Professional Level Options Module Advanced Taxation (Malaysia) Monday 6 June 2011 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. 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 % 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 2,500,000 More than or less 2,500,000 On the first 500,000 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 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 premium maximum 1,000 Medical expenses for parents maximum 5,000 Medical expenses for serious disease of self, spouse or child, including up to 500 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 a child into the National Education Savings Scheme maximum 3,000 Rebates Chargeable income not exceeding 35,000 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 Disposal by all persons Real property gains tax 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 to 5% where disposal takes place within five years of acquisition and to nil thereafter. Sales and service tax Rate % Sales tax 10 Service tax 5 3 [P.T.O.
Stamp duty Rates of duty under the First Schedule Conveyance, assignment, transfer or absolute bill of sale Rate % For every 100 or fractional part thereof: On the first 100,000 1 On the next 400,000 2 On the excess over 500,000 3 4
Section A BOTH questions are compulsory and MUST be attempted 1 Buatan Sdn Bhd (Buatan), a company resident in Malaysia with a paid up capital of 5 million, has established itself as a manufacturer of quality furniture in Malaysia. In 2009, Buatan started to export its furniture to Europe. Buatan has not been granted any tax incentives for the year of assessment 2010. The financial controller of Buatan now seeks tax advice from Excellent Tax Services regarding the tax incentive available for the export of manufactured products. In 2010, Buatan acquired a retail food business which incurred an adjusted loss of 15,000 for the year of assessment 2010. During a preliminary meeting with the financial controller a few days ago, the tax principal of Excellent Tax Services gathered the following information regarding the manufacturing business: Year to 31 December 2009 2010 000 000 Domestic sales revenue 2,500 3,000 Exports (free-on-board) sales revenue 1,000 1,450 Gross Malaysian dividend income (franked) 100 Interest income 20 Statutory income from manufacturing business 70 Cash donations to an approved institution 80 Unabsorbed manufacturing business loss carried forward (10) The financial controller also confirmed that since November 2009 Buatan has consistently attained more than 50% of value added in respect of its furniture output. As such, Buatan will be eligible for the allowance for increased exports at the rate of 15%. Prepare a letter from Excellent Tax Services to the financial controller of Buatan Sdn Bhd which: (a) Explains the requisite conditions for the allowance for increased exports that are satisfied by Buatan Sdn Bhd. Clearly identify the first year of assessment in which it will qualify for the allowance. (6 marks) (b) Explains, with reference to a computation of Buatan Sdn Bhd s chargeable income for the year of assessment 2010 (to be prepared with the letter): (i) (ii) The computation, absorption and exemption mechanism of the allowance for increased exports; (13 marks) The tax saving in the year of assessment 2010 and potential future tax savings arising from the allowance; (4 marks) (iii) The tax treatment of the unabsorbed business loss brought forward and the current year retail business loss; (3 marks) (iv) The tax treatment of the approved cash donation; (3 marks) (v) The tax treatment of the Malaysian franked dividend. (4 marks) Professional marks will be awarded for the appropriateness of the format of the letter and the effectiveness with which the information is communicated. (3 marks) (36 marks) 5 [P.T.O.
2 Tanah Sdn Bhd (Tanah) was incorporated on 1 March 2008 with a paid-up ordinary share capital of 1 million held as follows: Mr Ta 700,000 Miss Nah 300,000 On 1 July 2008, Tanah commenced its business of the distribution of fresh fruits. It closes its accounts to 30 June annually. On 1 December 2008, Tanah acquired its first and only real property, a 100-acre orchard of matured fruit trees, at a cost of 3 million. It secured a loan of 2 8 million to finance this acquisition. The other tangible assets of Tanah as at 1 December 2008 stood at 500,000. On 20 December 2009, Mr Ta sold his entire shareholding to Miss Nah for 1 4 million. On the same day, Tanah sold ten acres of its orchard land to Mr Ta for 1 million. At that date, the remaining 90 acres of its orchard land had a market value of 5 million while its other tangible assets amounted to 4 million Yesterday, Miss Nah received an offer from Big Guy Bhd (Big Guy) to buy all her shares in Tanah for 12 million. The offer is valid until 15 June 2011. Big Guy has a paid up capital of 100 million and a 30 June year end. Miss Nah has requested a report from her tax adviser on the tax implications of the impending sale of her shares in Tanah. (a) (b) (c) (d) As Miss Nah s tax adviser, draft a report addressed to her regarding the following: (i) (ii) Whether Tanah Sdn Bhd was a real property company (RPC) at the following dates: 1 March 2008; 1 December 2008; 20 December 2009. Whether the shares held by Miss Nah were RPC shares at the following dates: (8 marks) when the company was incorporated on 1 March 2008 (300,000 shares); when the company acquired the orchard land on 1 December 2008 (300,000 shares); when the 700,000 shares were acquired from Mr Ta on 