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Andy Leeandylee@ums.edu.my
BP34203TAXATION II
SPE, UMS
Week 3 AllowancesMalaysian Taxation
SPE, UMS
Lecture outlineAgriculture AllowancesForest AllowancesMining AllowancesProspecting Expenditures
SPE, UMS
Allowances Chp 13Schedule 3 of ITACapital Allowance on Plant & MachineryIndustrial Building AllowanceAgriculture Allowance (p. 542) Forest Allowance (p. 549) Schedule 4A of ITAApproved Agriculture Project (p. 549)
[Deleted]Schedule 2Mining Allowance (p. 529)Schedule 4 of ITAProspecting Expenditure (p. 539)
Agriculture AllowancesOverviewAllowances given to a person carrying
agriculture activities including cultivation of crops, animal farming, aquaculture, inland fishing and other agriculture activities (S. 18 ITA 1967)
Computation of agriculture allowance is provided under Schedule 3 of ITA 1967
Similar to Capital Allowance, agriculture allowance is deducted from adjusted income to get statutory income
Agriculture allowance not fully absorbed in a YA is c/fwd to the following YA
Agriculture AllowancesQualifying Agriculture Expenditure (QE)Clearing and preparation of land for the
purpose of agriculturePlanting (not replanting) of crops on land
cleared for plantingConstruction on a farm of a road or bridgeConstruction on a farm of a building used
for the purpose of business (wholly or partly for the farm), a building for the welfare of persons or as a living quarters for a person, employed in connection of that farm – if the farm ceases to work, such buildings have little or no value to the other person
Agriculture AllowancesNote:Subsidies given by the government (such
as subsidy for fertilizer) is not deductible in the income statement
Agriculture allowance is only given upon agriculture expenditure incurred for new planting. Any agriculture expenditure incurred in respect of replanting will be treated as revenue expenditure and deductible from gross income
Agriculture AllowanceEligibilityThe company or individual must be owner
at the end of basis periodQE was spent during the basis periodA taxpayer who is entitled to an
agriculture allowance shall not qualify for other allowances on the same expenditure
Agriculture AllowancesRate of allowancesBuilding used for the welfare of persons
or as living accommodation for a person employed to work on the farm (20% p.a. of the expenditure incurred)
Other buildings (10% p.a. of the expenditure incurred)
QE other than buildings (50% p.a. of the expenditure incurred)
Note: No Initial Allowance for QE
Agriculture AllowancesRate of allowances (E.g. 1)Syarikat KelapaMas Sdn Bhd incurred
qualifying agriculture expenditure for coconut plantation for year 2008
Purchase of land 150,000
Clearing and preparation of land
25,000
Planting of crops 60,000
Construction of workers quarters
20,000
Construction of office building 10,000
Agriculture AllowancesRequired: Calculate the qualifying expenditure and
agriculture allowances for Syarikat KelapaMas Sdn Bhd for year of assessment 2008. The company closes its accounts on 31 December 2008.
Agriculture AllowancesAnswer:All expenditure except purchase of land
qualifies as Qualifying Expenditure for agriculture allowance. The calculation of Qualifying Expenditure and Agriculture Allowance for Syarikat KelapaMas Sdn. Bhd. for YA 2008 is as follows:
Agriculture AllowancesAnswer:
Clearing and
preparation of land
Planting of
crops
Worker quarte
rs
Office buildin
g
Agriculture Allowance Rates
50% 50% 20% 10%
Qualifying Expenditure
25,000 60,000 20,000 10,000
Agriculture Allowance for YA 2008
12,500 30,000 4,000 1,000
Balance of Agriculture Expenditure on 31.12.08
12,500 30,000 16,000 9,000
Agriculture AllowancesNo allowances are to be given if the taxpayer is
not the owner of the asset at the end of basis period, or the asset was not in use for business
No allowances will be given where the asset is transferred in the basis year and not in use for the business within one month before the transfer
In the event of sale or transfers of an asset, an apportionment of the allowances is made on a time basis to the vendor/seller and the purchaser
Agriculture AllowancesE.g. 2: Continue from E.g. 1 (Syarikat
KelapaMas Sdn. Bhd.). On 1 July 2009, Syarikat KelapaMas Sdn. Bhd. sold the workers quarters to KKCoconut Berhad, another coconut planter next to its plantation. The price was RM100,000. Compute the agriculture allowances for both companies for YA 2009 and 2010. KKCoconut Berhad which closes its account on 30 September.
