T25 Final Revision 1

TUTORIAL 25
Advanced Taxation / BAC 4644/Dr Nakha Ratnam Somasundaram

FINAL REVISION
CUSTOMS AND EXCISE DUTIES
Question 1
What do you understand by duty to declare and what are the particulars that should be
declared?
Answer
It is the duty of the importer or exporter, whether personally or through his agent, to make a
declaration of any goods imported or exported which is a full and true account of the
particulars of which provisions are made in the relevant forms.
Generally, the following particulars must be submitted:
(i) Number of packages
(ii) Description of package
(iii)Description of goods to be imported or exported
(iv) Weight, measure or quantity
(v) Value
(vi) Country of origin.
Question 2
Mr. James recently visited Singapore and stayed there with his sister for a week. When he
departed Singapore, the sister gave him a small camera that she had been using for two years.
She bought it for SD400 when new but now worth only about SD30. His sister told him the
item is not dutiable as it is only a used camera, and the model is now discontinued. Mr.
James then placed it in his car boot and drove across the Causeway to Malaysia. At the
Customs point he told the Customs officer that he has nothing valuable to declare.
Required:
(a) Explain whether the conduct of Mr. James is appropriate.
(b) What do you think is the proper thing that he should have done?
(c) Quote any case law that you think is appropriate.
Answer
(a) Mr. James has a duty to declare the used article to the customs officer. Not declaring
could be an offence. He could even be treated as attempting to evade duty and commit
fraud.
(b) He should declare the article to the Customs officer. If the set is not liable to any duty,
it should be confirmed by the customs officer. And the exemption should then be
claimed in a proper manner.
(c) Case law: Regina v Hor How Choo it is the duty of the person to declare the goods
and claim the exemption. Goods not declared could be liable to a duty of RM30% of
the value of the goods (usually determined by the Customs unless you have sufficient
documentation to assist with the value determination).
Question 3
How is classification of goods and tariff codes made suitable for international trade?
Answer
Classification determines the tariff code of the product follows the established Harmonized
System. This system is complied with internationally by participating countries and thereby
harmonizes the coding and valuation issues. In addition the system and assist with the
following:
The proper payment of the applicable duty
Facilitating trade
Information gathering
Statistical analysis
The system is sometimes further facilitated by multilateral arrangement among countries with
enables the reduction or elimination of tariff on goods from or to participating countries.
Question 4
Explain the transaction value and how does it assist with international trade?
Answer
Transaction value is the value after the following adjustment:
Add back
1) Commissions and brokerage
2) Cost of containers
3) Royalties and license fees
4) Marketing assistance charges
5) Value accruing to the seller on disposal
Deduct
1) Assistance after importation (e.g. maintenance)
2) Transport after importation (e.g. inland road or rail transport)
3) Duties and taxes of the importing country (e.g. import duties)
This method gives a consistent or near consistent manner for the determination of the value
for the goods passing the custom point and thus making the liability to duty a more
systematic and predictable one.
Question 5
Mr. Ah Long was importing a container of sea-food from China. The agreed value with the
importer was RM800,000. And the duty payable on this at 20% was RM 160,000. He
instructed his agent to declare on the relevant Customs Forms only RM80,000 when it arrives
at Port Klang.
Required:
Discuss the action of Mr. Ah Long and explain are the actions that the Director General of
Customs can take.
Answer
There is false declaration of the value of the goods; and falsification of documents to show
an incorrect value.
The fine can be up to RM500,000.
Attempting to bring in goods without paying duty or insufficient duty could be treated as
smuggling which is a serious offence and the penalty is 10 times the duty or RM500,000
whichever is the lower.
The Director General of Customs could also confiscate the shipment of seafood i.e. Mr. Ah
Long could lose the shipment of seafood which may then be auctioned off by the Customs.
GOODS AND SERVICES TAX

Question 1
How does GST works?
Answer
GST is a multi-stage tax on domestic consumption. It is charged on all taxable supplies of
goods & service in Malaysia except those specifically exempted. GST is also charged on
importation of goods & services into Malaysia.
Payment of tax is made in stages by the intermediaries in the production & distribution
process.
Although tax is paid throughout the production & distribution chain, it is ultimately passed on
to the final consumer.
GST is accounted and paid by taxable persons. The taxable person pays GST or INPUT TAX
on his business purchases. He then adds value to those goods & services. When the goods
are sold or services provided, GST or OUTPUT TAX is collected based on the selling price.
Tax itself is not a cost to the intermediaries & does not appear as an expense item in their
financial statement. The registered person is required to charge GST (output tax) on his
taxable supply of goods & services to his customers. He (the registered person) is allowed to
claim input tax credit on any GST (input tax) incurred on his purchases which are inputs to
his business.
Question 2
Explain the types of supplies under the Goods and Services Act 2014 (as amended).
Answer
Three are three types of supplies
(a) Standard rated supplies
(b) Zero rated supplies
(c) Exempt supplies
Standard Rated Supplies.

Standard rated supplies are taxable supplies of goods & services which are subject to GST
Standard rate of 6%. A taxable person who is registered under GST has to collect GST on
the supply and is eligible to claim input tax credit on his business inputs in making
taxable supplies.
Zero Rated Supplies
Zero rated supplies are taxable supplies of goods and services which are subject to GST at
zero percent. In this case, businesses do not collect any GST on their supplies but are
entitled to claim credit on inputs used in the course or furtherance of the business.
Exempt Supplies
Exempt supplies are supplies of goods & services which are not subject to GST. In this
context, the businesses do not collect any GST on their supplies and are not entitled to
claim credit on his business inputs.
Table 1
Types of supplies and GST implications for input and output taxes
Type of supply
Output tax
Input tax
Standard rated
Zero rated
Exempted
6%
0%
GST not charged
Claimable
Claimable
Not claimable
Question 3
Discuss the concept and scope of a taxable person.
Answer
Meaning of person
Includes individuals, corporation, Federal Government, State Government, statutory body,
local authority, society, trade union, co-operative society, trust, partnership and any other
body, organization, association or group or persons, whether corporate or unincorporated.
Scope
Includes natural and juridical persons:
Individuals, sole proprietor and partnership

Company, club, association, society, co-operative, trade union, non-profit body and
unincorporated bodies
Trust, trustee, executor, administrator and joint venture
Federal Government, State Government, statutory body and local authority
Meaning of taxable person

A person who is, or is required to be, registered for GST
Question 4
Who is a person who is, or is required to be, registered for GST?
Answer
Any person who makes a taxable supply of Goods and Services in Malaysia must register for
GST. If a person makes a taxable supply exceeding RM500,000 (the prescribed threshold)
then it is mandatory for that person to register. If the turnover is below RM500,000 then the
GST registration is voluntary (voluntary registration allows you charge GST and to recover
the input tax credit).
Calculation of taxable turnover for registration is based on total value of taxable supplies for
12 months period.
The supplies include the following:
Standard rated supply

Zero rated supply (includes goods exported)
Deemed supply (disposal of business assets, business assets held on last day of
registration, private use of business assets, supply of services to connected persons
without consideration, business gifts exceeding RM500).
Disregarded supplies (supplies between members of the same group).
Person includes:
Individuals, sole proprietor, partnership, company, society, trade unions, club,
association.
Federal government, state government, statutory body and local authority in the
business of making taxable supplies in Malaysia
Taxable turnover is determined in two ways:
The historical method

o The annual turnover over the 12-months period ending at the end of the
current month
Fig 1
Historical method of determination of threshold (backward)
Jan
Dec
The future turnover method (forward)

o The annual turnover over the 12 months period commencing from the
beginning of the current month
Fig 2
Future method of determination of threshold
Jan
Dec
The turnover will exclude the following:
Exempt supplies.
Disposal of capital assets of the business.
Imported services.
Supplies of imported goods made within a warehouse (warehousing scheme).
Supplies made by a foreign principal or recipient, in accordance with Approved Toll
Manufacturing Scheme.
Out-of-scope supplies (i.e. a supply from a place outside Malaysia to another outside
Malaysia)
Supplies made between designated areas.
The GST component in the supply
In case of liability you must register within 28 days in the following month, of becoming
liable. The effective date of registration is the 1st day of the month following the month in
which registration occurred (see Fig 3).
Fig 3
Date of registration
GST
threshold
reached
May
Register for
GST by
28 June
June
GST
effective date
1 July
July
2016
Question 5
Discuss the liability to register for GST (whether voluntary or mandatory) in the following
instances:
(a) Lim has invested in eight residential homes that are rented out. The total rent
receivable per annum is RM600,000
(b) Lim has invested in five shop houses that are rented out. The total rent receivable per
annum is RM600,000
(c) Eswaran runs a motor workshop. His turnover is as follows:
Service charges= RM200,000; Sale of spare parts = RM40,000
(d) Nasir runs a sundry shop in Shah Alam (annual turnover = RM300,000) and a satay
restaurant in Bangi (annual turnover = RM400,000)
(e) RapidJalan & Scenic Sdn Bhd is a transport company. It operates a stage bus service
between Seremban and Kuala Lumpur (annual turnover RM300,000). It also operates
a tour bus service covering the area Kuala Lumpur to Malacca (annual turnover =
RM400,000)
Answer
(a) Residential premise are not subject to GST
(b) The shop houses are business premises and liable to GST if the gross rent exceeds the
threshold.
(c) His threshold is below RM500,000. He need not register for GST
(d) His combined turnover exceeds RM500,000 and must register for GST
(e) The stage bus operation is exempted from GST but the tour operation would be
subject to GST if the turnover exceeds RM500,000.
Question 6
Who are the persons not required to register for GST?
Answer
The following persons need not register:
Persons making wholly exempt supply

Persons making a supply in designate areas
Persons making supplies below the GST threshold
Persons making out of scope supply (e.g. making a supply outside Malaysia).
Question 7
What are the types of registration that are covered under the GST rules?
Answer
Types of registration would include the following:
(a) Sole proprietors
(b) Single taxable persons
(c) Companies and group of companies (companies in a group and controlled by the
holding of shares at least 50% in the second or other companies)
(d) Partnership
(e) Personal representative
(f) Joint venture
Question 8
Discuss briefly the meaning of Supply
Answer
It is the concept of a supply itself is the entry point into the GST system. Supply has been
statutorily defined as all forms of supply i.e. consisting of goods and services. Consideration
is an element for supply to be present. There is no supply if there is no consideration
subject to exception (deemed supply for example in case of supplies to connected persons
in controlled situations).
Definition of Consideration (Section 2 Goods and Services Act 2014 (as amended)
Any payment made or to be made, whether in money or otherwise, or any act of
forbearance, whether or not voluntary, in respect of, in response to, or for the
inducement of, the supply of goods or services, whether by the person or by any other
person
Consideration may be provided by third parties.
9
ESTATE UNDER ADMINISTRATION
Question 1
How is the income allocated between the deceased individual and the estate of the deceased?
Answer
In the year the individual died, there will be two tax computations
From the beginning of the basis year to the date of his death for the relevant year of
assessment
From the date of death to the end of the basis period for the year of assessment
The income is allocated as follows:
Business and rental income : On a time basis (sec 64(1)

Interest and dividends: These income are assessed on a receipt basis
Note that for income tax purposes, an executor is not an individual (defined in the law as a
natural person). Hence benefits available to an individual would not be available to an
executor. (Case law: Harta Pesaka TSDSHA v Ketua Pengarah Hasil Dalam Negeri).
Income arising from a source outside Malaysian and remitted to Malaysia and received by
any person is exempt from tax (Para 28 Sch 6 effective from year of assessment 2004).
Question 2
What are the special deductions allowable for an estate under administration, in determining
the chargeable income?
Answer
Sometime the will may provide for the payment of an annuity from the income of the estate
under administration. This annuity is allowable as a deduction under section 64(3) against the
aggregate income in arriving at the total income. The annuity is a taxable receipt on the
recipient. It taxable on a receivable basis and therefore as soon as the recipient becomes
entitled to the income, the amount will be assessed.
Payment of annuity must to be distinguished from a distribution which is capital and
therefore not deductible in arriving at the total income of the estate under administration nor
is it taxable in the hands of the recipient.
Sometimes annuities arise on the surrender of an insurance policy, or surrender of a fixed
asset, in exchange for an annual payment. Such payments, when received would constitute an
income and accordingly taxable.
But annuities contract issued by a Malaysian insurance company under a contract of
insurance is exempted (Para 38 Sch 6 effective from year of assessment 1995)
10
Question 3
Mr. Alfred Lim was a successful Malaysian businessman. He died in 2011 leaving behind a
wife and four children. In his will, written before his death, he had named his wife as the
executor with his four children as the beneficiaries. The will also require that she continues
the business after his death.
Under the terms of the will, the income from the trust paid out or distributed to the
beneficiaries for the year ended 31 December 2015 was as follows:
No.
Recipients
1
2
3
4
5
Annuity to wife
First child
Second child
Third child
Fourth child (sum to be accumulated)
Amount
(RM)
30,000
65,750
98,625
98,625
25,000
Under the will, payment to the first child would be one quarter of the distributable income,
and paid at the discretion of the executor; whereas the sum paid to the second and third child
shall be one half of the balance of the distributable income, after accumulation for the last
child, who in 2015 was only two years old.
The trust received income from some investments as follows during the year ended 31
December 2015:
No.
Particulars
1
2
3
4
Rent from a property in Malaysia

Interest from a fixed deposit in a local bank
Dividends (Malaysia)(single tier)
Dividend (Taiwan)(remitted in 2015)
Amount
(RM)
20,196
5,358
8,910
12,679
Legal fee of RM20,093 was incurred to settle some third party claims regarding the trust and
was settled with a lump sum payment of RM59,400. Mrs. Lim charged a management fee of
RM29,700 for managing the trust. During the year, Mrs. Lim, made a donation of food
packages to a temple valued at RM5,400. A cash donation of RM50,000 was made to a
Malaysian approved charitable institution. These various expenditure (i.e. legal fees,
settlement, management fees and donations) were charged to the trust business account
under EXPENSES and except for these charges, the tax agent has confirmed that the
balance of the other expenses are wholly and exclusively incurred for the purposes of the
business.
The result of the trust business for the financial year ended 31 December 2015 was as
follows:
RM
Gross income from business
683,130
Less: Expenses
292,587
11
Net profit
390,543
For the year of assessment 2015, the trust is entitled to a capital allowance of RM58,518 and
balancing allowance of RM29,258. It has a balancing charge of RM19,423.
The trust business has a loss brought forward to the year of assessment 2015 amounting to
RM7,367 and also an unabsorbed capital allowance brought forward of RM62,245.
The trust distributable income for the year ended 31 December 2015 before accumulation of
RM25,000 for the fourth child was RM288,000.
Required
Compute the chargeable income of the trust for the year of assessment 2015.
Note: Assume that the Director General of Inland Revenue has allowed the application of
section 61(2) of the Income Tax Act 1967 (as amended) to the trust income.
[40 marks]
Question 4
Mr. James Tan, a resident and citizen in Malaysia, was a businessman operating two
businesses one in Malaysia and one in Singapore. He passed away suddenly on 30
September 2015, without a will. The businesses close the accounts to 31 December each
year. For the year ended 31 December 2015, the trading results were as follows:
RM
Business
Business 1 (Malaysia )
Business 2 (Singapore)
Adjusted income
Adjusted income
97,200
16,000
Mr. James made a donation of RM500 to an approved Malaysian charitable institution in

May 2015.
Mr. James Tan had a rental source from a property in Kuala Lumpur, a single tier dividend
from a public listed company, as well as interest from a fixed deposit in a Malaysian bank.
The details are as follows:
Rental (year ended 31 Dec 2015)

Dividend (Paid in October 2015)
Interest (received in May 2015)
RM
19,440
7,623
3,267
Mr. James Tan left behind a wife, and a child aged 10 years old in 2015. At the time of his
death, Mr. James Tan was domiciled in Malaysia.
The administrator was Mr. James Tans close friend, one Mr. Kumar. He administered the
estate till the financial year end 31 December 2015. He made an annuity payment of
RM12,000 to the wife just before the estate was wound up. At the end of the year 2015, Mr.
12
Kumar liquidated the estate and made a distribution of RM200,000 each to the wife and the
child.
Required:
Compute the chargeable income for the year of assessment 2015, of:
(i) Mr. James Tan [assume that the wife and child reliefs were claimed by him];
(ii) The estate of Mr. James Tan (deceased);
Note: In relation to the question above, the personal relief in respect of the year of
assessment 2015 are as follows for: Wife RM3,000; Child RM1,000
Computation of chargeable income of Mr. James Tan
Year of assessment 2014
Business 1 (Malaysia)
Add:
Other income
Rent
Dividend - single tier (exempted Sch 6 Para 12B)
Interest (section 109C)
Aggregate income
Less: Approved donation
Total income
Less: Personal relief
Self
Wife
Child
Chargeable income
RM
72,900
0
3/4 x 97,200
3/4 x 19,440
14,580
0
0
87,480
500
86,980
9,000
3,000
1,000
13,000
73,980
Computation of chargeable income of the estate of James (deceased)

