TAXATION MARCH 2016 SUGGESTED SOLUTION Answer 1 PL Adjustment Musa Engineering Sdn Bhd Tax computation for the year of assessment 2015 Add (+) Ded (-) Note 000 000 000 Business income Profit before taxation 130,351 Cost of sales Less: Dividends-single tier (local) 1 14 Dividend (foreign) Interest 2 Interest-fixed deposit - foreign bank 12 12 Fixed deposit interest-local bank 12 Insurance recovery 3 50 130,301 Add/(Less): Salaries and wages 4 Director's salary EPF and PRF(rest: [(45k+27k) -(19% of 200k)] 34 Overseas trip for director 18 Loan interest Interest on loan for investment 5 20 Interest on loan for working capital Entertainment 6 Company annual dinner Staff disbursement (Disallow 50% of 100k) 50 Promotion Depreciation 60 Repairs and maintenance 7 Extending the sales office 180 Other repairs Bad and doubtful debts 8 Bad debts written off General bad debts provision 200 Specific loan debts provision 135 Bad debts (staff commission w/o) 16 Bad debts (advance to supplier w/off) 30
Motor vehicle expenses 9 Compound and fines Other maintenance charges Lease payments 10 Car [72k-50k max] Machine Advertisement 11 Advertsiing -patented product TV advertising Free gift 9 22 80 Professional fees 12 Termination of supply contract Guarantee fee for loan 14 Lease agreement New supply contract Secretarial fees [6k - 5k max) 1 Tax filing fees [12k-10k] 2 GST appeal 10 Transfer pricing advice Insurance 13 Local insurance-cargo import (DD) 12 Foreign insurance-cargo export Insurance-company assets Foreign exchange loss 14 Realized loss- stock imports Realized loss-machinery spare parts Unrealised loss-machine 10 Proprietory rights Ded.for proprietary rights (20% of 300k) 60 Donation 15 Cash to the Selangor Government 20 831 152 130,301 Add 831 131,132 Less 152 130,980 Adjusted income from business Less: Capital allowance Capital allowance on business assets 10,827 Statutory business income 120,153 Add: Other income Dividends (local - single tier) Dividend (foreign - exempted) Interest (fixed deposit-foreign bank- exempted) Interest (fixed deposit - local bank) 12 12
120,165 Less: Donation Cash donation to the Selangor State Government 20 Total income and chargeable income 120,145 54 =20 marks Answer 2 Answer 2(a) Ravi Manufacturing Sdn Bhd Year of assessment 2015 Qualifying industrial building expenditure Cost of land NQ Legal fee for transfer of land NQ Clearing of land NQ Cutting and leveling land NQ Excavation and preparation of site for construction 63,165 Piling and foundation works for building 113,074 Construction of building 278,897 Construction of wall 27,294 Architect fee-building 109,175 Legal services for obtaining various building approval 50,688 Subcontract charges for wiring and plumbing works 57,707 Landscaping charges NQ Total qualifying building expenditure 700,000 Ravi Manufacturing Sdn Bhd Computation of industrial building allowance Year of assessment 2015 Qualifying expenditure 700,000 Less: IA 10'% 70,000 AA 3'% 21,000 91,000 Residual expenditure c/f 609,000 Year of assessment 2016 Residual expenditure bf 609,000 Less: AA at 3% 21,000 Residual expenditure c/f 588,000
Year of assessment 2017 Residual expenditure bf 588,000 Less: Sale 1,800,000 Land 800,000 1,000,000 Balancing charge 412,000 Restricted to allowance given: (91,000+21,000) 112,000 Answer 2(b) = 5 marks Disposal price Consideration received 433,950 Less: Permitted expenses Cost of enhancement 47,340 Legal fees -defending title 7,000 54,340 379,610 Less: Incidental cost of disposal Valuation fees 6,707 Brokerage 9,468 Legal fees 3,400 Advertisement 1,184 20,759 Disposal price 358,851 (a) James Lam Acquisition price Consideration paid 339,270 Add: Incidental expenses Stamp duty on transfer 5,785 Legal fees 2,825 8,610 347,880 Less: Para 4(1) receipts Compensation received 30,000 Insurance recoveries 15,000 Deposit forfeited 7,000 52,000 Acquisition price 295,880 (b) Chargeable gain [(a) - (b)] 62,971 Less: Para 2 Sch 4 Exemption: Higher of 10,000; or 10,000 10% of chargeable gain 6,,297 10,000 Chargeable gain after exemption 52,971 21 = 10 marks
