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Advanced Taxation (Malaysia) March/June 2017 – Sample Questions

Time allowed: 3 hours and 15 minutes

This question 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 question paper until instructed by the supervisor.

This question paper must not be removed from the examination hall.

Paper P6 (MYS)

Professional Level – Options Module

The Association of Chartered Certified Accountants

SUPPLEMENTARY INSTRUCTIONS 1. 2. 3. 4.

You should assume that the tax rates and allowances shown below will continue to apply for the foreseeable future. Calculations and workings should be made to the nearest RM. All apportionments should be made to the nearest whole month. 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

First Next Next Next Next Next Next Next Next Next Exceeding

RM 5,000 15,000 15,000 15,000 20,000 30,000 150,000 150,000 200,000 400,000 1,000,000

Resident company Paid up ordinary share capital RM2,500,000 or less More than RM2,500,000

RM (0 – 5,000) (5,001 – 20,000) (20,001 – 35,000) (35,001 – 50,000) (50,001 – 70,000) (70,001 – 100,000) (100,001 – 250,000) (250,001 – 400,000) (400,001 – 600,000) 600,001 – 1,000,000)

First RM500,000 19% 24%

Non-residents Company Individual

Rate % 0 1 5 10 16 21 24 24·5 25 26 28

Cumulative tax RM 0 150 900 2,400 5,600 11,900 47,900 84,650 134,650 238,650

Excess over RM500,000 24% 24%

24% 28%

Labuan entity – income from a Labuan trading activity All chargeable profits Trust body – resident or non-resident All chargeable income

3%

24%

2

Personal deductions Self Disabled self, additional Medical expenses expended on parents Medical expenses expended on self, spouse or child with serious disease, including up to RM500 for medical examination Parental care Basic supporting equipment for disabled self, spouse, child or parent Purchase of sports equipment Study course fees for skills or qualifications Expenses on books for personal use Spouse relief Disabled spouse, additional Child – basic rate Child – higher rate Disabled child Disabled child, additional Life insurance premiums and contributions to approved funds Private retirement scheme contributions, deferred annuity premiums Medical and/or education insurance premiums for self, spouse or child Purchase of a personal computer Deposit for a child into the National Education Savings Scheme Contribution to Social Security Organisation (SOCSO)

(maximum) (maximum) (each) (maximum) (maximum) (maximum) (maximum)

(each) (each) (each) (each) (maximum) (maximum) (maximum) (maximum) (maximum) (maximum)

Rebates Chargeable income not exceeding RM35,000 Individual – basic rate Individual entitled to a deduction in respect of a spouse or a former wife

RM 9,000 6,000 5,000 6,000 1,500 6,000 300 7,000 1,000 4,000 3,500 2,000 8,000 6,000 8,000 6,000 3,000 3,000 3,000 6,000 250

RM 400 800

Capital allowances Initial allowance (IA) Rate % 10 20 20 20

Industrial buildings Plant and machinery – general Motor vehicles and heavy machinery Office equipment, furniture and fittings

Agriculture allowance Buildings for the welfare of or as living accommodation for farm employees Nil Other buildings used in the business Nil All other qualifying agricultural expenditure Nil

3

Annual allowance (AA) Rate % 3 14 20 10 20 10 50

[P.T.O.

Real property gains tax Companies

Category of disposal Disposal within three years after the date of acquisition Disposal in the fourth year after the date of acquisition Disposal in the fifth year after the date of acquisition Disposal in the sixth year after the date of acquisition or thereafter

All others

Rate %

Individuals – Non-citizens and non-permanent residents Rate %

30 20 15 5

30 30 30 5

30 20 15 0

Goods and services tax (GST) Standard rate

6%

Stamp duty Rates of duty under the First Schedule Conveyance, assignment, transfer or absolute bill of sale Rate % Sale of property For every RM100 or fractional part thereof: On the first RM100,000 On the next RM400,000 On the excess over RM500,000

1 2 3

Sale of company shares On every RM1,000 or fractional part thereof

0·3

4

Rate %

Section A – BOTH questions are compulsory and MUST be attempted 1

You are a tax associate of Tax Firm. You and your tax director met with Tax Firm’s new client, Serene Garment Sdn Bhd (SGSB), a company involved in the manufacturing of ladies’ cotton garments. Below are the notes taken from this client meeting. Notes of meeting with SGSB –

SGSB has a paid up ordinary share capital of RM10 million and is registered for goods and services tax (GST). SGSB’s factory is located in Shah Alam, Malaysia.