Business (Malaysia)
Add: Other income
Rent
Dividend (single tier)
Interest
1/4 x 19,440
Aggregate income
Less: Annuity to wife
1/4 x 97,200
RM
24,300
0
24,300
4,860
0
0
26,160
12,000
13
Total income
Less: Personal relief (domiciled in Malaysia)
Chargeable income
17,160
9,000
8,160
14
TRUST
Question 1
Outline the computation format for a trust in the following circumstances:
1) The computation of the trust body itself
2) The computation of the beneficiary if the trust distributes its total income to the
beneficiary (assume that there is only one beneficiary and the whole income is
distributed).
Answer
The computation of the trust body: format
RM
Business income
Net profit per PL account
Add: disallowable expenses
Adjusted income
Less: Capital allowances
Statutory income
Less: Unabsorbed losses b/f
Statutory business income after losses
Other statutory income
Interest
Dividend
Rent
Aggregate income
Less Annuities payable
Less: approved donations
Total income / Chargeable income
RM
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
15
Question 2
En. Tan Chong passed away on 30 October 1999. He left behind his wife and three children
along with some properties and businesses. Under the terms of his will, a trust was created
and his wife was named as the trustee and their four children as the beneficiaries.
Under the terms of trust, one quarter of the trust body income is to be distributed to the first
child at the discretion of the trustee. The balance must be distributed equally between the
second and third child. A sum of RM 30,000 is to be accumulated for the fourth child until
the child reaches the age of 18 years.
The wife is entitled to an annuity of RM 50,000 per year. En. Tan Chong had two business
and also several investments. The investments provided regular income by way of interest,
dividend and rent.
During the year, the trust paid a cash donation of RM 9,000 to an approved institution. It also
donated hardware for repairs and renovation to three welfare and old folks home. The
hardware supplied free of charge were worth RM 15,500. The trustee also paid legal fee of
RM 24,000 to a lawyer for defending the will against some claims made by relatives.
Based on the trust distributable income of RM 300,000 (before accumulation), the trustee
made the following payments or accumulation to the beneficiaries for the year ended 31
December 2008:
First child: RM 60,000
Second child: RM 90,000
Third child: RM 90,000
Accumulation for the fourth child: RM 30,000
The details of the business and the investment income for the year ended 31 December 2014
are as follows:
Trust income
Stationary Trading business :
1 January 2014 - 31 December 2014
Gross income
Allowable expenses
Capital allowances due
Balancing charges
Balancing allowances
RM
787,500
337,500
67,500
22,500
33,750
Hardware trading : 1 January 2014 to 31 December 2014

Gross income
Allowable expenses
Capital allowances due
Adjusted loss b/f
Capital allowances b/f
112,500
130,500
13,500
22,500
11,250
16
Other income
Rent
Interest
Dividends (Malaysia) (single tier)
Dividends (Hong Kong)(remitted)
22,500
6,750
10,125
14,625
Required
Compute the chargeable income of the trust for the year of assessment 2014 assuming that
section 61(2) of the Income Tax Act 1967 (as amended) is applied.
Answer
Trust
Year of assessment
Stationary Trading business : 1 January 2014 - 31 December 2014
Gross income
Less: Allowable expenses
Adjusted income
Add: Balancing charge
Less:
Balancing allowance
Capital allowance
Statutory income
Hardware trading : 1 January 2014 to 31 December 2014
Gross income
Adjusted loss
Statutory income
Aggregate of statutory income from business
Less: Unabsorbed loss b/f
Other income from non-business sources
Rent
Interest
Dividend (Malaysia-single tier)
Dividend (Hong Kong) - exempted Para 28 Sch 6
Aggregate income
Less: Current year adjusted loss (from Hardware trading)
Less: Annuity
Less:
33,750
67,500
787,500
337,500
450,000
22,500
472,500
101,250
371,250
112,500
130,500
(18,000)
0
371,250
22,500
348,750
22,500
6,750
0
0
29,250
378,000
(18,000)
360,000
50,000
310,000
17
Donation in kind
Donation in cash
Total income
Less: Payment to beneficiaries [sec 61(2)]
First child
Second child
Third child
Chargeable income
0
9,000
60,000
101,588
101,588
9,000
301,000
263,175
37,825
Distributable income of trust before accumulation

Less: Accumulation for the 4th child
Distributable income after accumulation
300,000
30,000
270,000
Deemed total income
301,000 x 270,000 / 300,000
270,900
Discretionary portion
Non-discretionary portion
Total
270,000 x 1/4
270,000 x 3/4
67,725
203,175
270,900
Amount paid to first child

Amount due to first child
Statutory income : Lower of the two
60,000
67,725
Second child
1/2 of 203,175
Third child
1/2 of 203,175
Total received by second and third child
60,000
101,588
101,588
203,175
18
SETTLEMENT
Question 1
Why do you think a settlement is of concern to the Revenue authorities?
Answer
A wealthy person (the settlor) on a high tax bracket may choose to transfer either properties
or income or both to another person (the beneficiary) to benefit from the lower tax bracket of
the beneficiary.
This essentially is a tax avoidance scheme that has no commercial or arms length
consideration and therefore is generally disallowed for tax purposes under section 65.
In this context one needs to understand the concept of settlement, settlor, relative and
reciprocal settlement, and exceptions to the application of section 65(1) as well as a revocable
settlement and its implication for tax.
Question 2
In the context of the Income Tax Act 1967 (as amended) explain the significance of the
following terms for income tax purposes, in your own words:
i)
ii)
iii)
iv)
v)
Settlement
Settlor
Relative
Reciprocal settlement
Revocable settlement
Answer
A settlement includes any disposition, trust, covenant, arrangement or agreement and any
transfer of assets or income but does not include
1. A settlement which in the opinion of the Director General of Inland Revenue is made
for valuable and adequate considerations
2. A settlement resulting from an order of a court; or
3. Any agreement made by an employer to pay to an employee or to the widow or any
relative, dependents of an employee after his death such remuneration, pension, or
lump sums as in the opinion of the Director General of Inland Revenue is fair and
reasonable.
Settlor in relation to a settlement includes any person by whom the settlement was made or
entered into directly or indirectly and any person who was provided or undertaken to provide
funds or credit directly or indirectly for the purpose of the settlement or has made with any
other person a reciprocal arrangement for that other person to make or enter into the
settlement.
19
Relative means a child of the settlor (including a step child of the settlor and a child over
whom the settlor has custody or whom he maintains wholly or partly at his own expense), a
child adopted by the settlor, or the husband or the wife of the settlor in accordance with any
law and any person who is a wife, grandchild, brother, sister, uncle, aunt, nephew, niece or
cousin of the settlor.
A reciprocal settlement is a settlement in which the two transactions are of a similar nature.
A revocable settlement is one which, under section 65(2) provides that:
1. Any person has or may have power whether immediately or in the future and whether
with or without the consent of any other person to revoke or otherwise determine the
settlement or any provisions thereof; and
2. In the event of the exercise of the power, the settlor or a wife or husband of the settlor
will or may become beneficially entitled to the whole or any part of the property then
comprised in the settlement, or of the income arising from the whole or any part of the
property so comprised.,
3. All income arising from the settlement from the property comprised in the settlement
shall be deemed to be income of the settlor and subject to section 45(2), and not
income of any other person;
4. Provided that the subsection shall not apply by reason only of the fact that the settlor
or a wife or husband of the settlor will or may become beneficially entitled to any
income or property relating to the interest of any beneficiary under the settlement in
the event of the beneficiary predeceasing him or her as the case may be.
Question 3
En. Ahmad is a successful businessman and owns several properties from which he derives
rental income. As he was getting old, he decided to settle some of the properties and the
income derived therefrom among his three children two daughters and one son.
Accordingly under the terms of the settlement:
1. The first daughter would receive a shop house and the rental income derived
therefrom. The daughter is married and is currently staying with her husband. She has
been diagnosed with cancer. Accordingly, the settlement terms provide for the
property and the income to revert to En Ahmad should the daughter predecease him.
2. The second daughter, who is 25 years old as at the beginning of the year of
assessment 2008, but unmarried, would receive an apartment and the rental income
therefrom.
3. The last child, the son who is 19 years old as at 1 January 2008 would receive the
bungalow and the rental income derived therefrom
20
Required
Explain with reasons, who will be assessed to income tax on the income derived from the
various properties settled by En. Ahmad, for the year of assessment 2008.
Answer
1. The first daughter will be assessed to the income from the shop house she is married
and therefore the age factor is not important. The fact that the asset and the income
would revert to the father should the daughter pre-decease him is not tantamount to a
revocation and will not have any effect on the settlement.
2. The second daughter will be assessed to the income from the apartments she is not
married but is more than 21 years old.
3. The income from the bungalow would be assessed on En Ahmad since the son is
below 21 years and is not married as at the beginning of the year of assessment in
question.
21
INVESTMENT HOLDING COMPANY
Question 1
What is an investment holding company?
Answer
These are companies that hold investments and for financial purposes, they generally
function as a holding company within a group of companies usually providing common user
services with or without charges: in other instances they are used as a vehicle for listing
purposes in the Malaysian stock exchange (Bursa Malaysia).
With effect from the year of assessment 2006, one need to distinguish between an ordinary
investment holding company, and an investment holding company listed in the Malaysian
stock exchange, since the tax treatment are different.
In other words, distinguish:
(a) an investment holding company (IHC); and
(b) a listed investment holding company (LIHC)
With effect from the year of assessment, an IHC is defined to mean a company whose
activities consists mainly of investments, and not less than 80% of its gross income other than
gross income from a source consisting of a business of holding an investments (whether
exempt or not) is derived therefrom.
A business of holding of an investment is defined as follows:
It means the business of letting properties and the company also provides
maintenance or support services in respect of the property.
In other words, if the company:
(a) does NOT provide any maintenance services in the letting of the property it is an
investment income
(b) if it provides maintenance services then it a business of letting of property and the
income will be excluded as an investment income for the purposes of the 80%
computation
22
Example 1
Determination of IHC status
Sources of income
Rent (Business)
Rent (Non-business )
85,000
0
20,000
0
0
75,000
50,000
20,000
20,000
30,000
10,000
20,000
100,000
20,000
20,000
10,000
100,000
Dividend
Interest
Management fee
Total income
5,000
10,000
50,000
30,000
100,000
100,000
10,000
5,000
10,000
100,000
% of income from
holding of investment
15100
15
80100
80
90100
90
50100
50
70100
70
No
Yes
Yes
No
No
IHC: Yes/No
Once the 80% criteria is satisfied, and the company is now treated as an investment holding
company or not an investment holding company, the rental income is still treated as a section
4(d) source income and NOT a section 4(a) income. The management income is then treated
as a section 4(f) income and NOT a section 4(a) income
Example 2
Source of income
2007
Year of assessment
2008
2009
2011
30,000
20,000
20,000
20,000
90,000
10,000
20,000
20,000
20,000
70,000
70,000
20,000
20,000
10,000
120,000
60/70
86
Rent (Business)
Rent (Non-business)
Dividend
Interest
Total income
60,000
10,000
10,000
20,000
100,000
% of income from
holding of investment
40/100
40
50/100
50
60/90
66
No
No
No
IHC: Yes/No
50,000
20,000
10,000
20,000
100,000
2010
Yes
50/120
42
No
23
Question 2
What do you understand by Permitted Expenses within the meaning of section 60F (2)?
Answer
An investment holding company listed in the Malaysian stock exchange will have its income
from the holding of investments treated as a business income derived from a single source.
This legal provision is not available to a company NOT listed in the Malaysian stock
exchange.
The investment holding company not listed in the Malaysian stock exchange would however
be allowed a special deduction under section 60F (2) known as the permitted expenses.
Revenue expenses in the case of an investment holding company are of two types:
Expenses falling within the meaning of section 33(2) (see working in the above
question)
Expenses falling within the meaning of section 60F(2)
Expenses falling within the meaning of section 33(2) would be deducted directly against the
relevant income.
Expenses falling within the meaning of section 60F (2) are known as permitted expenses.
These are specific expenses to be deducted as a proportion (i.e. a figure obtained from a
formula computation) against the aggregate income.
It is a comparative deduction one needs to compute the permitted fraction and then compare
this with 5% of the gross income consisting of dividends, interest and rent for the relevant
period the deduction being the LOWER of the two.
Permitted expenses consist of the following:
Directors fee
Wages, salaries and allowances
Management fees
Secretarial, audit and accounting fees, telephone charges, printing and stationary costs
and postage charges
Rent and other expenses incidental to the management of an office
Note that these listed expenses do not fall within the meaning of section 33(2). Also note that
Public Ruling 6 of 2006 prohibits secretarial fees as a deductible expense in arriving at the
adjusted income of a company. However, a secretarial fee is allowed as a concession in
determining the permitted fraction for deduction against the aggregate income of an
investment holding company.
The permitted fraction is deducted as a proportion and this is determined as follows:
A x B/4C
24
A=
total of the permitted expenses incurred for the basis period reduced by any receipt of
a similar kind
B=
the gross income consisting of dividend, interest and rent chargeable to tax for the
basis period for the year of assessment. Any other income for example, royalty, will
be assessed under section 4(f) and will not be included under B
C=
the aggregate of the gross income consisting of dividend whether exempt or not
interest, rent and gains from the realisation of investments for the basis period for the
year of assessment.
The permitted fraction is compared with 5% of the gross income consisting of dividend,
interest and rent (i.e. excludes exempt income): and only the LOWER amount is allowed as a
deduction.
Excess of permitted expenses cannot be carried forward to the subsequent year of assessment.
Question 3
List out the features of an investment holding company under the provisions of the Income
Tax Act 1967 (as amended).
Answer
Essentially the investment holding company treatment under the ITA can be tabulated as
follows:
Area
Investment holding company
Definition
It is a company whose activity consists in the making of investment.

The income must consist of at least 80% from investment
Applicable section of
the law
Section 4(c)
Section 4(d)
Section 4(e)
Section 4(f)
Deductibility of
expenses
Expenses are deducted in relation to each of the sources in respect

of expenditure incurred wholly and exclusively in the production of
gross income in arriving at the adjusted income from that source
dividend and interest

rental
annuity
other income
Permitted expenses are deducted at the aggregate stage using a

restrictive formula [A/B] x C = Permitted expenses
This is compared to 5% of the gross income chargeable to tax and
the lower is allowed a deduction at the aggregate stage
25
Basis of assessment
The financial year is taken as the basis period for the relevant year
of assessment
Example
Financial year ended 30 June 2015 = Year of assessment 2015
Treatment of losses
Does not arise as the expenses is limited to the gross income
Capital allowance
Not available
Investment related
income
Need to distinguish between revenue income and capital income.

