Paper P6 (MYS) Advanced Taxation (Malaysia) Monday 3 December Professional Level Options Module

Transcription

1 Professional Level Options Module Advanced Taxation (Malaysia) Monday 3 December 2007 Time allowed Reading and planning: Writing: 15 minutes 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 Tax rates and allowances are on pages 2 3 Paper P6 (MYS) 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

2 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 rates and allowances are to be used in answering this paper: Income tax rates (Rates applicable to all chargeable income liable to tax and not specifically chargeable at a different rate) Resident individuals and persons not mentioned below Chargeable income Tax payable Band Cumulative Rate Cumulative RM RM % RM 2,500 2, ,500 5, ,000 20, ,000 35, ,525 15,000 50, ,475 20,000 70, ,275 30, , , , , ,975 Excess 28 Resident companies Having a paid up ordinary share capital not exceeding RM2 5 million The first RM500,000 20% The remainder 27% Other resident companies All 27% Resident trust bodies and receivers All 27% Labuan offshore companies chargeable income from an offshore business activity All 3% Non-residents Companies 27% Individuals 28% 2

3 Selected personal deductions RM Single individual 8,000 Wife/husband 3,000 Child basic 1,000 Life insurance and approved schemes 6,000 Parents medical expenses 5,000 Own medical costs 5,000 Necessary basic supporting equipment 5,000 Educational and medical insurance 3,000 Fees for study courses 5,000 Purchase of a personal computer 3,000 Purchase of books, magazines etc 1,000 Rebates RM Single individual chargeable income up to RM35, Individual entitled to a deduction for a spouse or a former wife chargeable income up to RM35, Capital Allowances Initial Annual % % Industrial buildings 10 3 Plant and machinery general Motor vehicles, heavy machinery Computers, information technology equipment and computer software Office equipment, furniture and fittings Stamp duty Rates of duty under the First Schedule Conveyance, assignment, transfer or absolute bill of sale Item 32(a) Duty rate % For every RM100 or fractional part thereof: On the first RM100,000 1 On the next RM400,000 2 On the excess over RM500, [P.T.O.

4 Section A BOTH questions are compulsory and MUST be attempted 1 (a) Salmon Berhad, a company listed on Bursa Malaysia, is the holding company for three subsidiary companies; it also has a portfolio of debentures quoted on the stock exchange and in Malaysian government bonds. The subsidiaries are: (i) Mackerel Sdn Bhd, which is 70% owned by Salmon Berhad. This company carries on a business and is profitable. (ii) Tuna Sdn Bhd, which is 100% owned by Salmon Berhad. This company carries on a business, but continues to incur losses. (iii) Sardine Sdn Bhd, which is 70% owned by Salmon Berhad. This company, which carries on a profitable business, is located in a promoted area and is in the second year of its pioneer status, enjoying a 100% exemption of statutory income. All of the companies are resident in Malaysia and have a 31 December year end. Except for Mackerel Sdn Bhd, all of the investments and the interests in subsidiaries were acquired by Salmon Berhad using its free resources. Mackerel Sdn Bhd was acquired with a loan of RM2 5 million. Of this, RM1 million was used to buy the shares and RM1 5 million was lent to Mackerel Sdn Bhd as a loan bearing interest at the rate of 6% per annum. Salmon Berhad expects to have the following income and outgoings for the year to 31 December 2008: RM RM Income Dividend from Mackerel Sdn Bhd net of tax 219,000 Interest on quoted debentures and bonds 410,000 Interest from Mackerel Sdn Bhd 90,000 Management and administration expenses Directors fees 80,000 Rent and other office expenses 30,000 Secretarial, audit and accounting fees 18,000 (128,000) Interest on RM2 5 million loan (150,000) Salmon Berhad had no income tax liability for the years of assessment 2006 or The directors of the company, believing that there could be a liability for the year of assessment 2008, have asked the company s tax agents, Tip Top Tax Services Sdn Bhd, to prepare a report advising them on the company s responsibility for submitting an estimate of its tax liability for that year. The directors instructions were only given to its tax agents on 3 December Prepare the report requested by the directors of Salmon Berhad in respect of the year of assessment The report should consist of: (i) A statement of the estimated tax payable. (1 mark) (ii) The date for submission of the estimate and the amount of any penalty for late submission. (2 marks) (iii) Whether any of the management and administration expenses are tax deductible, explaining why or why not as the case may be. (6 marks) (iv) Whether any of the interest expense is tax deductible, explaining why or why not as the case may be. (2 marks) (v) An appendix containing calculations to support your report. (5 marks) Appropriateness of the format of the report and the effectiveness with which the information is communicated. (2 marks) 4

