the monthly salary of RM700 of a domestic servant employed and paid for by Puan Atika Car and fuel provided 1 April to 31 December The company incurred the following expenses in respect of a new car: Cost of the car Insurance premium and road tax Fuel RM 146,000 7,000 6,500 6,400 2,500 First child, unmarried, born on 12.8.1980, a second year student at Universiti Malaya. Encik Suhaimi spent RM3,000 on her maintenance. Second child, unmarried, born on 1.11.1981, a first year student at the University of Singapore. Encik Suhaimi spent RM7,000 on his maintenance and education.The child received a total income of RM800 from his uncle. Third child, born on 1.2.2000 was legally adopted by Encik Suhaimis sister on 8.10.2000. RM 275 800 2,900 3,000

A driver at a salary of RM800 per month employed by the company from 1 July 2000. Fuel provided 1 January to 31 March Prior to the purchase of the new car she used her own car and the company incurred RM2,200 on fuel. Accommodation The company provided her with a house rented at a monthly rental of RM8,000 (rental of furniture and household appliances excluded). Puan Atika paid RM1,500 per month to the employer. Household furnishings The monthly rental paid by the company for the household furnishings and appliances amounts to RM400. The annual value of BIK based on the Inland Revenue Board guidelines is RM3,360. Share option scheme On 9 August 2000 an option for the purchase of 8,000 units of the companys shares was offered to Puan Atika at RM250 per share. The market value at the time was RM550 per share. Puan Atika purchased 6,000 units on

5 January 2001 when the market price was RM560 per share. She purchased the remaining 2,000 units on 1 March 2001 when the market price was RM580 per share. The following claims were made in respect of Puan Atika Employees Provident Fund contributions Employees Provident Fund insurance policy Rental paid to the employer Entertainment expenses incurred on companys clients Donations to approved institutions Medical expenses for her mother (receipt submitted) She elected for joint assessment. Required: Compute the tax payable by Encik Suhaimi and Puan Atika for the year of assessment 2000. (26 marks) RM 27,940 1,000 18,000 34,800 9,300 4,000

[P.T.O.

(a) Mr Somchit, a Thai national, arrived in Malaysia on 11 March 1995 and left Malaysia permanently on 30 September 2000. Details of his stay in Malaysia are as follows: Year 1995 1996 1997 1998 1999 2000 Date Days 11 March to 6 September 180 1 July to 31 December 184 1 January to 5 January 5 3 June to 21 August 80 1 September to 10 October 40 1 April to 10 April 10 21 March to 19 May 60 1 June to 29 September 121 Left Malaysia permanently on 30 September at noon

Mr Somchit remitted to Malaysia foreign income of RM5,000 in 1995 and RM10,000 in 1998. Required: (i) State each of the years for which you consider Mr Somchit to be a resident in Malaysia, in each case give the reason or quote the relevant sub-section of the Income Tax Act, 1967 in support of your findings. (5 marks)

(ii) State with reasons whether or not the foreign income remitted to Malaysia is subject to Malaysian tax. (2 marks) (iii) State the circumstances in which a temporary absence from Malaysia would be accepted as part of the period of more than 181 days for purposes of determining the residence status of an individual. (3 marks) (b) Song Yong Sdn Bhd commenced operations on 1 October 2000. The company will close its accounts on 30 September 2001 and thereafter on 30 September. Required: (i) By what date must Song Yong furnish an estimate of its tax payable to the Inland Revenue Board? (1 mark)

(ii) When will Song Yong have to commence payment of tax and how many instalments will be allowed to the company? (2 marks) (13 marks)

Section B THREE questions ONLY to be attempted 4 Mr Leong, his wife Jeni, and daughter Alice are Malaysian citizens. They disposed of properties as follows: Disposal in 1998 bungalow house Mr Leong owned a bungalow house which had been rented out for several years. He sold it for RM750,000 on 9 September 1998 and incurred agents fees of RM7,500 to find a buyer. The bungalow was bought for RM490,000 on 3 July 1995 and expenses incurred were as follows: RM Stamp duty and legal fees 8,800 Cost of completely replacing the roof on 21 July 1995 which IRB disallowed deduction against the rental income because it represented a substantial improvement on the original roof 60,700 In 1997 he received a deposit of RM5,000 from an intended buyer which was forfeited because the sale was aborted. Disposal in 1999 double storey terrace house This house was registered in the name of Jeni. She bought it for RM240,000 on 1 March 1996 and sold it for RM330,000 on 24 June 1999. Mr Leong and his family occupied the house prior to the disposal. Mr Leong had never made an election for exemption of a private residence. Jeni, on the other hand, had made an election for exemption in respect of the disposal of another private residence disposed of prior to her marriage. Disposal in 2000 single storey terrace house A single storey terrace house owned by Mr Leong was transferred to his daughter Alice on 2 April 1998 as a wedding gift. Mr Leong bought the house on 12 June 1994. Expenses incurred by Mr Leong were: Consideration paid for the purchase Stamp duty Cost of renovation in 1997 RM 108,000 1,080 38,020

In May 1999 Alice received insurance money of RM20,000 for damages caused by fire in the house next door. Alice sold the house on 17 January 2000 for RM170,000. Required: (a) In regard to the double storey terrace house, state with reasons whether or not the disposal qualifies for exemption as a private residence. (3 marks) (b) Compute the real property gains tax payable in respect of Mr Leongs sale of the bungalow house and Alices sale of the single storey terrace house. (8 marks) (11 marks)

[P.T.O.

