Answers

Part 2 Examination – Paper 2.3(MYS) December 2004 Answers

Business Taxation (Malaysia) and Marking Scheme

Marks
1 (a) Ming Sdn Bhd
Year of assessment 2004
(Basis period 1 December 2003 to 30 November 2004)
Note RM000’s RM000’s
+ –
Profit before taxation 14,194
Advertisement cost 1 Nil 1/
2
Stock obsolescence provision 1 30 1
(RM570,000 x 5/95)
Insurance moneys 2 Nil 1/
2
Rental 204 1/
2
Insurance premiums 3 20 1
Employees Provident Fund contributions 4 26 1
(RM273,000 x 2/21)
Remuneration of disabled employees 4 77 1
Cost of air fare 5 15 1
Cost of accommodation and food 5 Nil 1/
2
Childcare centre – extension to building 5 90 1/
2
Childcare centre – maintenance 5 Nil 1/
2
Removal expenses 6 16 1
Legal cost to secure bank loan 7 6 1
Lease rentals 8 Nil 1/
2
Entrance fees to trade association 9 12 1
Sponsorship of foreign arts 9 11 1
(RM211,000 – 200,000 max.)
Donations to public library 9 Nil 2
Gain on foreign exchange (capital) 28 1
Bad debts written off 252 1/
2
Decrease in general provision 87 1/
2
Depreciation 180 1/
2
––––––– –––––
14,852 396
–––––
(396)
–––––––
Adjusted income 14,456
Less: Capital allowance
(RM140 + 165 + 37) 5 (342) 2
–––––––
Statutory income 14,114
Less: loss b/f (130) 1
–––––––
13,984
Rental income 204 1
–––––––
Aggregate total/chargeable income 14,188
––––––– –––
21
–––
(b) Notes:
1 The cost of the advertisement is a revenue expense incurred in the normal course of business, therefore 1/
2
an allowable deduction and no adjustment is necessary.
A general provision is not allowable because it is not realised. The amount disallowed is computed as 1/
2
follows:
Increase in ending stock: 570,000 (RM6,200,000 – 5,630,000)
5% provision: RM30,000 (RM570,000 x 5/95)
2 The insurance moneys received by the company are regarded as part of the gross income of the 1
company, therefore no adjustment is necessary. The company had incurred premium payments which
were deductible as the insurance was against loss of profits resulting from the death/disablement of
its key personnel – s.22(2), Income Tax Act (ITA)
3 The payment of RM20,000 constitutes capital expenditure as the company had acquired an enduring 1/
2
asset in return for the premium payment, therefore added back.

15
 Marks
4 The Employees Provident Fund contributions made by the employer are deductible, subject to the 1/
2
maximum rate at 19%, therefore, the excess 2% is added back – s.34(4)(a).
Remuneration of disabled employees specifically qualifies for double deduction under the Income Tax 1/
2
(Deductions for the Employment of Disabled Persons) Rules 1982.
5 Leave passage in respect of the cost of airfare is disallowable under s.39(1)(m). The cost of 1/
2
accommodation and food is allowable as entertainment expenses provided to employees – Public
Rulings No.1/2003. 1/
2

Revenue expense in respect of a childcare centre provided for employees is specifically allowed under 1
s.34(6)(i) in arriving at the adjusted income. The capital expenditure in respect of the extension to
the building qualifies for industrial building allowance under paragraph 42A(2), Schedule 3.
6 The removal of business premises is due to the expansion of the company’s business and represents 1/
2
an asset of an enduring nature, therefore removal expenses constitute capital expenditure.
7 The legal cost is not deductible because it was incurred to secure a bank loan for the purposes of 1/
2
business expansion, and thus constitutes capital expenditure.
8 Lease rentals are deductible up to the maximum of RM50,000 where the cost of the motor vehicle 1
exceeds RM150,000 – s.39(1)(k). As the total lease rentals incurred amount to RM46,000
(RM5,750 x 8 months), no adjustment is necessary.
9 The entrance fee to a trade association brings an enduring benefit to the company and is, therefore, 1/
2
not deductible.
Cash contributions to sponsor approved foreign arts are deductible subject to the maximum of 1/
2
RM200,000 – s.34(6)(k).
Cash donations to a public library qualify for deduction under s.39(6)(g),up to the limit of RM100,000. 1/
2
–––
9
Workings: Industrial building allowance for childcare centre (item 5) – paragraph 42A (2), Schedule 3. –––
Purchase Extension 30
RM RM –––
Qualifying building expenditure 280,000 90,000
Annual allowance 10% YA2004 28,000 + 9,000 = RM37,000

