Examiner s report F6 Taxation (MYS) March 2018 General Comments There were two sections to the examination paper and all of the questions were compulsory. Section A consisted of 15 multiple choice questions (two marks each) which covered a broad range of syllabus topics. Section B had four questions worth 10 marks each and two longer questions worth 15 marks each, testing the candidates understanding and application of taxation in more depth. The following paragraphs report on each section and focus on some of the key learning points for future candidates. Candidates must keep abreast of updates on the current income tax and other tax legislation examinable at a particular sitting and be able to answer the theoretical aspects together with the computations, where required. Generally, candidates did well and it was evident that they were well prepared on all areas of the syllabus and particularly on the basics of tax computations. Future candidates should note that theory-based questions are important and make sure that they are prepared for these. Some general advice is made as follows: If a 10 mark question examines one syllabus area, the same question will not examine another syllabus area. For example, a 10-mark question on goods and services tax (GST) will not also examine another syllabus area (for example income tax). Candidates should follow a format to do a tax computation. Types of expenses that are allowed a specific deduction and a double deduction, and their conditions and treatments are important. Tax administration is an important syllabus area and the relevant due dates and penalties for offences are important. Specific Comments Section A It was interesting to note that candidates who scored well in Section A tended to score well in the examination overall. The following questions are reviewed with the aim of giving candidates an indication of the types of questions asked, guidance on dealing with Section A questions and to provide a technical debrief on the topics covered by the specific questions selected. Examiner s report F6 (MYS) March 2018 1
Sample Questions for Discussion Example 1 Christopher arrived in Malaysia for the first time on 1 September 2016. He was seconded to work in Malaysia for a three-year period but, due to the ill-health of his wife, the secondment arrangement had to be ended early and he left Malaysia permanently on 4 July 2017. Christopher was present in Malaysia during the entire period from 1 September 2016 to 4 July 2017, with the exception of ten days in March when he visited relatives in Australia. What is Christopher s tax residence status for each of the years of assessment 2016 and 2017? Year of assessment 2016 Year of assessment 2017 A Not resident Not resident B Resident Not resident C Not resident Resident D Resident Resident The correct answer is option B for the following reasons: YA 2016: Christopher is tax resident pursuant to Section 7(1)(b) of the Income Tax Act, 1967 (as amended). Although from 1 September to 31 December 2016 is less than 182 days, it is linked to a period of more than 182 days (1 January to 4 July 2017) in the following basis year. The absence of ten days in March is a temporary absence for social visits not exceeding 14 days and so Christopher is deemed as being present in Malaysia for this period. YA2017: Christopher is not tax resident pursuant to Section 7(1)(a) as he is physically present in Malaysia for less than 182 days during the year (temporary absence does not apply to Sec 7(1)(a)). Section 7(1)(b) does not apply as Christopher spent less than 182 days in Malaysia during the year 2016. Sections 7(1)(c) and (d) do not apply as Christopher is present in Malaysia for only two years. Many candidates chose option D where Christopher was resident for year of assessment (YA) 2016 and 2017. Examiner s report F6 MYS March 2018 2
Example 2 MW Bhd (MW) closes its accounts annually on 31 December. MW acquired a production machine for RM200,000 on 2 February 2017. During the year ended 31 December 2017, MW also leased a photocopy machine for which it paid an initial deposit of RM30,000 and lease rental premiums of RM40,000 which related to the capital portion of the lease rentals. The purchase cost of the photocopying machine was RM185,000. MW s adjusted income for the year of assessment 2017 was RM370,000 before taking into account any adjustments for the above items. What is the statutory income of MW Bhd for the year of assessment 2017? A RM232,000 B RM281,000 C RM252,000 D RM246,500 The correct answer is option A, based on the following calculation: RM RM Adjusted income (as provided) 370,000 Less: Lease rental premiums paid (30,000 + 40,000) (70,000) Adjusted income (revised) 300,000 Less: Capital allowances Qualifying plant expenditure 200,000 IA (20%) (40,000) AA (14%) (28,000) (68,000) Statutory income 232,000 Many candidates chose option B, because they treated the leasing as subject to capital allowances whereas it should have been deducted in full as a revenue deduction. Examiner s report F6 MYS March 2018 3
Section B Question One A 10 mark question on goods and services tax (GST) in five parts. Part (a)(i) for 2 marks tested the circumstances when the basic tax point and actual tax point are not the same. Many candidates were able to identify the two circumstances. Part (a)(ii) for 2 marks tested the 21 day rule for tax invoices and the calculation of GST. Although a few candidates erroneously applied the tax fraction to determine the GST, many answered this part correctly. A supply would include the stationery and GST output tax should be computed. Part (b)(i) For 1 mark almost all candidates stated that the supply of fruit and vegetables was a taxable supply at zero rate, however some candidates stated that it was exempt supply. Part (b)(ii) A 4 marker testing the GST implications for a non-gst registrant required to account for output tax on imported services via the reverse charge mechanism. Most candidates were familiar with the reverse charge mechanism but assumed that it only applied for a GST registrant. For those candidates who knew, some did not state the due date. Some candidates stated that non-gst registrants would have to register first and then account for output tax. The amount of GST should be determined based on the value against the 6%, and the tax fraction is not applicable in this case. Future candidates should note that the due date to remit the GST is the last day, and not the first day, of the subsequent month from the month the supply is made. Part (b)(iii) for 1 mark required candidates to state that a registration would be required for a zero rated supply. This question was reasonably well answered, with the exception of part(b)(ii) as discussed above. Question Two This 10 mark question on real property gains tax (RPGT) was in 2 parts, involving a husband and wife for 7 marks and a company for 3 marks. Part (a)(i) for 5 marks, tested a non-citizen husband making a gift to his wife and many candidates were aware of the gift