Agriculture AllowancesAnswer:
Syarikat KelapaMas Sdn Bhd
YA 2008 (20% x 20,000) 4,000
YA 2009 (20% x 20,000) x 6/12mths
2,000
YA 2010 NIL
KKCoconut Bhd
YA 2009 (20% x 20,000) x 6/12mths
2,000
YA 2010 (20% x 20,000) 4,000
Agriculture AllowancesNote:Sale price of RM100,000 is not consideredAgriculture Allowance is based on old/cost
price of RM20,000Apportionment between Syarikat
KelapaMas Sdn Bhd and KKCoconut Bhd in YA 2009 is based on number of months, which Syarikat KelapaMas Sdn Bhd had used (i.e., 6 months: 01.01.09 – 01.07.09)
Agriculture AllowancesExample 3: Continue from Example 2
(Syarikat KelapaMas Sdn. Bhd.). If the sale of the worker quarters was 1 Oct 2009, what would be calculation of Agriculture Allowance for both companies?
Agriculture AllowancesAnswer:
Syarikat KelapaMas Sdn Bhd
YA 2008 (20% x 20,000) 4,000
YA 2009 (20% x 20,000) x 9/12mths
3,000
YA 2010 NIL
KKCoconut Bhd
YA 2009 (20% x 20,000) x 3/12mths
1,000
YA 2010 (20% x 20,000) 4,000
Agriculture AllowancesAgriculture ChargeAgricultural charge is the withdrawal of
agriculture allowance claimed (similar to balancing charge)
It arises (1) when grants or subsidies from the government or statutory body is received by the taxpayer – the receipt is to be included as a charge in the assessable incomeIf subsidies received after the taxpayer
ceased to operate a farm – the amount received will be included in the income of the basis period of cessation of operation
Agriculture AllowancesAgriculture Charge (cont’)It arises (2) when an asset upon which an
agriculture allowance has been made, is disposed off within a period of 6 years
A taxpayer is given an option to spread the agriculture charges over the year of assessment for which the allowances were made
Agriculture AllowancesAgriculture Charge (e.g.)Example 3: Lohan Sdn. Bhd., established,
on 1.4.2005 is in the business of cultivating oil palm. The company closes its accounts on 30 June each year. The agriculture expenditure for the company is as follows:
Agriculture AllowancesAgriculture Charge (e.g.)
Date Expenditure Amount
24.05.2005
Land cost 350,000
27.07.2005
Land clearing 100,000
14.02.2006
Road construction 200,000
18.03.2006
Oil palm planting 150,000
29.08.2006
Workers quarters construction
70,000
31.08.2006
Store construction 40,000
Agriculture AllowancesAgriculture Charge (e.g.)On 24.09.2006, the company received a subsidy
from the state government for RM40,000 for oil palm planting.
On 31.12.2010, the oil palm plantation was sold to Damai Sdn Bhd, an oil palm plantation company for RM750,000Required:Calculate the agriculture allowance/charge for Lohan Sdn. Bhd. for the relevant years of assessment until year of assessment 2011.