2 (a) Partnership (1.1.03 to 31.12.03) YA 2003 RM RM

Net profit per account 344,000
Less:
Dividend income (separately assessed) 3,800 1/
2
Exempt dividend 1,700 1/
2
––––––––
(5,500)
––––––––
338,500
Add:
Depreciation 27,300 1/
2
Approved donations 3,300 1/
2
Unapproved donations 1,800 1/
2
Bad debts written off (non trade) 10,000 1/
2
Partners’ private and domestic expenses (RM30,000 + 47,000) 77,000 1/
2
Partners’ salaries 204,000 1/
2
Interest on capital 2,000 1/
2
––––––––
325,400
––––––––
Provisional adjusted income 663,900 1/
2
Less:
Partners’ private and domestic expenses (RM30,000 + 47,000) 77,000 1/
2
Partners’ salaries 204,000 1/
2
Interest on capital 2,000 1/
2
––––––––
283,000
––––––––
Divisible income 380,900 1/
2
––––––––
6 months = RM380,900/2 190,450 –––
7
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16
 Marks
(b) Computation of each partner’s statutory income from the partnership for the year ended 31 December 2003:
Encik Amir Puan Aisha Total
1.1.03 to 30.6.03 (6 months)
Profit sharing ratio 60% 40%
RM RM RM
Private expenses 15,000 – 15,000 1/
2
Domestic expenses – 23,500 23,500 1/
2
Salary 60,000 42,000 102,000 1
Interest on capital 700 300 1,000 1
Divisible income: 114,270 76,180 190,450 1
–––––––– –––––––– ––––––––
Adjusted income (6 months) 189,970 141,980 331,950
–––––––– –––––––– ––––––––
Approved donations (May 2003) 1,980 1,320 3,300 1
1.7.03 to 31.12.03 (6 months)
Profit sharing ratio 50% 50%
RM RM RM
Private expenses 15,000 – 15,000 1/
2
Domestic expenses – 23,500 23,500 1/
2
Salary 60,000 42,000 102,000 1
Interest on capital 700 300 1,000 1
Divisible income 95,225 95,225 190,450 1
–––––––– –––––––– ––––––––
Adjusted income (6 months) 170,925 161,025 331,950
–––––––– –––––––– ––––––––
Adjusted income y.e. 31.12.03 360,895 303,005 663,900
Less: Capital allowance (12,515) (12,515) (25,030) 1
–––––––– –––––––– ––––––––
Statutory income 348,380 290,490 638,870
–––––––– –––––––– ––––––––
Non business source: –––
Dividend income (July 2003) 1,900 1,900 3,800 10
–––

(c) Tax payable – year of assessment 2003 (basis period 1.1.03 to 31.12.03)
(i) Encik Amir (ii) Puan Aisha
RM RM
Partnership income (y.e. 31.12.03) 348,380 290,490 2
Dividend 1,900 1,900 2
Rental income – 4,430 1/
2
–––––––– ––––––––
Aggregate income 350,280 296,820
Less: approved donations 1,980 1,320 1
–––––––– ––––––––
Total income 348,300 295,500
Less: personal reliefs
Self (8,000) (8,000) 1
Children (1,000) – 1/
2
–––––––– ––––––––
Chargeable income 339,300 287,500
–––––––– ––––––––
Tax on 250,000 54,975 250,000 54,975
Tax on 89,300 x 28% 25,004 37,500 x 28% 10,500
–––––––– ––––––––
79,979 65,475
Less: s.110 set-off (RM1,900 x 28%) (532) (532) 1
–––––––– –––––––– –––
Tax payable 79,447 64,943 8
–––––––– –––––––– –––
25
–––