Answer 3(a) Global SP Shipping Lines Year of Assessment 2015 Ratio Certificate Method Adjusted income 3,124,000 x [1,171,500 /4,686,000] 781,000 Less: Capital allowance 781,000 x [1,171,500/4,686000] 195,250 Statutory income 585,750 Less: Donation 5,000 Chargeable income 580,750 Tax charged Tax on 580,750 at 25% 145,187.50 Less: DTA relief at 50% 72,593.75 Tax payable 72,593.75 Rounding error: 1.00 8 = 5 marks ANSWER 3(b) When an income is received in a particular period, it does not necessarily become the income of that relevant period. One needs to consider several other factors including the time the amount is received, the purpose of the payment, whether the recipient has unconditional rights to the sum received and the rights of the payer to a refund and the terms and conditions under which such sums are collected or repaid. In this case, it appears that the payer is entitled to a part refund of the fees paid should the child be taken out before the completion of the six years primary education, the quantum varying depending on the particular circumstances. By the same token the school is not entitled to keep the whole sum received unconditionally i.e. there is a liability to refund the sum (or part of the sum) on the happening of certain events. It is suggested that the Inland Revenue Board may succeed in taxing that portion of the sum received by reference to the year where the education service was performed and not the whole receipt received. The case of Elson v Price Tailors Ltd [40 TC 61] and Arthur Murray (NSW) Pty. Ltd v FCT [114 CIR 314] could be cited in support. Students may consider citing the recent case of Clear Water Sanctuary Golf Management Berhad v Ketua Pengarah Hasil Dalam Negeri where advance payments received were not treated as income by the courts. But that case was followed by an amendment to the Income Tax Act 1967 (as amended) with a new section 24(1A) with key words like to be rendered and to be dealt with.
With this amendment, any debt, deposit or advance payment received in respect of a future service to be rendered (i.e. currently not performed yet) or the use or enjoyment of any property to be dealt with (i.e. not dealt with as yet) will now be treated as gross income in the relevant period it is received. In other words as soon as a sum is received [ deferred income ] it would be treated as gross income liable to income tax. The new law will be effective from the year of assessment 2016. (5 marks) Answer 3(c) In this case the lease appears to be the identifiable asset. And the company has made it a more advantageous asset by re-negotiating its terms so that now the lease payment is based on a lower portion of the gross takings (i.e. without the GST element). It has therefore become a more beneficial lease to the company, and the payment made to make that asset more valuable would be treated as spent on capital account and thus disallowable in arriving at the adjusted income. The case of Tucker v Granada Motorway Services Ltd [(1977) STC 353 would add support to the above argument. (5 marks) ANSWERS 4(i) Tax avoidance is the act of utilizing the tax provisions with the objective to reduce the amount of tax liability that is payable within the tax law. For examples taking advantage of tax relief and incentives provided by in the tax laws. Tax evasion is deliberate or wilful intention to reduce tax liability using illegal means. For examples, deliberate omission of income from a tax return, making false statement or entry in a return or giving false answer. ANSWERS 4(ii) (8 x ½ = 4 marks) Power of the DG in connection with a tax audit and investigation: S. 140 - to disregard certain transactions S.114 (1) - to prosecute taxpayers for wilful evasion S.78 to call for specific returns S.79 to call for bank statements etc S. 80(1) access to buildings and documents etc S.82 requires taxpayer to keep records and give receipts S.91 make a best judgement assessment (Any 4 answers= 4 marks) ANSWERS 4(iii) - Fine between 1,000 to 20,000 or imprisonment not exceeding three years or both, and - Penalty of 300% of the amount of tax undercharged (4 x ½ = 2 marks) [Total: 10 marks]
ANSWER 5 a) Criteria to be eligible for reinvestment allowance: - The company is resident in Malaysia - The company has been operation for more than 3 years i.e. 2010 - The company had incurred capital expenditure for a new project which was related to an expansion of the present business activity b) Computation of chargeable income and exempt income 4 x ½ = 2 marks YA 2015 New Business Present Business Total Adjusted income - 5,000,000 / Capital allowance: Current Year Brought forward - c/f 40,000 / (600,000) / - Statutory income - 4,400,000 Exemption - - Statutory income - 4,400,000 4,400,000 after exemption Dividend Exempt / Aggregate income 4,400,000 Adjusted loss (40,000) / Chargeable income 4,360,000 / Exempt income - / Unabsorbed ITA c/f 60,000 / YA 2016 New Business Present Business Total Adjusted income 840,000 / 7,000,000 / Capital allowance: Current Year Brought forward (100,000) / (40,000) / (500,000) / - Statutory income 700,000 6,500,000 Exemption (180,000) / - Statutory income 520,000 6,500,000 7,020,000 Interest 10,000 / Aggregate income 7,030,000 Adjusted loss - Chargeable income 7,030,000 / Exempt income 180,000 Workings on Investment Tax allowance: 2015 2016 ITA c/f - 60,000 60% x QPE / 60,000 / 120,000 / ITA available 60,000 180,000 70% x Statutory income / - 630,000
