Professional Level Options Module Advanced Taxation (Malaysia) Friday 7 December 2012 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 2,500 2,500 10 0 2,500 5,000 11 25 15,000 20,000 13 475 15,000 35,000 17 1,525 15,000 50,000 12 3,325 20,000 70,000 19 7,125 30,000 100,000 24 14,325 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 offshore company income from an offshore business activity All chargeable income 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 4,000 Disabled child each 5,000 Disabled child additional each 4,000 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 Broadband subscription maximum 500 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 3,000 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 Real property gains tax Disposal by all persons (except non-citizen individuals) Date of disposal Rate % Disposal within two years after the date of acquisition 30 Disposal in the third year after the date of acquisition 20 Disposal in the fourth year after the date of acquisition 15 Disposal in the fifth year after the date of acquisition or thereafter 5 Note: an exemption is granted which reduces the effective rate of tax as follows: where the disposal takes place within two years of acquisition 10 where the disposal takes place in the third, fourth or fifth year of acquisition 5 where the disposal takes place in the sixth year or thereafter 0 3 [P.T.O.
Sales and service tax Rate % Sales tax 10 Service tax 6 Rates of duty under the First Schedule Stamp duty 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 attempted 1 Grand Sdn Bhd (Grand) is an investment holding company which makes up its accounts annually to 31 December. Grand is currently in the midst of preparations for a public listing at the Bursa Malaysia in a year s time. Grand wishes to seek tax advice from Excellent Tax Services regarding the tax treatment of an investment holding company and any other relevant tax issues. A draft statement of income or loss for the basis period for the year of assessment 2012 has thus been made available, as follows: RM RM Revenue Rents: Factory building used in manufacturing 72,000 Apartment 96,000 Agricultural land 14,000 182,000 Interest from bank deposits 34,000 216,000 Less Expenditure Audit fees 3,500 Directors fees 140,000 Loan interest 35,000 Quit rent and assessment rates 13,000 Tax computation fees 3,000 Secretarial fees 1,000 Staff remuneration 60,000 Upkeep of office 6,000 Depreciation 36,000 297,500 Net loss (81,500) Other information: 1. Grand has been letting its properties to its subsidiaries at 15% below market rates because the subsidiaries are not yet profitable. 2. The only loan still owing by Grand was taken to finance the acquisition of the agricultural land. 3. The qualifying building expenditure (in 2008) in respect of the factory building was RM500,000. Other than the factory, Grand has no assets qualifying for capital allowances. 6
Required: Prepare a letter from Excellent Tax Services to Grand Sdn Bhd s managing director, which explains the following: (i) (ii) The income tax treatment of Grand Sdn Bhd as an unlisted investment holding company. Support your explanations with a computation of the company s chargeable income for the year of assessment 2012, indicating by the use of the word nil any item referred to in the draft statement of profit or loss which does not form part of the tax computation. (11 marks) The income tax treatment of Grand Bhd as a listed investment holding company, highlighting the differences in income tax treatment with that before it became listed. Again, support your explanations with a computation of the company s chargeable income for the year of assessment 2012 as a listed investment holding company, similarly indicating by the use of the word nil any item referred to in the draft statement of profit or loss which does not form part of the tax computation. (10 marks) (iii) The income tax implications of the current practice of under-charging rents and your advice as to a recommended course of action. (5 marks) Professional marks will be awarded in question 1 for the appropriateness of the format of the letter and appendix and the effectiveness with which the information is communicated. (4 marks) (30 marks) 7 [P.T.O.
2 In May 2009, AA Sdn Bhd (AA), a controlled company, was incorporated to carry on a warehousing business. In June 2010, AA incorporated a wholly-owned subsidiary, BB Sdn Bhd (BB). In July 2011, another wholly-owned subsidiary, CC Sdn Bhd (CC), was incorporated by AA. The AA group of companies closes its accounts annually to 31 December. The only real properties owned by each of the three companies are their respective business premises as follows: land and warehouse used in the provision of storage space to the public by AA commercial shop lot which houses the travel business of BB; and vacant land used by CC in its car park business. AA claims an annual industrial building allowance of RM21,600 for its warehouse. All three companies acquired their real properties on the day after their respective incorporation dates and on that same date the only available asset other than the real property was cash equal to 10% of each company s total tangible assets. Shortly thereafter, each of the companies commenced their respective business operations. The properties have since appreciated by about 10%. The AA group has so far expanded organically. However, there is now a proposal to restructure the group in order to achieve greater efficiency in operation, as follows: AA will incorporate a new wholly-owned subsidiary, NewCo. By 31 March 2013, NewCo will have acquired all the real properties currently owned by AA, BB and CC at their prevailing market values of: RM Land and warehouse (RM400,000 + RM800,000) 1,200,000 Commercial shop lot 450,000 Vacant land 90,000 NewCo will borrow from banks to settle the full consideration for all three assets in cash. Thereafter, the only other tangible asset (i.e. other than the real properties) owned by NewCo will be RM60,000 in cash. AA, BB and CC will continue to operate their respective businesses but they will lease their business premises from NewCo at prevailing market rates. All four companies in the AA group are resident in Malaysia. Required: (a) (b) (c) (d) Explain whether and when AA Sdn Bhd, BB Sdn Bhd and CC Sdn Bhd (i) became real property companies; and (2 marks) (ii) will cease to be real property companies. (3 marks) With reference to the transfer of the three business premises, explain the income tax and the real property gains tax implications for each of the disposers and the acquirer, assuming that no relief is available under the Real Property Gains Tax Act. Note: Tax computations are not required for this part. (16 marks) Compute the stamp duty that NewCo is potentially liable to pay on the acquisition of each of the three properties, assuming that no relief is available under the Stamp Act. (3 marks) Determine whether the AA group of companies will qualify for relief in respect of the transfer of real properties proposed as part of the restructuring exercise and, if so, explain the nature of the relief available, under: (i) the Real Property Gains Tax Act; and (4 marks) (ii) the Stamp Act. (4 marks) (32 marks) 8