Revenue income is brought to charge (except dividends paid under
the single tier or tax exempted dividends)
Income from the sale of investment is capital income and is not
brought to charge.
Question 4
Lim Holdings Sdn Bhd is an investment holding company (the company) (financial year
end: 31 Dec) and derives its income mainly from investments. Investment consists of fixed
deposit, shares and a shophouse for which no support or maintenance services are provided.
For the year ended 31 December 2015, the company has produced the following result:
Lim Holdings Sdn Bhd
Year ended 31 December 2015
Gross income
Fixed deposit interest
Rent - shophouse
Dividends (single tier)
Investment 1
Investment 2
Gains from realization of investment
Total gross income
Less: Expenses
Director's remuneration
Staff salary
Accounting and secretarial
Audit fees
Interest charges (loan for investments)
Printing and stationary
Management expenses
Office rent
RM
RM
65,037
54,198
156,588
78,296
79,200
433,319
47,998
28,799
9,601
19,199
38,399
1,920
26,878
47,916
26
Quit rent and assessment (shophouse)

Entertainment
Depreciation
Net profit
1,920
2,879
4,800
230,309
203,010
The details of the cost of the investments are as follows:

Investments costs
Shop house
Shares Investment lot 1
Shares - Investment lot 2
Total
RM
600,000
700,000
800,000
2,100,000
The share investments lot 1 and lot 2 are in shares in a local company quoted in the
Malaysian stock exchange, and which pays single tier dividends to shareholders. The
shophouse from which the rental income is received is located in Putrajaya.
Lim Holdings Sdn Bhd borrowed substantial funds from a local bank for these investments
(shophouse and shares) and incurred interest charges as shown in the accounts. Its paid up
capital as at the beginning of the basis year for the year of assessment 2015 was RM3 million.
Required:
In respect of the year of assessment 2015, compute the following:
i) chargeable income of Lim Holdings Sdn Bhd; and
ii) the income tax liability of Lim Holdings Sdn Bhd .
Note: The corporate tax rate is 25%.
Answer

Interest
Rent from shophouse
Less: Expenses
Prop of interest expenses
38,399 x 600,000/2,100,000
Quit rent and assessment
Dividends - single tier
Investment 1
Investment 2
RM
65,037
54,198
10,971
1,920
41,307
0
0
27
Aggregate of statutory income

Less: Fraction of permitted expenses
Total income and chargeable income
Income tax
Income tax

Computation of permitted fraction
Permitted expenses
Director's remuneration
Employee's salary
Accounting and secretarial fee
Audit fee
Printing and stationary
Management expenses
Rent
Gross income chargeable to tax

Interest
Rent
Gross income whether or not chargeable to tax
Interest
Rent
Dividend-investment 1
Dividend-investment 2
Gain from realization of investment
Fraction of permitted expenses allowable

A x [B / (4 x C)]
182,311 x [119,235/(4 x 433,319]
Or
5% of gross income chargeable to income tax
5% x 119,235
Lower of the two
106,344
5,962
97,215
RM
24,303.75
97,215 at 25%
RM
47,998
28,799
9,601
19,199
1,920
26,878
47,916
182,311
RM
65,037
54,198
119,235
65,037
54,198
156,588
78,296
79,200
433,319
C
RM
12,541
5,962
5,962
28
LISTED INVESTMENT HOLDING COMPANY
Question 1
What is a listed investment holding company?
Answer
With effect from the year of assessment 2006, a listed investment holding company is given
a preferential treatment to have the income from the holding of investment be treated as a
business source unlike in the case of just an investment holding company not listed in the
stock exchange.
This company is different from the IHC in that it is listed in the Malaysian Stock Exchange
(or the Bursa Saham). Therefore the income from the holding of investment is treated as a
source or sources consisting of business of the listed investment holding company. The
applicable law for LIHC is section 60FA
Question 2
What is the treatment of expenses of a listed investment holding company?
Answer
The overhead expenses of operating a LIHC such as directors fees, wages, salaries and
allowances, management fees etc. would be fully deductible against the gross income
Example 1
LIHC
Gross income (from investments sources)
Less: Expenses
Adjusted income
RM
100,000
20,000
80,000
29
Question 3
What are the restrictions that are applicable to an LIHC that are unusual?
Answer
The income of a LIHC is treated as a business source under section 60FA(2) and 60FA(3) but
the deductions for expenses are limited to the gross income from that source. If the source
produces no income then no expenses relating to that source is allowed i.e. it is disregarded.
Since the expenses are limited to the gross income (or is ignored if there is no income) losses
does arise. Hence there is no current year loss or for that matter losses to be carried forward.
Similarly capital allowance is available to be deducted from the adjusted income to arrive at
the statutory income. But this too is limited to the adjusted income. Hence should the capital
allowance exceed the adjusted income, the excess will not be carried forward to the following
year of assessment and will be lost.
Question 4
A LIHC has provided the following accounts for the year ended 31 Dec 2014:
Profit and Loss account
Year ended 31 Dec 2014
Rental income
Interest
RM
500
80
20
120
Less: Expenses
Interest charges (on property loan)
Quit rent
Assessment
Directors fees
Salaries
Wages and allowances
Management fees
Audit
Secretarial fees
Accounting fees
Stationery
Postage
Travelling
53
3
5
105
85
21
27
15
11
16
3
1
17
RM
720
30
Entertainment
Advertisement
Net profit
25
5
392
328
Required
Determine the aggregate and the chargeable income of the listed investment holding
company.
Answer
Computation of listed investment holding company
RM
Net profit per account
Less:
Interest
Add: Disallowable expenses
Travelling
Entertainment
Advertising
Add: Other income
Interest
Gain from realization of investment (capital)
Aggregate/total/chargeable income
20
80
120
17
25
5
20
0
0
RM
328
220
108
47
155
20
175
31
UNIT TRUSTS and PROPERTY TRUST
Question 1
Outline the format of the tax computation for a unit trust in accordance with the requirements
of the Income Tax Act 1967 (as amended).
Answer
Unit Trust
Computation template
Interest
Adjusted/statutory interest income
Adjusted/statutory dividend income
Gross rental income
Less: Section 63A deduction
Statutory rental income
Aggregate income
Less: Section 63B deduction
Less: Approved donations
Restricted to 10% of aggregate income
Total income/ chargeable income
RM
10,000
3,000
7,000
7,000
0
0
0
10,000
7,000
3,000
1,000
2,000
1,000
900
RM
2,000
9,000
3,000
6,000
900
5,100
32
Question 2
Explain the conditions and restrictions under which the deductions under section 63B are
allowed to a unit trust in respect of permitted expenses.
Answer to Question 4
In ascertaining the total income of a unit trust for the basis period for a year of assessment,
there shall be deducted before any deductions falling to be made under section 44(1) (c) i.e.
donations to the government or an approved institution, an amount in respect of expenses
incurred by that unit trust during that period which amount shall be determined in accordance
with the formula prescribed in section 63B (1):
The permitted fraction is deducted as a proportion and this is determined as follows:
A x B/4C
A=
total of the permitted expenses incurred for the basis period
B=
the gross income consisting of dividend, interest and rent chargeable to tax for the
basis period for the year of assessment
C=
the aggregate of the gross income consisting of dividend whether exempt or not
interest, rent and gains from the realisation of investments for the basis period for the
year of assessment.
Note:
1) As regards income falling under B in the formula, note that any other income for
example, royalty, management fee etc. will be assessed under section 4(f) and will not be
included under B
2) Also income that is not chargeable to tax e.g. exempted income will not be included in B.
3) Exempted income will fall in C because of the words whether exempted or not.
Permitted expenses consist of the following [Sec 63B (2)]
Managers remuneration
Maintenance of register of unit holders
Share registration expenses
Secretarial, audit and accounting fees, telephone charges, printing and stationary costs
and postage charges
Note that these listed expenses do not fall within the meaning of section 33(1) i.e. they are
not deductible under section 33.
Also note that Public Ruling 6 of 2006 prohibits secretarial fees as a deductible expense in
arriving at the adjusted income of a company. However, a secretarial fee is allowed as a
concession in determining the permitted fraction for deduction against the aggregate income
of an investment holding company.
33
The amount to be deducted shall not be less than 10% pf the total permitted expenses
incurred for that basis period.
Where by reason of an absence or insufficiency of aggregate income for that year of
assessment effect cannot be given or cannot be given in full to any deduction falling to be
made to the unit trust under section 63B for that year, that deduction which has not been so
made shall not be made to the unit trust for any subsequent year of assessment. In other
words, excess of permitted expenses cannot be carried forward to the subsequent year of
assessment.
Question 3
Pacific Unit Trust was formed in 1997 and managed by Premier Bhd. It is not approved by
the Securities Commission as a Real Estate Investment Trust or a Property Trust Fund, and
has not distributed its total income. The trust invests its funds primarily in fixed deposits and
shares. It also acquired a building which was rented out.
Its profit and loss account for the year ended 31.12.2014 shows the following:
Pacific Unit Trust
Statement of accounts for year ended 31 Dec 2014
RM
Income
Gross Rent
Gross Interest
Malaysian dividends (single tier)
Gain from realization of investments
Less: Expenses
Assessment and quit rent
Fire insurance
Property management fee
Property management fee paid to Premier Bhd
Share registration expenses
Secretarial, audit and accounting fee
Telephone, printing and stationery
expenses
Office rent and incidental expenses
Trustees remunerations
Net profit
RM
100,000
360,000
240,000
100,000 800,000
4,000
2,000
6,000
80,000
10,000
12,000
4,000
24,000
6,000 148,000
652,000
34
During the year, Pacific Unit Trust installed a lift in the building. The cost of the lift,
inclusive of installation cost, was RM 500,000 and the expenditure incurred on alteration of
the building to install the lift was RM 100,000.
Required:
Compute the tax payable by Pacific Unit Trust for YA 2014.
Answer
Pacific Unit Trust
Income Tax Computation
Year of Assessment 2014
RM
Rental (Sec. 4 d income)
Less:
Assessment and quit rent
Fire insurance
Property management fee
Adjusted income
Less: Special deduction under Sec. 63A
(10% of 600,000)
4,000
2,000
6,000
RM
100,000
12,000
88,000
60,000
28,000
Add: Other income

Interest
Aggregate income
Less: Section 63B deduction
Chargeable income
360,000
0
628,000
23,188
604,813
Income tax
151,203
604,813 x25%
35
RM
80,000
10,000
12,000
4,000
106,000
RM
100,000
360,000
460,000
RM
100,000
360,000
240,000
100,000
800,000
Permitted expenses
Property management fee to Premier Bhd
Share registration fees
Secretarial, audit and accounting fee
Telephone, printing and stationary

Gross rent
Gross interest
Gross income whether or not chargeable to tax

and gains from realization of investment
Gross rent
Gross interest
Dividends
Gain from realization of investments
Permitted fraction
A x B / 4C
RM
15,238
106,000 x 460,000/(4 x 800,000)
Or:
10% of permitted expenses
106,000 x10%
10,600
Whichever is the higher
23,188
Capital allowance
Cost of lift
Add: Installation cost
Aggregate cost
500,000
100,000
600,000
Percentage of installation cost to aggregate cost

(100,000 / 600,000) x 100
17 %
The percentage of installation cost is less than 75%

The whole expenditure qualifies for capital
allowance
RM600,000
Capital allowance
600,000 x 10%
60,000
36
REAL ESTATE INVESTMENT TRUST and PROPERTY TRUST FUND
Question 1
What is your understanding of a real estate investment trust (REIT?)
Answer
A REIT is a special kind of unit trust that invests at least 50% in real estate i.e. land, building
and in companies holding large properties (i.e. companies with large land banks). Also
known as a Property Trust Fund (or PTF), the income is largely derived from rent. REIT/PTF
must be approved and comply with rules of the Securities Commission.
REIT and PTF are accorded special treatment for tax purposes under section 61A.
Question 2
What constitutes the basis year for a REIT and PTF
Answer
Generally for companies the financial period is the basis period for a year of assessment.
Example
Year end 31 Dec 2014
(a) Basis period is ye 31.12. 2014
(b) Year of assessment is 2014
Year end 30 Sept 2014
(a) Basis period is ye 30 Sept 2014
(b) Year of assessment is 2014
37
Question 3
What is the basis year for a REIT and PTF that commences business and does not close the
first account to 31 December or closes the first accounts to a period of more than 12 months
or less than 12 months from the date of commencement?
Answer
The law has been amended under section 21A (4) with effect from 2014 and the
determination of the basis period and the relevant year of assessment are as follows:
First accounts for less than 12 months
If the accounts are drawn for a period of less than 12 months ending on a day in that basis
year, that period shall constitute the basis period for that year of assessment.
Example
Company A commences operations on 1 March 2013 and closes the accounts to 30
September
The basis period for the year of assessment 2013 is the period 1 March 2013 to 30 September
2013
First accounts for more than 12 months

If the period of months ends on a day immediately following the basis year, that period (the
second year of assessment) shall constitute the basis for the year of assessment immediately
following the first year of assessment. In such a situation, there is no basis year for the first
year of assessment
Example
Company A makes commences on 1 March 2013 the first accounts to 30 June 2014.
The first year of assessment is 2014 and the basis period is 1 March 2013 to 30 June 2014.
There is no assessment year for 2013
Example
First accounts for more than 12 months and ends in the third year
For any period of months ending on a day immediately following the second year, that period
(the third year of assessment) shall constitute the basis for the year of assessment
immediately following the second year of assessment. There is no basis year for the first and
the second year of assessment.
Example
38
Company A commences operations on 1 December 2013 and closes the first accounts to 31
March 2015.
The first year of assessment is 2015 and the basis period is 1 December 2013 to 31 March
2015
There is no assessment year for the years of assessment 2013 and 2014.
Question 4
Since a substantial part of a REITs income is from rental, what is the treatment accorded to
such income under the Income Tax Act 1967 (as amended)
Answer
The applicable law is section 61A. Rental income from the letting of real property is treated
as a business source but only for purposes of section 61A and not section 4A.
Thus all expenses relating to the rental source is fully deductible.
However any excess of the expenses cannot be carried forward to the following year of
assessment.
The capital allowance are allowed under schedule 3 of the ITA (unlike for unit trust). In other
words, the initial and annual allowance will be computed on the qualifying plant and
machinery or industrial building based on the rates specified in the schedule 3 (unlike the flat
10% allowed for unit trusts). Again, any excess of capital allowances cannot be carried
forward to the following year of assessment.
Thus an income of a REIT is treated like a business but is not given the full effect of the
treatment as is due for an income falling under section 4(a).
Question 5
In computing the income of a REIT would you allow any deduction under section 63A (for
capital allowance) or under section 63B (capital allowance)?
Answer
As all the expenses relating to the earning of the rental income is allowed as a deduction
against the rental income, section 63B permitted fraction would not apply.
Similarly as capital allowance is given under schedule 3, the deduction under 63A is not
applicable to the income of a REIT in arriving at the adjusted income and the statutory
income.
39
Question 6
What is the special feature as regards the distribution of income of a unit trust?
Answer
To make REIT and PTF an attractive vehicle for investment and to make Malaysia a financial
hub, special treatment is given designed to distribute the income of a REIT to the unit
holders.
Thus under section 61A(1) there is no chargeable income to the REIT if 90% of the total
income as computed for income tax purposes under the Act is distributed to the unit holders.
But is a lesser percentage is distributed the whole of the total income would be brought to
charge.
Example Distribution exceed 90% of TI
Distribution
90%
exceeds RM
Distribution less than 90%
RM
Total income of REIT

Amount distributed
100,000
96,000
Total income of REIT

Amount distributed
100,000
60,000
Chargeable income
Tax charged
Nil
Nil
Chargeable income
Tax charged
100,000
25,000
Question 7
How is the distribution of income by a REIT treated for income tax purposes?
Answer
Under Part X Sch 1, REIT shall deduct taxes from the income distributed and pay only the
balance to the unit holders. It can be tabulated as follows:
Type of Unit holder
Foreign institutional investor
[pension fund, investment schemes]
Non-resident company
Others (e.g. resident individuals)
Resident Malaysian company
%
10
25
10
0
The tax represents the final tax. Thus individuals receiving the income from a REIT need not
report the income in their income tax return as it is already taxed at source by the REIT.
40
But for resident companies since no taxes are deducted from the payments made, companies
will report the income in their return and will be taxed according on that income according to
the applicable rate. Ordinary companies whose paid up capital exceeds RM2.5million will
suffer tax at 25% on the income received from the REIT. A SME will suffer tax at the
appropriate bracket i.e. 20% on the first RM500,000 and 25 on the amount exceeding that
amount.
Question 7
How would the REIT deal with the income tax deducted from the payments made to unit
holders? And what are the penalties for non-compliance?
Answer
The tax deducted from the payments to the unit holders must be paid to the Inland Revenue
Board within one month of the payment to the unit holders with an account of the payments
and tax deductions made.
In case of non-compliance, a penalty of 10% on the taxes remaining unpaid will be imposed.
The taxes and the penalty becomes a debt due to the government and can be enforced via a
civil suit.
The penalties may be remitted if there is good cause shown by the taxpayer.
Question 8
How would expenses incurred by a REIT on legal fees, valuations and consultancy fees etc.
incurred in setting up a REIT and before the commencement of the business be treated for
income tax purposes?
Answer
These are pre-operating expenses and legally speaking it does not rank for a tax deduction.
As the government wants to promote REIT as an investment vehicle, a deduction is allowed
under the Income Tax (Deduction for establishment expenditure of REIT or PTF) Rules 2006
as a concession.
Question 9
What is the position if a company that has incurred qualifying capital expenditure on an
industrial building and has claimed capital allowanced on the asset, disposes that building to
a REIT?
41
Answer
A companys disposal an industrial building where that company has previous claimed an
industrial building allowance on that building will not have any balancing allowance or
charge on the disposal [See Public Ruling 2/2015]. The situation is similar to a controlled
sale.
Question 10
New REIT is a real estate investment trust operating since 2012. It closes the accounts to 31
December each year. For the year ended 31 December 2014, it has produced the following
statement of accounts:
New REIT
Income Statement for the year ended 31 Dec 2014
RM
Gross income
Rent from shopping malls
Rent from warehouses
Rent from factories
Interest from fixed deposits
Dividends (Malaysian single tier)
Total gross income
Less: Expenditure
Audit fee
Accounting fees
Depreciation
Management fee
Property upkeep
Secretarial fee
Trustee administration fee
Approved donation
Administration
RM
950,000
450,000
782,000
32,000
95,000
2,309,000
30,000
50,000
26,000
80,000
300,000
60,000
35,000
200,000
60,000
841,000
1,468,000
During the year the New REIT acquired a factory building costing RM4 million of which the
land cost was RM1 million and let it out for rent. The income is included under Rent from
factories for the year ended 31 December 2014.
Required:
(a) Compute the total income of New REIT for the year of assessment 2014.
42
(b) What is the income chargeable to tax, and the income tax liability for New REIT in
the following instances for the year of assessment 2014:
(i) The amount distributed is RM1.1 million
(ii) The amount distributed is RM1 million
(c) Assuming one of the factory buildings is disposed of during the year, within a period
of 3 years from the date of acquisition; indicate the liability to real property gains tax
if any.
Answer
(a)
Computation of total income
New REIT
Computation of chargeable income
Rent from malls
Rent from warehouses
Rent from factories
RM
950,000
450,000
782,000
Less: Deduction allowed

Audit fees
Accounting fees
Depreciation
Management fee
Property upkeep
Secretarial fee
Trustee fee
Approved donation
Administration
30,000
50,000
0
80,000
300,000
0
0
0
60,000
Less: Capital allowance

