Professional Level Options Module Advanced Taxation (Malaysia) Monday 6 December 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 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 premium maximum 1,000 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 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 and heavy machinery 20 20 Office equipment, furniture and fittings 20 10 Real property gains tax Disposal by companies and other than companies 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 disposal 15 Disposal in the fifth year after the date of acquisition or thereafter 5 Note: An exemption is granted which reduces the effective rate 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 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 4
Section A BOTH questions are compulsory and MUST be attempted 1 (a) Precise Sdn Bhd (Precise), a resident company with a paid up ordinary share capital of RM10 million, has been manufacturing industrial tools in Perak since 2005. It is not, and does not intend to become, a listed company. Increasing demand has driven increased output, which has necessitated additional factory space, plant and machinery and Precise commenced an expansion project to provide these additional facilities in June 2010. The managing director of Precise wishes to fully understand the tax implications of the expansion project and has asked for a report to be prepared to clarify various issues. The finance director has gathered the following data and forecast figures for the relevant years: Year to 30 Year to 30 September 2010 September 2011 RM 000 RM 000 Qualifying capital expenditure on Factory 3,000 3,000 Plant and machinery 1,000 6,000 Statutory income 1,800 9,600 Interest income 50 50 Approved donations 20 40 As the finance director, prepare a report to the managing director of Precise Sdn Bhd clarifying the following issues: (i) (ii) The conditions that must be satisfied for a company to be eligible for the reinvestment allowance; Whether or not Precise Sdn Bhd fulfils these conditions and will qualify for the reinvestment allowance for the years of assessment 2010 and 2011; (iii) Assuming that Precise Sdn Bhd is eligible for the reinvestment allowance, state and explain, with reference to relevant tax computations for the years of assessment 2010 and 2011: the amount of reinvestment allowance available and the manner of its absorption in the two years of assessment; the tax savings resulting from the capital expenditure incurred; and the mechanism of the exempt account and the cumulative exempt income credited to the exempt account for both the company and its shareholders. (15 marks) Professional marks will be awarded in part (a) for the appropriateness of the format of the report and the effectiveness with which the information is communicated. (b) Precise is considering relocating its manufacturing activity, by transferring it to its subsidiary in Vietnam, in the year of assessment 2012. If it does this, it will dispose of its factory, plant and machinery in Perak to its Malaysian subsidiary. Thereafter Precise will provide management services to its two subsidiaries, in Vietnam and Malaysia, and receive dividends from them. Explain the Malaysian income tax implications for Precise Sdn Bhd of the relocation and the disposal of its assets with regards to: (i) The balancing allowances and charges (under Schedule 3) for the year of assessment 2012; (ii) The reinvestment allowance granted in the years of assessment 2010 and 2011; (iii) The potential status of Precise Sdn Bhd as an investment holding company in the year of assessment 2013 and the classification of its sources of income. (5 marks) (35 marks) 5 [P.T.O.
2 Anak Sdn Bhd (Anak) was incorporated on 1 March 2010 with a paid-up ordinary share capital of RM3 million. On 1 May 2010 Anak acquired all the assets, liabilities and activities of an ongoing trading business, including the employees, from its holding company Bapak Sdn Bhd. Anak continued the trading business and will close its first set of accounts on 31 December 2010, and thereafter annually on 31 December. The trading business distribution manager will retire at 55 years of age in November 2011, after having served (Bapak then Anak) continuously for 30 years. Hence Anak will create a provision for retirement benefit of RM250,000 in the period ending 31 December 2010. A few days ago, Anak learned that one of the trade debtors taken over from Bapak is experiencing financial difficulties and will likely cease operations by the end of the year 2010. Anak proposes to treat the said debtor as doubtful as follows: Debt taken over from Bapak: Debt incurred from May to November 2010: 100% of RM120,000 50% of RM20,000 As a member of the accounts staff of Anak Sdn Bhd, draft a memorandum to the company s Chief Accountant explaining the following: (i) The basis period for the first year of assessment for Anak Sdn Bhd; (ii) The tax treatment of the following items from Anak Sdn Bhd s perspective: the business assets taken over from Bapak Sdn Bhd; (5 marks) the provision for retirement