5 (b) As a separate instruction, the secretary of Salmon Berhad has asked Tip Top Tax Services Sdn Bhd for advice on the income tax implications of a proposal that Salmon Berhad should set up a system for charging management fees to its three subsidiaries. This will help cover the expenses incurred on management and administration. Prepare a letter from Tip Top Tax Services Sdn Bhd to the secretary of Salmon Berhad identifying and discussing the income tax implications of this proposal from the point of view of both the company and the subsidiaries. Note: It can be assumed that the minority shareholders of the subsidiary companies do not need to be consulted. (14 marks) Appropriateness of the format of the letter and the effectiveness with which the information is communicated. (2 marks) (34 marks) 5 [P.T.O.

6 2 (a) Alex, a non-malaysian citizen living in retirement in Malaysia is married to Kate, a Malaysian citizen. Both of them are resident in Malaysia. Alex s only income is from a foreign pension. Kate owns two luxury condominiums. One is rented out and Kate and Alex live in the other one. Kate s only source of income is the condominium rent. However, she has been quite successful with her property investments, having bought several residential properties and sold them at a profit over the last few years. It has been proposed that the rented condominium, which has been owned by Kate for several years, be transferred into their joint names with Kate making a gift to Alex of a half share. The condominium, presently valued at RM2 million, produces a monthly income of RM8,000 after all outgoings, including interest of RM3,000 per month on a mortgage loan taken out by Kate to help finance the purchase of the condominium. The bank is quite happy to agree to the transfer of the property into joint names provided that a new joint loan is taken out and used to repay the existing loan to Kate. Discuss the tax implications of this proposal and conclude whether it is tax-efficient or not, giving reasons for your answer. Where possible, illustrate your discussion with calculations showing the amounts of tax payable. Marks will be allocated for: (i) Discussion, conclusion and explanations; (9 marks) (ii) Calculations. (7 marks) (b) Kate has been given the chance to buy a dilapidated older-style bungalow on a substantial plot of land in an up-market part of Kuala Lumpur. Kate believes that the bungalow has a lot of potential and she intends to extend and renovate it making use of her past experience in renovating properties. Using all of their available resources Kate and Alex have enough money to buy the bungalow. To pay for the renovations, Kate proposes to take a bank loan which will be repayable within two years. Kate s stated intention at the present time is that she and Alex will occupy the bungalow as their residence when it is ready for occupation. On the assumption that, when the works are completed, Kate and Alex decide not to occupy the property themselves but to sell it, discuss the potential tax implications of the sale for Kate. (9 marks) (c) It has been suggested that Kate and Alex should incorporate a company which will buy the bungalow and extend and renovate it using finance provided by Kate and Alex and the proposed bank loan. The shares in the company will be owned equally by Kate and Alex. Discuss the potential tax implications arising from the acquisition and renovation of the bungalow by a company owned by Kate and Alex assuming that: (i) Kate and Alex occupy the bungalow on completion of the extension and renovation; (2 marks) (ii) The bungalow has to be sold in order to repay the bank loan as soon as the works of extension and renovation are completed. (7 marks) (34 marks) 6