Add: Other income
Interest
Dividends (Malaysian single tier)
Aggregate income
Less:
Approved donation
Restricted to 10% of aggregate income
Total income
32,000
0
200,000
130,400
RM
2,182,000
520,000
1,662,000
390,000
1,272,000
32,000
1,304,000
130,400
1,173,600
43
(b)
Income chargeable to income tax and the income tax liability
Taxability based on income distribution

Total income
Amount distributed
Percentage distributed
Chargeable income
RM
1,173,600
1,100,000
94
Nil
Total income
Amount distributed
Percentage distributed
Chargeable income
Income tax at 25%
1,173,600
1,000,000
85
1,173,600
293,400.00
(c)
Real property gains tax
The real property gains tax liability arises as follows:
Disposal
With three years of acquisition
Disposal in the 4th year
Disposal in the 5th year
Disposal in the 6th and subsequent years
Rate of tax (%)

30
20
15
0
For New REIT the real property disposal would attract real property gains tax at 30% on the
chargeable gain arising from the said disposal.
44
LEASING
Question 1
What do you understand by leasing and what are the special features of the legislation
relating to leasing?
Answer
Leasing is a form of financing for the acquisition of high cost capital assets. It is similar to
renting and hire purchase with a variation in legal terms and conditions. Generally leasing
helps:
the acquirer to relief or improve his cash flow by way of deduction of lease payments;
and
The lessor achieves tax efficiency of capital assets by way of capital allowance.
However, in view of the possibility of tax abuses, special legislation was introduced in 1986
to streamline the industry.
Special features
Under section 36(1) of the Income Tax Act 1967 (as amended) where the DGIR is satisfied
that there is a need for some treatment in computing the gross income with respect to:
A hire purchase transaction;
A transaction under which a debt is payable by installments;
A lease transaction in respect of movable property;
Any other transaction involving a debt or stock in trade; or
Such other transaction as may be prescribed.
He may also prescribe the manner in which the adjusted income and statutory income from
the business is computed, by giving directions and formula, rules, regulations for the special
treatment with respect to any such transactions either in relation to a particular business or in
relation to any business having any such transaction.
As a result, the Income Tax Leasing Regulations 1986 were gazette on 8 April 1986.
Some of the special features are as follows:
Meaning of lease:
A lease includes a sub-lease, a tenancy of three year or less and any agreement for a lease or
sub-lease (Sec. 2, Income Tax Act 1967 (as amended)).
Under the Leasing Regulations of 1986, a lease is any kind of agreement or arrangement
under which payments are made for the use of an asset.
45
A controversy is that the definition is wide and may cover both moveable and immovable
asset while the Income Tax Act 1967 (as amended) under section 36 talks of only the
movable asset.
Separate business
A business which consists of leasing transactions and other activities will be deemed to have
two businesses one consisting of leasing transactions, and the other of the other activities.
In other words, a leasing company which has leasing and non-leasing activities will be having
two businesses.
Gross income of a lessor

The lease rental received or receivable (i.e. on an accrual basis) will be recognized as gross
income charged to tax in the basis period for a year of assessment in accordance with the
financial period of the lessor.
Under section 24(1) (c) of the Income Tax Act 1967 (as amended):
where in the relevant period a debt owing to the relevant person arises in respect of the
use or enjoyment of any property dealt at any time in the course of carrying on a business, the
amount of the debt shall be treated as gross income of the relevant person from the business
for the relevant period
Income accruing evenly

Regulation 3 of the Leasing Regulations provides that the total income of a lease is deemed to
accrue evenly over the period of the lease term;
Special provisions for the treatment of lease income receivable

The full rental receivable in a basis period for a year of assessment may be treated as the
gross income of the lessor where the DGIR considers such a treatments as being just and
reasonable (proviso to regulation 3).
Deem sale transaction

Under the leasing regulations, there are six situations where lease agreement is deemed to be
sale transaction.
1.
The lessee is given an option to purchase the asset during or upon the expiry of the
lease term;
2.
The lessee is given the beneficial ownership of the asset
3.
The lessee during the lease term or upon its expiry acquires the relevant asset at below
the market value.
46
4.
5.
6.
The asset is a special purpose asset

The lessee has claimed capital allowance in respect of the asset prior to the lease
The lessee is given the right to sell or dispose of the asset prior to the lease
The implication of this deemed sale is that the lessee becomes the owner of the asset.
Therefore, the lessor cannot claim any capital allowance on the asset in question.
Treatment of terminal payments

Where any terminal payments are made by the lessee to the lessor as compensation for
termination the lease, such payments would be deemed as taxable in the hands of the lessor.
Question 2
Heavy Plant Leasing Sdn Bhd. (HPL) is a Malaysian incorporated company carrying on the
business of leasing heavy plant, machineries, and equipment to the building industry for
several years. HPLs accounts are closed to 31 December each year. During the year 2008,
the company leased out a machine to Roadbuilders Sdn Bhd. (RSB) under a stepped-up
monthly payments arrangement. The arrangement was agreed upon to enable the lessee to
ease its cash flow. Under this arrangement, RSB will make lease payment to HPL over a
period of two and a half years as follows:
Period
July 2008 to 31 December 2008
January 2009 to 31 December 2009
January 2010 to December 2010
Total lease payments
Lease payments (RM)

200,000
300,000
400,000
900,000
Required:
In the context of section 24 of the Income Tax Act 1967 (as amended) and Rule 3 of the
Income Tax Leasing Regulations of 1986, advice the tax implications of this
arrangement to Heavy Plant Leasing Sdn Bhd.
Answer
Section 24 of the Income Tax Act 1967 (as amended) provides that where in the relevant
period a debt is owing to the relevant person arises in respect of the use or enjoyment of any
property dealt with at any time in the course of carrying on a business, then the amount of the
debt shall be treated as the gross income of the relevant person from the business for the
relevant period.
The lease rentals received and receivable (i.e. the income is assessed on an accrual basis) will
be recognized as gross income charged to tax in the basis period for a year of assessment.
Regulation 3 of the ITLR 1986 deems that the lease rental receivable in respect of a lease
shall be deemed to accrue evenly throughout the period of such lease term and the gross
47
income of the lessor in respect of that lease for the basis period for a year of assessment shall
be a portion of the total sum receivable for the lease term being a portion which bears the
same proportion to that total sum receivable as the number of days in the basis period for that
year that falls within the lease term bears to the total number of days of the lease term- an
anti-avoidance ruling designed to prevent the structuring of the lease payments to secure tax
advantage, especially in non-arms length transaction.
However, the full rental received in the basis period for a year of assessment may be treated
as the gross income of the lessor for the basis period for that year of assessment where the
Director General of Inland Revenue considers such treatment to be just and reasonable in the
circumstances.
Where in a transaction between independent person dealing at arms length it could be
established that the arrangement is in line with commercial realities the DGIR would accept
such an arrangement (e.g. in a case of a floating rate lease or a stepped up or stepped down
lease)
Based on the law, there are two possible results:
(a)
If the company is not able to satisfy the DGIR that the arrangement is commercially
justifiable, the lease payments would be spread out over the period of the lease by virtue of
Regulation 3, as follows:
Period
July 2008 -Dec 2008
Jan 2009 - Dec 2009
Jan 2010 - Dec 2010
YA
2008
2009
2010
Apportionment
900,000/30 x 6 mths
900,000/30 x 12 mths
900,000/30 x 12 mths
Total
Amount
180,000
360,000
360,000
900,000
(b)
If the Director General of Inland Revenue is satisfied that the arrangement is just and
reasonable, then the lease rental would be treated as received in the relevant basis period for
the year of assessment as follows:
Period
July 2008 -Dec 2008
Jan 2009 - Dec 2009
Jan 2010 - Dec 2010
YA
2008
2009
2010
Total
Amount
200,000
300,000
400,000
900,000
48
Question 3
SP Leasing Sdn Bhd (the company) is a locally incorporated resident company and has been
in business for several years. It carries on the business of leasing heavy construction
machineries and the business of selling plant and machinery on hire purchase terms.
The company closes its accounts to 30th June each year. For the year ended 30th June 2014
(the financial year) , the company had provided the following information:
(i)
The adjusted income from the leasing business was RM97,702 while that from the
hire purchase business was RM99,473.
(ii)
In respect of the leasing business, the company is entitled to a capital allowance of

RM73,968 for assets used in that business i.e. on assets leased out;
(iii)
The capital allowance on office equipment used in the leasing business is RM47,258
(iv)
The capital allowance for assets used in the hire purchase business is RM58,190.
(v)
The company has office equipment and furniture and fittings that are used in both the
leasing and the hire purchase business (the common user assets). For the year of
assessment 2014, the capital allowance due on the common user assets is RM8,534. It
is agreed with the Director General of Inland Revenue that 70% of the capital
allowance should be allocated to the leasing business while 30% should be allocated
to the hire purchase business.
(vi)
The company incurred a loss in respect of the leasing business in 2013 and the loss
brought forward to the year of assessment 2014 was RM21,574.
(vii)
The company owns a large warehouse that is let out. The adjusted rental income was
RM24,461
(viii)
It has a fixed deposit with a local bank that was placed as security for the companys
overdraft facilities. During the financial year, the interest earned from this fixed
deposit was RM3,255.
(ix)
The company received a single tier dividend of RM5,500 from a Malaysian public
listed company on 20th November 2013.
(x)
During the financial year, the company made a cash donation of RM11,000 to a
Malaysian approved charitable body.
(xi)
Required
Compute the chargeable income of SP Leasing Sdn Bhd for the year of assessment 2014.
49
Answer
SP Leasing Sdn Bhd
Computation of chargeable income
RM
Leasing business
Adjusted income
Less: CA
CA on leased assets
CA on office equipment
CA on common user assets (8,534x70%)
Less: Absorbed
Balance CA c/f
Statutory income
Hire purchase business
Adjusted income
Less: CA
58,190
Less: CA on common user assets
(8,354x30%)
2,560
Statutory income
Agg. statutory business income from business
Aggregate of statutory business income (after losses)
Add: Other income
Rent
Interest
Aggregate income
Donation restricted to 10% of aggregate income
Total income and chargeable income
RM
97,702
73,968
47,258
5,974
127,200
97,702
29,498
0
99,473
60,750
38,723
38,723
38,723
21,574
17,149
0
24,461
3,255
11,000
4,486
27,716
44,865
4,486
40,379
50
BANKING
Question 1
What is the scope of taxation of a bank?
Answer
A banking business source is taxed on a world scope in other words, on income wherever
accruing or derived. The world scope applies only to the banking business and not the nonbusiness sources of income like rent.
The business income of the overseas branch of a bank would be subject to Malaysian income
tax at the point of accrual of the foreign income.
Question 2
What is the relief due to the bank for income subject to tax in the foreign jurisdiction?
Answer
Where the foreign income suffers tax in the foreign jurisdiction, then tax relief is due as
follows:
Where Malaysia does not have a double taxation agreement with the country in which the
income arose, then a unilateral relief is due, i.e. a tax relief of a maximum of 50% of the
foreign tax suffered would be allowed as a deduction in arriving at the Malaysian income tax
payable
Where Malaysia has a double taxation agreement with the country in which the income arose,
then a bilateral relief is due i.e. the tax relief would be the lower of the tax suffered in
Malaysia on the foreign income or tax suffered in the foreign country.
Example
MBB Bhd derives business income of RM1,000 in a foreign tax jurisdiction. The tax
suffered was RM20,000.
The Malaysian tax suffered on the same income is RM15,000.
Required
What is the tax relief due to MBB Bhd in the following situations?
(a) The foreign tax jurisdiction does not have a double tax agreement with Malaysia.
(b) The foreign tax jurisdiction does not have a double tax agreement with Malaysia.
51
Answer
In the case of (a) MBB Bhd would be entitled to a maximum relief of RM10,000 being half
of the foreign tax suffered.
In the case of (b) the relief entitlement would be RM RM15,000 being the lower of the
foreign tax suffered (RM20,000) or the Malaysian tax suffered (RM15,000) on the same
income.
Question 3
ABB Bhd is a Malaysian resident bank and in line with its expansion program, opened its
first branch in Chennai, South India in 2012. The bank closes its accounts on 31 December
each year.
For the year ended 31 December 2013, it received the following payments from the Chennai
branch:
(a) Interest of RM30,000 in respect of a short term loan extended to the Chennai branch
in May 2013. The interest was accrued in November 2013 and remitted to Malaysia in
January 2014.
(b) Management fees of RM200,000 to assist with the setting up of the branch office in
Chennai and putting in place a proper standard operating procedures that included
complying with Indian banking laws.
Answer
The Chennai branch in South India would be treated as part of its banking business
operations and would be taxed on a world scope under section 60C.
The interest is therefore liable to tax as part of its business operations. It will be brought to
charge when the payment accrued in November 2013, and will be taxed in the year of
assessment 2013.
The management fees, while it was received for assistance with the setting up of the Chennai
branch, would still form part of its banking operations and would be liable to Malaysian
income tax.
52
Question 4
Malaysian Indian Bank Holdings Bhd (the Malaysian bank) is a local bank with operations
in Malaysia and branches in India (the Indian branch). For the year ended 31 December
2012, it received the following sums:
a) RM40,000 being interest on interbank transfer the Indian branches ran short of cash
in September 2012 and the Malaysian Bank gave a short term loan to tide over the
cash shortage. The interest was remitted to Malaysia.
b) Interest of RM100,000 from a subsidiary in Malaysia for a loan extended to the
subsidiary for the purchase of a building.
c) RM3000,000 being interest on funds made available to another subsidiary for
maintaining the net working capital funds of the said subsidiary as prescribed by Bank
Negara.
The Malaysian bank had also invested in bonds and this was realized during the year. The
bank a profit of RM300,000 on the sale of the bonds; while it incurred a loss of RM85,000
on the disposal of a landed property acquired as a long term investment in a landed property.
Required
Discuss the taxability of the income received, including the treatment of the profit from the
sale of the bonds and the loss arising from the sale of the land property
Answer
The RM40,000 from the interbank transfer would be liable to income tax as part of its
banking operations.
The RM100,000 would be liable to income tax also as part of its banking operations.
The RM300,000 received would be liable to tax as it was for maintaining the net working
capital funds of the said subsidiary as prescribed by Bank Negara.
The gain from the profit from the sale of the bonds would be liable to tax as it forms part of
the trading operations of the bank.
The loss of RM85,000 incurred on the investment in a landed property would not be
allowable as it is a capital loss arising from a long term investment, and did not arise in the
course of the banking business.
Note: One needs to make a distinction between a short term investment from surplus funds (the income or gains
derived from its realization would be liable to income tax) and one made on a long term basis (the gains from its
realization made, based on the circumstances, and would not be liable to income tax. This is a tricky area and
one needs to study the facts of the case carefully and apply the decisions of the courts to the case accordingly.
The trend in recent times is for the courts to distinguish between a short term investment being treated as part of
a business operations and long term investment the gains from the realization of which is treated as capital
receipt not liable to income tax. For example, one needs to make a distinction between the Punjab Co-operative
Bank Ltd v CIT (old school of thought) and Waylee Investment Ltd v CIR (the current trend in thinking on
banking operations).
53
Question 5
For the year ended 31 December 2012, MB Bank Bhd (the bank), a Malaysian resident has
an adjusted income of RM 250 million, and is entitled to a capital allowance of RM40
million. The bank has investments in a foreign country from which it received a dividend of
RM7.125 million after suffering an underlying tax of 25% and another 5% withholding tax
on the dividends paid out to non-residents. The double taxation agreement between the two
countries provided for a double taxation relief.
Required
Compute the tax payable by MB Bank Berhad after the bilateral relief due.
Answer
RM000
250,000
40,000
210,000
10,000
220,000
Adjusted business income

Statutory income
Add: Dividend
Aggregate/chargeable income
Income tax at 25%
Less: Bilateral relief - lower of
Malaysian tax 10,000 x 25%
Foreign tax 2,500 + 375
Tax payable after relief
55,000
2,500
2,875
2,500
52,500
The gross dividend income is computed as follows:

Net dividend
Add: 5% WHT
(7,125/95x100x5%)
7,125
375
7,500
Add: 25% underlying tax

