TAX667 FA 26 Julai 2021 - Final July 2021 PDF

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UNIVERSITI TEKNOLOGI MARAFINAL EXAMINATIONCOURSE : ADVANCED MALAYSIAN TAXATIONCOURSE CODE : TAXEXAMINATION : JULY 2021TIME : 9. 00 A M – 12 PM (3 HOURS)INSTRUCTIONS TO CANDIDATES This question paper consists of five (5) questions. Answer ALL questions in the Answer Booklet. Start each answer on a ne...

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AC/JULY 2021/TAX667

UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION

COURSE

:

ADVANCED MALAYSIAN TAXATION

COURSE CODE

:

TAX667

EXAMINATION

:

JULY 2021

TIME

:

9.00 AM – 12.00 PM (3 HOURS)

INSTRUCTIONS TO CANDIDATES 1.

This question paper consists of five (5) questions.

2.

Answer ALL questions in the Answer Booklet. Start each answer on a new page.

3.

Do not bring any material into the examination room unless permission is given by the invigilator.

4.

Please check to make sure that this examination pack consists of: i) ii) iii)

5.

the Question Paper an Answer Booklet – provided by the Faculty a two-page Appendix 1.

Answer ALL questions in English.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO This examination paper consists of 10 printed pages © Hak Cipta Universiti Teknologi MARA

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QUESTION 1 Encik Farid, a tax resident, owns several businesses in Malaysia and abroad. On 1 October 2019, he passed away in a car accident, and left behind a wife and three children. Under the will, a resident trust was set up and managed by a resident trustee. The particulars pertaining to the trust and the beneficiaries for the basis year 2020 are provided below: Business in Ipoh Adjusted Loss Balancing charge

RM (16,000) 2,000

Business in Kuala Lumpur Gross Income Balancing allowances (2020) Capital allowances (2020) Capital allowances (2019)

230,000 3,500 21,000 4,000

Property in Klang Gross rental income for the year 2020, received in the same year. Non-refundable deposit Major repair of roof (RM28,000) Quit rent and assessment for the year (RM2,800) Interest income from Malaysia

58,000 8,000

9,000

Additional information: 1.

A total amount RM42,000 was paid for the trustee’s remuneration. Out of this amount, RM12,000 was incidental to the production of business income in Kuala Lumpur while the remaining amount was paid for the administration of the trust.

2.

Annuity payable to Encik Farid’s widow was RM3,500 per month.

3.

All the children were tax resident except for the second child. The trust body’s total income was distributed to the first and second child at the discretion of the trustee. An amount of RM1,800 per month will be accumulated for the third child.

4.

During the year 2020, each beneficiary received the following sum from the trust body: First child (RM120,000) and second child (RM100,000).

5.

The second child contributed RM5,000 cash to the state government in 2020. In the same year, the second child received RM17,000 royalty for publication of literary works.

Required: a.

Assuming that Section 61(2) is to be applied, compute the followings for the year of assessment 2020: i. Chargeable income of the trust body. ii. Tax payable of the second child. (10 marks)

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b.

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Explain the tax implications of proviso s. 61(2) to the second child. (2 marks) (Total: 12 marks)

QUESTION 2 Megah Holdings Sdn Bhd is a resident investment holding company (unlisted on Bursa) with a paid-up capital of RM7 million. Its income is derived mainly from investments. The investments consist of fixed deposit in local financial institutions, shares in companies listed on the Bursa Malaysia and some real properties including shop lots. There is no support or maintenance services provided for the shop lots. The company has produced the following result for the financial year ended 31 December 2019: Megah Holdings Sdn Bhd Statement of profit or loss for the year ended 31 December 2019 Gross income RM RM Fixed deposit interest 100,171 Rent - shop lots 81,754 Dividends (Malaysian single tier) Investment 1 26,952 Investment 2 117,915 144,867 Management fees 120,000 Total gross income 446,792 Less: Expenses Director's remuneration Staff salary Accounting and secretarial fees Audit fees Interest charges (loan for investment) Printing and stationary Management expenses Office rent Quit rent and assessment (shop lots) Entertainment Depreciation Net profit

80,777 48,466 16,159 32,073 62,888 3,230 45,233 80,640 3,257 4,845 7,000 (384,568) 62,224

Additional information: 1. Single tier dividends were received from the investments made in two lots of shares and rental income from the shop lot. The details of the investment are as follows: Cost of investment RM Shop lot 1,179,150 Investment 1 - shares 2,080,806 © Hak Cipta Universiti Teknologi MARA

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Investment 2 - shares Total cost of investments