Section B TWO questions ONLY to be attempted 3 WasteNot Sdn Bhd (WNSB) was incorporated in Malaysia ten years ago to carry out a recycling business. It has since grown into a leading manufacturer of recycled paper products for local and export markets, with a paid up share capital of RM5 million. In recent years, WNSB has established several 60%-owned subsidiaries in Vietnam and Cambodia to manufacture the paper products from recycled materials sourced in those countries. These foreign subsidiaries sell 40% of their outputs in their domestic markets, with the remaining 60% being supplied exclusively to WNSB. The following information has been extracted from WNSB s statement of profit or loss for the year ended 31 October 2012: RM 000 Direct export sales 65,000 Drop shipment export sales 40,000 Local sales 25,000 Gross revenue from sales 130,000 Tax deductible expenditure 90,000 Other information: 1. Capital allowances for the year of assessment 2012 amount to RM3 million. 2. WNSB does not derive any other income for the year of assessment 2012. Required: (a) (b) (c) Determine whether WasteNot Sdn Bhd is eligible for approval from the Minister of Finance as a regional distribution company. (8 marks) Assuming that WasteNot Sdn Bhd is approved as a regional distribution company, compute the exempt income and the chargeable income for WasteNot Sdn Bhd for the year of assessment 2012. (8 marks) With reference to the computation in part (b), state the amount that may be credited to the exempt account and explain the significance of such a credit and its impact on the shareholders of WasteNot Sdn Bhd. (3 marks) (19 marks) 9 [P.T.O.
4 Yummy Wok Sdn Bhd (Yummy) owns a chain of popular and famous restaurants. It has a paid up share capital of RM3 million. In the year ended 31 December 2012, Yummy incurred legal expenses in respect of the following: Defence against a suit brought by a restaurant customer who alleged discrimination by the restaurant staff. Legal action taken against a contractor for supplying sub-standard food ingredients to Yummy. Registration of Yummy Wok as a trademark in Malaysia. Yummy has a 108 credit balance of RM65,000 as at 6 December 2012. It plans to distribute a net dividend of RM180,000 in cash on 31 December 2012 to its three resident shareholders: Mr Veteran, who holds 10% of the company s shares, is a retiree who does not have any other income for the year 2012; Miss Agro, who holds 20% of the company s shares, has a statutory income of RM350,000 for the year 2012 from her business source; and Aok Sdn Bhd, which holds 70% of the company s shares, and expects to incur a current year business loss for its basis period ending on 31 January 2013. Required: (a) (b) (c) State, with reasons, whether each item of legal expense is tax deductible in arriving at the adjusted income of Yummy Wok Sdn Bhd. (6 marks) Explain the impact under the Income Tax Act on Yummy Wok Sdn Bhd of paying the proposed franked dividend and state the course of action available to the company and the time frame for taking such action in respect of the remaining 108 balance. (3 marks) In the case of each of Yummy Wok Sdn Bhd s shareholders, explain the income tax treatment and impact of the proposed franked dividend received. (10 marks) (19 marks) 10
5 After a long absence, Mr AnakMalaysia (AM) decided to return to Malaysia and take up a position in Penang. His Malaysian employer is prepared to incur up to RM224,000 a year for his services. This amount is all inclusive of: his cash remuneration, the employer s contributions to the Employees Provident Fund (EPF), perquisites and benefits in kind. Two alternative remuneration packages have been offered for AM s consideration: Package A consists of cash remuneration of RM200,000 and RM24,000 of EPF contributions. Package B consists of cash remuneration of RM120,000, 12% employer s EPF contributions, unfurnished accommodation worth RM60,000 a year, exclusive use of a company car costing RM120,000 and free shares in the employer s parent company with a market value RM15,000, but which are likely to appreciate in value. If AM accepts Package A, he expects his domestic expenditure will include house rental of RM60,000 and car rental of RM12,000 per annum. AM has remitted RM2 million to Malaysia, being the cumulative savings from his earnings and capital gains while abroad. He plans to invest half this sum in a residential property for rental and a further quarter in shares for dividend yield and capital appreciation. The remaining quarter, he will place on deposit with a bank to earn interest. AM intends to pay for all his investments in cash. Required: (a) (b) (c) Calculate the income tax chargeable under each package (A and B) and compare the relative merits of the two packages in terms of Mr AnakMalaysia s net disposable income after paying income tax, house and car rental costs. Notes: 1. You should assume that Mr AnakMalaysia is eligible for tax reliefs of RM15,000 (RM9,000 personal relief and RM6,000 for EPF contributions) and treat the employer s EPF contributions as a non-disposable income in your calculation of net disposable income. 2. The annual prescribed value of the use of a car costing RM120,000 is RM5,000. 3. In your calculation, you should ignore any potential investment income Mr AnakMalaysia may derive. (10 marks) State, with reasons, the tax treatment of the income and capital components of the remittance of RM2 million. (3 marks) Explain the tax treatment of the income or any realised gains arising from Mr AnakMalaysia s investment plans. (6 marks) (19 marks) End of Question Paper 11