(7,500/75x100x25%)
2,500
10,000
54
INSURANCE
Question 1
How is the insurance categorized for income tax purposes?
Answer
The insurance business is categorized into two major businesses:
(a) The general insurance ; and
(b) The life insurance.
Question 2
What is the distinction between the general insurance and the life insurance?
Answer
The general insurance would include the business of insuring fire, property, motor vehicle,
transportation, health, education, and general damages i.e. other than life.
Life insurance is only focused on risk to life of the assured.
Question 3
What are the sub-categories of insurance business under general and life business?
Answer
A general insurance may also carry out inward re-insurance, off-shore insurance in addition
to the general insurance. For income tax purposes, each of those businesses is treated as a
separate business.
Similarly, the life insurance business is deemed to have two sources of business income one
from the life fund and the other from the shareholders fund.
A life insurance company can also carry on the business of life re-insurance business and an
inward life re-insurance business.
For income tax purposes, the life re-insurance and the inward life re-insurance are treated
separately as general insurance business sources.
Question 4
What is the scope of charge of a resident life insurance business?
55
Answer
The income of a resident life insurer is taxed on a world scope, and is taxed on the income
derived from investments or sale of investments that are derived from investments made out
of the life fund or shareholders fund of the business.
As the resident insurers income would be taxed on a world scope, it is likely to suffer double
tax and therefore relief may be available for any foreign tax suffered. The relief is set off
against the Malaysian income tax charged. Para 28 Schedule 6 is not applicable to the income
received in Malaysia from outside Malaysia in respect of insurance business.
Question 5
What is the scope of charge of a non-resident life insurance business?
Answer
A non-resident life insurer is taxable on the income from investment and sale of investment
from the Malaysian life fund. The income from this fund is taxable notwithstanding that the
particular investment income arose outside Malaysia.
The life fund refers to a special fund that the law requires life insurance companies to
establish under section 38 of the Insurance Act 1996
Question 6
Identify the type of income and expense that will be considered for income tax purposes in
respect of the following:
Resident life insurance business

Resident general insurance business
A non-resident general insurance business
Answer
Life insurance business
When a life insurer underwrites the life of an assured, the insurer undertakes to make
payments to the insured upon death or upon maturity of the relevant policy. As there is a
contingency event, the premium received is treated as not earned and therefore, not treated as
income of the insurer.
The amount of premium to be paid upon the life policy is carefully determined based on
actuarial computation. And if any surplus arises, for example on account of overestimates
then such surplus is transferred to the shareholders account and this sum so transferred is
liable to income tax.
56
As the premium received for a life policy is not taxable, any claim paid out on a life policy is
also not deductible for income tax purposes.
In the case of resident life insurance business, the following would constitute income and
expenses for the purposes of Income Tax Act 1967 (as amended):
Gross income from commissions, interest, and dividends made out of life fund or the
shareholders fund
Gross proceeds from the realization of the investment or rights
The following are allowable expenses
Cost of acquiring and realizing investments this deduction is applicable to both the
life fund and shareholders fund
Amount transferred from the shareholders fund to set off the actuarial deficit for the
relevant period arising from the life fund this deduction is only applicable to the
shareholders fund
General insurance resident

In the case of resident general insurance business, the following would constitute income for
the purposes of Income Tax Act 1967 (as amended):
Gross premium first receivable in the period (less returns)

Gross income from general business, including commissions, interest, and dividends
Gross proceeds from the realization of the investment held
Amounts recovered under a contract of re-insurance
Reserve for unexpired risk - opening balance
Claims incurred during the period

Reinsurance premiums payable during the period a 100% of the premium paid
would be allowed if the reinsurance were with a resident company; and only 95% if it
is with a foreign company outside Malaysia.
Commissions paid and discount allowed
Management expenses
Cost of acquiring and realizing investments
Reserve fund for unexpired risk closing balance
General insurance non-resident
Gross premium first receivable in the period (less returns) these are restricted to
only Malaysian issued policies (i.e. derived from Malaysia)
Gross income from general business, including commissions, interest and dividends these are restricted to only Malaysian derived income
Gross proceeds from the realization of the investment held
Amounts recovered under a contract of re-insurance
Reserve for unexpired risk - opening balance
57
Claims incurred during the period

Reinsurance premiums payable during the period a 100% of the premium paid
would be allowed if the reinsurance were with a resident company; and only 95% if it
is with a foreign company outside Malaysia.
Commissions paid and discount allowed
Management expenses
Reserve fund for unexpired risk closing balance
Cost of acquiring and realizing investments
A proportion of head office expenses this amount are computed as a proportion of
the Malaysian gross premium as bears the world gross premium as a proportion of the
head office
Proportion of head office expenses is computed as follows:
[Malaysian gross premium / world gross premium] x head office expenses
Question 7
What is the treatment of capital allowances and losses in respect of the life fund and the
shareholders fund?
Answer
The adjusted income of the shareholders fund (both resident and non-resident) is deemed to
be the statutory income i.e. no capital allowance is deducted against the adjusted income from
the shareholders fund.
Capital allowance is allowed only against the adjusted income of the life business. Any
unabsorbed capital allowance can be carried forward and allowed only against the life
insurance business in the following and subsequent years of assessment.
Losses arising from the life fund must be deducted only against the life fund.
Any unabsorbed losses of the life fund would be carried forward and deducted against the
adjusted income of the life fund.
As for non-life fund (example, shareholders fund, general insurance etc.), the current year
loss, and the unabsorbed loss from the non-life fund must be deducted from the non-life fund.
58
Example
Adjusted income
Current year allowance
Unabsorbed allowance b/f
Statutory income
Aggregate of statutory income
From life fund
From SHF and GI business
Chargeable income
(c)
LF
RM000
60,000
26,278
15,000
18,763
18,736
Non-life fund
SHF
GI
RM000 RM000
90,148
11,059
90,148
50
9
11,000
101,148
736
18,000
82,156
18,992
Question 8
What do you understand by reserve for unexpired risk and what is the treatment accorded
under the Income Tax Act 1967 (as amended)?
Answer
This is a reserve fund created for unexpired risk, which is an estimate of future liabilities that
may be incurred on existing general insurance policies. As the risk has not expired, the
premium received cannot be recognized as income for income tax purposes.
Under section 60(9), the unexpired risk is ascertained as follows:
25% of the net adjusted premium in respect of marine, aviation ad transit policies
the actuarys computation of the net adjusted premiums of accidents, fire and other
general insurance not covered in the above category this amount must be in relation
to the appropriate accounting principles approved by Bank Negara
The term net adjusted premium refers to situations where if reinsurance policies exist, to the
difference between the gross premium receivable and the amount of the re-insurance
premium payable [being the 95% or the 100% premium payable under section 60(7)].
In order to determine the reserve fund for unexpired risk take note that the marine, aviation,
and transit policies are aggregated as one business source under general insurance.
59
Example
Say ABC Insurance Company paid reinsurance premium as follows on the relevant policies:
Reinsurance and net premiums paid for general insurance
MAT
FMO
RM000
RM000
Gross premiums received
Less:
Reinsurance in Malaysia
Reinsurance outside Malaysia
Net premium paid
Total
RM000
(c)
8,800
7,700
16,500
(d)
700
350
1,050
350
175
525
1,050
525
1,575
(c-d)
7,750
7,175
14,925
MAT=Marine, aviation and transit policies; FMO=Fire, motor and other policies
The amount to be allowed in respect of the reinsurance and the reserve for the unexpired
would be as computed as follows:
MAT
RM000
FMO
RM000
Total
RM000

(c)
Less:
Reinsurance in Malaysia-allowed 100%
Reinsurance outside Malaysia - allowed 95%) [Sec 60(7)]
(d)
8,800
7,700
16,500
700
333
1,033
350
166
516
1,050
499
1,549
Net premium paid
7,768
7,184
14,951
600
2,542
Reinsurance and net premiums paid deductible
(c-d)
Closing balance of the reserve for unexpired risk

(expenditure deductible for income tax purposes)
MAT- computed at 25% of net premium paid
[sec 60(9)(a)] [25% x 7,768]
FMO - on actuarial basis
[section 60(9)(b)] [ fully allowed as provided]
1,942
60
Question 9
What is the treatment for income tax purposes of the following income?
(a) foreign source income
(b) dividend received under the imputation system
(c) capital gains from the realization of investment
Answer
(a) Foreign sourced income would be subject to tax and Para 28 Schedule 6 does not
apply to such income.
(b) Dividends issued under the imputation system and received by an insurance company
would be treated as part of the business income of the insurance company, falling
under section 4(a) of the ITA and would be charged to tax accordingly. However, any
dividends issued under the single tier system would be exempted from income tax.
(c) Capital gains from the realization of investment would be subject to tax and a
deduction would be available for the cost of acquiring such investment.
Question 10
In respect of an inward re-insurance business falling under section 60A:
Explain the meaning of re-insurance

The tax adjustments in arriving at the adjusted income
The steps in the computation of the chargeable income
What is the tax rate applicable under schedule 1 of the Income Tax Act 1967 (as
amended?)
The treatment of the income for the determination of exempt dividends under
schedule 7A of the Income Tax Act 1967 (as amended)
ANSWER TO QUESTION
Re-insurance refers to any risk that is re-insured with insurance. In this context, inwardreinsurance for example means re-insuring the risk with a Malaysian company where the
risk or the original policy was issued outside Malaysia.
The re-insurance business is treated in a manner similar to that of the general insurance
business.
The chargeable income would be calculated as follows:
61
General
insurance
Inward reinsurance
100,000
30,000
70,000
(a)
20,000
2,000
18,000
(b)
Adjusted income
Statutory income
Aggregate of statutory income (a) + (b)
Chargeable income
88,000
8,000
80,000
The amount of chargeable income attributable to the inward re-insurance would be computed
as follows:
80,000 x [18,000/88,000] = 16,363
The tax on the inward re-insurance business shall be charged at the reduced rate of 5% on this
computed chargeable income.
62
Question 11
MGR Insurance Bhd is a resident insurance company carrying on the business of life
insurance business and general insurance business. The company closes the accounts to year
end 31 December. For the year ended 31 December 2012, the companys financial statement
in respect of its insurance business is as follows:
LF
RM000
SHF
RM000
GI
RM000
(a)
60,516
396
795
4,770
5,565
6,899
3,711
670
83,322
0
5,565
3,711
26,504
37,105
129,872
51,730
838
255,325
20,809
221
773
0
0
0
0
699
22,502
(b)
7,421
1,362
1,855
4,241
5,863
2,384
16,927
585
40,638
3,876
1,362
708
10,601
111,319
42,419
13,398
754
184,437
5,302
1,387
663
0
0
0
1,575
4,484
13,411
(a-b)
42,684
70,888
9,091
Income
Gross premium
Interest income
Rental income
Gross dividend
Sale of shares
Sale of office building
Sale of mining land
Reserve for unexpired risk b/f
Less: Expenses
Net claims incurred
Management expenses
Commissions
Cost of shares
Cost of office building
Cost of mining land
Re-insurance premium
Reserve for unexpired risk c/f
Profit
LF=Life fund; SHF=Shareholders fund; GI=General insurance
63
The insurance company had also furnished the following information in respect of the capital
allowances, losses, reinsurance, and the reserves for unexpired risk.
Note 1
Capital allowances and losses
LF
RM000
SHF
RM000
GI
RM000
648
200
800
23,258
17,000
0
249
300
658
Capital allowance for YA 2012

Unabsorbed capital allowance b/f
Unabsorbed losses b/f
Note 2
Reinsurance and net premiums paid for general insurance
MAT
RM000
FMO
RM000
Total
RM000

(c)
Less:
Reinsurance in Malaysia
(d)
8,800
7,700
16,500
700
350
1,050
350
175
525
1,050
525
1,575
Net premium paid
7,750
7,175
14,925
(c-d)
MAT=Marine, aviation and transit policies; FMO=Fire, motor and other policies
Note 3
Reserve for unexpired risk for General insurance
Section 60(9)(a) and (b)
RM000
554
Unexpired risk b/f from YA 2011 (aggregate)

Unexpired risk c/f to YA 2012
Based on FRS 202 (company allows 50%)

Actuarial basis per section 60(9)(b) ITA
MAT
RM000
FMO
RM000
Total
RM000
600
4,484
3,884
64
Answer
MGR Insurance Bhd
Computation of income tax for year of assessment 2012
LF
RM000
SHF
RM000
GI
RM000
(a)
0
396
795
4,770
5,565
6,899
3,711
0
22,136
0
5,565
3,711
26,504
37,105
129,872
51,730
0
254,487
20,809
221
773
0
0
0
0
699
22,502
(b)
0
0
0
4,241
5,863
2,384
0
0
12,488
0
0
0
10,601
111,319
42,419
0
0
164,339
5,302
1,387
663
0
0
0
1,549
2,542
11,443
(c)
9,648
90,148
11,059
648
200
8,800
90,148
249
300
10,510
Income
Gross premium
Interest income
Rental income
Gross dividend
Sale of shares
Sale of office building
Sale of mining land
Reserve for unexpired risk b/f
Less: Expenses
Net claims incurred
Management expenses
Commissions
Cost of shares
Cost of office building
Cost of mining land
Re-insurance premium
Reserve for unexpired risk c/f
Adjusted income
Current year allowance
Unabsorbed allowance b/f
Statutory income
SI(LF)/Aggregate of SI(SHF+GI)
Life fund
General insurance
Chargeable income
8,800
100,658
800
8,000
658
100,000
65
Workings
Reinsurance and net premiums paid
MAT
RM000
FMO
RM000
Total
RM000

(c)
Less:
Reinsurance in Malaysiaallowed 100%
allowed 95% [Sec 60(7)]
(d)
8,800
7,700
16,500
700
350
1,050
333
1,033
166
516
499
1,549
Net premium paid
7,768
7,184
14,951
600
2,542
(c-d)
Reserve for unexpired risk

MAT- computed at 25% of net premium paid
[sec 60(9)(a)]
FMO - on actuarial basis [section 60(9)(b)]
1,942
66
PROPERTY DEVELOPERS
Question 1
In the case of a property developer, what are the factors that you would consider in
determining the date of commencement, including active development and booking date ?
Answer
The property development industry is a specialized industry and therefore complicated in
nature. The determination of the date of commencement of the business is therefore not a
simple straightforward matter. One therefore has to resort to the general rules and case laws
relating to commencement of business for guidance.
Date of commencement could be determined as being the earlier of the following:
The date the developer commenced active development of the land; or

The booking of lots for sale.
Active development: this term is not defined and one has to take that it means a series of
activities connected with the development of the land, like clearing and leveling land etc.
Note:
Booking refers to the date the purchaser can pay a booking fee to purchase a property. This has to be
distinguished from registering to buy a property, where no payment is made by the potential buyer.
Date of commencement
The date of commencement for a property developer is very much dependent on the facts of
the case. But generally it is accepted that the date of commencement would be indicated by
the active development of the land or alternatively by the booking (which has to be
distinguished from mere registration by potential buyers) of the units to be constructed. The
earlier of these two activities would be accepted as the date of commencement.
Where the property development consists of more than one project, then each project is
treated as a separate and distinct source of income.
The implication is that the capital allowance would be deducted in respect of each of the
artificial separate business.
Active development of the land
Active development of the land refers to the commencement and continuation of the works
necessary for the development and completion of the development project. Such works would
include excavation, filling and levelling as well as piling prior to the actual erection of the
relevant buildings
67
Booking date
This refers to the date when the property developer invites the public either by personal
invitation or by an announcement to the public in the media (e.g. the newspaper) to book the
properties to be constructed. This is different from the registration of potential buyers for the
purchase of the property.
The two acts are distinguished by the fact that in the case of potential registration, no fees
need to be paid. On the other hand in the case of actual booking, the buyer may have to pay a
certain amount of towards the purchase price usually termed the down payment, followed by
stage payments based on the development progress.
Question 2
Company T has a piece of land with total land area of 200 hectare. The company plans to
build a block of luxurious condominium on 10% of the land area while reserving the balance
of 180 hectare for bungalow houses in future. The total cost of the land was RM10 million.
Required
What is the applicable land cost that would be allocated to the condominium project?
Answer
The cost of the whole piece of land is RM10 million. Hence the cost of land to be allocated to
the condominium project is RM1 million being 10% of the total cost of cost [10% of RM10
million].
Where the development is ongoing and there are several phases, the allocation would be
apportioned based on the formula:
Total development area of the relevant phase
Total development area of all phases
common
infrastructure cost
Question 3
How should common infrastructure be apportioned to the relevant projects of a developer for
the purposes of determining the adjusted income?
Answer
The accounting standards prescribe that common costs may be allocated using relative sales
value or any other generally accepted method.
For income tax purposes common infrastructure costs have to be apportioned in accordance
with:
(a) the area (acreage) method;
68
(b) the relative sales value method; or

