Part A (a) To : The Management of Resources Sdn Bhd From : Tax agent Date : 1 October 2011 Subject : Tax

computations for the year of assessment 2011 (i) Registered patents Cost of acquisition of propriety rights including patents is entitled 20% tax relief deduction in arriving at business adjusted income. Resources, as subsidiary which has obtained patents from its parent company, Prime with holding 51% shares of Resources, on 1.4.2009 is then eligible for the relief of the remaining unused amount by Prime, commencing from the year of acquisition until the amount is fully used. A relief of RM16,000 (20%*RM80000), in which RM80,000 is the original acquisition cost will be given for each YA. Prime, which acquired the patents in 2008 would claim the relief for YA2008 and YA2009, while Resource would continue to claim for the YA2010 onwards until YA2012. (ii) Capital allowances for plant and machinery As Prime is parent company by holding 51% shares of Resources, the acquisition of general machinery on 1.4.2009 and grinding machine on 1.10.2010 by Resources from Prime is regarded as control transfer. Hence the residual expenditure of Prime is deemed as the acquisition cost incurred by Resources in which no initial allowance can be claimed by Resources but annual allowances based on the historical cost until the residual expenditure is fully consumed. (iii) Reinvestment allowance (RA) (1) The additional machinery and new production line acquired by Resources on 1.10.2009 and 1.6.2010 for expansion and automation purposes respectively are not qualified for RA since it has not been in operation for at least 36 months. To be eligible for RA, Resources must be in operation for 36 months and has incurred capital expenditure on a factory, plant or machinery used in Malaysia for a qualifying project. The 15 years of qualifying period will commence from the beginning of the basis period in which the expenditure is incurred. As conclusion, Resources is only eligible to claim from 31.3.2012, after operating for 36 months since its commencement of business on 1.4.2009.
(2)

(3) In YA2010, Resources has incurred capital expenditure on new production line and grinding machine. However, zero of the capital expenditure is qualifying for RA because Resources has not been operating for 36 months and grinding machine acquired under control transfer Resources as acquirer is anyway disallowed for RA. (4) RA is given as an exemption from income tax, in which RA including any brought forward from previous year is deducted against the statutory income (SI) of the year. However, RA is restricted to 70% of SI where the qualifying project is not located in promoted area. Moreover, where restriction is due to insufficient SI in the year, SA can be carried forward to the following year. For being eligible for enhanced RA (100% deduction against SI), Resources is required to incur capital expenditure on the qualifying project located in such promoted areas as Labuan, Pahang, Sabah, Sarawak, and also to achieve certain level of productivity as proposed by Minister of Finance.
(5)

(iv) Interest expense The interest incurred by Resources on the bank loan is qualifying for deduction as the money borrowed is used in the production of gross income such as inventories or laid out on assets held for production of gross income from the business such as patents and machinery. However, for the interest free loan lent to its holding company, Freshlite, it is non-deductible as it is not used in production of gross income. The interest deductible for the YA2011 is calculated as follows: RM Interest for whole year Amount of the loan due from Freshlite Amount of the bank loan outstanding Restriction ratio (250,000/750,000) Interest deductible for the whole year (61,200*2/3) 61,200 250,000 750,000 1/3 40,800

(b) The proposed bonus issue The proposed bonus share will increase the paid up capital and cause Resources not being qualified as SME to get a lower tax rate of 20% at the first RM500,000 chargeable income. It is suggested to Resources paying cash dividends under single tier dividend system since the dividend income tax paid by the company is final tax and dividends received by shareholders are tax exempted.