Paper P6 (MYS)

Professional Pilot Paper – Options module

Advanced Taxation
(Malaysia)

December 2010 pilot question 1

Time allowed
Reading and planning: 15 minutes
Writing: 3 hours

This paper is divided into two sections:

Section A – BOTH questions are compulsory and MUST be attempted
Section B – TWO questions ONLY to be attempted

Do NOT open this paper until instructed by the supervisor.

During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.

The Association of Chartered Certified Accountants

SUPPLEMENTARY INSTRUCTIONS
1 You should assume that the tax rates and allowances shown below will continue to apply for the foreseeable future.
2 Calculations and workings should be made to the nearest RM.
3 All apportionments should be made to the nearest whole month.
4 All workings should be shown.

TAX RATES AND ALLOWANCES

The following tax rates, allowances and values are to be used in answering the questions.

Income tax rates

Resident individual
Chargeable income Tax payable
Band Cumulative Rate Cumulative
RM RM % RM
2,500 2,500 0 0
2,500 5,000 1 25
15,000 20,000 3 475
15,000 35,000 7 1,525
15,000 50,000 12 3,325
20,000 70,000 19 7,125
30,000 100,000 24 14,325
Excess 26

Non-resident individual
All chargeable income 26%

Resident company
Paid up ordinary share capital RM2,500,000 More than
or less RM2,500,000
On the first RM500,000 20% At standard rates
On the remainder or all at standard rates 25% 25%

Non-resident company
All chargeable income 25%

Labuan offshore company – income from an offshore business activity

All chargeable income 3%

Trust body – resident or non-resident

All chargeable income 25%

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 Personal deductions
RM
Self 9,000
Self – additional if disabled 6,000
Spouse 3,000
Spouse – additional if disabled 3,500
Child – basic rate each 1,000
Child- higher rate each 4,000
Disabled child each 5,000
Disabled child, additional each 4,000
Life insurance premiums and approved scheme contributions maximum 6,000
Deferred annuity premium maximum 1,000
Medical expenses for parents 5,000
Medical expenses for serious disease of self, spouse or child,
including up to RM500 for medical examination maximum 5,000
Basic supporting equipment for self, spouse, child
or parent if disabled maximum 5,000
Educational and medical insurance for self, spouse or child maximum 3,000
Study course fees for skills or qualifications maximum 5,000
Purchase of a personal computer maximum 3,000
Broadband contribution maximum 500
Purchase of books, magazines etc for personal use maximum 1,000
Purchase of sports equipment maximum 300
Deposit for child into the National Education Savings Scheme maximum 3,000

Rebates
RM
Individual with chargeable income not exceeding RM35,000 – basic rate 400
Further rebate for an individual entitled to a deduction for a spouse or a former wife 800

Capital allowances
Initial Annual
Rate % Rate %
Industrial buildings 10 3
Plant and machinery – general 20 14
Motor vehicles, heavy machinery 20 20
Office equipment, furniture and fittings 20 10

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 Real property gains tax

Disposal by all persons

Date of disposal Rate%
Disposal within 2 years after the date of acquisition 30
Disposal in the third year after the date of acquisition 20
Disposal in the fourth year after the date of disposal 15
Disposal in the fifth year after the date of acquisition or thereafter 5
An exemption is granted which reduces the effective rate of 5% where disposal takes place
within five years of acquisition and to nil thereafter.

Sales and service tax

Rate %
Sales tax 10
Service tax 5

Stamp duty

Rates of duty under the First Schedule

Rate %
Conveyance, assignment, transfer or absolute bill of sale – Item 32(a)
For every RM100 or fractional part thereof:
On the first RM100,000 1
On the next RM400,000 2
On the excess over RM500,000 3

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Section A – BOTH questions are compulsory and MUST be answered