3 (a) (i) Manufacturers 1

Importers 1
–––
2
–––
(ii) (1) 1
(3) 1
(4)
–––
2
–––
(iii) RM
Sale value (market value) 190,000
Sales tax payable at 10% 19,000 1

17
 Marks
The taxable period is May – June 2004 1
The sales tax must be paid within 28 days after the end of the taxable period i.e. by 28 July 2004. 1
–––
3
–––
(b) (i) A taxable person who provides taxable services will have to apply for a service tax licence once his 1
–––
annual sales turnover reaches the threshold prescribed by law, or when he commences to provide
taxable services.
(ii) A taxable person who falls under any one of the following circumstances will have to surrender his
service tax licence:
(a) he ceases business in providing any taxable service; or
(b) he goes into a partnership, or a partner withdraws or a new partner is added to a partnership; or
(c) a registered company, or any person as defined under section 2 of the Act, takes over any
business licensed under s.8 or 8A of the Act; or
(d) he becomes a taxable person in another Group of the Group of the Second Schedule; or
(e) there is any change in the name of the company or business; or
(f) there is any change in the number of business or location of business in the same building; or
(g) there is any change in the address of business; or
(h) called upon to do so by the Director General. –––
Any 4 items at 1 mark each 4
–––
(iii) The service tax which Yoon Sdn Bhd will have to repay the Customs Department is computed as
follows:
RM29,400/73,500(RM70,000 + 3,500) x 3,500 = RM1,400 3
(payment recovered/sale value of taxable service plus service tax payable on such service x service tax –––
payable on such service) – s.21C of Service Tax Act, 1975 15
–––

