Professional Level Options Module Advanced Taxation (Malaysia) Friday 5 December 2014 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 4 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. Paper P6 (MYS) The Association of Chartered Certified Accountants
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 tax rates, allowances and values are to be used in answering the questions. Income tax rates Resident individual Chargeable income Tax payable Band Cumulative Rate Cumulative RM RM % RM 5,000 5,000 10 0 15,000 20,000 12 300 15,000 35,000 16 1,200 15,000 50,000 11 2,850 20,000 70,000 19 6,650 30,000 100,000 24 13,850 Excess 26 Non-resident individual All chargeable income 26% Resident company Paid up ordinary share capital RM2,500,000 More than or less RM2,500,000 On the first RM500,000 20% 25% On the remainder 25% 25% Non-resident company All chargeable income 25% Labuan entity income from a Labuan trading activity All chargeable profits 3% Trust body resident or non-resident All chargeable income 25% 2
Personal deductions RM Self 9,000 Self additional if disabled 6,000 Spouse 3,000 Spouse additional if disabled 3,500 Child basic rate each 1,000 Child higher rate each 6,000 Disabled child each 5,000 Disabled child additional each 6,000 Life insurance premiums, approved scheme contributions maximum 6,000 Deferred annuity premiums, private retirement scheme contributions maximum 3,000 Medical expenses for parents maximum 5,000 Medical expenses for serious disease of self, spouse or child, including up to RM500 for medical examination maximum 5,000 Basic supporting equipment for self, spouse, child or parent if disabled maximum 5,000 Educational and medical insurance for self, spouse or child maximum 3,000 Study course fees for skills or qualifications maximum 5,000 Purchase of a personal computer maximum 3,000 Purchase of books, magazines etc for personal use maximum 1,000 Purchase of sports equipment maximum 300 Deposit for child into the National Education Savings Scheme maximum 6,000 Rebates Chargeable income not exceeding RM35,000 RM Individual basic rate 400 Individual entitled to a deduction for a spouse or a former wife 800 Capital allowances Initial Annual rate % rate % Industrial buildings 10 3 Plant and machinery general 20 14 Motor vehicles and heavy machinery 20 20 Office equipment, furniture and fittings 20 10 Agriculture allowance Buildings for the welfare of employees nil 20 Other buildings used in the business nil 10 All other qualifying agricultural expenditure nil 50 Real property gains tax Individuals Individuals All (citizens and (non-citizens) other permanent persons residents) Rate Rate Rate % % % Date of disposal Disposal within three years after date of acquisition 30 30 30 Disposal in the fourth year after date of acquisition 20 30 20 Disposal in the fifth year after date of acquisition 15 30 15 Disposal in the sixth year after date of acquisition or thereafter 0 5 5 3 [P.T.O.
Sales and service tax Rate % Sales tax 10 Service tax 6 Stamp duty Rates of duty under the First Schedule Conveyance, assignment, transfer or absolute bill of sale Rate % For every RM100 or fractional part thereof: On the first RM100,000 1 On the next RM400,000 2 On the excess over RM500,000 3 4
This is a blank page. Question 1 begins on page 6. 5 [P.T.O.