1 In January 2011, Global Sdn Bhd (Global) will commence the manufacturing of a promoted product in Shah Alam,
Selangor. By December 2011, Global will have invested RM30 million on its factory, plant and machinery. It makes
up its accounts annually to 31 December.
Global has been granted with pioneer status and expects its production day to be set on 1 March 2011.
Mr Jaga Duit, the financial controller of Global contacted ReallySmart Tax Consultancy regarding the tax impact of the
pioneer incentive. Accordingly, he furnishes the following forecast details:
Year of Adjusted Capital Interest on Approved
assessment income/(loss) allowance bank deposits cash donations
RM’000 RM’000 RM’000 RM’000
2011 0(2,400) 8,100 50 20
2012 (10,000) 3,100 50 30
2013 (17,300) 3,100 50 40
2014 (18,100) 3,100 50 60

Required:
(a) Based on the information given above, prepare a letter from ReallySmart Tax Consultancy to Global Sdn Bhd,
addressing the following aspects:
(i) Determine the pioneer tax relief period and explain its significance for tax purposes; (3 marks)
(ii) Provide a tax analysis of the pioneer incentive, supported by Global Sdn Bhd’s tax computations for the
years of assessment 2011 to 2014, with special mention of:
– the income tax liability;
– the absorption of the business loss and approved donations;
– the cumulative exempt income credited to the exempt account; and
– any item and amount carried forward to the year of assessment 2015. (12 marks)
Professional marks will be awarded in part (a) for the appropriateness of the format and content of the letter and the
effectiveness with which the information is communicated. (2 marks)

(b) Based on the same facts, consider the merits of the alternative incentive measure of investment tax allowance.
Required:
(i) Provide a parallel tax analysis with supporting computations, assuming that investment tax allowance is
granted, instead of pioneer status. (11 marks)
(ii) Explain and quantify your conclusions as to whether the pioneer status or the investment tax allowance yields
the greater tax benefits to Global Sdn Bhd, and recommend the preferred incentive measure. (4 marks)

(32 marks)

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Answers

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Pilot Paper question 1 Answers
P6 (MYS) – Advanced Taxation (Malaysia)

All statutory references are to the Income Tax Act 1967, as amended, unless otherwise stated.

1 (a) Pioneer status

ReallySmart Tax Consultancy
123, Jalan Satu,
50000 Kuala Lumpur, Malaysia.
6 December 2010
Mr Jaga Duit,
Financial Controller,
Global Sdn Bhd,
456, Jalan Dua,
48000 Shah Alam, Selangor, Malaysia

Dear Sir,
Shah Alam Manufacturing Facility
Pioneer status
We refer to Global Sdn Bhd’s (Global) investment in the Shah Alam manufacturing facility and your request for advice on the
tax impact of the pioneer status that Global has been granted.
(i) Tax relief period
As the production day is set to be on 1 March 2011, the tax relief period will run for five years from that date. Therefore
the tax relief period under the pioneer status will be 1 March 2011 to 28 February 2016.
During this period, 70% of the statutory income derived by Global from the manufacturing of the promoted product,
appropriately adjusted by any pioneer loss as well as any current year non-pioneer business loss, will constitute pioneer
income exempted from income tax.
Such exempt income will be credited to the pioneer exempt account. Exempt dividends may then be distributed out of
such exempt account i.e. the shareholders who receive such dividends will be exempted from tax. A two-tier exemption
applies for corporate shareholders.
(ii) Tax analysis
Please refer to the attached Appendix which contains our tax computations for Global for the years of assessment 2011
to 2014 based on the forecast figures you have provided.
Based on the tax computations, our comments and observations are as follows:
Income tax liability
During the four-year period, Global expects to register total adjusted income of RM25.4 million, which is reduced to RM8
million after deducting capital allowances of RM17.4 million. Out of this, RM2.4 million, being 30% of the statutory
income of the pioneer business would be “leapfrogged” to the total income stage and thus subject to income tax. Global
can expect to pay taxes at 25%: this will add up to RM633,000 by the end of the year of assessment 2014.
Absorption of pre-pioneer business loss and approved donation
Due to the abovementioned “leapfrog” treatment, no part of the 30% pioneer income will form part of aggregate income.
The impact is that the non-pioneer business loss and approved donation may not be set off against the taxable pioneer
income at all.
Further, the aggregate income base for the calculation of the 10% threshold for the deduction of the approved donations is
reduced as it comprises only the interest income source. This leads to a severe restriction of the absorption of the approved
donations.
Cumulative exempt income credited into the exempt account
Out of the total statutory income of RM8 million, only RM3.6 million will be credited into the pioneer exempt account.
This means that by the end of the year of assessment 2014, the shareholders of Global can potentially only avail
themselves of RM3.6 million as exempt dividend.
Business loss carried forward to the year of assessment 2015
At the end of the year of assessment 2014, Global has an unabsorbed business loss of RM350,000 to be carried forward
to the end of the tax relief period in 2016. Yet Global has to pay taxes of RM633,000 in the interim.