–

As part of its expansion plan, SGSB intends to undertake the following capital investment projects: Project A: New factory building SGSB plans to embark on the manufacturing of men’s garments by investing in a new production facility. The total investment is expected to be RM4·5 million, made up as follows:

New factory building (to be completed in October 2017) Machinery (to be put into use in October 2017) Total investment

Financial year ending 30 September 2017 2018 Total RM’000 RM’000 RM’000 1,500 1,000 2,500 – 2,000 2,000 –––––– –––––– –––––– 1,500 3,000 4,500 –––––– –––––– ––––––

Note: All amounts are quoted exclusive of GST. The new machinery will be acquired under hire purchase as follows: RM 2,000,000 200,000 1,800,000 24 1 October 2017

Cost of machinery Down payment Hire purchase loan Number of instalments First instalment due

Project B: Yarn weaving machine In view of increasing fabric prices, SGSB has decided to invest in a yarn weaving machine to produce cotton fabrics, which are the raw materials for its garment business. The machine will cost RM4,000,000 (exclusive of GST) and following the machine being put into use in August 2017, SGSB’s cost of purchasing fabrics is expected to reduce by 50%. –

SGSB intends to claim the reinvestment allowance (RA) incentive in respect of both the above capital investment projects. SGSB first claimed RA in the year of assessment (YA) 2001.

–

In its financial year ending 30 September 2017, SGSB has also incurred the following expenditure all of which has been expensed in the profit or loss account: Chimney construction The old chimney, forming part of the existing factory building, was damaged and needed to be rebuilt. Due to SGSB undertaking the yarn weaving activities in this building (Project B), the chimney needed to be heightened to meet the environmental requirements. The new chimney cost RM530,000 (inclusive of GST of RM30,000). According to the contractor, had the chimney not been required to be heightened, the replacement cost would only have been RM200,000. The input tax on this tax invoice has been claimed in SGSB’s GST return. Light bulbs SGSB replaced the light bulbs used in its office at a cost of RM159,000 (inclusive of GST of RM9,000). The supplier’s tax invoice was erroneously issued in the name of SGSB’s parent company. As a result, the input tax on this tax invoice was not claimed in SGSB’s GST return and the full amount of RM159,000 was expensed.

5

[P.T.O.

Notes of meeting with SGSB (continued) Compensation payment to a neighbouring company A neighbouring company to SGSB, Taylormade Sdn Bhd (TMSB), is currently involved in the manufacturing of silk garments. TMSB proposed to venture into the manufacturing of cotton garments. As the production of cotton garments would have been in direct competition to SGSB, it managed to persuade TMSB not to venture into the manufacturing of cotton garments. Instead, it was agreed that TMSB will refer all its orders for cotton garments to SGSB and that SGSB will reciprocate by referring all its orders for silk garments to TMSB. As part of this arrangement, SGSB is required to make a compensation payment of RM300,000 to TMSB. TMSB is a GST registrant. –

SGSB has computed the following tax projections, before taking into account the RA claim for YAs 2017 and 2018: Note Adjusted income/(loss) Capital allowance

YA 2017 RM’000 (500) 2,000

1 2

YA 2018 RM’000 5,000 2,000

Notes: 1.

The adjusted income/(loss) has been calculated before taking account of any tax adjustments required for the expenditure relating to the chimney, light bulbs and compensation payment.

2.

The capital allowance figures have taken into account the effect of the capital expenditure in Projects A and B but not the effect of any tax adjustments to be made to the adjusted income/(loss).

Your tax director has sent you an email requesting you to prepare a report for the board of directors of SGSB, which addresses the following: (i)

Whether, as a company, SGSB will be eligible for the RA incentive, and if so, when the incentive period will expire.