Section A BOTH questions are compulsory and MUST be answered 1 The tax director of Tax Advice Co has received a letter from AtoZ Sdn Bhd (AtoZ), a long-time client of the firm. AtoZ has paid-up share capital of RM50 million and makes up its accounts annually to 30 June. Extracts from the letter from AtoZ and from an email from the tax director to you, his assistant, are set out below. Extract from the letter from AtoZ As an established manufacturer of specialised fibreglass, we intend to invest in research and development (R&D) in order to produce high-tech fibreglass for use in space-shuttles. We are not sure at this juncture whether we will conduct the R&D ourselves (within the company) or contract with a third party (a reputable R&D company called Eksilent Mind) to carry out the R&D. If we carry out the R&D ourselves, it will cost RM10 million to set up the fixed assets and another RM8 million as revenue expenses to run the project. If we outsource the R&D, Eksilent Mind s fee will be RM15 million but we will not own any R&D assets at the end of the project. We need to know about the different tax incentives for R&D for each option, what we need to put in place in order to qualify for these incentive/s, how each incentive works and for how long each incentive is available. Also, as you know, we have many suppliers of raw materials and services, and many customers. In the forthcoming financial year, we expect to incur a considerable amount in legal fees for: the renewal of existing supply and tenancy contracts; the renewal of existing loans; the preparation of claims for insurance compensation in respect of loss or damage to raw materials and finished products while in transit, some of which may be unsuccessful; the recovery of trade debts which are subject to dispute; and litigation regarding breaches of contract by our trade suppliers. We need an explanation of how these legal expenses will be treated for tax purposes. In November we reached a settlement with one of our customers who had contracted to buy our specialised fibreglass for 24 months, i.e. until December 2015. The customer will pay us RM400,000, being compensation for the early termination of our supply contract. Our customer had to stop buying the fibreglass from us because of adverse market conditions affecting their product. We have come to an agreement for the RM400,000 to be payable in 20 monthly instalments commencing on 10 December 2014. Will the RM400,000 be taxable? Assuming it is taxable, how will this sum be brought into tax? 6
Extract from an email from the tax director Please prepare a report to the finance director of AtoZ which addresses the following issues: (a) (b) (c) Tax incentives for R&D Consider the R&D incentives under the two options: (1) AtoZ will conduct the R&D itself; and (2) the R&D will be outsourced to Eksilent Mind. For each R&D tax incentive, state the conditions for eligibility, whether AtoZ fulfills them, and how each incentive is computed. Pay attention to the mutual exclusion of some of these incentives. Provide calculations of the total amounts deductible (including capital allowances) together with an indication of the cashflow implications under each incentive. I have checked the latest promoted lists and found out that R&D is a promoted activity. Additionally, I can confirm that Eksilent Mind provides R&D services only to non-related companies and is therefore a contract R&D company. Our file records also confirm that AtoZ has not previously enjoyed any form of tax incentive. Legal expenses State, giving reasons, the income tax treatment of each of the categories of legal fees listed in the letter from AtoZ. Compensation received for early termination of the contract Explain why the RM400,000 compensation received will be taxable, when the tax liability will arise, the impact of the additional tax on the tax estimate for the year of assessment 2015, and the appropriate course of action to be taken by AtoZ with regard to the tax estimate. Required: Prepare the report to AtoZ Sdn Bhd as requested in the email from the tax director. The following marks are available: (a) (b) R&D tax incentives. Legal expenses. (17 marks) (7 marks) (c) Compensation received for early termination of the contract. (7 marks) Professional marks will be awarded in question 1 for the appropriateness of the format of the report and the effectiveness with which the information is communicated. (4 marks) (35 marks) 7 [P.T.O.