Agriculture AllowancesLand
clearingRoad Oil Palm
plantingWorkerquarter
s
Store
Rate 50% 50% 50% 20% 10%QE 100,000 200,00
0150,000 70,000 40,000
YA2006 – AA 50,000 100,000
75,000 - -
YA2007 – AA– AC
50,000-
100,000-
75,000(40,000)
14,000 4,000
YA2008 – AA - - - 14,000 4,000YA2009 – AA - - - 14,000 4,000YA2010 – AA - - - 14,000 4,000YA2011 – AA (*) YA2011 –
AC (**)
-(100,00
0)
-(200,00
0)
-(110,00
0)
7,000(63,000
)
2,000(18,00
0)
Agriculture AllowancesNotes -* In YA2011, Lohan Sdn. Bhd only entitled to 1/2
agriculture allowance because the plantation was sold.**Alternatively, subject to a written request and DGIR’s
approval, Lohan Sdn. Bhd may spread the agriculture charge to the previous YA’s as follows:
Land clearing: RM100,000 / 2 = RM50,000 in YA 2006 and 2007 Road: RM200,000 / 2 = RM100,000 in YA 2006 and 2007 Oil Palm Planting: RM110,000 / 2 = RM55,000 in YA 2006 and
2007 Workers Quarters: RM63,000 / 5 = RM12,600 in YA 2007, 2008,
2009, 2010 and 2011 Store: RM18,000 / 5 = RM3,600 in YA 2007, 2008, 2009, 2010
and 2011
Approved Agriculture ProjectsDefinition:An approved agricultural project is an
alternative to Schedule 3 AllowanceA taxpayer carrying on an approved
agricultural project can elect that the capital expenditure incurred be deducted against his aggregate income
Qualifying expenditure – Schedule 4A, ITA 196
Deleted with effective from YA2006
Forest AllowanceGiven to person involved in timber
industryUnder para. 8, 30 and 31, sch 3, ITA 1967Forest – means forest in Malaysia in
respect of which a person has a concession or license to extract timber and conducting business of extracting timber from the forest
Forest AllowanceAllowance
• 10% - QE incurred on roads and buildings which are used for the purposes of the business of extracting timber from the forest
• 20% - QE incurred on buildings provided for the welfare or living accommodation of employee engaged in the extraction of timber
Forest AllowancePermanent cessation – the whole balance of
capital expenditure which has not been allowed will be given
Forest charges – when the forest is disposed of and the amount of charges is equal to the allowances made to the taxpayer
Disposal of forest – transfer or assigns the concession (license) or surrenders that concession (license) for a valuable consideration
In a transfer, apportionment of the allowances is made on a time basis to the vendor/seller and the purchaser
Forest AllowanceE.g. 4: TM Timber Sdn Bhd, a timber company,
closes its accounts every 31 December. The following are expenditure on the timber operations:
01.01.06 – 31.12.06 Road Construction 1
40,000
01.01.06 – 31.12.06 Workers Quarters 1
80,000
01.01.07 – 31.12.07 Road Construction 2
200,000
01.01.07 – 31.12.07 Workers Quarters 2
120,000
Forest AllowanceThe company stopped its operations on
30.11.2009 and disposed all the company's asset on 01.01.2010. From the sale, the company obtained RM30,000 for 2006 expenditure and RM20,000 for 2007 expenditure.Required: Calculate the forest allowance and/or forest charge for the relevant years of assessment. Show your workings clearly.
Forest AllowanceAnswer:
Road1
Workers
quarters 1
Road2
Workers
quarters 2
Rate 10% 20% 10% 20%
Qualifying Exp 40,000
80,000 200,000 120,000
YA2006 – FA 4,000 16,000 - -
YA2007 – FA 4,000 16,000 20,000 12,000
YA2008 – FA 4,000 16,000 20,000 12,000
YA2009 – FA 28,000
32,000 160,000 96,000
YA2009 – FC (*) (40,000)
(80,000)
(200,000)
(120,000)
Forest AllowanceNote:(*) Alternatively, subject to a written
request and DGIR’s approval, TM Timber Sdn. Bhd may spread the agriculture charge to the previous YA’s.
The disposal price is not considered
Mining AllowancesOverviewProvided under Sch 2 of ITA 1967Mining allowance is treated as revenue
expenditure (deductible expense) and is deducted from the gross income of a mining business (S. 34(6)(c) ITA 1967)
Treatment of adjusted loss from mining operation is similar to business loss. The excess of mining allowance over the gross mining income for a YA can be offset against the aggregate income for that YA
Mining AllowancesRationaleCertain capital assets used in mining
operations would no longer be of use (no value) once the mining operations ceased
The deduction would assist the mining operator to be more competitive
Mining AllowancesDefinitionMine
Source of minerals over which mining operations are, have been or can lawfully be, carried on
Minerals & depositsprecious metals, stones and non-precious minerals excluding common clay, sand, sand stones, mineral oils
Mining operationsEvery method or process by which minerals are obtained
Mining AllowancesQualifying Expenditure (QE)• Site and rights – *cost of site, acquiring
mineral rights, land to be used for mining works
• Prospecting (successful or not) – cost of searching, discovering, testing deposit or winning access thereto
• Works – construction work which is likely to be little or no value when the deposits are worked out. Example – tunneling, water supply, roads, railways, building including staff quarters
• Non-productive expenditure – management, administration and development expenditure before the commencement of actual production
Mining AllowancesComputation
Residual expenditure at the end of basis period
Residual life at the beginning of basis period
• Where account are made up for more or less than 12 months, mining allowances are computed by increasing or decreasing them proportionately.
• Existing mining company which starts new mining operation : entitled for the whole year allowance
Mining AllowanceResidual Expenditure• Total qualifying mining expenditure reduced
by any deductions which have already been given in respect of mining allowances and any amount or consideration received in respect of capital expenditure (i.e compensation or recoupment)
Recovered expenditure• Any consideration (money or non monetary
received for sale or transfer of mining asset)• Deducted for purposes of arriving at the
residual value
Mining AllowancesLife of mine• The number of years during which the
extraction of minerals from the mine can be expected
• Determined by the mine operator immediately after the works started. Provide with details calculation on how the period is determined. If not the DG will use his/her discretion
Mining AllowancesLife of mine (cont’)Common formula:
Total acreage of deposits available for mining
(a) -----------------------------------------------------Expected acreage to be mine annually
Total estimated deposits in tons(b) ---------------------------------------------------
Expected rate of annual production in tons
Mining AllowancesE.g. 1MMC Sdn. Bhd. (accounting period ends on
31/12) started a mining operation on 1/7/2002. Expenditures incurred in the year 2002 were
1/5/02 Cost of site 350,000
1/5/02 – 30/6/02
Prospecting exp.
20,000
Roads and bridges
10,000
Labour quarters 10,000
1/5/02 – 31/12/02
Others dev. cost 10,000
Expected life of the mine is 8 years
Mining AllowancesRequired: Compute mining allowances for MMC
Sdn. Bhd. for years of assessment 2002 to 2004.
Mining AllowancesAnswer: MMC Sdn. Bhd. As all expenses qualify as mining expenditure, total Qualifying Mining Expenditure is RM400,000. Calculation of mining allowance is below:
Qualifying Mining Expenditure 400,000YA 2002
Mining Allow.Residual Exp
(400,000/8) (50,000)350,000
YA 2003
Mining Allow.Residual Exp.
(350,000/7) (50,000)300,000
YA 2004
Mining Allow.Residual Exp.
(300,000/6) (50,000)250,000
Mining AllowancesTwo or more mines• Should be treated separate mineCessation of a mine (Para 15, Sch2 ITA)• Permanently ceases to work a mine (other
than on death or transfer of a mine) – any recovered expenditure received after the cessation is treated as being received on the date of cessation. An election can be made by the taxpayer to have the mining allowances recomputed for the preceding five basis period. If less than 5 years, use the actual number of years
Mining Allowances Continue from previous e.g. (MMC Sdn.
Bhd.). Due uneconomic deposits, operations of the mine was terminated on June 2007.Required: a) Compute mining allowances for MMC
Sdn. Bhd. for YA 2002 to YA 2007.b) If an election is made under para 15
Sch 2 of ITA 1967, what would be the effect on your calculation?
Mining AllowancesAnswer:
Qualifying Mining Expenditure 400,000YA 2002 Mining Allow
Residual Exp(400,000/8) (50,000)
350,000YA 2003 Mining Allow
Residual Exp(350,000/7) (50,000)
300,000YA 2004 Mining Allow
Residual Exp(300,000/6) (50,000)
250,000YA 2005 Mining Allow
Residual Exp(250,000/5) (50,000)
200,000YA 2006 Mining Allow
Residual Exp(200,000/4) (50,000)
150,000YA 2007 Mining Allow(6
mths)Residual Exp
(150,000) (150,000)Nil
Mining AllowancesAnswer:
Qualifying Mining Expenditure 400,000
YA 2002
Mining AllowResidual Exp
(400,000/( 5 + 6/12))
(72,727)
327,273
YA 2003
Mining AllowResidual Exp
(327,723 /( 4 + 6/12))
(72,727)
254,546
YA 2004
Mining AllowResidual Exp
(254,546/( 3 + 6/12))
(72,727)
181,819
YA 2005
Mining AllowResidual Exp
(181,819/( 2 + 6/12))
(72,727)
109,092
YA 2006
Mining AllowResidual Exp
(109,092/( 1 + 6/12))
(72,727)
36,365YA
2007Mining Allow(6 mths)Residual Exp
(36,365) (36,365)
Nil
Prospecting ExpenditureUnder Schedule 4 ITA 1967Allowable as deduction to against
aggregate incomeIncludes searching for, discovering, or
winning access to deposits or minerals in an eligible area, or testing such deposits
Prospecting ExpenditureExcludes the following:
Cost of the site of resourcesCost of the site of any works which are
likely to be of little or no value when the source is no longer worked
The cost of acquiring any rights in or over any such site and/or deposit
Qualifying expenditure includes the market value of plant and machinery used in prospecting even though such asset was not originally bought for that purpose
Prospecting ExpenditureQualifying prospecting expenditure is
deductible against aggregate income after adjusting for the following receipts:• Consideration received on sale of plant
& machinery• Amount received or receivable from the
use of plant and machinery• Market value of unsold plant and
machinery at the date of cessation• Sale of rights or other benefits arising
from or connected with the area• Grant or payment received or receivable
from the government, statutory authorities
Prospecting Expenditure The prospector has two choices:
1) Deduct the expenditure when it is incurred (P5(a), Sch 4). Writing claim should be submitted to the DGIR three months after the beginning of a year of assessment
2) Accumulate the expenditure up to maximum of 10 years and deduct it at the end of the basis year (P5(b), Sch 4) when the prospecting becomes abortive
Prospecting Expenditure If an election is made under (1) and the
prospecting is successful, the whole expenditure will be added back to the aggregate income and mining allowance will be given when the works start
If an election is made under (2) and the prospecting is successful, the prospecting expenditure becomes qualifying mining expenditure and mining allowance will be given when the works starts
Prospecting ExpenditureUnder Schedule 4 ITA 1967Allowable as deduction to against
aggregate incomeIncludes searching for, discovering, or
winning access to deposits or minerals in an eligible area, or testing such deposits
Prospecting ExpenditureExcludes the following:
Cost of the site of resourcesCost of the site of any works which are
likely to be of little or no value when the source is no longer worked
The cost of acquiring any rights in or over any such site and/or deposit
Qualifying expenditure includes the market value of plant and machinery used in prospecting even though such asset was not originally bought for that purpose
Prospecting ExpenditureQualifying prospecting expenditure is
deductible against aggregate income after adjusting for the following receipts:• Consideration received on sale of plant
& machinery• Amount received or receivable from the
use of plant and machinery• Market value of unsold plant and
machinery at the date of cessation• Sale of rights or other benefits arising
from or connected with the area• Grant or payment received or receivable
from the government, statutory authorities
Prospecting Expenditure The prospector has two choices:
1) Deduct the expenditure when it is incurred (P5(a), Sch 4). Writing claim should be submitted to the DGIR three months after the beginning of a year of assessment
2) Accumulate the expenditure up to maximum of 10 years and deduct it at the end of the basis year (P5(b), Sch 4) when the prospecting becomes abortive
Prospecting Expenditure If an election is made under (1) and the
prospecting is successful, the whole expenditure will be added back to the aggregate income and mining allowance will be given when the works start
If an election is made under (2) and the prospecting is successful, the prospecting expenditure becomes qualifying mining expenditure and mining allowance will be given when the works starts