(c) any method that is acceptable by the DGIR.
A property developer who chooses to apply any of the method above need not apply to the
DGIR. He only needs to indicate it in the tax computation and ensure that the method used
reflects a fair and reasonable allocation of the costs.
Question 3
What is the implication of determining the date of commencement for the property
developer?
Answer
Expenditure incurred before the date of commencement is not allowable for tax deduction
purposes, as it would be capitalized as development expenditure.
Question 4
How is the revenue for a property developer recognized?
Answer
As the profit accrual period is a prolonged one (i.e. covering a long period), it is important
that the profit recognition is reasonably matched to the expenses to give a true profit.
The accounting rules have developed the percentage of completion method to do this. And
the tax authorities have adopted this method to compute the adjusted income of a property
developer.
Essentially the method falls in line with section 24 of the ITA 1967 (as amended) that
requires income to be recognized on an accrual basis.
Section 24(1)
(1)
where in the relevant period a debt owing to the relevant person arises in
respect of
a) any stock in trade sold (or part with on requisition or compulsory
acquisition or in a similar manner) in or before the relevant period in
the course of carrying on a business;
b) any services rendered at any time in the course of carrying on a
business; or
c) the use or enjoyment of any property dealt with at any time in the
course of carrying on a business
The amount of the debt shall be treated as gross income of the relevant person from the
business for the relevant period.
69
The accounting base for the percentage of completion method is based on cost, while the
IRBs base is founded on payment received and receivable.
Accounting base
[Cost incurred to date / total cost] x estimated gross profit = estimated profit for the relevant year
IRB base
[Payment received/receivable / total sales value of project] x estimated gross profit of the project = estimated profit
for the relevant year
70
SEA AND AIR TRANPORT
Question 1
What is the scope of charge under the Income Tax Act 1967 (as amended) in respect of
income derived from shipping and airline operations?
Answer
Shipping and airline operations fall under the special industries and are assessable on a world
scope under section 54(2) (a), i.e. from income wherever accruing or derived; unlike other
income that are only assessed on a derived, accrued or received in Malaysia basis.
Question 2
What do you understand by the following terms?
a)
Malaysian ship
b)
gross income derived from Malaysia
c)
casual call
d)
transshipment
Answer
Malaysian Ship
A Malaysian ship is defined under section 54A (6) to mean a sea going ship registered under
section 11of the Merchant Shipping Ordinance of 1952. It excludes several types of vessels
like tug boat, fishing boat etc.
Gross income derived from Malaysia
Gross income derived from Malaysia is defined under section 54(5) to means the total of all
sums received or receivable in Malaysia by the operator in the basis period in respect of
transporting by sea or air passengers or cargo embarked or loaded in Malaysia into ships or
aircraft owned or chartered by the operator.
It would exclude the following:
Goods transshipped
Casual call
Refund
A casual call
This is one where the ship owned or operated by an owner or charterer has not called at a
Malaysian port in the last 24 months and will not probably call at a Malaysian port in the next
24 months. Essentially a casual call would be an isolated call.
71
Transshipment
This refers to passengers and cargo brought into Malaysian solely to be transferred to
transship to another ship or plane. Alternatively such transshipment is on a casual call basis.
The income from such activities would be excluded in determining the income of the operator
derived from Malaysia.
Question 3
What are the conditions that must be satisfied before a ratio certificate is accepted by the
Director General of Inland Revenue Malaysia?
Answer
The following must be satisfied:
It must be issued by a revenue authority of the country of residence of the sea or air
transport operator
The said revenue authority must compute and assess the full profits of the nonresident operator from his shipping or airline operations
The tax computation basis must be quite similar to the Malaysian basis of
computation.
The certificate must state the world gross freight earnings, the adjusted profits or
losses, and the capital allowances due
The certificate issued by most countries with which Malaysia has a double tax
agreement is generally acceptable on a reciprocal basis.
Question 4
Orion Shipping Lines Ltd. is a Hong Kong based shipping company. For the year ended 31
Dec 2015 it has submitted to the Director General of Inland Revenue Malaysia the following
adjustment to its accounts made by the Hong Kong tax authorities:
Net profits per accounts

Add: Depreciation
Less: Rent received from outside Hong Kong
RM
3,000
8,700
11,700
1,800
9,900
The company has produced an acceptable certificate from the Hong Kong tax authorities that
indicates the following:
RM
Gross world income
86,000,000
72
World adjusted income
80,000
World depreciation allowance
4,800,000
4,300,000
Required:
For the year of assessment 2015, compute the tax payable by the company using the
following:
a)
5% method;
b)
the acceptable certificate method
Answer
The 5% method
4,300,000
Deemed statutory income at 5%
215,000
Malaysian tax payable:
53,7500
215,000 @ 25%
The Acceptable Certificate Ratio Method

Deemed Malaysian derived income
4,300,000/86,000,000 x 80,000
Less:
Deemed Malaysian capital allowances
4,300,000/86,000,000 x 4,800,000
Deemed Malaysian statutory income
Malaysian tax payable
3,760 at 25%
4,000
240
3760
940.00
Note: The current rate is 25% for 2015.
Question 5
Transshipping Lines (the company) is an Australian incorporated shipping company
carrying on the business of transporting passengers and cargo by sea to various destinations.
The company however does not have an office in Malaysia. Certain merchants who wish to
ship their goods using the companys ships would arrange with their agent in Port Kelang to
73
ship their goods to Singapore in feeder vessels, which will take the goods to Singapore. The
feeder vessels do not belong to the company nor are they chartered by the company for this
purpose. Once in Singapore, the goods will be loaded from the feeder vessels on to the ships
belonging to the company and sent to their respective destinations. The payments for the
services are made to the agents in Port Kelang.
Required
Discuss the taxability of Transshipping Lines to Malaysian income tax under the
Income Tax Act 1967 (as amended) in respect of the payments received for the cargoes
shipped from Port Kelang. Quote relevant case laws in support of your answer.
Answer
The company will not be liable to any Malaysian income tax since the Australian shipping
company was not operating in Malaysia. The goods were in fact loaded on to the Australian
ship in Singapore and not in Malaysia.
In the case of OOCL Ltd v Ketua Pengarah Hasil Dalam Negeri a shipping company resident
in Hong Kong had no business operations in Malaysia but Malaysian merchants wishing to
ship cargo to Hong Kong would approach a local agent who acted for the Hong Kong
shipping company. The cargoes were loaded from Penang, Kuching and Kota Kinabalu into
feeder vessels and sent to Singapore where it was transshipped on to the Hong Kong vessel.
The Inland Revenue Board charged the payments received as income derived from shipping
operations Malaysia. On appeal as to whether the Hong Kong company has derived income
from Malaysia the Special commissioners of Income Tax held that as the feeder ships on to
which the cargoes were loaded on in the various ports were neither owned or chartered by the
Hong Kong company, the income derived from the transport of the Malaysian cargo is not
derived from Malaysia.
74
TRADE ASSOCIATION
Question 1
What do you understand by the term mutuality? Quote relevant cases in support of your
answer.
Answer
The mutuality principle holds that a man cannot make a profit by trading with himself.
Therefore, where a number of people have associated together for a common purpose and
have contributed to a common fund in which all of the contributors are interested, the surplus
of their contributions remaining after the fund has been applied to the common purpose is the
return of their own moneys (which they have overpaid) and is therefore not profit.
Thus, when the mutuality principle applies, any dealings with members contributions or
subscriptions will not give rise to a liability to tax.
Case laws:
Last v London Assurance Corporation
Social Credit Savings and Loan Society Ltd v FCT
Municipal Mutual Insurance Ltd v Hills
Question 2
How is the mutuality principle applied or not applied in Malaysia in respect of mutual
activities of trade associations?
Answer
In Malaysia, trade associations are generally organisations formed with the stated objective of
safeguarding and promoting further the businesses of its members. As only members are
involved in such organisations, the principle of mutuality exists and any gains arising from
their activity should not give rise to a chargeable income.
However, s.53 of the Income Tax Act 1967 effectively excludes the application of the
mutuality principle by deeming a resident trade association to be carrying on a business and
its gross income to be all sums receivable on revenue account, including entrance fees and
subscriptions. These incomes are brought to charge.
However, some exemption is available to the associations vide Income Tax (Exemption)
(No.19) Order 2005 (PU(A) 190/2005), under which members subscription fees, less a
proportion of common expenses and common capital allowances, are exempted from income
tax.
75
Note that the legislation does not provide for an outright exemption (i.e. a full exemption for
subscription) but only a partial exemption being a proportion arrived at by disallowing
certain proportion of common expenses and capital allowances. It can be represented as
follows:
Subscription fees (say)

Less:
Proportion of common expenses (note 1)
Proportion of capital allowances (note 2)
Exempted income
Note 1:
RM
10,000
3,000
1,000
4,000
6,000
Proportion of common expenses
Common expenses x [ subscription fees / total gross income ]

Note 2:
Proportion of capital allowance
Capital allowances x [ subscription fees / total gross income ]
76
Question 3
Assume you have the following information re: the Coffee Shop Association of Malaysia
for the year ended 31 December 2015:
Statement of income for year ended 31 December 2015:
The Coffee Shop Association
Accounts for the period 1 January 2015 to 31 December 2015
RM
Income
Membership subscription
Seminar fees
Lantern Festival contributions
Total income
Less: Expenses
Salary and wages
Rental of seminar hall
Lantern Festival expenses
Speaker fees
Employee's Provident Fund
Stationery
Utility expenses
Painting of premises
Donation and contributions
Assessment
Quit rent
Surplus of income over expenditure
143,826
71,913
42,552
20,425
1,702
280,418
73,000
10,000
17,872
5,000
8,000
7,000
6,000
3,000
2,451
1,500
500
134,323
146,095
Other information:
Other information
RM
Capital allowance
Specific
Common
5,106
0
900
Donation
77
Approved
Non-approved
Total
1,000
1,451
2,451
Required:
Compute the chargeable income of the Coffee Shop Association for the year of assessment
2015.
Answer
Workings
Gross income from business
Members
subscription
Seminar fees
Total gross income from
business
Common expenses
Salary and wages
EPF
Stationery
Utility
Painting of premises
Assessment
Quit rent
Total common expenses
RM
143,826
71,913
42,552
258,291
RM
73,000
8,000
7,000
6,000
3,000
1,500
500
99,000
Common expenses allocation

Common expenses attributable to memberships' subscription fees
[Membership sub./Gross bus income ] x common expense
143,826 /258,291 x 99,000
55,127
Common expenses attributable to seminar fees
[Seminar fees /Gross income ] x common expenses
71,913/258,291 x 99,000
27,563
78
Common expenses attributable to Lantern Festival

['Deepavali Night' /Gross income ] x common expenses
42,552/258,291 x 99,000
16,310
Common capital allowance allocation

Common capital allowance attributable to memberships' subscription fees
[Membership fees/Gross income ] x Capital allowance
143,826 /258,291 x 900
501
Common capital allowance attributable to seminar fees
[Seminar fees/Gross income ] x Capital allowance
71,913 /258,291 x 900
251
Common capital allowance attributable to 'Lantern Festival'
[Lantern Festival/Gross income ] x Capital allowance
42,552 /258,291 x 900
148
The Coffee Shop Association

Business income
Membership subscription
Less: Prop of common expenses
Adjusted income
Less: Prop of Capital allowance
Statutory income (to be exempted)
Seminar
Seminar fees
Less: Direct expenses
Speaker fees
Rental of seminar hall
Prop of common expenses
Adjusted income
Less: Prop. of capital allowance
Lantern Festival
Less:
RM
RM
143,826
55,127
88,699
501
88,198
71,913
5,000
10,000
27,563
42,563
29,350
251
29,099
42,552
79
Direct expenses
Prop of common expenses
Adjusted income
Less: Prop. of capital allowance
Aggregate of statutory income from business
Less: Amount exempted (M'ship subscription)
Aggregate of SI from business after exemption
Other income
Dividend - single tier
Interest
Aggregate income
Less: Donation
Chargeable income
17,872
16,310
34,182
8,370
148
8,222
125,519
88,198
37,321
0
1,702
1,702
39,023
1,000
38,023
80
CLUBS AND SOCIETIES
Question 1
Explain what you understand by a club and society?
Answer
These terms club and society are not defined in the Income Tax Act 1967 (as amended).
Generally these entities are taken to be some kind of loose association that exist not for a
business purposes and if there is any business advantage it is certainly one of incidence than
purpose.
Case laws:
Kowloon Stock Exchange Ltd v CIR v
Fletcher v Income Tax Commissioners
Question 2
How does the principle of mutuality apply to a club?
Answer
The principle of mutuality is that a man cannot trade with himself.
Essentially it means that the contribution to the fund of the club and its participators in the
surplus must be the same person.
As such in a club any surplus of income over expenditure is treated as no income and
therefore not liable to income tax.
Question 3
How is a club assessed?
Answer
As the income from the transaction with the members is not liable to tax, the following
receipts of a club may not be taxed:
(i)
(ii)
(iii)
(iv)
Entrance fees
Subscriptions
Provision of services to the members
Sale of goods to members
81
Example of club computation:
Club
Income and Expenditure account
Year ended 31 Dec 2014
Income
Subscription from members
Entrance fees from members
Malaysian dividends (single tier)
Fixed deposit interest (Malaysian bank)
Less: Expenditure
Salaries
Utilities
Repairs and maintenance
Bank charges
Depreciation of plant and machinery
Approved donation
Surplus of income over expenditure
RM
RM
260,000
18,000
28,000
50,000
356,000
105,000
20,000
6,000
4,500
30,000
4,000
169,500
186,500
Computation of chargeable income of a club

Subscription (members)
Entrance fee (members)
Dividends
Aggregate income
Restricted to 7% of agg income
Chargeable income
RM
0
0
0
50,000
50,000
4,000
3,500
3,500
46,500
82
CO-OPERATIVE SOCIETIES
Question 1
Under what circumstances is the income of a co-operative society exempted from tax?
Answer
Under Para 12(1) (a) the income of any co-operative society is exempted in respect of a
period of five years commencing from the date of registration of such co-operative society.
Therefore, it would enjoy tax exemption for the first five years from the date of registration.
Thereafter under Para 12(1) (b) the co-operative society would be liable to tax where the
members fund as at the first day of the basis period for the relevant year of assessment is less
than seven hundred and fifty thousand ringgit.
Example 1
The members fund as at 1 Jan 2015 is:
Paid up share capital

Subscribed capital
Share premium account
Statutory reserve fund
Unappropriated profits
Members funds
400,000
200,000
80,000
150,000
70,000
900,000
In this case as the members fund as at the first day of the basis period is more than RM
750,000, then the co-operative society is subject to tax.
Example 2
The members fund as at 1 Jan 2015 is:
Paid up share capital
Subscribed capital
Share premium account
Members funds
200,000
100,000
80,000
150,000
70,000
600,000
As the members fund as at the first day of the basis period is less than rm750,000 the cooperative society is exempted on its income.
83
Question 2
The Chicken Farmers Cooperative Society, which was registered in 2008, commenced
operations on 1 August 2008 prepares its accounts to July 31 annually.
Required:
Determine the basis period of the for the first and second year of assessment for the cooperative society
Answer
Co-operative societies are allowed to prepare accounts to a date other than 31 December if it
is a period of 12 months [Sec 21A (2)].
Sec 21A (2)
Subject to sub-section (5) and (6) where a company, trust body or a co-operative
society has made up the accounts of its operations for a period of twelve months
ending on a day other than 31 December in the basis year, that period shall constitute
the basis period for that year of assessment for any of its sources of income.
In this case, as the accounts for the first period was for a period of 12 months, then that
period is acceptable as the basis period for the relevant year of assessment.
1
2
Year of assessment is 2009: Basis period is 1 August 2008 31 July 2009

Year of assessment is 2010: Basis period is 1 August 2009 31 July 2010
84
Question 3
The ABC Cooperative Society (the Society) is a local cooperative society incorporated in
1980 in the state of Selangor. The accounts are closed to 31 December each year. The
members are rubber planters from the state. For the year ended 31 December 2007, the
societys audited accounts showed the following:
Profits from rubber trading

Gross Malaysian dividends
Less:
Salaries and bonus
EPF and allowances
Traveling and accommodation
Rental
Depreciation
Excess of income over expenses
RM
'000
RM
'000
4,000
700
2,185
6,885
600
65
45
25
150
885
6,000
Details of the members funds as at 31 December 2006 and 2007 are as follows:
Paid up capital
Bonus shares (issued out of revaluation
surplus of building)
Share premium reserve
Statutory reserve
Unappropriated profit
31-Dec-06
31-Dec-07
RM '000
RM '000
4,000
3,500
800
3,000
7,000
4,500
19,300
500
3,500
9,000
6,000
22,500
Required:
Compute the chargeable income of the cooperative society for the year of assessment 2007.
The tax computation will be as follows:

Business: Excess of income over expenditure
Less: Dividend income
Interest income
RM '000
6,000
700
2,185
2,885
85
3,115
150
3,265
Add: Depreciation
Adjusted and statutory income
Dividends
Interest
Less:
700
2,185
Total income
Deductions under section 65(A)(a)
25% of net audited profit
Or
Amount transferred to reserve account
[9 m less 7 m]
Whichever is the lower
Less:
Deductions under section 65(A)(b)
8% of [4m +3m + 7m + 4.5m ]
Chargeable income
2,885
6,150
1,500
2,000
1,500
4,650
1,480
3,170
86
Question
Assume the following information is available in respect of the Kampung Jusa Co-operative
Society for the year ended 31 December 2014:
Kampung Jusa Co-operative Society
Statement of income and expenditure for year ended 31 December 2014
Income
Member's subscription
Entrance fees
Sale of fruits
Rent
Interest on fixed deposit
Less: Expenditure
Salaries and bonus
Interest on member's loans
Meeting allowances
Travelling
Entertainment
Repairs and maintenance
Donation to an approved institution
Utilities
Depreciation
Audited net profit
Less:
Dividends paid to members
Obligatory contributions
Co-op education trust fund
Co-op development fund
Unappropriated profit for the year
RM000
RM000
110
35
3,869
2,310
4,245
279
10,848
121
47
35
45
45
62
86
20
23
484
10,364
217
133
184
534
9,830
87
Members fund as at the beginning of the basis period:

