Professional Level Options Module Advanced Taxation (Malaysia) Monday 7 June 2010 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 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 27 Non-resident individual All chargeable income 27% 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 or all at standard rates 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 8,000 Self additional if disabled 6,000 Spouse 3,000 Spouse additional if disabled 3,500 Child basic rate 1,000 Child higher rate 4,000 Disabled child 5,000 Life insurance premiums and approved scheme contributions maximum 6,000 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 a child into the National Education Savings Scheme maximum 3,000 Rebates RM Individual with chargeable income not exceeding RM35,000 basic rate 400 Rate for an 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, heavy machinery 20 20 Office equipment, furniture and fittings 20 10 Stamp duty Rates of duty under the First Schedule Conveyance, assignment, transfer or absolute bill of sale Item 32(a) 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 3 [P.T.O.
Section A BOTH questions are compulsory and MUST be attempted 1 (a) Ironside Sdn Bhd is an old established manufacturing company which has fallen on hard times. An offer has been put forward by three members of the present management team (the managers), who presently own no shares in the company, to buy out the business. Their offer has been agreed by the Board of Directors. The offer amounts to RM5 million for which the new owners will acquire: Cost to Ironside Residual value Managers Sdn Bhd at 30 June 2010 purchase price RM RM RM Heavy machinery 4,000,000 Nil 1,500,000 General machinery 1,000,000 300,000 500,000 Stock of raw materials and finished goods 2,000,000 3,000,000 5,000,000 The following information is also available: (i) Ironside Sdn Bhd will continue to own the freehold factory from which the business has been conducted and it will be rented to the new owners for RM750,000 per annum (ii) The managers have negotiated a bank loan of RM4 million which will be used, together with RM1 million from their private resources, to inject RM5 million of ordinary share capital into a new company (Newco Sdn Bhd). Newco Sdn Bhd will then take over the business of Ironside Sdn Bhd, paying RM5 million to Ironside Sdn Bhd for the assets to be taken over with the business. (iii) 1 July 2010 has been designated as the takeover date and Newco Sdn Bhd intends to make up its first accounts to 30 June 2011. (iv) The new owners have produced the following profit projection for Newco Sdn Bhd for the first year of operation: RM RM Sales 15,000,000 Cost of sales (including opening stock at RM3 million) (10,000,000) Gross profit 5,000,000 Overheads: Rent 750,000 Depreciation 350,000 Other costs 200,000 Directors fees 300,000 1,600,000 Net profit before tax 3,400,000 4
Prepare a letter to the managers from Newco Sdn Bhd s tax agents (Hai and Loh) dealing with the following matters: (i) (ii) Based on the information given above, provide an estimate (supported by an appropriately formatted computation) of the income tax liability of Newco Sdn Bhd for its first year of assessment, stating which year of assessment this is; (7 marks) Explain your treatment for tax purposes of the opening stock and machinery and plant of Newco Sdn Bhd; (4 marks) (iii) State the date by which Newco Sdn Bhd is required to submit its first estimate of tax payable, the number of instalments payable, the date of the first instalment payment and any minimum requirement for the first estimate. (5 marks) Professional marks will be awarded in part (a) for the appropriateness of the format and presentation of the letter and the effectiveness with which the information is communicated. (2 marks) (b) State and explain how the overall tax efficiency of the proposal could have been improved if the bank loan of RM4 million had been arranged as a loan to Newco Sdn Bhd rather than to the shareholders themselves. (8 marks) (26 marks) 5 [P.T.O.
2 MY Land Sdn Bhd is a Malaysian resident company set up with the intention of operating a theme park open to the public. It will not be located in a promoted area. The promoters have conducted a feasibility study and believe that they can be ready to commence operations on 1 October 2010. They expect to incur the following amounts of capital expenditure on or immediately prior to the commencement of operations: RM 000 s Land 3,000 Planting of trees and plants 1,000 Construction of road and other infrastructure facilities 1,200 Provision of buildings and structural improvements 1,800 Buggies and other mechanical rides 6,000 For the first five years of operation, the adjusted income/(adjusted loss) is expected to be as follows: Year to 30 September RM 000 s 2011 (1,500) 2012 (500) 2013 2,000 2014 3,560 2015 4,840 A senior assistant (Kenneth) has been asked by his employers (V. Smart & Partners) to submit to the partner in charge a draft report to the promoters of MY Land Sdn Bhd advising on whether they should apply for pioneer status or investment tax allowance. The report is to be prepared on the assumption that MY Land Sdn Bhd will be eligible for either pioneer status with the production day fixed at 1 October 2010, or investment tax allowance with effect from the same date and that all capital expenditure eligible for capital allowances will qualify for the annual allowance at 14%. Prepare the draft report to the promoters of MY Land Sdn Bhd concluding as to which incentive is the more tax efficient. The draft report should be supported by detailed computations showing the position under each incentive for the first five years of operation. (22 marks) Professional marks will be awarded in question 2 for the appropriateness of the format and presentation of the report and the effectiveness with which the information is communicated. (2 marks) (24 marks) 6
Section B TWO questions ONLY to be attempted 3 (a) Mr Weng, a director of Weng (M) Sdn Bhd has occupied a bungalow owned by the company for many years. He has now agreed to buy the bungalow from the company and it is anticipated that the transfer will take place on 31 July 2010. The purchase price is to be RM2,600,000, the value put on it by the valuer acting for the company. Determine the initial amount of stamp duty to be paid and the amount of the bank guarantee required by the Inland Revenue based on the value of RM2,600,000. (5 marks) (b) Assuming that subsequently the government valuer determined that the value of the bungalow at the time of the transfer was RM6,000,000. Determine the additional amount of stamp duty and penalty to be paid by Mr Weng. (5 marks) (c) (d) (e) State and explain whether Mr Weng is an employee of Weng (M) Sdn Bhd for the purposes of income tax. (3 marks) State and explain any further tax consequences for Mr Weng as a result of the determination of the value of the bungalow to be RM6 million. (7 marks) State and explain any tax consequences for Mr Weng if, instead of paying the full purchase price of RM2,600,000 for the bungalow, he had paid only RM600,000 immediately and Weng (M) Sdn Bhd had allowed the balance of RM2,000,000 to be paid over the next ten years with no interest payable. (5 marks) (25 marks) 7 [P.T.O.