2 Yesterday, your manager met with the group chief financial officer of the AdaGaya group of companies. Extracts from the record of the meeting and from an email from your manager are set out below. Extract from the record of the meeting The AdaGaya Group The group comprises AdaGaya Sdn Bhd, the holding company, and two wholly-owned subsidiaries. All three companies make up their accounts annually to 30 June. They run profitable businesses as follows: AdaGaya Sdn Bhd Ada Sdn Bhd Gaya Sdn Bhd Raising finance Retail stores for groceries and household goods Distribution of a brand of tonic drink Budget hotel The group wants to expand, and estimates that the expansion will require about RM100 million of additional capital. The group also intends to list on the Bursa Malaysia and to carry out an initial public offering (IPO) in three years time. Expansion exercise The expansion plans entail the following: Creating a group holding company, HoldCo, which will wholly own all three operating companies, as well as some other investments. HoldCo may occasionally render management services to its subsidiaries. HoldCo will become the listed vehicle on Bursa Malaysia after the IPO. Opening ten more outlets for AdaGaya Sdn Bhd throughout Malaysia. Adding more product lines to optimise the distribution network of Ada Sdn Bhd. Upgrading the budget hotel owned by Gaya Sdn Bhd to serviced suites for business travellers. The expansion will involve the following capital expenditure: Setting up ten more outlets including store renovations, fittings and equipment. Securing distribution rights to more product lines and delivery vans. Converting to serviced suites requiring furniture, fittings and equipment, and renovations. 8
Extract from an email from your manager I trust you have read the extract of the record of the meeting I passed to you yesterday. In preparation for my next meeting with the AdaGaya group, please prepare the following: (a) (b) (c) Raising capital of RM100 million An explanation of the tax implications of raising capital by way of: a loan to be taken from a commercial bank by each user company; loans from shareholders who are also directors; and additional equity from existing shareholders. Among other things, ensure that you explain the tax treatment of the incidental expenses of raising the capital, the interest expense on the amount borrowed and the potential control over the interest rate applicable. Mode of financing the fixed asset acquisitions An explanation of the tax implications of using: operating leases; finance leases (which are not deemed sales); and outright purchase. You should approach this from the perspective of: eligibility for capital allowances (CA): how much and how many years to deplete the CA claim; eligibility for a tax deduction in arriving at adjusted income; and maintenance costs. Group holding company An explanation of why HoldCo will be an investment holding company. Also, provide a tabulated summary of the income tax treatment which will be accorded to HoldCo before and after its listing on the Bursa Malaysia, with respect to the following: the classification of income; the deductibility of direct and common expenses; and the availability of CA. Required: Carry out the work required as requested in the email from your manager. The following marks are available: (a) Raising capital of RM100 million. (8 marks) (b) Mode of financing the fixed asset acquisitions. (7 marks) (c) Group holding company (HoldCo). (10 marks) (25 marks) 9 [P.T.O.
Section B TWO questions ONLY to be attempted 3 Prosperous REIT, a real estate investment trust, was first established on 1 May 2013. It made up its first set of accounts to 31 January 2014 and intends to continue to make up its accounts to 31 January annually. Prosperous REIT derives rental income from letting out commercial lots in the mall and ten units of factories in an industrial estate. All of the factories will be used for manufacturing by the tenants. All ten factories are identical units and were acquired en bloc on 1 December 2014 for RM2 5 million, of which RM1 million related to the cost of land. The ten units of factories will all be let out from 1 January 2015. The statement of profit or loss of Prosperous REIT for the year ended 31 January 2015 is expected to indicate the following: RM 000 RM 000 Rents from the mall 8,000 Rents from the ten factories 50 Interest 22 Dividends 10 8,082 Less Expenditure Audit fees 20 Depreciation 25 Management fee 805 Property maintenance, repairs and upkeep 790 Secretarial fees 5 Trustee s fee 35 Various other expenses (all tax deductible) 5,890 (7,570) Net profit before tax 512 Required: (a) Explain how the basis periods of Prosperous REIT for the years of assessment (YA) 2013, 2014 and 2015 will be determined. (5 marks) (b) (i) Compute the total income for tax purposes of Prosperous REIT for YA 2015 based on the information above. Note: Label the figures comprising the stages of the computation and indicate, by the use of the word nil, any item shown in the statement of profit or loss which is not taxable or not deductible. (8 marks) (ii) State, giving reasons, the tax which will be payable by Prosperous REIT for YA 2015, if it proposes to distribute 91 5% of its total income for the year of assessment 2015 to its unit holders on 15 March 2015. (2 marks) (c) (i) In respect of YA 2015, for unit holders who are resident individuals, state how the distribution will be taxed and whether or not the amount received will need to be reported in their annual returns. (2 marks) (ii) In respect of YA 2015, for unit holders who are resident companies, state how the distribution will be taxed and the effective tax rate(s) which might apply. (3 marks) (20 marks) 10