4 (a) (i) Encik Sim is not liable to real property gains tax. Since the disposal involves the transfer of property 1
between spouses the transaction falls under paragraph 3(b)(i), Schedule 2, Real Property Gains Tax
Act. The disposal price is deemed equal to the acquisition price and Encik Sim is deemed to have 1
made no gain/suffered no loss. –––
2
–––
(ii) Puan Joyce RM RM
Disposal price:
Consideration received 492,000 1/
2
Less: Incidental costs of disposal:
Advertisement to find a buyer (300) 1/
2
Agents’ fees (9,000) 1/
2
––––––––
482,700
Acquisition price of the transferor (Encik Sim):
Consideration paid by the transferor 360,000 1/
2
Add: Incidental costs of acquisition:
Stamp duty 4,200 1
Less: Insurance money received (19,000) 1
––––––––
Encik Sim’s acquisition price 345,200
Plus: Permitted expenses incurred by the transferor:
Cost of extension to building 71,000 1/
2
Legal expense to defend title to land 6,500 1
–––––––
77,500
––––––––
Joyce’s deemed acquisition price 422,700
Less: Deposit forfeited to Joyce after the transfer (24,000) 1
––––––––
Joyce’s acquisition price 398,700
––––––––
Chargeable gain 84,000
Less: Schedule 4 exemption:
RM5,000 or 10% of chargeable gain
whichever is greater 8,400 1/
2
––––––––
75,600
––––––––
Real property gains tax payable RM75,600 x 5% = RM3,780 1
(disposed of in the fifth year after the date of acquisition i.e. date of transfer, 6 April 2000) –––
8
–––
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 Marks
(b) (i) The types of exemptions available to an individual are:
Schedule 4, Real Property Gains Tax Act (RPGT, Act):
(a) A gain accruing in respect of the disposal of a chargeable asset before the date of coming into
force of this Act. (Paragraph 1)
(b) An amount of RM5,000 or 10% of the chargeable gain, whichever is greater, in respect of a
chargeable gain accruing to an individual on the disposal of a chargeable asset which is not or
was not part of a larger chargeable asset at the time of the disposal:
Provided that in the case of a disposal by a co-proprietor of his share of the chargeable asset,
such disposal shall not be regarded as a disposal of part of a larger chargeable asset for purposes
of this paragraph. (Paragraph 2)
(c) A gain equal to the amount of estate duty payable under any law relating to estate duty applicable
in Malaysia on an estate of a deceased person accruing in respect of a disposal of a chargeable
asset from that estate where the Director General is satisfied that the disposer is compelled to
dispose of the property in order to pay the estate duty. (Paragraph 4)
(d) Schedule 3, RPGT Act:
A gain accruing to an individual on the disposal of a private residence owned by him.
–––
Any 2 items at 1 mark each 2
–––
(ii) The types of disposals in which an individual is treated as making no gain/no loss are:
Paragraph 3, Schedule 2, RPGT Act:
(a) the devolution of the assets of a deceased person on his executor or legatee under a will or
intestacy or on the trustees of a trust created under his will;
(b) the transfer of assets between spouses or the transfer of assets owned by an individual, by his
wife or by an individual jointly with his wife or with a connected person to a company (whether
or not resident in Malaysia) controlled by the individual, by his wife or by the individual jointly
with his wife or with a connected person for a consideration consisting of shares in the company,
or for a consideration consisting substantially of shares in the company and the balance of a
money payment;
(c) disposals to a nominee or trustee resident in Malaysia by an individual or his wife or by both
being absolutely entitled as against the nominee or trustee;
(d) the conveyance or transfer of an asset by way of security, or the transfer of a subsisting interest
or right by way of security in or over an asset (including re-transfer on the redemption of the
security);
(e) gifts made to the Government, a State Government, a local authority or a charity exempt from
income tax under the income tax law;
(f) the disposal of an asset as a result of a compulsory acquisition under any law; or
(g) the disposal of an asset by a person to an Islamic Bank under a scheme where that person is
financed by such bank in accordance with the Syariah.
Paragraph 12, Schedule 2, RPGT Act
Gifts made by an individual to his/her spouse, child or grandchild within five years after the date of
acquisition of the asset by the donor.
–––
Any 3 items at 1 mark each 3
–––
15
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5 (a) (i) Coco Sdn Bhd – Agriculture allowance/charge
Clearing of land Planting Road Living quarters Office
Rate 50% 50% 50% 20% 10%
RM RM RM RM RM
QAE 50,000 38,000 26,000 40,000 17,000
YA01 25,000 13,000 8,000 1,700 2
YA02 25,000 19,000 13,000 8,000 1,700 21/2
YA03 19,000 8,000 1,700 11/2
YA03 Agriculture charge
(grant received)
(44,000) 1
–––
7
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19
 Marks
(ii) Coco Sdn Bhd – Statutory income for year of assessment 2003
RM
Adjusted income as given 1,300,000
Cost of replanting – s.34(6)(d) (21,000) 1
––––––––––
Adjusted income 1,279,000
Add: Agriculture charge 44,000 1/
2
––––––––––
1,323,000
Less: Capital allowance (P&M) 5,440 1
Agriculture allowance (AA)
(RM19,000 + 8,000 + 1,700) 28,700 1
––––––––
(34,140)
––––––––––
Statutory income 1,288,860 1/
2
––––––––––
Workings: Machinery RM RM
Qualifying plant expenditure 16,000
Initial allowance 20% 3,200
Annual allowance 14% 2,240
–––––––
5,440
––––––– –––
Residual expenditure as at 31.12.2003 10,560 4
––––––– –––

(b) Agriculture allowance (AA) for YA2004

Living quarters Office
AA RM RM
Coco (3 months) 1,989 423 2
(91/366 days x RM8,000 = 1,989)
(91/366 days x RM1,700 = 423)
Farmfresh (9 months) 6,011 1,277 2
(275/366 days x RM8,000 = 6,011) –––
(275/366 days x RM1,700 = 1,277) 4
–––
15
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The agriculture allowances are apportioned between the transferor and the transferee on a time basis for
the same year of assessment – paragraph 24, Schedule 3