ITA absorbed - 180,000 ITA c/f 60,000 - Workings on capital allowance: Machine A Machine B Total YA 2015 QPE 100,000 IA 20% (20,000) AA (20,000) 40,000 YA 2016 QCE 200,000 IA 20% (40,000) AA (20,000) (40,000) 100,000 20 x ½ = 10 marks c) Computation of withholding tax: Gross amount of rent Less 10% WHT S.4A 1,000) Net payment to NR 9,000 10,000 (charged as an expense / in the book of Superpower Sdn Bhd) Penalty for non-compliance i.e. failure to submit the withholding tax by 30 April 2015, Superpower Sdn Bhd will be subject to a penalty of 10% of withholding tax i.e. 100 and the gross amount of rent of 10,000 becomes a disallowable expense until the penalty has been paid to the Inland Revenue Board of Malaysia (IRBM). 8 / x ½ = 4 marks d) GST Input Tax Credit Mechanism The company has to charge and collect GST on all taxable goods and services supplied to the consumers. Only business registered under GST can charge and collect GST. The company is allowed to claim whatever amount of GST paid on the company inputs by offsetting against the output tax. The maximum time period to claim input tax is 6 years from date of supply. The excess amount of output tax shall be remitted to the government together with the GST returns not later than the last day of the following month after the end of the taxable period In the case where the amount of input tax cannot be fully recovered, the company can make a claim for refund. The refund of tax may be offset against other unpaid GST, customs and excise duties. Refund will be made to the company within 14 days if the claim is submitted online or 28 workings days if the claim is submitted manually. 8 x ½ mark = 4 marks [Total: 20 marks]
ANSWER 6 a) Statutory income of Encik Sufian for the year of assessment 2015 S.13(1)(a) Salary 15,000 x 12 180,000 / Entertainment allowance 5,000 x 12 60,000 / Servant 800 x 12 9,600 / Tuition fees 400 x 12 4,800 / 254,400 S.13(1)(b) Furniture 3,360 / Corporate membership Entrance fee exempted / subscription 3,000 / Mobile phone Bills exempt / Driver 600 x 12 7,200 / Car 7,000 / Fuel 1,800 / Holiday - Europe Air tickets (8,000-3,000) 5,000 / Meals 4,000 / Accommodation 5,000 / Medical expenses exempted / 36,360 S.13(1)(c) Living accommodation Defined value 32,800 / 30% x 13(1)(a) 76,320 / 32,800 / Gross income 323,560 Less: Entertainment expenses (60,000) // Adjusted/statutory income / 263,560 21 / x 1/3 = 7 marks b) Computation of adjusted income and the statutory income for Sara, Joan and Tiara for the year of assessment 2015. Accounting period: 1.1.2015 30.6.2015 Partners Salary Interest Divisible Income Adjusted Income Sara 42,000 5,000 29,000/ 76,000/ Joan 36,000 3,500 14,500/ 54,000 / Total 78,000 8,500 43,500 130,000 Accounting period: 1.7.2015 31.12.2015 Partners Salary Interest Divisible Income Adjusted Income Sara 48,000 5,000 12,000/ 65,000 / Tiara 48,000 5,000 12,000/ 65,000 / Total 96,000 10,000 24,000 130,000
Sara Joan Tiara YA 2015 Adjusted income 141,000 54,000 65,000 Capital allowance (20,000) / - / (20,000) / Statutory income / 121,000 / 54,000 / 45,000 / 15/ x 1/3 = 5 marks c) Computation of income tax liabilities of Encik Sufian and Puan Sara for the year of assessment 2015. Sufian Sara Sec. 4(a) Business 121,000 / Sec. 4(b) Employment 263,560 / Aggregate income / 263,560 121,000 Donation (8,470) max. 7% of Agg income // Total income / 263,560 112,530 Personal relief: Self (9,000) / (9,000) / Books (900) / Basic supporting equipment (5,500) / Medical expenses - parents (6,000) / Children (3 x 1000) (3,000) / EPF / life insurance premium (6,000) / (4,800) / Medical and education insurance (3,000) / premiums Chargeable income / 238,660 90,230 Tax at scale rate: 1 st 150,000 / 1 st 70,000 23,900 / 5,600 / Next 88,660 x 24% / Next 20,230x 21% 21,278.40 / 4,248.30 / Tax payable 45,178.40 9,848.30 Zakat (12,000) / - Net tax payable / 33,178.40 / 9,848.30 / 24 / x 1/3 = 8 marks [Total: 20 marks]