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 Summary
Despite enjoying the pioneer status incentive, Global is potentially facing a tax liability of RM633,000, while it has a
business loss carried forward of RM350,000 and a substantial portion of its cash approved donations will not be given a
deduction in arriving at total income.
It appears that the tax position of Global requires further study and possibly a re-think. Please do not hesitate to contact
us should you require further clarifications or consideration.

Yours faithfully,

(Verri Smart)
Tax Senior,
ReallySmart Tax Consultancy

Appendix
Pioneer status
YA2011 YA2011 YA2012 YA2013 YA2014 Total
Pre-pioneer Pioneer
1.1.2011– 1.3.2011–
28.2.2011 31.12.2011
RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Adjusted income nil nil 10,000 7,300 8,100 25,400

Less Capital allowance: nil nil
Current year (8,100) (3,100) (3,100)
B/f (3,100) (1,200)

(11,200) (4,300)
Maximum
(10,000) 17,400
Statutory income nil nil nil 3,000 5,000 8,000
70% thereof N/A nil nil 2,100 3,500
Less Pioneer loss N/A nil nil (2,000) nil
Pioneer exempt income nil nil 100 3,500

Statutory / Aggregate income 50 50 50 50

Less current year business

non-pioneer loss 2,400/12 x 2 = 400 (50) nil nil nil
Less approved donation nil Restricted Restricted Restricted
to 10% to 10% to 10%
(5) (5) (5) (15)

Add 30% of Pioneer statutory income nil nil 900 1,500 2,400
Total/chargeable income nil 45 945 1,545 2,535
Tax charged at 25% nil 11 236 386 633

Unabsorbed capital allowance c/f (8,100) (1,200) nil nil
Unabsorbed business loss
carried forward (350) (350) (350) (350)

Unabsorbed pioneer loss c/f (2,000) (2,000) nil Nil

Exempt income credited
to exempt account nil nil 100 3,500 3,600

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 (b) Investment tax allowance as an alternative incentive to pioneer status
As Global is producing a promoted product, it is eligible to apply for either pioneer status or investment tax allowance (ITA).
It is noted that Global has invested RM30 million on factory, plant and machinery, all of which constitute qualifying capital
expenditure for ITA purposes.
Based on the forecast figures, the parallel position of Global under ITA is as follows:
(i) Tax analysis – ITA

With the total qualifying capital expenditure incurred by December 2011, the ITA for the year of assessment 2011 is
RM18 million, being 60% of RM30 million. This means that, in addition to the claim of capital allowances amounting in
total to RM30 million over time, there is an additional tax deduction of RM18 million from its statutory income.
Global will have RM180,000 of chargeable income over the four years of assessment to the year of assessment 2014,
with tax charged of RM45,000. Yet, its exempt income credited to the exempt account stands at the higher amount of
RM5,600. The entire business loss of RM2.4 million in the year of assessment 2011 and RM20,000 of its approved
donations will be absorbed.
Finally, as at end of the year of assessment 2014, Global has RM12.4 million of unabsorbed ITA carried forward to be
utilised against 70% of the statutory income for the year of assessment 2015 and after.
(ii) The comparative analysis
Pioneer status ITA
RM RM
Chargeable income 2,535,000 180,000
Tax chargeable/payable 633,000 45,000
Exempt income to exempt account 3,600,000 5,600,000
Non-pioneer business loss c/f 350,000 Fully absorbed
Donations deducted 15,000 20,000
ITA c/f nil 12,400,000
Conclusions and recommendations
As clearly indicated in the comparative analysis above, ITA yields greater tax benefits to Global and its shareholders in
terms of higher exempt income, reduced tax liability, better absorption of the business loss and approved donations and
a substantial unabsorbed ITA carried forward to yield more exempt income post 2014.
It is highly recommended to apply for the ITA to replace the pioneer incentive.