Member's fund at the beginning of the basis period
Paid up capital
Bonus shares (from asset revaluation
surplus)
Reserves
Member's fund as at the beginning of the basis period
1-Jan-14
RM000
3,630
2,241
13,445
8,964
6,723
35,003
Other related information:

Notes:
Bonus shares issued out of revaluation
surplus
Current year capital allowance on qualifying assets
Unabsorbed loss b/f
RM000
2,241
440
220
330
Required:
Compute the chargeable income of the Kampong Jusa Co-operative society for the year of
assessment 2014.
88
Answer
Kampung Jusa Co-operative Society
Tax computation for year of assessment 2014
RM000
Audited net profit
Less:
Member's subscription
Entrance fees
Rent
110
35
2,310
4,245
279
Add:
Entertainment - disallow 50%
Donation to an approved institution
Depreciation
23
86
23

Current year capital allowance
440
220

Add: Other income
Rent
Dividends (single tier )
Aggregate income
Total income
Less:
Section 65A(a) deduction - lower of
Contribution to statutory fund
Co-operative education trust fund
co-operative development fund
Or
25% of audited net profit
Less: Section 65A(b) deduction
8% of member's fund [8% x 32,762]
Chargeable income
2,310
0
279
RM000
10,364
6,979
3,385
132
3,517
660
2,857
330
2,527
2,589
5,116
86
5,030
133
184
317
2,591
317
2,621
2,938
2,092
89
Member's fund as at beginning of the basis period

Paid up capital
Bonus shares (issued out of revaluation of property)
Reserves
Less: Bonus shares issued out of revaluation of property
Member's fund as at the beginning of the basis period
RM000
3,630
2,241
13,445
8,964
6,723
35,003
2,241
32,762
90
GROUP LOSS RELIEF
Question 1
What do you understand by a surrendering company, a claimant company and a related
company?
Answer
Surrendering company
A company having an adjusted loss in the basis period for a year of assessment that
passes over its losses to another company.
Claimant company
A company which is related to the surrendering company that claims the losses
against its own income
Related company
Companies are related in the context of Section 44A, if at least:
70% of the paid-up ordinary capital of the surrendering company is directly or

indirectly owned by the claimant company, or
70% of the paid-up ordinary capital of the claimant company is directly or

indirectly owned by the surrendering company, or
70% of the paid-up ordinary capital of both the surrendering company and the
claimant company are directly or indirectly owned by another company resident
and incorporated in Malaysia.
In the above context, Indirectly owned means through the medium of other companies
resident and incorporated in Malaysia.; and Ordinary share means any share other than one
carrying the right to a fixed percentage of the nominal value of the share or of the profits of
the company.
Question 2
When can a company claim loss relief
Answer
Entitlement to group relief is very restricted on account of the various conditions and
limitations. A valid claim can be only made when all of the pre-conditions have been met.
Question 3
91
In relation to question 3, what are the pre-conditions to claim loss relief?

Answer
The following six requirements apply to both the surrendering company and the claimant
company:
1. They must be related companies throughout the basis period for the year of
assessment (of claim) and the 12 months preceding.
2. Both must have a paid-up share capital of more than RM2.5m at the beginning of the
basis period for the year of assessment (of claim).
3. Both must be resident in Malaysia for the basis period for the year of assessment (of
claim).
4. Both must be incorporated in Malaysia.
5. Both must have a 12-month basis period ending on the same day.
6. Both must be subject to tax at the full company rate applicable (and not the reduced
rate of 20%).
Question 4
When would a company be excluded from making a claim for group loss?
Answer
If any of the following apply in the basis period for the year of assessment concerned, a
company will be excluded from surrendering or claiming the losses:
The company is a pioneer company, or has been granted approval for investment tax
allowance.
The company enjoys either a tax exemption in respect of a shipping operation, or a
ministerial exemption.
The company has made a claim for reinvestment allowance.
The company has claimed a deduction for an approved food production project.
The company has claimed a deduction for the cost of acquisition of proprietary rights.
The company has been granted a deduction for the cost of acquiring a foreign-owned
company.
The company has claimed a deduction under any rules made under s.154 (a PU Order)
which prohibit the application of group relief.
The following requirements also apply:
The surrendering company must have an adjusted loss in the basis period for the year of
assessment (i.e. in the year in which the loss is to be claimed).
The claimant company must have a defined aggregate income for the year of assessment
(of claim).
The residual assets and residual profits test must be satisfied.
Both companies must make an irrevocable election to surrender or claim an amount of
adjusted loss in the return (Form C) furnished for the year of assessment (of claim).
92
Question 5
What are the factors and steps you would consider in arriving at the losses in a group relief?
Answer
Any eligible company having an adjusted loss may be a surrendering company.
Current year loss relief must be applied first. The amount of loss eligible for surrender is 50%
of the adjusted loss for the basis period for the year of assessment, after it is reduced by any
aggregate income of the company for that year of assessment.
The capital allowances of the surrendering company are not taken into account.
The aggregate income of a claimant company is defined as the aggregate income as

reduced by all of the items which qualify for deduction under Section 44 when
calculating total income, except for group relief itself.
These items are:

current year loss
qualifying prospecting expenditure
qualifying pre-operational business expenditure (approved overseas
expenditure)
monetary and other gifts, such as approved donations.
Aggregate income is computed as follows:

aggregate of statutory business income from all sources, reduced by
unabsorbed losses brought forward
aggregate of statutory income from all other sources
claw-back of qualifying prospecting expenditure.
Example of the steps in arriving at the defined aggregate income:
Aggregate income (say)

Less: sec 44(1) deduction
Current year loss
Prospecting expenditure
Pre-operating business expenditure
Approved donations
Defined aggregate income
RM
100,000
10,000
13,000
12,000
5,000
40,000
60,000
93
TRANSFER PRICING
Question 1
What do you understand by transfer pricing? And why is this an issue for the revenue
authorities of the relevant jurisdictions
Answer
Transfer pricing [TP] describes the pricing of goods and services between related parties.
The pricing here may not be affected by market forces as in arms length transactions.
General aim of TP is tax avoidance.
This is achieved by shifting profits from a high tax jurisdiction to a low tax jurisdiction.
The capital exporting countries fear reduced repatriation of income to the home country
The capital importing countries see a tax base erosion and reduction of tax revenue
Question 2
What are the areas where transfer pricing could be an issue?
Answer
TP affects the following transactions:
Purchase and sale of goods
Provision of management and technical services
Financial assistance
Use of intangible assets
Example
(1) Company A Sdn Bhd is a subsidiary of Company B Private Ltd, a company incorporated
in India. Company A borrows RM100m from Company B in 2014 and paid the following
sum as interest debited to the PL account.
(a) Interest at 15%
(b) Interest at 8%
What is the outcome of these rates for the derivation of commercial profit, and the tax
consequences to jurisdiction where Company A is situated?
Answer
Loan
RM'000
100
94
Commercial interest rate

Charged to subsidiary
Charged to subsidiary
10%
15%
8%
Net profit before interest charges

Less: interest at 15%
Profit
300
15
285

Less: interest at 8%
Profit
300
8
292
Revenue adjustments for transfer pricing

Less: Interest at market rate (10%)
(2)
300
10
290
Assuming Company A Sdn Bhd is a loss making company and is a high credit risk,
would you accept the interest rate of 15% charged by the parent company when the
commercial rate is agreed as 10%?
Discuss.
Question 3
What is contemporaneous documents and why is this required and by whom?
Answer
In line with section 140A, if a business transaction on the supply or acquisition of goods or
services is made between related parties the DGIR may make appropriate adjustments to
reflect the market value.
Market value is the value obtainable in dealing between independent parties dealing at arms
length
The taxpayer must prepare contemporaneous documents to reflect the transaction made in a
controlled transaction in respect of acquisition of goods and services including financial
services. This should be made available to the Revenue authorities to indicate the basis of the
pricing of the goods and services.
It covers a wide range of documents, including the following:
95
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Organization structure and persons involved

Nature of the industry and market conditions
The details of the transaction
Marketing strategy and pricing policies
Comparability, function and risk analysis
Application of the relevant transfer pricing
Other related and connected information
This information and the related documentation must be regularly updated to reflect the
current state of affairs as regards the transactions.
Contemporaneous documents are not required in the following cases:
(a)
(b)
(c)
(d)
Not carrying on a business

Financial assistance is below RM50m
Gross income is below RM25m
Related party transactions is below RM15m
Question 4
What are the Transfer Pricing methodologies generally used by the Revenue authorities?
Answer
For income tax adjustment purposes there is no one single method. The method accepted
must be chosen very carefully and supported by relevant acceptable documents.
Essentially the methods chosen should give the most appropriate arms length price. There
should be minimal adjustments required. It should be reliable to use to make the relevant
adjustments.
One needs to see the commercial reality of the transaction and examine whether in adopting
the particular pricing and charges, the taxpayer has resorted to transfer pricing with the
intention to avoid tax in the relevant jurisdiction.
The generally accepted methods are as follows:
Traditional transaction method

Comparable uncontrolled price
Resale price
Cost plus
Transactional profit method
Profit split
Transactional net profit
96
Question 5
In considering a transfer pricing issue, and with a view to making a comparison, what are the
factors that a taxpayer or a revenue authority should look at?
Answer
In the real world business transactions are not conducted in a uniform environment. Each
company faces a different situation and prices are determined according to those particular
circumstances and the business strategy adopted.
For example, a new company that is entering the market may be willing to accept a loss in the
sale of its goods or services for the first three years in order to penetrate the market and gain
market acceptance. The pricing may therefore be lower than its competitors.
Generally the following factors are accepted as important:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
Character of the goods and services

Functions performed
Assets used in the course of the operations
Financing issues e.g. loans, interest and discounts
Cost sharing e.g. advertising
Risk assumed by the relevant parties
Contract terms and conditions between the parties
Business strategies adopted by the relevant entity (e.g. new company, old company,
new market, expanding market etc.)
Economic situations like recession or slow growth.
Question 6
Explain the CUP method in relation to transfer pricing.
Answer
The CUP method makes a direct comparison of the price between a controlled and an
uncontrolled transaction. And adjustments are made for significant differences as in question
(5) above
Question 7
Alpha Sdn Bhd is a Malaysian company that manufactures tablets for the relief of headaches.
These are sold for RM100 per pack of 50 tablets exclusively to an overseas company Beta
Corporation in China which is a subsidiary of Alpha Sdn Bhd. Both companies are owned by
India Pharmaceuticals Corporation Private Limited, a company incorporated in India.
97
A similar product is sold by its competitor, Pfizer of the United States to its subsidiary in
China, Pfizer of China. The product is sold for the equivalent of RM130 per pack of 40
tablets. Both companies, Pfizer (US) and Pfizer (China) are owned by The Pfizer of
Switzerland.
Question
(a) What is the issue that you would consider in this scenario?
(b) Would you apply section 140 or a transfer pricing methodology in this case?
(c) What are the factors that you would consider in determining whether the prices
charged by the Malaysian company is a value reflective of the market price?
(d) What are the documents that should be kept by the Malaysian company to support its
pricing of the product?
(e) What is the penalty for failure to keep or keep insufficient documents are required by
the revenue authorities?
Answer
(a) A medication for the relief of headache is marketed by two different companies in
China and the prices are different. The Malaysian revenue authorities may want to
know why there is a pricing difference, and whether such difference is on account of
market forces or a shifting of profits i.e. a transfer pricing issue.
(b) Section 140 is a specific law governing basically anti-avoidance issues [i.e. the
taxpayer has intentionally avoided or evaded tax in a particular circumstances] and is
not transfer pricing issues.
The onus is on the revenue to prove that there was an avoidance or evasion. There are
4 circumstances under which the Revenue may invoke Section 140(1) to disregard or
vary a transaction. In other words, the Revenue must prove that they have reason to
believe that the transaction had the direct or indirect effect of altering the incidence of
tax, relieving the company from any tax liability, evading or avoiding any liability, or
hindering or preventing the operation of ITA.
The application of section 140 or the transfer pricing methodology would depend on
the particular facts of the case identified at the ground level. In real life this can be
tedious and complicated requiring several verifiable information.
(c) One could look at the following features carefully (these are a mix of business,
commercial and technical nature) and could be discussed in detail in the class. But
generally one could consider the following matters:
a. The particular product features (e.g. the packaging, dosage and effectiveness,
plain compressed tablet or effervescent tablet)
b. The brand name (established, new, market acceptance of the brand)
c. Sales volume (large, fast moving cf low and slow moving)
d. Market risk assumed by the parties to the transaction
e. The timing of the sale (winter season vs summer)
f. Transaction mode (cash on delivery, credit terms, returns of unsold stock)
g. Transportation (CIF or FOB etc.)
h. Condition of sale (terms, conditions, liability for breach of terms)
i. Intangible property issues (ownership of property, R&D cost, royalty charges)
98
(d) The taxpayer should keep contemporaneous documents that identifies and address the
following :
a. Organization structure and persons involved
b. Nature of the industry and market conditions
c. The details of the transaction
d. Marketing strategy and pricing policies
e. Comparability, function and risk analysis
f. Application of the relevant transfer pricing
g. Other related and connected information
h. Updates of these documents in line with changed circumstances
(e) Penalties are imposed under section 113(2) as follows:
(i) Documentation not available : 35%
(ii) Documentation not conforming to revenue requirements: 25%
99
TAX PLANNING
Question 1
What do you understand by Tax Planning?
Answer
Tax planning is a combination of fiscal steps taken to eliminate, minimize or defer the tax
liability of tax entity. These are done within the limits of the existing tax laws, rules and
regulations. Sufficient tax competency and vast experience is required to do these planning
that demand a skillful management of competing alternatives to achieve the optimum
financial effect. There is also a considerable risk of interpretations going wrong or worse
viewed by the revenue authorities as avoidance or evasion with very serious consequences.
Question 2
What are the factors to consider in relation to the mode of finance, the acquisition of assets to
be used in the business?
Answer
Financing has effect on the companys cash flow and tax liability. In the acquisition of
business assets companies need to consider the following modes:
Acquire for cash

Loan and overdraft
Hire purchase
Leasing
Qualifying capital expenditure on plant and machinery and industrial building would be given
an allowance that can be set off against the adjusted income.
Allowances can be computed based on:
The Income Tax (Qualifying plant annual allowance) Rules 2000.

Accelerated capital allowance rules.
Reinvestment allowance rules (where expenditure is incurred after the
commencement of the business).
How the acquisition of the assets is financed would have an effect on the tax liability.
The manner of financing need to be considered carefully in the context of the business
performance i.e. whether the business is making a loss or a profit.
A cash payment for the acquisition of an asset qualifying for capital allowance would allow
the taxpayer to claim capital allowance on the full cost, reducing the adjusted income.
However this may affect the cash flow for operational purposes.
100
Acquiring the asset that qualifies for capital allowances vide a bank loan would ease any cash
flow problems while entitling the taxpayer to claim a full allowance on the asset so acquired.
Bank loan interest paid would also be a deductible expenditure reducing the adjusted income
accordingly.
But obtaining a loan requires one to consider other issues like an acceptable collateral or
security as well as personal guarantee for the loan from the bank. Other cost would include
legal fees, commissions, stamp duty etc. Repayment of such loans may not be flexible and
might result in bank foreclosing the business in difficult times when the entity is unable to
service or pay the loans in time and fall into arrears.
Acquiring a qualifying asset under a hire purchase would limit the claim of capital allowance
to the amount paid under the hire purchase arrangement. But an added advantage is the hire
purchase interest would be a deductible expense in arriving at the business adjusted income.
Also, motor vehicle not used for commercial purposes (e.g. a car for the use of the director)
would suffer a qualifying capital expenditure restriction, limiting the full benefit of the capital
expenditure for business purposes.
Acquiring a qualifying asset under a lease arrangement would be similar to renting the asset
where the full lease or rental payments would be an allowable expenditure in arriving at the
business adjusted income. The drawback is the asset would not belong to the taxpayer at the
end of the lease term unlike the hire purchase arrangement where the asset would be
transferred from the vendor to the acquirer and can continued to be used in the business
maximizing the investment on the asset.
Where assets are acquired from related parties one needs to consider the rent or lease
payments made in the context of arms length values i.e. it must reflect the market value for
such payment and arrangements.
One could be claiming accelerated capital allowance where this is available. Sometimes
special rates may be prescribed for certain plant and machineries. These may also have a time
frame within which it is available. Thus timing of the expenditure becomes equally critical.
On the same note, the special rates are usually applicable to special industries and at specific
times based on sectors that the government desires to promote.
Tax advisors and tax planners must have an updated knowledge of the availability of these
incentives and allowances in order to maximize capital allowance claims, and the tax benefit,
for the client.
Question 3
If a business choose to dispose of an asset what are the factors that one should be aware of in
relation to the income tax law and what are its impact on the income tax liability of a taxable
entity?
101
Answer
Since the law provides for an allowance on the qualifying expenditure incurred on plant and
machinery and industrial buildings that are used in the carrying on of a business, the revenue
is concerned that the facility should not be abused to gain an undue tax advantage from its
disposal.
Some issues that should be considered could arise from a disposal within a period of two
years from the date of acquisition and disposal within a context of a controlled situation.
These elaborated below:
Disposal within two years:
(a) The allowance previously given would be withdrawn - the effect being the adjusted
income would be increased by the amount of the allowance withdrawn (it is equal to
the allowance previously given) or alternatively a loss may be reduced by an equal
amount.
(b) The Director General may exercise discretion in certain situations and these are
situations where there is commercial justification or a business need.
Example: a mini being sold within two years to buy a larger capacity lorry because
business turnover has exceeded expectation.
Disposal after two years