(ii) Assuming that SGSB as a company will be eligible for the RA incentive, the applicability of such an incentive claim to each of Project A and Project B. In each case you should clearly indicate whether, and if so how, each investment will be regarded as a qualifying (or a non-qualifying) project and where relevant, identify the eligible qualifying expenditure and the timing of the claim. (iii) The income tax deductibility of the expenditure incurred on the construction of the chimney, light bulbs and the compensation paid to TMSB. In relation to the compensation payment, you should present the arguments for both its deductibility and non-deductibility and draw an appropriate conclusion. (iv) Whether the input tax incurred by SGSB in respect of the chimney construction and the light bulbs will be allowed as an income tax deduction. (v) Whether the compensation paid to TMSB will be subject to GST. (vi) Illustrate the tax impact of the above items by computing SGSB’s total income for each of the YAs 2017 and 2018, clearly identifying any amounts to be carried forward.

6

Required: Draft the report to Serene Garment Sdn Bhd (SGSB) as instructed by your tax director. The following marks are available: (i)

Eligibility for the reinvestment allowance incentive and its expiration date.

(ii) Applicability of the incentive claim for each of Project A and Project B.

(2 marks) (6 marks)

(iii) Income tax deductibility of the expenditure incurred on the chimney construction, light bulbs and compensation payment. (9 marks) (iv) Tax deductibility of the input tax incurred on the chimney construction and the light bulbs.

(4 marks)

(v) Goods and services tax (GST) implications of the compensation payment.

(3 marks)

(vi) Computations of SGSB’s total income for each of the years of assessment 2017 and 2018.

(7 marks)

Professional marks will be awarded in question 1 for the appropriateness of the format and presentation of the report and the effectiveness with which the information is communicated. (4 marks) (35 marks)

7

[P.T.O.

2

Tax Firm has been appointed as the tax agent for Lamsah Berhad (LB) to prepare its income tax return for the year of assessment (YA) 2017. LB is a company listed on Bursa Malaysia and its principal activity is that of investment holding. In addition, to support its group, LB also provides management services to its subsidiaries. The relevant financial information provided by LB for the preparation of its tax return is as follows: Financial information for the year ended 31 March 2017 RM’000 Revenue – Dividend from local subsidiaries – Dividend from foreign subsidiaries – Interest from local subsidiaries – Fees for management services from subsidiaries

3,000 1,400 4,600 1,000

Other income – Gain from disposal of an investment

3,000

Investment balances (no movement during the year) Investment in local subsidiaries Investment in foreign subsidiaries Amount owing by local subsidiaries (interest-bearing) Amount owing by local subsidiaries (non-interest-bearing)

80,000 50,000 110,000 10,000

Notes: 1.

The direct expenses incurred in respect of the provision of the management services are RM200,000 for staff costs and RM100,000 for office overheads.

2.

The interest expense incurred for the year is RM600,000, of which RM100,000 relates to the loan taken from a Labuan bank to finance investment in foreign subsidiaries.

3.

The amount of common expenses after excluding the expenses in items 1 and 2 is RM1 million.

4.

The current year capital allowance relating to the common assets is RM200,000.

5.

During the financial year, due to the bearish stock market performance and to improve the share price of the company, LB carried out a share buyback exercise by which it purchased its own shares on the Bursa Malaysia at a cost of RM100,000. These shares are held as treasury shares. Half of the shares will be used to fulfil LB’s obligations under an employee share award scheme to be given to its employees in the financial year ending 31 March 2018. The balance of the shares will be sold on the stock exchange market in the future, when the share price sufficiently improves.

6.

Based on the tax computation for YA 2016, there was an excess of deductible expenses over gross income in respect of the management fee and interest income sources of RM100,000 and RM50,000 respectively.

Your tax manager has arranged a meeting next week with the finance director of LB to discuss the tax computation for YA 2017 as well as the income tax treatment of the share buyback made by the company. In preparation for this meeting, your tax manager has requested you to carry out the following work: (a) Investment holding company Explain, with supporting calculations, why LB will be regarded as an investment holding company and its tax treatment as an investment holding company. (b) Tax computation for YA 2017 Starting with the gross income from the respective sources, compute LB’s total income for YA 2017. Each revenue or other income item should be reflected in this tax computation, indicating by the use of ‘nil’ any item for which no adjustment is required.