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1,173,500 4,433,456

2. Megah Holdings Sdn Bhd took substantial loans to make the investments in the shop lots and the shares, for which interest charges incurred were charged in the accounts. Required: a. Compute the chargeable income of Megah Holdings Sdn Bhd for the year of assessment 2019 (Show all the relevant workings). (15 marks) b. Megah Holdings Sdn Bhd plans to dispose all the shares that it invested in the listed companies in early 2020 and has no plan to acquire additional shares. Assume in 2020 all other income remains the same, discuss the IHC status of Megah Holdings Sdn Bhd. (5 marks) (Total: 20 marks) QUESTION 3 Sutera Desa REIT (SDR), is an approved real estate investment trust (REIT) which derives rental income from letting out number of factories in Klang Valley since 2010. To expand the business, five (5) new factories were acquired in Serdang on 1 September 2017 for RM3 million. The cost includes RM0.5 million related to the cost of land. The factories were let out starting on 1st September 2019. The income and expenses related to SDR for the year ended 31 August 2020 is as follows: RM INCOME

Rent from factories in Klang Valley Rent from factories in Serdang Interest from approved debenture Dividends EXPENSES General expenses (allowable) Trustee’s fees Maintenance and repairs Secretarial fees Tax filing Donation Management fees

2,500,000 1,500,000 300,000 40,000

350,000 70,000 120,000 10,000 12,000 45,000 150,000

Interest expenses

20,000

Depreciation Business zakat

80,000 70,000

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Note : 1. Capital allowance for investment in Klang Valley is RM75,000.00. Capital allowance for factories in Serdang is not yet computed. 2. The total income distributed to unitholders on 10 October 2020, amounted to RM1,500,000. 3. Interest expenses is wholly related to approved debenture. Required: a.

Compute the total income of SDR for the year of assessment 2020. Indicate ‘nil’ for item not taxable or deductible. (10 marks)

b.

Based on the amount of total income distributed to the unitholder, determine the chargeability of SDR to tax for the year of assessment 2020. Provide detail computation to support your answer. (5 marks)

c.

Assuming that SDR is having several types of unitholder, briefly explain its responsibility with regard to the distribution of the dividend and the consequence of non-compliance with the regulation. Supports your answer with related section of Income Tax Act 1967.

(5 marks) (Total: 20 marks) QUESTION 4 Mr Jimmy Lau was being investigated by the Inland Revenue Board of Malaysia for suspected under declaring his income for year of assessment 2020. The following information were obtained by the IRB officers during the investigation. i)

Mr Jimmy Lau has been operating his clothing business, Casual Look in Kuala Lumpur for the past 5 years. Below is the information extracted from his business: As at 31 December Capital Balance of retained earnings Drawings

2018 80,000 120,000 20,000

2019 80,000 110,000 -

2020 80,000 150,000 10,000

ii)

Mr Jimmy Lau purchased a new Toyota car by way of hire purchase in July 2019. The cost of the car was RM140,000. The deposit was RM50,000 paid in July 2019 and the installments were RM3,000 per month for 36 months commencing in August 2019.

iii)

Mr Jimmy Lau bought a bungalow in 2016 at a cost of RM450,000. This was financed by a bank loan. The market value of the house was RM580,000, RM505,000 and RM600,000 at the end of the year 2018, 2019 and 2020. The outstanding loan balances

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as at the end of 2018, 2019 and 2020 were RM220,000, RM180,000 and RM150,000 respectively. iv)

Mr Jimmy Lau acquired 50,000 unit of shares costing RM50,000 in May 2017. In June 2020, Mr Jimmy Lau sold 25,000 unit of shares for RM50,000.

v)

Mr Jimmy Lau received a repayment of loan for RM20,000 from his niece in 2020. The loan of RM30,000 was given out in 2017. No payment has been made before that.

vi)

Mr Jimmy Lau provided additional information pertaining to his assets were as follows: Balance as at 31 December Saving accounts Current accounts Jewellery

2018 25,000 30,000 (credit) 15,000

2019 10,500 20,000 (credit) 25,000

2020 38,000 10,000 (debit) 30,000

Other information: i)

In May 2019, Mr Jimmy Lau went to Hong Kong for holidays. The trips cost RM15,000.

ii)

In April 2020, Mr Jimmy Lau bought a Proton car for his daughter at a price of RM57,000 by cash as a birthday gift.

iii)

The living expenses for basis year 2019 and 2020 were as follows:

Household and personal expenses Medical expenses Income tax paid Cash donation to Perak Public Library

2019 60,500 20,000 35,000 5,000

2020 70,000 15,000 45,000 -

iv)

Mr Jimmy Lau bought a land in Sungai Dua, Penang for RM200,000 in March 2017. He obtained bank loan to buy the land. The bank statements showed that the balance of the loan at 31 December 2018, 2019 and 2020 were RM150,000, RM100,000 and RM50,000 respectively. The total loan interest paid for 2019 and 2020 were RM30,000 and RM15,000 respectively.

v)

Mr Jimmy Lau has declared income of RM350,000, RM400,000 and RM230,000 for the years of assessment 2018, 2019 and 2020.

Required: a.

Based on the information above, using the capital statement method, compute the amount of income not reported by Mr Jimmy Lau for the years of assessment 2019 and 2020. (20 marks)

b.

Briefly explain taxpayer’s responsibility during the field audit in taxpayer’s company. (3 marks) (Total: 23 marks)

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QUESTION 5 A.