Mrs Gomez, the sole proprietor of a laundry service prepared the following sets of accounts: Accounting Date Year ended 31 December 2000 1 January to 31 March 2001 Year ended 31 March 2002 Required: (a) Determine the basis periods and the adjusted income for the years of assessment 2000, 2001 and 2002 in respect of the above business. (7 marks) (b) Define the overlapping period covered by two of the years of assessment and explain your treatment of the adjusted income that falls within such period. (2 marks) (c) Explain, with examples, what is meant by basis year and basis period for a year of assessment. (2 marks) (11 marks) Adjusted Income RM 13,500 2,900 15,000

(a) Total Realty, a registered valuer and real estate agent, is licensed for the purposes of service tax. It rendered the following services: Procured the sale of a condominium located in Kuala Lumpur for a Singaporean owner. The agent travelled to Singapore to meet the owner. Telephone and courier charges were included in the invoice; Maintained and managed a commercial complex in Singapore for a Hong Kong company; Conducted market research on pricing trends of properties in various locations in Singapore for the publisher of a magazine published in Labuan.

Required: State, with reasons, whether or not the above services are subject to service tax. (7 marks)

(b) Globe Management Services Sdn Bhd which commenced business on 1 April 2000 closes its first accounts on 31 March 2001 and thereafter to 31 March. The company provides management services. Its sales turnover is as follows: RM RM 2000 April 5,000 2001 January 45,000 May 8,000 February 14,000 June 12,000 March 16,000 July 20,000 April 35,000 August 22,000 May 55,000 September 32,000 June 62,000 October 40,000 July 110,000 November 15,000 August 190,000 December 10,000 September 85,000 Required: (i) Explain what is meant by annual sales turnover in determining the threshold limit for the purposes of service tax. (1 mark)

(ii) What is the threshold limit for Globe Management Services under the Service Tax Regulations, 1975? (1 mark) (iii) At what point in time is Globe Management Services regarded as a taxable person? (iv) What must the company do in order to be in a position to charge service tax in its invoices? (1 mark) (1 mark) (11 marks) 10

(a) Mr Ho will be receiving a gratuity of RM78,000 upon his retirement on 30 June 2003, his 57th birthday. He has been employed as a marketing executive with Marktrend Sdn Bhd since 1 May 2001. Prior to that he was employed by the holding company of Marktrend Sdn Bhd from 1 April 2000. Required: Explain to Mr Ho whether or not his retirement gratuity will be exempt from income tax. If not, how would the lump sum be taxed? (5 marks) (b) Mr Chow received a notice of assessment for the year of assessment 2000 (current year basis). It is a combined assessment showing tax payable of RM2,175. The aggregate of Mr Chow and his wifes total income amounts to RM48,000 of which his wifes total income is RM28,000. His wife refused to pay her tax on the ground that she did not receive the notice of assessment. She argued that her husband should pay the tax for both of their incomes as the assessment was made on him. Mr and Mrs Chow were contemplating a divorce. Late payment penalty of 10% and 5% had been imposed.The couple come to the Inland Revenue Board to have the matter resolved. Required: Assuming you are a tax officer in the Collections Branch of the Inland Revenue Board explain to Mrs Chow the provisions in the law with regard to her position and the amount of tax /penalty she is required to pay, if any. (6 marks) (11 marks)

(a) What do you understand by a taxable period for purposes of sales tax? Give an example.

(1 mark)

(b) Builtup Sdn Bhd, a manufacturer of building materials licensed under the Sales Tax Act sold taxable goods amounting to RM50,000 to a trading company in Kuala Lumpur. The sale was made on 6 November 2000 and sales tax was charged to the customers and paid to the Customs Department on 15 May 2001. Required: Compute the sales tax payable together with the penalty which will be imposed for failing to pay the tax on time. (5 marks) (c) Plasware Sdn Bhd, a manufacturer of plastic products disposed of a machine to its wholly-owned subsidiary company, Trendware Sdn Bhd for RM35,000. The machine was purchased at a cost of RM100,000 on 20 April 1997 and was in use for the business of the transferor company from that date up till the time of its disposal on 17 May 2001. Trendware did not bring the machine into use. Both companies close their accounts on 31 December. Required: State, with reasons, the capital allowances or balancing charges applicable to each company for the year of assessment 2001. Use the rate of annual allowance of 14% throughout. (5 marks) (11 marks)

End of Question Paper

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