6 (a) (i) A more tax-efficient remuneration package can be provided for Encik Looi if instead of only cash
payments the company were to provide him with fringe benefits as follows: 1/
2

– a car; 1/
2
– an interest-free loan; 1/
2
– the cost of one overseas leave passage; 1/
2
– two domestic servants and a driver; 1/
2
– Employees Provident Fund contributions increased to 17%. 1/
2
–––
3
–––
(ii) The benefit of an interest free loan is tax exempt because the employer does not have to bear any 1
cost of having to borrow from any party. –––

(iii) Leave passage consisting of the cost of air fare incurred by the company is not deductible in computing –––
the company’s own tax liability. 1
–––

20
 Marks
(b) (i) The economic cost and the revised salary are computed as follows:
RM RM
Car depreciation (RM145,000 x 15%) 21,750 1/
2
Fuel 5,500 1/
2
Driver 13,750 1/
2
Domestic servants (RM9,000 x 2) 18,000 1/
2
Air travel for one overseas leave passage 10,000 1/
2
–––––––
Economic cost of providing fringe benefits 69,000 1/
2
Proposed salary RM420,000 – 69,000 = 351,000 x 100/117 = 300,000 1
Proposed EPF contributions at 17% x RM300,000 51,000 1/
2
––––––––
Total economic cost of the remuneration package per annum 420,000 1/
2
––––––––
–––
5
–––
(ii) Tax computation for a year of assessment – Encik Looi
RM
Cash payments – 13(1)(a)
Salary 300,000
Fringe benefits – 13(1)(b)
Car 5,000 1/
2
Fuel 1,500 1/
2
Driver 3,600 1/
2
Domestic servants (RM4,800 x 2) 9,600 1/
2
Leave passage (RM10,000 – 3,000 max) 7,000 1
–––––––
26,700
––––––––
Total income 326,700
Less: personal reliefs:
Self 8,000 1/
2
Wife 3,000 1/
2
Children 4,000 1/
2
EPF 5,000 max. 1/
2
–––––––
(20,000)
––––––––
Chargeable income 306,700
–––––––– –––
5
–––
15
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21
 Marks
7 (a) (i) Section 108 account – Minlee Sdn Bhd
Year of assessment (YA) 2003 (basis period 1.10.02 to 30.9.03) RM
Balance b/f Nil 1/
2
+ Monthly instalment for YA 2002 (paid in October 2002) 5,500 1
+ Monthly instalments for YA 2003 (RM8,000 x 11) 88,000 1
––––––––
Balance c/f to YA2004 93,500
––––––––
Year of assessment 2004 (basis period 1.10.03 to 30.9.04)
Balance b/f 93,500 1/
2
+ Monthly instalment for YA 2003 (paid in October 2003) 8,000 1
+ Final tax paid for YA 2003 on submission of Form C in March 2004
(RM25,500 – RM14,000 penalty under s.113(2)) 11,500 1
+ Monthly instalments for YA 2004 RM9,500 x 11 104,500 1
+ Lower of: RM
(i) tax credit on dividend received in basis period 2004 17,360 1/
2
(RM62,000 x 28%) or
(ii) tax charged on chargeable income YA 2004 110,000 17,360 1
––––––––
– Tax refunded on 12.9.04 (29,000) 1
––––––––
Compared aggregate 205,860
––––––––
Income tax deducted from dividends distributed on 15.9.04:
28% x RM860,000
Compared total (240,800) 1
––––––––
s.108(6) charge – debt due to the Government (34,940) 1/
2
––––––––
–––
10
–––
(ii) The s.108 account is presented in a prescribed Form (Form R) which, along with Form C, must be 1
submitted to the Inland Revenue Board within seven months following the close of the financial year. 1
(i.e. by 30 April 2004/2005) –––
2
–––

(b) Dinco Sdn Bhd – dividend income of RM288,000 is tax exempt 1

Ho Sdn Bhd – dividend income of RM200,000 is tax exempt 1
Encik Nik & Encik Cheah – the dividends received from Ho Sdn Bhd are taxable 1
–––
3
–––
10
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