Factors that will impact the tax liability would be a combination of the following factors:
(a)
(b)
(c)
(d)
Residual expenditure
Disposal price
Balancing allowance
Balancing charge
A balancing charge would increase the statutory income while a balancing allowance would
reduce it.
Depending on the profit or loss situation of the business, one could time the disposal of the
asset to take maximum advantage from the balancing charge or allowance. Also disposal of
assets to related parties would have to take into account the market value of the asset
disposed. Balancing allowance or balancing charge would not be applicable to the disposer
in the case of a related party disposal of an asset on which capital allowances have been
claimed. The acquirer on the other hand would not be entitled to an initial allowance but only
an annual allowance for the balance of the residual value of the asset acquired.
102
Question 4
Would a disposal to a related company or a disposal at a price not reflecting the market value
has any impact for income tax purposes?
Answer
As noted above, controlled provisions of the law apply to the disposal - assets are deemed to
be disposed at the tax residual value. As such, no balancing charge or balancing allowance
arises on the disposal to the disposer.
The acquirer would be entitled to an annual allowance for the balance of the residual
expenditure. He would not be granted an initial allowance. This rule applies even to assets
sold or transferred to a related non-resident company.
Question 5
Discuss the importance of distinguishing between a business income and an investment
income.
Answer
For income tax purposes it is without doubt very important to distinguish between business
income and investment income because of the entirely different tax treatment.
Parking the category of income as between business income as opposed to non-business
income the essential issue is whether to treat the gains received from a transaction as one
arising from a business transaction or from a capital transaction. In one case it would be
liable to income tax whereas in the other it would a capital and therefore not liable to income
tax. Whether it falls into one or the other category needs to be carefully considered before
the transaction could be done.
In the case of a loss arising from a transaction, one needs to consider the following factors as
regards the losses:
BUSINESS
Treatment of sources
A business source is given several flexible treatments. A business can have a loss
when the expenses exceed the gross income. This loss can then be set off in several
ways against the business income and even non-business income. This may not apply
in the case of a non-business source such as interest and dividend. Any losses arising
from such non-business source is lost and are not available to provide any tax shelter.
Business losses, current year losses and b/f losses
103
A basic attractive feature of a business loss is that a current year loss can be allowed
all other sources of income. Any brought forward losses can be allowed against all
business sources; and any balance of losses remaining can be carried forward to be
deducted against the business income of the following year until such losses are fully
absorbed. The losses are not distinguished by sources for deduction purposes.
Groups loss relief under certain conditions

In certain situations, a company can claim a group relief for losses in this instance
the loss is allowed against the income of another taxable entity. For this several
conditions must be fulfilled as required under section 44A.
Capital allowance deductions

In the case of a business, capital allowances are allowed for assets used in the
business and these are deducted against the particular source of business income.
Unabsorbed capital allowances may be carried forward to be deducted against the
same source of business income.
Deductibility of expenses against the income
The scope is much wider in the case of a business source as compared to a nonbusiness source.
INVESTMENT
Single and separate source

Income falling under a non-business category is treated as separate sources and this
could be limiting the scope of deduction and therefore the total tax liability.
Excess of expenditure and loss deductibility

Losses would be ignored and therefore not available to shelter from tax other sources
of income or against future tax liability. The losses may be then lost.
104
Question 6
What is the income tax effect of the interest payment on a loan taken to finance business
operations while an excess is temporarily invested to produce a short term return?
Answer
Interest payments would be subject to a restriction depending on the fund usage and tax
planning would involve maximizing the deduction or reducing the restriction . The money
borrowed and used wholly in the business operations would be fully allowed. If the money is
borrowed and used wholly for investment purposes would be fully disallowed. But where
money is borrowed and used partly for the business purposes and partly for non-business
purposes would be subject to some interest restriction.
The restriction is computed using the formula:
[Investment/Borrowings] x interest charges = interest disallowed
However the restricted interest which is disallowed in arriving at the adjusted income of the
business would be now available for deduction against the income derived from the particular
investment.
Example: A commercial property is financed with a loan. The interest would be allowed
against the rental income . However if the property does not produce income, the interest
cannot be used. Similarly if the interest exceeds the gross rental income, the excess would be
lost.
Question 7
If a holding company provides management services to its related company, what are the
factors that it should take into account to obtain the fullest benefit under the tax law for itself
and for its related companies?
Answer
In providing management fees between companies in the group, several factors need to be
considered in these inter group transactions. One important element is that the transactions
must be at arms length and reflect market value for the consideration. The charges for work
done or fees received should also reflect market value. In other words, the charges or fees
must have a commercial basis and not an insert or padding in a series of transactions designed
to reduce tax liability on the related parties.
105
Question 8
Upon cessation of a business what are the factors that one needs to consider in relation to the
outstanding debtors and stocks of the company ceasing business?
Answer
Transfer of stocks between companies in the group should essentially bear in mind that
whatever transacted value should reflect the market value for the stocks. Where for example
it is sold for a value less than the market value, sufficient documentation must be produced to
substantiate the lower value (e.g. out of date items, deteriorated stocks, damaged or spoiled
stocks, slow moving stocks etc.).
Example
Supermarkets may sell items close to the expiry date at 50% discount.
Fruits and vegetables that are showing signs of decay could be disposed of at below normal
price.
Question 9
A business group structure consists of Gabong Sdn Bhd which is the holding company with
two wholly-owned subsidiaries. The three companies close the accounts to 30 December and
have been in operation for many years.
Gabong Sdn Bhd operates several retail stores for groceries.
Gabong Manis Sdn Bhd is involved in the distribution of a branded health drink which is
popular among university students.
Gabong Lena Sdn Bhd operates a three star hotel in Cyberjaya.
The group plans to expand and later become a public listed company. In achieving this goal,
the expansion exercise would require RM500 million additional capital.
The Board of Directors (BOD) plan to incorporate a new company, Gabong Baru Sdn Bhd
that will bring under its fold the existing three companies. The new company will be listed in
the Malaysia stock exchange later.
Gabung Barus income will be mainly derived from its investments in the three subsidiaries
and the provision of management services to them.
The BOD also plans to open more retail stores and add in additional products for its retailing
network. The existing outlets will be renovated and refitted with electrical fittings, plant and
machinery and coolers.
106
The hotel business would acquire additional buildings near airports and convert and
refurbish these into a BBM (self-serviced bed and breakfast motel) to cater for budget
travelers taking the low fare flights.
The BOD is considering the following funding options:
(a) Option 1: additional capital requirement for the expansion would be met by way
of a loan from a commercial bank by each of the company
(b) Option 2: the funds could be provided by way of loan from the directors of the
company or
(c) Option 3: by the issue of additional shares to existing shareholders if obtaining
sufficient financial support from the bank is difficult or insufficient.
To acquire the fixed asset, plant and machinery and building for the proposed expansion, the
BOD is considering the following financing mode:
(a)
(b)
(c)
(d)
an operating lease
a finance lease
a hire purchase; or
outright cash purchase
The BOD is not clear as to the income tax implication of these matters such as the availability
of deductions for leases payments, capital allowance claims and maintenance cost deductions,
as well as the conditions that must be complied with to afford these deductions for income tax
purposes for each of the businesses.
The companys lawyer has informed the BOD that the newly incorporated company will be
initially an unlisted investment holding company. And after three years, it could be listed in
the stock exchange and be a listed investment holding company. The wants the lawyer to
clarify the difference between a listed and unlisted holding company, and the tax
implications.
The BOD wants a report on the recommended steps to be taken, and why such steps as
recommended would be advantageous over competing alternatives.
The present and proposed company structures are as follows:
Fig 1
Existing company structure
Gabong Sdn Bhd
Gabong Manis
Sdn Bhd
Gabong Lena
Sdn Bhd
107
Fig 2
Proposed company structure
Gabong Baru
Sdn Bhd
Gabong
Sdn Bhd
Gabong Manis
Sdn Bhd
Gabong Lena
Sdn Bhd
Required:
Based on the information supplied, consider the relevant issues in relation to the Income Tax
Act 1967 (as amended) and advise the company accordingly.
Answer
The issues to consider are the following:
1.
2.
3.
4.
Raising of capital
Associated cost related to the raising of the capital
Mode of financing the acquisition of capital assets for the business
Explaining to the BOD the difference between an investment holding company and a
listed investment holding company
Raising of capital
Based on the BOD there are three avenues:
(a) Borrow from a commercial bank
(b) Borrow from the directors
(c) Borrow from the shareholders
Associated cost related to the raising of capital

One needs to consider the cost of the borrowing where the following expenses would be
incurred:
(a) Legal fees to draw up the loan and charge documents
(b) Professional fees e.g. accounting and secretarial fees to prepare the applications
(c) Cost of valuations of properties to be charged to the bank
108
(d) Stamp duty on the instrument of agreement, conveyance and charge or lien etc.
(e) Miscellaneous and incidental expenses connected with these activities
As all these cost are connected with the obtaining of a loan, it will not qualify for a tax
deduction. These are capital cost of raising capital
Implication and consequences of borrowing from the three different sources of fund:
(a) Borrow from a commercial bank
(b) Borrow from the directors
(c) Borrow from the shareholders
(a)
Borrow from a commercial bank

The loan from the bank is used for the purposes of the business (and not investment)
and would qualify for a tax deduction. This will reduce the adjusted income by the
amount of the loan.
The interest charges on the loan would usually vary with market rates and central
bank directives. This may add or reduce the cost of the funds. And eventually affect
the cash flow, and the deduction available for tax purposes in arriving at the adjusted
income.
Borrowing from the bank would also require having sufficient collateral to secure the
loan and guarantors to guarantee the loan. Fees may be involved in securing these.
(b)
Borrow from the directors

The amount of the borrowing and the interest rate charges on the borrowing could be
determined by the BOD.
But the interest charge must be at arm's length and reflect the market rate. Excessive
charge would be disallowed for income tax purposes.
As the interest is an expense to the company and deductible in arriving at the adjusted
income, the sum would be an income in the hands of the directors, and accordingly,
would be taxable in their hands.
(c)
Borrowing from shareholders

Same rules as in the borrowing from the directors also apply to borrowing from the
shareholders.
If additional shares are issued to the shareholders to obtain the additional funds, the
cost of issuing the additional shares would be capital expenditure, and are not
deductible in arriving at the companys adjusted income.
109
The dividends earned on these acquisitions of the shares would be income to the
shareholders. As these would be single tier dividends, these would not be taxable in
the hands of the shareholders.
Also, as dividends are distribution of income of the company after it has been earned,
it is not an expense and not deductible in arriving at the adjusted income (in other
words these are not expenditure incurred in the course of carrying on a business to
earn profits).
Mode of financing the acquisition of capital assets for the business

The following are alternative mode of acquisition of the assets:
(a) Operating leases
(b) Finance lease
(c) Hire purchase
(d) Cash purchase.
The BOD could be advised as follows on the income tax implication of the different mode of
financing the purchase of the company assets:
(a) Operating leases
In an operating lease the asset is legally owned and maintained by the lessor and is
let to the lessee only for its use. The lease charges a similar to a rental payment and
may not be flexible.
For income tax purposes, the lease charges would be fully tax deductible. The lessee
cannot claim any capital allowance. And as there is no maintenance charges a
deduction for these do not arise.
(b) Finance lease

In an operating lease the asset is legally owned but not maintained by the lessor. It is
let to the lessee for its use. The lease charges are similar to a rental payment and are
fully deductible in arriving at the adjusted income. Similarly the maintenance charges
incurred by the lessee would be also fully deductible. Any excess payment exceeding
the gross income would create a loss that can be allowed against other sources of
income or business sources in the following year of assessment.
But in the case of a finance lease, the terms of the payment can be negotiated, and is
therefore flexible and this is an added advantage for cash flow purposes. However the
arrangement could be scrutinized by the revenue authorities the impact of any
disallowance being more for the lessor than the lessee.
110
(c) Hire purchase

In a hire purchase arrangement, the repayment has two parts a capital payment for
the asset acquired and an interest element being the use of funds. Upon completion
of the payment schedules, the asset would be legally owned by the purchaser.
The interest element is fully deductible in arriving at the adjusted income.
The capital portion paid would qualify for capital allowance both initial and annual.
The annual allowance is computed on the accumulated capital instalments paid. The
capital allowance claim will be spread over the period of the installment payment and
as such could be longer than if the asset had been bought for cash or with a loan.
(d) Cash purchase.

If the asset is purchased for cash the full qualifying expenditure would be given an
initial allowance in the first year and annual allowance thereafter until the assets
residual value is zero.
However the purchase of any private motor vehicle would suffer a qualifying capital
expenditure restriction and this applies even for other modes of acquisition of the
said asset (e.g. loan, lease or hire purchase).
Difference between an investment holding company and a listed investment holding company
Very briefly, the summarized difference could be illustrated as follows:
Nature of the
matter
Unlisted investment holding

company
Income
Business income (e.g. management

fees) and non-investment income
(e.g. commission or fees) would be
treated as Other income
Rental, interest and dividend would
be treated as investment income
according
to
the
relevant
classification
Direct expenses
Listed investment holding company
Business income (e.g. management

fees) would be treated as Business
income
Investment income such as rental,
interest and dividend would also be
treated as deemed business
income and all will form only one
business source
Non-business and non-investment
(e.g. rent = sec 4(d) income; income (e.g. fees and commission)
dividend and interest = sec 4c would be Other income
income)
Each of these would be a separate
source
Expenses incurred in producing the Expenses incurred in producing the
income are deductible
income are deductible
It is limited to the gross income It is limited to the gross income
111
from that source and any excess is

lost
No deduction of expenses against
exempted income
from that source and any excess is

ignored.
exempted income
These must fall within the meaning

of Permitted Expenses
The quantum of expense is
restricted using the formula:
A x [B/4C]
And is further restricted to 5%
whichever is lower of the
chargeable gross income.
It is allowed at the aggregate stage
Any excess of expenses is ignored
(it would not create a loss)
Common expenses are allowed

against the relevant gross income.
Any excess is ignored.
exempted income
Capital
allowance
CA is not available
Available against adjusted business

income
Limited to the income
Excess is ignored
Losses
Loss is ignored
Loss is ignored
Common
expenses
No permitted expenses and no

formula applies
112

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TUTORIAL 25

Advanced Taxation / BAC 4644/Dr Nakha Ratnam Somasundaram

CUSTOMS AND EXCISE DUTIES

GOODS AND SERVICES TAX

Standard Rated Supplies.

Individuals, sole proprietor and partnership

Federal Government, State Government, statutory body and local authority

Meaning of taxable person

Standard rated supply

Taxable turnover is determined in two ways:

The historical method

The future turnover method (forward)

The turnover will exclude the following:

Persons making wholly exempt supply

ESTATE UNDER ADMINISTRATION

Business and rental income : On a time basis (sec 64(1)

Rent from a property in Malaysia

Mr. James made a donation of RM500 to an approved Malaysian charitable institution in

Rental (year ended 31 Dec 2015)

Computation of chargeable income of the estate of James (deceased)

Hardware trading : 1 January 2014 to 31 December 2014

Distributable income of trust before accumulation

Deemed total income

301,000 x 270,000 / 300,000

Amount paid to first child

INVESTMENT HOLDING COMPANY

Investment holding company

It is a company whose activity consists in the making of investment.

Expenses are deducted in relation to each of the sources in respect

dividend and interest

Permitted expenses are deducted at the aggregate stage using a

Does not arise as the expenses is limited to the gross income

Need to distinguish between revenue income and capital income.

Quit rent and assessment (shophouse)

The details of the cost of the investments are as follows:

Lim Holdings Sdn Bhd

Aggregate of statutory income

Lim Holdings Sdn Bhd

Gross income chargeable to tax

Fraction of permitted expenses allowable

LISTED INVESTMENT HOLDING COMPANY

UNIT TRUSTS and PROPERTY TRUST

total of the permitted expenses incurred for the basis period

Permitted expenses consist of the following [Sec 63B (2)]

Add: Other income

Gross income chargeable to tax

Gross income whether or not chargeable to tax

106,000 x 460,000/(4 x 800,000)

Whichever is the higher

Percentage of installation cost to aggregate cost

The percentage of installation cost is less than 75%

REAL ESTATE INVESTMENT TRUST and PROPERTY TRUST FUND

First accounts for more than 12 months

Distribution less than 90%

Total income of REIT

Total income of REIT

Computation of total income

Less: Deduction allowed

Less: Capital allowance

Income chargeable to income tax and the income tax liability

Taxability based on income distribution

Real property gains tax

The real property gains tax liability arises as follows: