Dr Nakha Ratnam Somasundaram MIAQE ANSWER SET 1 …preferential rate of 3% of net profits as per the...
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Dr Nakha Ratnam Somasundaram MIAQE ANSWER SET 1 April 2014 examination Question 1 Badges of trade – case scenario (i) Briefly the argument for the Inland Revenue Board to tax the sum received would be under section 4(a) on the grounds that what was done was by way of a trade. And even it was an isolated transaction, it was carried out by way of a trade. The fact that it was necessitated by the need to repay the loan is irrelevant to the issue [DGIR v LCW (1975) 1 MLJ 250 ] The badges of trade could be lined in favour of the Revenue and this could include the subject matter of the transaction (Rutledge v CIR), modification and supplementary work before disposal – in this case construction of a saleable building (Cape Brandy Syndicate v CIR v), the sale over a short period of two years over which a substantial number of units were sold (Pickford v Quirke; Gray and Gillette v Tilly). (5 marks) (ii) For Mr Kumar it could be argued that that the original intention was that of an investment and when the properties were sold, it was merely realizing an investment. It was further accelerated by the high cost of the development resulting in him having to borrow from the bank and the sale was necessitated by the need to repay the loans i.e. it would not have been sold had it been otherwise. Law: Section 24(2); (5 marks) [Total: 10 marks]
Transcript of Dr Nakha Ratnam Somasundaram MIAQE ANSWER SET 1 …preferential rate of 3% of net profits as per the...
Dr Nakha Ratnam Somasundaram MIAQE ANSWER SET 1 April 2014 examination
Question 1 Badges of trade – case scenario (i) Briefly the argument for the Inland Revenue Board to tax the sum received would be under section 4(a) on the grounds that what was done was by way of a trade. And even it was an isolated transaction, it was carried out by way of a trade. The fact that it was necessitated by the need to repay the loan is irrelevant to the issue [DGIR v LCW (1975) 1 MLJ 250 ] The badges of trade could be lined in favour of the Revenue and this could include the subject matter of the transaction (Rutledge v CIR), modification and supplementary work before disposal – in this case construction of a saleable building (Cape Brandy Syndicate v CIR v), the sale over a short period of two years over which a substantial number of units were sold (Pickford v Quirke; Gray and Gillette v Tilly).
(5 marks)
(ii) For Mr Kumar it could be argued that that the original intention was that of an investment and when the properties were sold, it was merely realizing an investment. It was further accelerated by the high cost of the development resulting in him having to borrow from the bank and the sale was necessitated by the need to repay the loans i.e. it would not have been sold had it been otherwise. Law: Section 24(2);
(5 marks) [Total: 10 marks]
QUESTION 2(a) Profit and loss adjustment Jengka Sdn Bhd Tax computation for the year of assessment 2013
Jengka Sdn Bhd Tax computation for the year of assessment
2013
Add (+)
Deduct(-)
Note RM’000 RM’000 RM’000
Business income Profit before taxation
√116,673
Cost of sales Less:
Dividends
1
√14 Interest
2
Fixed deposit
√11 Customer-late payment charges
√0
Insurance recovery
3
√0 25
116,648
Add/Less: Salaries and
wages
4 Director's salary
√0
EPF and PRF(rest: [(45+20) -(19% of 225)]
√22 Overseas trip for director
√11
Loan interest Interest on loan for
investment
5 √14 Interest on loan for working capital
√0
Entertainment
6 Company annual dinner
√0
Entertainment disbursement (Disallow 50% of 90)
√45
Depreciation
√54 Repairs and maintenance
7
Construction of covered car park
√17 Replacing the perimeter
fence
√50 Widening and deepening the drains
√43
Others
√0 Bad and doubtful debts
8
Bad debts written off
√0
General bad debts provision
√190 Specific debts provision
√0
Bad debts (staff commission w/o)
√15 Bad debts (advance to supplier w/off)
√29
Motor vehicle expenses
9 Compound and fines
√4
Other maintenance charges
√0 Lease payments
10
Car [62-50 max]
√12
Advertisement
11 Newspaper, magazines and radio
√0
Local advertising for branded goods (DD)
0 √340
Professional fees
12 Termination of supply contract
√0
Guarantee fee for loan
√12 Lease arrangement for vehicles
√0
Income tax appeal
√8
Integrated TP audit system
√22 Insurance
13
Freight insurance on cargo import and export (DD)
0 √12
Insurance on other company assets
√0 Foreign exchange loss
14
Unrealized loss on stock imports
√4 Realized loss-purchase of machinery spare parts
√0
Donation
15 Cash 'ang pow' to inmates
√12
Provision of pubiic school library facilities [120 - 100(max)]
√20
Scholarship to foreign university
√34 Sponsoring foreign art activity [235-200(max)]
√35
653 352 116,648
Add
653
117,301
Less
352
Adjusted income from business
116,949 Less: Deduction for proprietary rights (20% of RM200,000)
√40
116,909
Less: Capital allowance
Allowance as claimed
√926 IBA on additional expenditure during the year
[W1]
√96 1,022
Statutory business income
115,888 Add: Other income
Dividends
√0 Interest
√11 11
Less: Donation
115,899
Cash to approved institution
√12
Total income and chargeable income
115,887
W1 IBA on additional building expenditure incurred during
the year
RM'000 RM'000
Construction of covered car park
√17
Replacing of perimeter fence
√50
Widening and deepening of drains
√43
Total
110
Less: Initial allowance
√11 Annual allowance
√3 14
Residual expenditure carried forward
96
51 √= 15 marks Question 2(b) Repair and maintenance Repair and maintenance expenses as understood in the ordinary sense and incurred wholly and exclusively in the production of gross income are generally allowable as a deduction in arriving at the adjusted income from a source consisting of a business or rent. However one needs to distinguish between ‘repairs’ and ‘improvements’ as improvements that add substantial value to the repaired item maybe disallowable – for example changing a zinc roof of a factory to a tiled roof. A large repair expenditure on a newly acquired used asset for example may also not qualify as it falls within the meaning of ‘initial repairs’ [Law Shipping Company which can be contrasted with Odeon Associated Theatres Ltd v Jones where initial repairs were disallowed in the first case but allowed in the second case – which illustrates that the particular facts of the case have a great bearing on the outcome of the decision].
Other issues include the matter of replacement of an entirely or part of an entirety as in the case of Bullcroft Main Collieries Ltd v O’Grady and Samuel Jones Ltd v Devondale; and renewal which may be allowed if it is not of a capital nature.
2 ½ points Bad and doubtful debts One needs to distinguish between trade debts and non-trade debts; and for trade debts as between specific bad debts and general bad debts and bad debts written off. The IRB had issued a Public Ruling No. 1/2002 with deals with the law, practice and treatment for tax purposes of bad debts in some detail. Bad debts taken over would constitute a capital asset and so do advances to a supplier. Some relevant case laws concerning decision on bad debts (including advances in the course of trading) are Reynolds and Gibson v Crompton (bad debts taken over), Reid’s Brewery (loans to customers) , English Crown Spelter and Charles Marsden and Sons (dealing with advances extended to suppliers).
2 ½ points
(5 marks) Question 3 A JPK Private Hospital Sdn Bhd Determination of qualifying building expenditure RM
Cost of land
√0
Legal fee for transfer of land
√0
Cutting and leveling land
√0
Excavation and preparation of site for construction
√30,347
Piling and foundation works
√507,637
Construction of building
√3,844,375
Construction of perimeter wall
√13,113
Architect fee-hospital building design
√52,451
Legal services for obtaining various building approval √24,353
Subcontract charges for installation of wiring and plumbing √27,724
Landscaping charges
√0
Qualifying building expenditure
4,500,000
JPK Private Hospital Sdn Bhd
Computation of industrial building allowance
Constructed building
Year of assessment 2012 RM Qualifying building expenditure √4,500,000
Initial allowance 10% √ 450,000
Annual allowance 3% √ 135,000 585,000
Residual expenditure 3,915,000
Year of assessment 2013
Annual allowance 3% √135,000
Residual expenditure 3,780,000
Leased building RM
Renovation expenditure √618,250
Year of assessment 2012 Qualifying
Leased building - used as hospital RM
Qualifying expenditure (75% of 618,250) 463,688
Initial allowance 10% √46,369
Annual allowance 3% √13,911 60,279
403,408
Year of assessment 2013
Annual allowance 3% √13,911
Residual expenditure c/f 389,498
Leased building - used as administrative office
Year of assessment 2012 Non-
qualifying
RM
Non-qualifying expenditure (25% of 618,250) √154,563
Initial allowance 10% √0
Notional allowance 3% √46,369 46,369
108,194
Year of assessment 2013
Notional allowance 3% √46,369
Residual expenditure c/f 61,825
23√ = 10 marks
QUESTION 3B Real Property Gains Tax
Mr Ravi
Computation of disposal and acquisition price
Year of assessment 2013
Disposal RM RM
Consideration received √582,196
Less: Permitted expenses
Cost of improvement √58,086
Legal fees -defending title √4,763 62,849
519,347
Less: Incidental cost of disposal
Valuation fees √7,784
Legal fees for disposal √11,623
Brokerage √14,521
Advertisement √1,511 35,439
Disposal price 483,908
Acquisition RM RM
Consideration paid √406,604
Add:
Legal fees √6,912
Stamp duty on transfer √7,132 14,044
420,648
Less:
Compensation received √35,549
Insurance recoveries √13,012
Interest on mortgage loan √0
Deposit forfeited √11,000 59,561
Acquisition price 361,087
14 √= 10 marks
ANSWER 4(A) (i) A Labuan business activity refers to a Labuan trading or a Labuan non-trading
activity carried on in or from Labuan in currency other than the Malaysian ringgit by an offshore company with persons not resident in Malaysia or with another offshore company but excluding shipping operations.
(4 x 1/2 marks= 2 marks) (ii) 2 examples of Labuan trading activity
- Banking, insurance, trading, management, licensing or any other activity which is not offshore non-trading activity.
2 examples of Labuan non-trading activity - Holding of investments in securities, stock, shares, loans, deposits and
immovable properties by an offshore companies on its behalf.
(4x ½ mark = 2 marks)
(iii) The income derived from Labuan non-trading activities is exempted from tax. Meanwhile income derived from Labuan trading activities Ltd will be taxed at a preferential rate of 3% of net profits as per the company’s audited accounts or at a fixed sum of RM20,000 upon election as follows:
3 % Preferential rate Election
RM’million RM
Audited net profit 50
3% preferential rate 15 20,000
Zakat payment [1.25] [1,250,000]
Income tax payable 13.75 nil
(6 x ½ mark = 3 marks) (iv) Dividends paid by Barakah (L) Ltd in July 2013 would be deemed to be derived
from Malaysia. However the dividends are exempted from tax in the hands of the shareholders.
(2x 1/2 mark = 1 mark)
(v) Interest on loan given to Makmur Sdn Bhd is exempted from tax. Therefore, Makmur
Sdn Bhd is not required to withhold taxfrom interest payments made to Barakah (L) Ltd. (2 x 1/2 mark = 1 mark)
(vi) The directors’ fees received by non-resident directors are deemed to be derived
from Malaysia and should be assessed at a flat rate of 26%.
(2x ½ mark = 1 mark)
ANSWER 4(B) (i) Tanjung Pagar Pte Ltd (TPPL) is foreign company i.e. Singapore resident company.
There is no evidence to establish that TPPL has a permanent establishment in Malaysia since TPPL does not has a branch in Malaysia. Furthermore, TPPL just provides special equipment to Sari Setia Malaysia (SSM) and the maintenance of the equipment is done in Singapore. Therefore, business income of TPPL is not subject to Malaysian tax at 25%.
TPPL has an arrangement with SSM for the renting of moveable property i.e. special equipment which is used by SSM to provide service of water treatment for his clients in Malaysia. Hence, the rental income is deemed to be derived from Malaysia. Thus, RM100,000 paid to TPPL would be subject to withholding tax. It is special classes of income falling under Section 4A.
(8x ½ mark = 4 marks)
(ii) Sari Setia Malaysia (SSM) is required to withhold 10% from RM100,000 i.e. RM10,000
on rental payable to TPPL, that is only RM90,000 should be payable to TPPL (S. 109B). The withholding tax RM10,000 withheld should be remitted to the IRBM within one month from the date of payment to TPPL. Failure to do, SSM can be charged: 1) A penalty of 10% of the unpaid amount; and 2) RM100,000 is not allowed as deduction (S.39) in arriving at the adjusted business income of SSM.
(4x 1/2 mark= 2 marks)
(iii)
RM
Factory price 1,000,000
Inland transport from factory to Korean port 10,000
Freight from Korea to TanjungPelepas 46,000
Ocean Insurance 4,000
CIV value 1,060,000
Import duty rate 5%
Import duty payable 53,000
CIV value 1,060,000
Import duty payable 53,000
1,113,000
Sales tax rate 10%
Sales tax payable 111,300
(8x ½ mark = 4 marks)
[Total: 20 marks]
ANSWER 5(A) (i)
Computation of income tax payable for the Year of Assessment 2013 for Sohimin and Rose
RM RM RM
Section 13 (1) (a) Sohimin Rose
Salary 90,000 √
Interest on loan (6,000 – 3,000) 3,000 √
Prize – i-pad (exempt) Nil √
Hamper 300 √
Refund of Professional fees 500 √
93,800
Section 13 (1) (b)
Furniture (prescribed value) 3,360 √
Car (prescribed value) 5,000 √
Fuel (exempt) Nil √
Utilities 3,600 √
Leave passage:
- Air fares (RM5,000 – RM3,000 Exemption)
2,000 √
13,960
Section 13 (1) (c)
House: DV [(RM21,600 – RM3,600) = 18,000
√
30% x 93,800 = 28,140
√
WIL 18,000√
GROSS EMPLOYMENT INCOME 125,760
Professional fee (500)
STATUTORY EMPLOYMENT INCOME 125,260 exempt√
Rent 38,000√
Aggregate income√ 125,260 38,000
Donations: cash (500) √
Total income√ 124,760 38,000
Personal reliefs
self 9,000 √
Special relief 2,000 √
Purchased of books 1,000 √
Study course fees 5,000 √
EPF (max) 6,000 √
Medical insurance premium 3,000 √ (26,000)
Chargeable income√ 98,760 38,00
0
Tax chargeable at special rate 15% √ / 26%√ 14,814 9,880
Less: zakat (1,500) √
Net tax payable 13,314√ 9,880√
(30√ x 1/3 = 10 marks)
(i) RM2,000 allowance to be received by Sohimin from Singapore’s clients will be subjected
to tax under S.4(b)√. This is due to that the service rendered in Singapore is incidental to his employment in Malaysia √.
(2x 1 mark = 2 marks) ANSWER 5(B) Total Income (RM) Business income 220,000 √ Adjusted loss b/f (20,000) √ Statutory income 200,000 Rent 80,000 √ Dividend Exempt √ Foreign income Exempt √ Aggregate income 280,000 Annuity (10,000) √ Trust fees NA √ Total Income 270,000 Tax rate 25% √ Tax payable 67,500 √ Adjusted Trust Total Income = 270,000 x [245,000 / 250,000] = 264,600
Alif RM Bahrin RM
Citra RM Dora RM
Annuity 10,000√
Accumulation 5,000√
Share of trust income 198,450√ 66,150√
Total income 10,000 Not taxable√
198,450 66,150
Self relief [9,000] √ [9,000] √ [9,000] √
Chargeable Income 1,000 189,450 57,150
Tax chargeable at scale rate
0 37,107√ 4,208.50√
Tax rebate [400] √
Tax credit S.110(8) NA [49,612.50] √ [16,537.50] √
Tax refundable 0 12,505.50√ [12,329] √
(24x 1/3 mark = 8 marks) [Total: 20 marks]
QUESTION 6 (i) Income derived from business source of real estate S.4 (a) will be assessed separately
from director fees S.4 (b) √. The business income will be taxed at a flat rate of 25% under the company √. Meanwhile, the director fees will be assessed under the personal tax of Encik Subhan √. If En Subhan is a tax resident, he may claim personal relief and will be taxed at a scale rate √.
(4x 1 mark = 4 marks)
(ii) As a director of the company, Encik Subhan is responsible for the tax affairs of the
company √. He is responsible to settle the tax liability of the company besides his own personal tax. (S.75A) √
If Encik Subhan fails to pay the tax due either tax for the company as well as his own personal tax √, he may be stopped from leaving Malaysia √. (S104).
En Subhan also must make sure the company keeps proper records and book of account √. All business transactions must be recorded within 60 days from the date of the transaction √. Official receipts must be issued by the company if the total sales is more than RM150,000 or the provision of services exceeds RM100,000√√.
(8x ½ mark = 4 marks) (iii) If the company fails to furnish a return in accordance with S.77(1) or S.77A(1); or give
notice of chargeability pursuant to S.77(3) √, a penalty of between RM200 to RM2,000 or 6 months imprisonment or both can be imposed on the company √.
(2x 1 mark = 2 marks)
[Total: 10 marks]
END OF ANSWER PAPER