rules and that no gain no loss (NGNL) rules were applicable but it was restricted only for Malaysian citizens. So in this situation, RPGT would apply on the market value. This change was introduced initially in 2015 but there were candidates who were not aware of the change and assumed that non-citizens can enjoy the NGNL concession. This part not was well answered. Candidates must keep abreast of updates in legislation that affect the syllabus. Part (a)(ii) for 2 marks required candidates to state that the date of transfer was the date of acquisition for the recipient of the gift, and also the acquisition price. Many candidates stated correctly that it was market value. Some candidates correctly stated that it was market value but when computing the RPGT for the husband making the gift used the disposal price rather than the market value. Part (b) for 3 marks tested the calculation of the allowable loss for a company on disposal of a property and many candidates did this part well, demonstrating good knowledge of the Examiner s report F6 MYS March 2018 4
adjustments for the appropriate amounts and showing they had taken notice of the note in the question to state any items of nil adjustment for additional marks. Overall, candidates performed satisfactorily well in this question. Question Three This 10 mark question was divided into 2 main parts and tested capital allowances for a company incurring expenditure on assets. Part (a)(i) for 3 marks required candidates to state the conditions to claim capital allowances and a majority were able to state the main factors correctly. Future candidates should always apply the conditions to the given scenario. Part (a)(ii) for 2 marks tested the theoretical aspects of which assets are considered to be plant. Many candidates were not able to state the relevant considerations which are fundamental to the capital allowance rules. Future candidates need to be aware of the guiding principles on plant, since it is not defined in the Income Tax Act, 1967 (as amended), such as the functional and apparatus test and the difference from the settings test. They must understand that plant also includes office equipment and machinery. This part was not well answered. Part (b) for 5 marks was made up of two parts. In the first part most candidates were able to compute the initial allowance and annual allowance for a machine, although some applied the industrial building allowance rates for the machine when the site preparation costs were nowhere near the 75% limits. The second part involved the calculation of the balancing allowance on disposal of a non-commercial motor vehicle, requiring the restriction of the disposal proceeds based on the cost and not the full amount. Whilst they correctly restricted the qualifying expenditure many omitted the disposal proceeds. Overall, candidates did very well on this question. Question Four This 10 mark question was made up of two parts. Part (a) for 3 marks tested a scenario on whether a partnership existed and almost all correctly stated that there was a partnership. This was well answered. Part (b)(i) for 4 marks on computing the statutory income of two partners, was answered correctly by most candidates. It should be noted that private expenses incurred by a partner form part of income and are not deductible in arriving at the adjusted income of the partner. Part (b)(ii) for 1 mark and (iii) for 2 marks tested tax administration, specifically due dates and the number of instalments for person who is deriving business income. For part (ii), many candidates stated the correct date of 30 June 2018. For part (iii), on the due date for paying an instalment and total instalments, many candidates were not familiar with the relevant information. Future candidates should note that marks are given for precise dates and therefore they must ensure that if the due date is say, 30 March then it cannot be 31 March as it would be late and hence, be subject to late payment penalties. Examiner s report F6 MYS March 2018 5
This question was reasonably well answered by the candidates. Question Five This 15 mark question tested the computation of company. chargeable income for a manufacturing Many candidates were able to make appropriate deductions and additions and nil adjustments. There were some areas of the question that were not well answered such as the double deductions available for research and development (R&D) expenses and vendor development related expenses and there were also some errors on the recovery of a staff loan previously written off. Candidates scored marks for setting off the unabsorbed brought forward business loss against statutory business income and not against aggregate income including non-business income. This question was well answered. Some points for future candidates to note: A receipt such as the recovery of a staff loan or an item of income that has already been included in the accounts will never be added again. It should either be a deduction or item of nil adjustment. The double deduction relating to vendor development has been increased to RM700,000 and candidates should be aware of updates, if applicable. For a R&D double deduction, the amount approved is available for deduction and the unapproved amount is available for deduction as long as it is revenue in nature. There is no requirement to add back the unapproved revenue expenditure. Foreign source income such as rental income from a Hong Kong property is exempt and need not be brought to tax in Malaysia even if it is remitted. Accrued statutory audit fees need not be paid during the year to be deductible. This requirement only applies to tax filing fees and secretarial fees. Secretarial fees are subject to maximum deduction of RM5,000 and the excess should be disallowed. Overall, candidates scored very well in this question. Question Six A 15 mark question on computing a separate assessment for two individuals, a husband with employment income, and wife having business and other income. The question was generally well answered by candidates with a few errors in treatment, such as the current year loss and taxing compensation received as income subject to income tax. Most candidates correctly claimed the current year adjusted loss from the aggregate income from business and non-business income. It should be noted that for chargeable income exceeding RM1 million, the excess is taxed at 28%, not the whole amount of chargeable income. Some points for future candidates to note: A capital receipt such as compensation relating to a property is generally capital in nature and not subject to income tax. Always check whether figures in a question are for a month or a whole year. Examiner s report F6 MYS March 2018 6
Care should be exercised to state the car benefit. Interest income is not always exempt. Specific exemptions are available for individuals such as interest income from placement of a fixed deposit in a local bank. Overall candidates performed very well. Examiner s report F6 MYS March 2018 7