29 December 2009. (6 marks) (iii) Miss Nah s real property gains tax liability if she were to dispose of all of her shares in Tanah Sdn Bhd on 15 June 2011 for 12 million. (8 marks) Professional marks will be awarded in part (a) for the appropriateness of the format and presentation of the report. (2 marks) State, with reasons, whether Mr Ta acquired and disposed of real property company (RPC) shares and compute his real property gain tax, if any. (2 marks) State, with reasons, whether Tanah Sdn Bhd is subject to real property gains tax in respect of the disposal of the ten acres of orchard land on 20 December 2009. (1 mark) Assuming that Big Guy Bhd proceeds to acquire all of the shares of Tanah Sdn Bhd on 15 June 2011, explain the difference in income tax treatment of Tanah Sdn Bhd, with regard to its: claim for capital allowances; and income tax rates, stating clearly the first year of assessment such treatment will commence to take effect. (5 marks) (32 marks) 6
Section B TWO questions ONLY to be attempted 3 Green Gold Sdn Bhd (Green Gold) owns and operates oil palm plantations in various parts of Malaysia. To date it has been selling its oil palm fruits to mills and refiners in Malaysia and has been consistently profitable. In a recent board meeting, it was decided that the company would build a mill to process the palm fruits into crude oil for export. The capital investment in the mill, plant and machinery is estimated at 100 million, which will be financed by a loan to be raised by Green Gold. The mill will be located in one of the plantations. The mill operation is expected to incur an adjusted loss in the first two years but to be profitable thereafter. Two alternatives are being considered: 1. Green Gold will own and operate the mill as an extension of its plantation business. 2. A new company, a wholly-owned subsidiary of Green Gold, will be incorporated to hold and operate the mill. Explain the comparative tax impact or efficiency of each of the two alternatives, with reference to the following aspects: (a) The deductibility of the cost of any feasibility studies and other preparatory expenses related to the establishment of the mill. (2 marks) (b) The pricing of the palm fruits supplied by the plantations to the mill. (3 marks) (c) The deductibility of the loan interest. (4 marks) (d) The capital allowances available. (3 marks) (e) The treatment of the initial losses incurred. (4 marks) (16 marks) 7 [P.T.O.
4 Kawan REIT is a real estate investment trust which owns and manages a shopping mall. Its acquisition of the shopping mall was partly financed by a mortgage loan. For the year ended 31 December 2010 Kawan REIT s financial statements indicate the following: 000 000 Income Gross rental income 10,000 Interest income from bank deposits 50 Expenditure Interest on mortgage loan 500 Trustee s fee 70 Manager s remuneration 120 Mall operation expenses 3,330 Depreciation 450 (4,470) Net profit before tax 5,580 Other information: Distribution made to unit holders on 18 February 2011 5,000 Capital allowance for the year of assessment 2010 600 (a) Starting with the net profit before tax, compute the tax payable by Kawan REIT for the year of assessment 2010, giving reasons for your treatment of relevant items. Notes: (1) You should indicate by the use of the word nil any item referred to in the question for which no adjusting entry needs to be made in the tax computation. (2) Marks will be awarded for the use of accurate technical terms to describe the figures comprising the stages in the computation of chargeable income. (13 marks) (b) Explain the treatment of the distribution in the hands of the following unit holders: a resident individual; and a resident company. (3 marks) (16 marks) 8
5 Tangki Sdn Bhd (Tangki), a Malaysian resident company, fabricates water tanks in Malaysia and installs them for buyers. In 2010, it secured a large order from a foreign country. The income and expenditure relating to this order is as follows: Supply of 1,000 water tanks at 3,000 per unit 3,000,000 Installation of the tanks on site in the foreign country 800,000 Remuneration paid to the two site engineers (120,000) Other project expenses incurred in the foreign country (80,000) Profit from the installation project 600,000 The two engineers were employed by Tangki specifically and exclusively to carry out this four-month project in the foreign country. One is a Malaysian tax resident while the other is a resident of the foreign country. Tangki paid the Malaysian engineer s remuneration of 70,000 directly into his bank account in Malaysia, while the foreign engineer was paid the equivalent of 50,000 in cash in the foreign country. The 3,000,000 from the sale of the water tanks was retained in a bank in the foreign country while the profit of 600,000 from the installation was remitted to Malaysia in 2010 upon the conclusion of the project. Determine whether the following receipts are derived from Malaysia and explain the Malaysian income tax treatment: (a) The 3,000,000 from the supply of water tanks to the buyer from the foreign country. (5 marks) (b) The 600,000 profit from the installation project. (5 marks) (c) The 70,000 received by the Malaysian engineer for the four months he worked on the project in the foreign country. (4 marks) (d) The 50,000 received by the foreign engineer for the four months he worked on the project in the foreign country. (2 marks) Note: you should disregard the income tax impact of the provisions of any double tax agreements. (16 marks) End of Question Paper 9