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Taxation 1 / BAC 2674 / Tutorial 4

Business income Part 1


QUESTION 1
What is The Badges of Trade? Discuss some of the salient features taken into account in the
Badges of Trade.
QUESTION 2
Under what circumstances is income deemed derived from Malaysia? Why is it important to
determine that it is deemed derived from Malaysia?
ANSWER
Under section 12, gross income of a person derived from Malaysia from a business, so much of
the gross income from the business as is not attributable to the operation of the business carried
on outside Malaysia shall be deemed to be derived from Malaysia.
It is important to determine the derivation because only income derived from Malaysia is taxable
in Malaysia income derived from sources outside Malaysia being not taxable.
QUESTION 3
How would you distinguish between a capital income and a revenue income?
Please go through the solution on your slide/text on distinguishing characteristics of the two i.e.
recurring, fixed capital etc.
QUESTION 4
Mr. Rajoo is a qualified engineer and works with a company that assembles and sells cranes. In
2010 the company ran into financial difficulties and was closed. Mr Rajoo with the help of Mr
Nair, a banker and Mr. Pandy, a marketing agent with a local distributor of toys bought several
pieces of crane parts. Mr Pandy put together the various componetns and the five cranes so
assembled were sold over a period of two years for a large profit. The financing was arranged by
Mr. Nair while the sales was arranged by Mr. Pandy.
The trio never engaged in a similar transaction after this. Mr Rajoo got a job with a oil palm
factory in Johore and moved out of Selangor. Mr Pandy set up his own used car agency in
Kajang . Mr Nair migrated to Australia in 2011.
Required: Discuss whether the profit arising from the assembly and sale of the cranes are taxable
as a business profits.

ANSWER
The transaction appears to be an isolated transaction by people with diverse background.
However the activity of acquiring parts, assembling and selling of the cranes has the color of an
adventure in the nature of trade for the following reasons:
There was a profit motive
There was an organized activity of acquiring parts, assembling and selling of the cranes
resembling a business process.
The activity yielded no personal enjoyment other than to make profit from the sale of the cranes.
QUESTION 5
Mr Presley is a music teacher who graduated with a Masters degree from the London School of
Music. He teaches aspiring music students to play the piano at his home in Dengkil. He has
three classes every for the various grades of students. He charges the students a fee by the
number of hours the lessons are taught.
On weekends, he plays the piano at an international hotel. He has a contract with the hotel under
which Mr Presley is entitled to a free welcome drink (a glass of beer) and is to be paid RM200
per hour to play western classical music on the piano for three hours, from 7 pm to 10 pm. The
piano is provided by the hotel. Under the contract, the hotel can ask him to play after midnight at
their discretion.
Required:
Determine the status of Mr Presley for income tax purposes i.e. whether he is a professional
musician or an employee exercising an employment under a contract of employment.
ANSWER
As a music teacher, Mr Presley is exercising a profession as he runs his own classes and imparts
professional knowledge and skill to music students in an environment that he controls, as well as
assuming business risk in the process. The fees received are therefore professional income and
would be assessment under section 4(a).
The income earned by playing the piano at the international hotel is an employment income i.e.
there is a master servant relationship where the hotel pays him for his services, he is provided the
tools of the trade by the hotel and is required to play on specific days and time as determined by
the hotel.
QUESTION 6
What is the general provision relating to gross income and what is the principle of taxability of
receipts?
ANSWER

Under section 22 Gross income from a business would consist of the following:

Gross income of a person from a source of his for the basis period for the year of
assessment
Sums receivable or deemed to be receivable from insurance, indemnity, recoupment,
recovery, reimbursement or otherwise
Compensation for loss of income

