f6 1999 dec a

Answers

13

Certificate Examination – Paper 7(M) Answers andTax Framework (Malaysia) Marking Scheme

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1 Adcom Sdn BhdYear of Assessment 1999

Note RM000 RM000 + —

Net loss before taxation 1,198Compensation for termination of contract 1 —Compensation for restrictive covenant 1 500Interest from fixed deposits 8Consultancy fees 2 50Adcom Provident Scheme 3 140Research and development – fixtures 4 44

– operating costs 4 485Entertainment of clients 5 131Arts exhibition 5 16Depreciation 490Bad and doubtful debts 6 469Insurance 7 —Leave passage 8 65Removal expenses 9 4Donations 10 25Entrance fees 11 5Tax penalty 11 75Foreign exchange loss 12 —Retrenchment benefits 13 —

1,464 2,241(1,464)

Adjusted loss 777

Adjusted income NilAdd: Balancing charge 3Less: Capital allowances 14 (95)

Statutory income NilAdd: Statutory income from interest 8

Aggregate income 8Less: Adjusted loss 15 (8 )

Total income/chargeable income Nil

Notes:1 The sum of RM200,000 constitutes a trading receipt as it is in respect of one of the many commercial contracts executed by the

company in the course of its business. Therefore, it is taxable but no adjustment necessary.The sum of RM500,000 constitutes a capital receipt as it is compensation for restrictive covenant, hence not taxable.

2 Consultancy fees are incurred in the production of income therefore deductible. As a payment to a non-resident it is subject towithholding tax under s.109 at the rate of 10% gross. A further deduction of RM50,000 is arrived at as follows:

RM450,000 × 100/90 = 500,000 grossP/L 450,000

50,000

3 Adcom Provident Scheme is not an approved scheme therefore not deductible.

4 As the research is approved by the Minister double deduction under s.34A is granted to operating costs which are revenue expenses.

Cost of fixtures is excluded from double deduction as it is of a capital nature. As a capital expense it is also prohibited unders.39 therefore added back.

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05 Entertainment of clients is specifically disallowed under s.39(1) (1).

Sponsorship of arts exhibition is deductible under s.34(6)(k) as the activity is approved by the Minister of Culture, Arts and Tourism.However, the deduction is limited to a maximum of RM200,000.

06 Bad and doubtful debts is adjusted as follows:

RM000 RM000+ –

Bad debts written off – non trade 23Legal expenses 8Increase in specific provision – non trade 14Increase in general provision 464Bad debts recovered – non trade 40

509 40

(40)

469

Only trade debts are deductible and taxable.General provision is not deductible.

07 Premium in respect of insuring the employer against the risk of loss of income that might arise in the event of the death of the keypersonnel constitutes a revenue expense.

08 Leave passage is specifically disallowed under s.39(l)(m).

09 Removal expenses are revenue in nature as the company was compelled to relocate upon the expiry of the tenancy agreement whichthe landlord had declined to renew.

Electricity and telephone deposits are refundable therefore not expenses incurred in the production of income.

10 DonationGift of painting qualifies for deduction under s.44(6A) in arriving at the total income.

11 Miscellaneous expensesEntrance fee is a payment to acquire a lasting privilege therefore not deductible.

Since income tax is not deductible it follows the tax penalty is also not deductible.

12 Foreign exchange loss is in respect of a revenue expenditure incurred in the production of income therefore deductible.

13 Retrenchment benefitsSince the business is still in existence the expenditure incurred is deductible but no adjustment necessary.

14 Unabsorbed capital allowances of RM92,000 will be carried forward to be utilised for the year of assessment 2000.

15 Current year loss is set off against aggregate income from all sources.

Unutilised adjusted loss of RM769,000 will be carried forward to the year of assessment 2000.

16 The donation though approved cannot be deducted as there is no available aggregate income after deducting current year loss.

The unutilised donation cannot be carried forward to the following year of assessment.

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2 (a) Separate Assessment

Husband RMBusiness income NilRental income 10,000

Aggregate income 10,000Less: Current year business loss (3,800)

Donations (200)

Total income 6,000Less: Personal reliefs: RM

Self 5,000Insurance premium 4,400

9,400 restricted to 6,000

Chargeable income Nil

Tax chargeable Nil

Tax payable llNil

No deduction for tax rebate and zakat/fitrah as there is no chargeable income.

WifeBusiness income NilEmployment:

S.13(1)(a) salary 33,000S.13(1)(b):Leave passage (RM5,000 – 3,000 exempt) 2,000Water and electricity 460Child care exemptFurnishings 840

S.13(1)(c)3% × RM33,000 990

Court award exempt RMStatutory income from employment 37,290Interest income exemptRental income 14,000Dividend income 1,000

Aggregate income 52,290Less: Current year business loss (26,500)

Donations (290)

Total income 25,500Less: Personal relief:

Self 5,000First child —Second child RM800 × 4 3,200Other children RM800 × 2 1,600EPF and insurance – maximum 5,000

14,800

Chargeable income 10,700

Tax on RM10.000 RM250·00Tax on 700 at 6% 42·00

Tax chargeable 292·00Less: S.110 set off (280·00)