4 (a) Having worked continuously for 28 years for the same employer, Ms Goode retired on 31 January 2014 at the age of 55 years. She received sums of money as follows: RM Note Retirement gratuity 420,000 RM15,000 x 28 years of service Withdrawal from EPF 1,250,000 On 1 April 2014, Ms Goode took up an adviser s position with another company on a two-year contract. After eight months, her contract was prematurely terminated on 30 November 2014 on grounds of incompetence. She was paid RM60,000 being three months remuneration in lieu of notice as stipulated in her contract. She plans to sue the company for the remaining 13 months remuneration of RM260,000 and damages of RM400,000 for the damage to her reputation caused by the dismissal. Required: (i) (ii) Explain the tax treatment of the retirement gratuity of RM420,000, the EPF withdrawal of RM1,250,000 and the RM60,000 received on the termination of her new employment. (6 marks) Assuming Ms Goode succeeds in her law suit, state the nature of the two sums of RM260,000 and RM400,000 and explain the assessability or otherwise of each of these two sums of money. (4 marks) (b) Mr Raite is an architect who, together with his family, has lived in Malaysia for between four and seven months every year since the year 2011. Having taken up photography several years ago as a hobby, Mr Raite has since developed outstanding photographic skills. Last year, he succeeded in selling stock photographs to international corporations via the internet. Mr Raite maintains a studio office for his architectural design and photography pursuits at his home in Malaysia but regularly travels to other Asia Pacific countries on field trips for business and photography purposes. He does not have a fixed base in any country other than Malaysia. All the Asia Pacific countries which Mr Raite has visited have signed double tax treaties with Malaysia. Required: (i) Determine Mr Raite s residence status in Malaysia in the year of assessment (YA) 2014. (2 marks) (ii) Assuming Mr Raite is resident in Malaysia for YA 2014, explain the significance of his residence status if he suffers withholding tax in the other Asia Pacific countries or when he carries out business activities in those countries. (4 marks) (iii) Explain why Mr Raite s income from the architectural practice and photography is derived from Malaysia. (4 marks) (20 marks) 11 [P.T.O.
5 Happy Toys Sdn Bhd (Happy) acquired three separate pieces of land in Malaysia on 12 January 2009. Happy does not own any other chargeable assets. The first piece of land was sold on 12 November 2012, incurring an allowable loss of RM188,000. The second piece of land was acquired for RM800,000. An additional RM30,000 was incurred on legal fees and stamp duty. Happy also incurred RM120,000 on roads and drainage and RM200,000 on raising the river embankment. Unfortunately, the embankment was completely washed away in the last rainy season. Insurance compensation of RM165,000 was received for this loss. The owner of the adjoining land claimed that a part of this second piece of land rightly belonged to him and the dispute was brought to court. On 28 November 2014, a settlement was reached whereby the neighbour signed the sale and purchase agreement to acquire the whole of the second piece of land from Happy for RM1 5 million. In thus defending its title to the land, Happy incurred legal fees of RM75,000. The third piece of land was acquired for RM200,000. Happy received RM25,000 being a forfeited deposit from an earlier abortive sale. Negotiations are now under way to exchange this third piece of land for another piece of land in a foreign country. The prevailing market value of the third piece of land is RM480,000 while the foreign land is worth RM570,000. The agreements to effect the exchange will be ready for signature tomorrow. However, the requisite approval from the State Government is only expected to be available in June 2015. Required: (a) Compute the real property gains tax (RPGT) liability of Happy Toys Sdn Bhd on the disposal of the second piece of land. Note: Indicate by the use of the word nil any an item referred to in the question for which no adjustment needs to be made in the computation. (9 marks) (b) With reference to the third piece of land: (i) Explain why a disposal will occur, the disposal date and how the disposal price will be determined. (6 marks) (ii) Compute the real property gains tax (RPGT) liability on the disposal. (5 marks) (20 marks) End of Question Paper 12