benefit of RM250,000 in the period ended 31 December 2010; (2 marks) the payment of a retirement benefit of RM300,000 to the distribution manager in the year ended 31 December 2011; and (4 marks) the provision for doubtful debt for the trade debtor; (6 marks) (iii) The first year of assessment for which Anak Sdn Bhd is required to provide an estimate of tax to the Director General of Inland Revenue, the date by which the estimate must be provided and the date on which the first instalment will be paid. Explain the difference if the paid-up ordinary share capital of Anak Sdn Bhd had been less than RM2 5 million; (5 marks) (iv) The tax treatment of the RM300,000 retirement benefit received in November 2011 from the perspective of the distribution manager. A professional mark will be awarded in Question 2 for the appropriateness of the format and presentation of the memorandum. (1 mark) (29 marks) 6
Section B TWO questions ONLY to be attempted 3 Miss Eko Frenly, a university lecturer in environmental studies, commissioned a feasibility study and presented a business plan for a wetlands resort in 2007. Several individuals expressed their support and willingness to invest in the project. On 2 April 2007, Miss Frenly acquired a tract of coastal land deemed suitable for the proposed resort development. She financed the purchase price of RM780,000 with her entire savings. Since then, she has learnt, to her dismay, that the global financial crisis has prevented her potential investors from fulfilling their promises to invest. Faced with the prospect of having to set up the resort project business on her own, Miss Frenly is seriously considering an offer from Green Sdn Bhd to purchase the coastal land from her for RM1,200,000 together with a promise to appoint her as their technical adviser. The current market value of the coastal land is considered to be at least double what Miss Frenly paid for it in 2007. (a) (b) (c) Explain the tax deductibility of the cost to Miss Frenly of commissioning the feasibility study and of the business plan against her employment income. (4 marks) With reference to the proposed sale of the coastal land: (i) Provide arguments for treating the gain from the disposal as (1) a capital gain; and (2) a revenue gain from an adventure in the nature of trade; (8 marks) (ii) State, giving reasons, which alternative you would support. Explain the basis on which the stamp duty payable by Green Sdn Bhd will be determined if the coastal land transaction goes through as planned. Note: you are not required to compute the duty. (18 marks) 7 [P.T.O.
4 Cashrich Sdn Bhd (Cashrich) has a paid-up capital of RM10 million and closes its accounts to 31 December annually. As at 31 December 2007, Cashrich had an imputation balance (s.108) of RM100,000. No dividends have been distributed in the years 2008 and 2009. In 2010, the following dividends were paid to the ordinary shareholders of the company: Date paid Dividend (net) Mode of payment 1 February 2010 RM75,000 Cash 8 August 2010 RM150,000 In specie (shares of a subsidiary) Other information relating to Cashrich for the year ended 31 December 2010 is as follows: RM RM Income Gross dividend (Franked, s.110 set-off: RM100,000) 400,000 Single-tier dividend 150,000 Interest from term deposits with a bank in Malaysia 50,000 Gross rent 120,000 Gain on sale of investment 180,000 Expenditure Permitted expenses 165,000 Rental expenses (all tax deductible) 70,000 (a) Compute Cashrich Sdn Bhd s imputation balance (s.108) as at 31 December 2010, giving reasons for your treatment of the two dividends. (4 marks) (b) Compute the tax payable by Cashrich Sdn Bhd as an unlisted investment holding company for the year of assessment 2010. (14 marks) 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. (18 marks) 8
5 Beezee Sdn Bhd (Beezee) made the following payments to non-residents during the financial year ended 30 November 2010. Explain to Beezee Sdn Bhd whether the withholding tax provisions are applicable in the case of each of the payments listed below; and, where applicable, state the rate of withholding tax. Note: you should ignore the provisions of any double tax treaties that Malaysia may have entered into with some of the relevant countries. (a) (b) (c) (d) (e) RM500,000 being fees to Geotechnik Ltd for marine investigations performed in the middle of the Pacific Ocean. (2 marks) RM60,000 being commission to Miss Saylavie for introducing a supplier of parts from India. Miss Saylavie is a commercial pilot and this is the first time she has made such an introduction. (5 marks) RM15,000 being a late payment charge, calculated at the prevailing interest rate, paid to a foreign supplier for an overdue trade account. RM1 million to BigMachines Inc for the supply and installation of machines in Beezee s premises in Malaysia. Of the total amount, 12% is for the installation and commissioning of the machines. (5 marks) RM150,000 being the outright purchase of software from SinoSoft Ltd, which specialises in developing customised software for manufacturers. (18 marks) End of Question Paper 9