7 Section B TWO questions ONLY to be attempted 3 An appointment has been made for the manager of your taxation department to meet the representative of a European company who is visiting Malaysia. The European company has expressed an interest in setting up a call centre in Malaysia, using a locally incorporated company operating in the Multimedia Super Corridor, to handle telephone enquiries from the company s customers in Europe. The call centre will be staffed by Malaysians. Prepare a note for the manager drawing his attention to the tax incentives that are or might be available to the proposed company, including those relevant to multimedia services. The note should contain a brief description of each incentive, the conditions for eligibility and should be confined to incentives which are immediately relevant to the stated intentions of the European company. (16 marks) 4 Suhaimi and Rohaya, both Malaysian citizens, married after they graduated from a foreign university and have spent the last seven years working abroad. During that time, they have made only a few short visits to Malaysia. Having learned that the Malaysian Government wants to encourage graduates to return to Malaysia and has offered attractive incentives such as being able to bring back two cars duty free, they have decided to return. Suhaimi has given notice to terminate his employment with his foreign employer at the end of December 2007 and he will be on terminal leave until the end of December. Besides his salary for the month of December 2007, Suhaimi expects to be paid a substantial bonus for the year 2007 some time in January Suhaimi has been offered a job in Malaysia to start from 1 January 2008 but he has not yet accepted the offer. He plans to make a trip to Malaysia for one week during December 2007 during which time he will try to finalise the terms of the job offer and spend time with his family. He will return to his foreign location even if he agrees to start work in Malaysia on 1 January 2008 because he needs to tie up loose ends there. Rohaya can give up her work at short notice and will travel to Malaysia with Suhaimi when he is ready to start his new job. Suhaimi and Rohaya jointly own a house in Malaysia which is rented out through an agent who is assessed to tax on their behalf. The net rental income for 2007 is estimated to be RM21,000. Suhaimi and Rohaya have no other income other than that referred to above. (a) Analyse the factors affecting Suhaimi s Malaysian tax residence for the year of assessment 2007, indicating whether the choice of dates for his one week visit is of any significance. (10 marks) (b) State whether a change in Suhaimi s tax status from non-resident to resident for the year of assessment 2007 would have any effect on his or Rohaya s tax liabilities and if so, to what extent. (5 marks) (c) State the Malaysian tax implications for Suhaimi, if any, of receiving his foreign salary and bonus during the year 2008, assuming that he becomes resident in Malaysia in the year of assessment (1 mark) (16 marks) 7 [P.T.O.

8 5 A person who assists or advises another person in the preparation of a tax return has a statutory duty to exercise reasonable care. (Inland Revenue Board Public Ruling No. 8/2000 Wilful Evasion of Tax and Related Offences). Alvin Ng is the tax agent for C.Y.Lee and his wife, who run a restaurant business in partnership together. Alvin Ng s wife and C.Y.Lee s wife often lunch together. Recently, Alvin Ng s wife remarked casually to her husband that C.Y.Lee s wife keeps two sets of books for the restaurant business. Alvin Ng dismissed this, saying that he had known both C.Y.Lee and his wife for many years and had never had any reason to believe that they are not completely honest and trustworthy. He did nothing more about it. At a later time, C.Y.Lee and his wife were subjected to a tax audit and they admitted to the Inland Revenue officer, when challenged, that they had kept a secret set of books containing the real figures for the business and had provided false information to Alvin Ng. The false information had been used by Alvin Ng to prepare the business accounts used to complete their tax returns, resulting in an understatement of their tax liabilities. Alvin Ng s wife takes no part in his tax practice. Describe the offence(s), if any, committed in respect of the understatement of tax liabilities of C.Y.Lee and his wife, and identify any penalties possibly arising for each of the following: (a) (b) C.Y.Lee and his wife. Alvin Ng. (8 marks) (8 marks) (16 marks) End of Question Paper 8