8

(c) Share buyback Explain the income tax treatment of the share buyback in terms of: – – –

the initial purchase of the shares on the stock exchange market; the application of the shares to fulfil the share award scheme; and the future disposal of the shares on the stock exchange market.

Required: Carry out the work as instructed by your tax manager. The following marks are available: (a) The tax status of Lamsah Berhad as an investment holding company. (b) Tax computation for the year of assessment 2017. (c) Tax treatment of the share buyback.

(7 marks) (12 marks) (6 marks) (25 marks)

9

[P.T.O.

Section B – TWO questions ONLY to be attempted 3

ForinCo, a company incorporated and operating in Ruritania with a paid up share capital of RM2 million, intends to expand its sales network to Malaysia. Beginning in July 2017, ForinCo will station a marketing manager in Malaysia to establish business contacts, collect local market information and exhibit ForinCo’s products to businesses. On 1 December 2017, the marketing manager will report to ForinCo as to the feasibility and viability of doing business in Malaysia. If the report is favourable, in January 2018, the marketing manager will proceed to establish a sales team, enter into contracts, maintain inventory and fulfil orders. It is expected that the Malaysian operation will pay interest and technical fees to the ForinCo head office in Ruritania. ForinCo is seeking tax advice on whether to locally incorporate a wholly-owned subsidiary (with an issued share capital of about RM1 million) or to operate in Malaysia through a branch. In the double tax agreement signed between Malaysia and Ruritania, the article relating to a permanent establishment is based on the standard clauses in the OECD model convention for double tax treaties. Required: (a) Assuming a positive feasibility report, explain whether ForinCo will have a permanent establishment in Malaysia in (1) 2017; and (2) 2018. (4 marks) (b) Explain to ForinCo the comparative income tax treatment of a branch and a Malaysian-incorporated company with reference to each of the following aspects: – – – – –

the deductibility of business expenses; the claiming of capital allowances in respect of the assets used in the Malaysian operations, including small value assets; the application of the withholding tax provisions on the payment of interest and technical fees to ForinCo head office; the tax rates applicable to the chargeable income; and the repatriation/distribution of profits. (16 marks) (20 marks)

10

4

(a) After a long absence, Mr Balik Kampong (BK) returned to live and work in Malaysia in September 2016. In November 2016, as a sole proprietor, BK rented a warehouse building from Madam Rich. During the period November 2016 to April 2017, BK incurred expenditure of RM300,000 on renovations to alter the building from a storage building into a factory, and installed plant and machinery costing RM200,000. On 1 May 2017, the raw materials arrived and the production of fine pottery began immediately. On 1 June 2017, the first shipment of finished goods was delivered to a customer overseas. In addition to the above business venture, BK receives rental income from his residential property located overseas and dividend income from companies in Singapore and Malaysia. BK has forecast his income for 2017 to be as follows: RM Pottery business Turnover Business expenses (all tax deductible) Rental income from overseas property Singapore dividend income Malaysian dividend income

1,000,000 (793,000) 90,000 22,000 8,000

Required: (i)

Determine the date of commencement of the pottery business and the first basis period for the business. (5 marks)

(ii) Assuming that the business commenced in 2017, compute Mr Balik Kampong’s (BK’s) aggregate income for the year of assessment 2017, duly supported with explanations regarding the assessability or otherwise of each of his sources of income and his eligibility for capital allowances. (8 marks) (iii) Explain Madam Rich’s eligibility to claim industrial building allowance against her income from the letting of the warehouse to BK and the expenditure on which any such claim will be based. (3 marks) (b) OneTwoThree Sdn Bhd (OTT) has filed its annual tax return on time every year since its commencement in 2009. In July 2015, the Inland Revenue Board (IRB) conducted a tax audit on OTT, reviewing the tax returns for the years of assessment 2010 to 2013 inclusive. On 1 June 2017, OTT received an additional assessment for each of the four years of assessment 2010 to 2013, all dated 18 May 2017 and totalling RM100,000. The additional amount represents the tax on additional chargeable income arising from the company’s directors remune...