A receipt is taxable only if it is income falling within the meaning of the taxing statutes of the
Income Tax Act 1967 (as amended). Receipts of a capital nature are not taxable.
QUESTION 7
Area Trading Sdn. Bhd. deals with recycled paper. In 2007 it found the business was very
competitive and therefore entered into an agreement with its competitor also operating in the
area. Under the arrangement to run for 25 years, both companies will share the raw materials and
will distribute the recycled products in their own segregated market at prices agreed by both
parties. In this way both companies will be able to make a reasonable profit and stay in business
since the machinery for the recycling process is very expensive and use-specific, in addition to
the market being limited. The arrangement worked very well until a new management took over
the competitor. They were not in favor of the arrangement and called off the arrangement. They
agreed to pay Area Trading RM 25m in settlement.
Required
1.
What is the tax implication of the amount received by Area Trading Sdn. Bhd. and of the
payment made by the competitor?
2.
Would it make any difference to the tax treatment had Area Trading Sdn. Bhd. made
several such agreements in the course of its trading activities?
ANSWER
The sum received would not be taxable the arrangement relates to the profit making structure
and the cancellation of the arrangement is actually destroying that structure which would be a
loss of capital advantage. The payment made by the competitor may also not be allowed the
payment is not part of the trading expenditure and therefore may be considered to be a capital
payment.
If the company had made several such arrangements it could be considered to be part of the
operating style and as such the receipts may not be considered to be capital but revenue.

QUESTION 8 - SELF REVISION


Mr. Long, an employee of fast food company and Mr. Razak, a bank manager made some profit
on the purchase and sale of nine units of fruit cutting machines. This was the first time that Mr.
Long and Mr. Razak undertook such a transaction. The units of fruit cutting machines were sold
to different buyers. Expenses such as commission, advertising, repairs, insurance, traveling and
entertainment were incurred to facilitate sale.
State whether the profits arising from the above transactions are liable to income tax.
ANSWER
The purchase & sale of 9 units of machines appear to be isolated transactions under Adventure
or concern in the nature of trade (An isolated transaction that gives rise to business income
Use badges of trade to distinguish gains arising from the disposal of an investment and gains
from trade or an adventure or concern in the nature of trade the profits
Others: Existence of short-term ownership, profit motive, alteration of assets, efforts of disposals
etc (Explain the points with situation).
QUESTION 9 - SELF REVISION
Mr Kollai Segaran is a well know lawyer in Dengkil. He has many clients for whom he arranges
to purchase or acquire landed properties. In the course of his business he was able to acquire for
himself a property in a good location with potential for development in about 15 years. He
acquired it with the intention of holding it as a long term investment and sell it when the price is
right.
However, two years after its acquisition, he came to know from the staff of the land office that
the land has been earmarked for the building of a large hospital. He found an unsuspecting buyer
for the property and sold it at handsome profit.
Required:
Determine whether Mr Kollai Segaran has engaged in the trade of dealing in landed properties.
ANSWER
Mr Kollai Segaran could be treated as dealing in properties as he is already engaged in the
business of arranging land deals for his clients. The purchase and sale of the land, even though it
was one off transaction, was no different from what he was doing for his clients acquiring and
or disposing landed properties. Only this time, he was doing it for himself.
On the other hand the gains made could be treated as a capital gain as it was not the intention of
Mr Kollai Segaran to buy and sell landed properties he was a lawyer and only arranged a sale
or an acquisition for his clients as part of his legal business. The land was bought as a long term
investment and the fact he sold it within 2 years was on account of changed circumstances i.e.
the land was to be acquired soon by the government.

QUESTION 10 - SELF REVISION


MyVi Spares Sdn. Bhd. is a local company incorporated to produce leather seats for the MyVi
car sold in Malaysia. The following are the activities after incorporation in January 2005:
Date

Activity

November 2005
December 2006

Land acquired in Sepang


Foundation for factory laid by a minister who now lost his seat in the
recent election.
Factory completed
Plant and machinery installed in the factory
Staff were trained in the plant operation by the supplier of the machine
The company received its first batch of leather from Australia
The first batch of manufactured leather seats were delivered to the MyVi
car factory for installation in the cars.

June 2007
September 2007
October 2007
December 2007
January 2008

Required
1.
State the date of commencement MyVi Spares Sdn. Bhd.
2.
What is the significance of the determination of the commencement date
ANSWER
The date of commencement is the day the raw materials arrived.
Case law: The Birmingham & District Cattle By-Products. Co. Ltd. V CIR
Expenses incurred prior to the date of commencement are treated as pre-commencement
expenses and are not tax deductible.

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