Computations
Investment Tax allowance
YA2011 YA2012 YA2013 YA2014 Total
RM’000 RM’000 RM’000 RM’000 RM’000
Adjusted income nil 10,000 7,300 8,100 25,400
Less Capital allowance
Current year nil (3,100) (3,100) (3,100)
B/f nil (8,100) (1,200)
Statutory income nil nil 3,000 5,000
Less ITA @ 60% of RM30m
qualifying capital expenditure 18,000 nil
70% of Statutory income:
ITA b/f nil 18,000 18,000 15,900
ITA absorbed/utilised nil nil (2,100) (3,500)
ITA c/f 18,000 18,000 15,900 12,400
nil 900 1,500 2,400
Business loss b/f nil 2,350 2,350 1,450
Less: Absorbed/utilised nil (900) (1,450)
Business loss c/f 2,350 1,450 nil
Net S.I. from businesses nil nil nil 50
Add interest income 50 50 50 50
Aggregate income 50 50 50 100
Less current year business loss (50) nil nil nil
Less approved donation
(Restricted to 10% of aggregate income) nil (5) (5) (10) (20)
Total / chargeable income nil 45 45 90 180
Tax charged at 25% nil 11 11 23 45

ITA c/f 18,000 18,000 15,900 12,400
Business loss c/f 2,350 2,350 1,450 nil
Capital allowance c/f 8,100 1,200 nil nil
Exempt income credited to exempt account nil nil 2,100 3,500 5,600

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Pilot Paper P6 (MYS) Marking scheme
Advanced Taxation (Malaysia)

Marks
1 (a) (i) Tax relief period determined 1
Significance – Determination of exempt income to exempt account 1
Exempt dividend, two-tier exemption 1

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(ii) Tax analysis
Income tax liability – How quantified 0.5
30% of statutory income leapfrogged to total income 0.5
Business loss – absorption hampered by leapfrog treatment 0.5
Approved donation – restricted scope 0.5
Cumulative exempt income – quantum and significance on shareholders 0.5 + 0.5
Business loss c/f and its significance 0.5
Summary of position 0.5
Appendix on pioneer status
YA 2011 – Determination of pre-pioneer loss, absorption and c/f 1 + 0.5 + 0.5
YA 2011 – Capital allowance and Pioneer loss c/f 0.5 + 0.5
YA 2012 – Absorption of capital allowance 1
YA 2012 – Absorption of donation 0.5
YA 2013 – Absorption of capital allowance 0.5
YA 2013 – 70% of statutory income 0.5
YA 2013 – Absorption of pioneer loss 0.5
YA 2013 – Exempt income 0.5
YA 2013 – 30% leapfrogged to total income 0.5
YA 2014 – 30% leapfrogged to total income 0.5
YA 2014 – Pre-pioneer loss c/f 0.5

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Professional marks
Format and presentation of letter (calculations in appendix) 1
Effectiveness of communication 1

2

(b) (i) Tax analysis – Investment tax allowance
Quantification of ITA and its significance 2
Parallel analysis re tax charged, exempt income, absorption of business loss
and donations and carry forward item 2
Computations on investment tax allowance
YA2011 – Determination of ITA. Absorption and c/f 1 + 0.5 + 0.5
YA2012 – Computation 1
YA2013 – 70% of statutory income 1
Computation 1
YA2014 – Computation and amounts c/f 2

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(ii) Comparative analysis 2

Conclusions 1
Recommendation 1

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