4 (a) The directors of ABC Berhad, a listed company, are considering a proposal to make shares in the company available to employees free of cost. Two possibilities have been put forward: Scheme 1 Employees will be granted options to buy a specified number of shares in the company at RM1 per share within a period of two years from the date of the grant. At the same time, each participant will become entitled to a bonus equal to the price to be paid for the shares (RM1 per share) payable at the time of exercising the option so that these funds can be used to pay the purchase price of the shares. Scheme 2 Employees will be given free of any payment the same number of new shares in the company as is specified under Scheme 1. If the proposal is implemented, employee A will be entitled to 10,000 shares in ABC Berhad with effect from 1 July 2010. The market price of the shares will be RM3 each at the time of the grant of the option, or the date of the gift depending on which scheme is used. If granted the option, assume employee A will exercise the option on 1 July 2011 at a time when the market price is expected to be RM7 per share. In either case employee A will sell all of the shares on 1 January 2012 when the price is expected to be RM10 per share. (i) (ii) Explain the tax implications for employee A of each of the alternative schemes, making appropriate reference to the applicable law; Note: marks will be allocated as to: Scheme 1 Scheme 2 (9 marks) (2 marks) State and explain the tax implications for ABC Berhad of applying each of the alternative schemes. (3 marks) (b) According to the Income Tax (Deduction for Investment in a Venture Company) Rules 2005 PU(A) 76/2005, In ascertaining the adjusted income of a company or an individual who is resident in Malaysia from his business for a basis period for a year of assessment, there shall be allowed as a deduction an amount equivalent to the value of investment made in the basis period in a venture company. (i) (ii) State ANY ONE of the two basic requirements for a company to be treated as a venture company; (1 mark) State ANY TWO of the activities in which a venture company must be involved when utilising seed capital financing, start-up financing or early stage financing; (2 marks) 8
(iii) In September 2006, Ahmad Mizan applied for and was issued 15,000 shares in Risky Ventures Sdn Bhd, a company classified as a venture company, at a cost of RM1 each. He sold the shares for RM3 each in November 2008. Having obtained a certificate from the Securities Commission confirming his entitlement, Ahmad Mizan now wants to claim any tax relief due to him. Before making any claim, Ahmad Mizan had declared the following details in his tax returns: Year of assessment 2007 2008 2009 RM RM RM Business: Adjusted income 50,000 10,000 40,000 Capital allowances (15,000) (8000) (5,000) Rents statutory income 30,000 45,000 25,000 Based on the information given above, compute Ahmad Mizan s total income after relief for his investment in Risky Ventures Sdn Bhd for the year(s) affected by his claim, clearly identifying the year(s) affected. (6 marks) (c) With effect from the year of assessment 2009, any gross income derived by an individual from share options is disregarded in determining the benefit from the use of living accommodation [s.32(4)]. Explain the significance of this change for income tax purposes. (2 marks) (25 marks) 9 [P.T.O.
5 (a) A company needing to raise finance in order to acquire business assets can choose between several different methods. Explain the tax implications for a company of raising finance under each of the following methods: (i) raising a loan; (7 marks) (ii) raising fresh capital by the issue of shares; (2 marks) (iii) buying the assets on hire purchase; and (iv) leasing the assets. (5 marks) (3 marks) (b) State, giving reasons, which of the methods of financing listed in (a) above would be the most tax efficient for a company in the following circumstances: (i) The company itself is profitable but it has had to support a loss-making subsidiary with loans and advances and expects to continue doing so; (4 marks) (ii) The company is profitable and part way through its pioneer period. (4 marks) (25 marks) End of Question Paper 10