YIN Bhd is an investment holding company that established on 1 July 2015. YIN Bhd is a tax resident and owns 100% paid up ordinary shares capital of RAC Sdn Bhd (RAC). RAC incorporated on 1 January 2016 and involves in manufacturing facemasks. YIN Bhd also owns 60% paid up ordinary shares capital of SAM Sdn Bhd (SAM). SAM Sdn Bhd established on 1 October 2017 and involves in manufacturing hand sanitizer. RAC also acquired 20% paid up ordinary shares capital of SAM Sdn Bhd. All the three companies closed their accounts on 30 June, annually. The paid-up ordinary shares capital for each company exceeded RM2.5 million. Details for the year ended 30 June 2020 are as follows: YIN RM’000 Adjusted income/(loss) Capital allowance Rental income Dividend income Approved donation

1,800 400 20

RAC RM’000 4,000 1,400 200 160

SAM RM’000 (6,000) 2,400

Required: a.

Advice whether YIN, RAC and SAM are related companies for group relief purposes. (3 marks)

b.

Calculate the chargeable income of YIN Bhd for the year of assessment 2020. (After considering the group relief provided under Section 44A of the Income Tax Act 1967). (5 marks)

c.

Assume that SAM Sdn Bhd commenced its business on 1 October 2019, advice the management of YIN Bhd on the eligibility of group relief loss. (4 marks)

B.

Quantum Sdn Bhd (QSB) closes its account on 31 December, annually. The company’s activities include manufacturing and letting out moveable and immovable property. QSB sustained losses in its business and ceased operations on 30 June 2018. QSB owns a factory building which has been left idle. QSB renovated, beautify and advertise the availability of the building. On 1 February 2019, QSB secured a tenant. The following information was provided by QSB for the basis year 2019. Income derived from letting out its property Cost of maintenance, administration and amenities for the tenant Unabsorbed business loss

: : :

RM180,000 RM70,000 RM40,000

Required: Based on the relevant provisions of Income Tax Act 1967, explain the income tax treatment of the followings to QSB:

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i.

RM180,000 rental income

ii.

RM70,000 expenses for maintenance, administration and amenities

iii.

RM40,000 unabsorbed business losses (8 marks)

C.

Mutiara Bhd has a 90% and 72% ordinary shareholding in Cerdik Sdn Bhd (CSB) and Pandai Sdn Bhd (PSB), respectively. CSB determined its defined aggregate income as RM330,000 for the year of assessment 2019, while PSB suffered a business loss of RM120,000 for that year. Both CSB and PSB are resident companies incorporated in Malaysia, with a paid-up capital of ordinary shares exceeding RM3 million, each. Both companies share the same year end, subjected to a 24% tax rate and are not eligible for tax incentives. Required: Suggest a tax planning strategy to reduce the tax liability of Cerdik Sdn Bhd. (5 marks) (Total: 25 marks)

END OF QUESTION PAPER

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APPENDIX 1 (1) •

The following tax rates and allowances are to be used in answering the questions: (a) (b)

Companies

Income Tax Rates 24%

Small and Medium companies: Chargeable Income ≤ RM600,000 Chargeable Income > RM600,000

(c)

Non-resident individuals

(d)

Resident individuals

(e)

Trust Body – Resident or Non-resident

(f)

Executor – Domiciled in Malaysia

(g)

Executor – Not domiciled in Malaysia * Scaled Rate *Chargeable Income RM On 5,000 Next 5,000 On 10,000 Next 10,000 On 20,000 Next 15,000 On 35,000 Next 15,000 On 50,000 Next 20,000 On 70,000 Next 30,000 On 100,000 Next 150,000 On 250,000 Next 150,000 On 400,000 Next 200,000 On 600,000 Next 400,000 On 1,000,000 Next 1,000,000 On 2,000,000 Exceeding 2,000,000

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17% 24% 30% Scaled rate* 24% Scaled rate* 24%

Rate

1 1 3 8 14 21 24 24.5 25 26 28

Cumulative Tax RM 0 50 50 100 150 450 600 1,200 1,800 2,800 4,600 6,300 10,900 36,000 46,900 36,750 83,650 50,000 133,650 104,000 237,650 280,000 517,650

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APPENDIX 1 (2) Personal reliefs 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 Basic supporting equipment for disabled self, spouse, child or parent Study course fees for skills or qualifications Lifestyle allowance Spouse relief Disabled spouse, additional Child - basic rate Child - higher rate Disabled child Disabled child, additional Childcare (below six years old)

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

(each) (each) (each) (each) (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

Rate of Capital Allowances Initial allowance (IA) Rate % Industrial buildings 10 Plant and machinery – general 20 Motor vehicles and heavy machinery 20 Office equipment, furniture and fittings 20 Computers 20 Agriculture allowance Buildings for the welfare of or as living accommodation for farm employees Other buildings used in the business All other qualifying agricultural expenditure

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Nil Nil Nil

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

RM 400 800

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

20 10 50

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