Tax payable 12·00

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(b) Joint AssessmentRM RMTotal income – Husband 6,000

– Wife 25,500

Aggregate total income 31,500Less: Personal relief:

Self 5,000Wife 3,000Children 4,800EPF and insurance (4,400 + 5,000) 9,400

22,200

Chargeable income 9,300

Tax on RM5,000 50·00Tax on 4,300 at 4% 172·00

Tax chargeable 222·00Less: Tax rebates:

Self 110·00Wife 60·00Zakat/fitrah 52·00

222·00

NilLess: S.110 set off (280·00)

Tax repayable (280·00)

The combined assessment results in a tax savings of RM292 on account of a lower tax rate due to the fact that there is sufficient totalincome (but not too much) to absorb the maximum personal reliefs which they are entitled.Also, there is sufficient tax chargeable to take advantage of the tax rebates which they are entitled.

3 (a) Year of Assessment Basis Period Adjusted Income/LossRM

1995 1.1.94 to 31.12.94 (5,000)

1996 1.1.95 to 31.12.95 s.21(1) 13,4008,000 + 6/12 × 10,800

1997 1.7.95 to 30.6.96 s.21(2) 10,800

1998* 1.7.96 to 31.5.97 s.21(3) 100

(1,000) + 13,200 × 1/12

1999* 1.6.97 to 30.4.98 12,100

13,200 × 11/12

* As the accounts are for a period of not more than12 months and as the company is required to change its accounting date tocomply with the provision of a law relating to companies, the period from 1.7.96 to 30.4.98 is divided on a time basis for YA 98 andYA 99 i.e. 11 months to each basis period.

(b) The failure year is 1997

‘Failure year’ refers to the year in which the business, after a non 31 December year-end, failed to make up accounts for a 12-monthperiod from the previous accounting date.

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4 (a) Where the employer has failed to:

(i) give notice of an employee commencing employment;

(ii) give notice of an employee who has ceased or about to cease employment, except where income from the employment issubject to standard tax deduction or is less than the deduction threshold and the employee is not retiring permanently –s.83(3) second proviso;

(iii) give notice of an employee who is leaving Malaysia for more than three months with no intention of returning;

(iv) retain any money payable to an employee referred to in (ii) or (iii) above which he is required to retain for ninety days after thereceipt by the Inland Revenue Board of the notice which he is required to give the IRB.

(b) (i) He is liable to Malaysian tax on his salary from 1 January 1998 to 31 December 1998 including the leave pay and the one monthsalary in respect of his duties in Singapore i.e. RM250,000.

(ii) The basis of liability to tax is as follows:

The employment is exercised in Malaysia;

The employment is substantially exercised in Malaysia and the duties carried out in Singapore are incidental to the employmentin Malaysia;

The leave pay is attributable to the exercise of employment in Malaysia.

5 Year of assessment 1996 – house

Deemed acquisition RMMarket value as at 1.1.70 60,000Add: Incidental costs:

Legal fees prior to 1.1.70 disregardedLess: Compensation received from 1.1.70 80,000

Chargeable gain 20,000

Tax at 5% RM1,000

RPGT payable for YA 1996 RM1,000

Disposal YA 1997 RM

Disposal price 150,000Less: Permitted expenses:

Cost of extension prior to 1.1.70 disregarded

Acquisition price NilChargeable gain 150,000

Tax at 5% RM7,500

RPGT payable for YA 1997 RM7,500

Year of assessment 1998 – shop house

DisposalConsideration received 340,000Less: Incidental costs:

Advertising 200

Disposal price 339,800

AcquisitionConsideration paid 400,800

Allowable loss (61,000)

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RPGT loss relief at 20% (RM12,200) carried forward RM(disposal in the third year)

Year of assessment 1999 – land

Disposal price 200,000Acquisition price 130,000

Chargeable gain 70,000

Tax payable at 15% RM10,500(disposal in the fourth year)Less: Loss relief b/f 10,500

RPGT payable for YA 1999 Nil

RPGT loss relief of RM1,700 carried forward

6 (a) RMQualifying mining expenditure at 31.12.92:Cost of site 170,000Allowances for 1.7.92 to 31.12.92170,000 × 1/8·5 × 6/12 (10,000)

160,000Add: QME – staff quarters 35,000

Residual expenditure at 31.12.93 195,000Allowances for year ended 31.12.93195,000 × 1/8 (24,375)



121,875Less: Recovered expenditure received on 18.7.96 11,000

Residual expenditure at 30.6.96 110,875Allowances for 1.1.96 to 30.6.96 110,875

Nil

(b) Election under paragraph 15, Schedule 2 RM

Qualifying mining expenditure at 31.12.92 170,000

Allowances 1.7.92 to 31.12.92170,000 × ¼ × 6/12 (21,250)

148,750Add: QME – staff quarters 35,000

Residual expenditure at 31.12.93 183,750Allowances year ended 31.12.93183,750 × 1/3·5 (52,500)

Residual expenditure at 31.12.94 131,250Allowances year ended 31.12.94131,250 × ½·5 (52,500)

Residual expenditure at 31.12.95 78,750Allowances year ended 31.12.9578,750 × 1/1·5 (52,500)

26,250Less: Recovered expenditure received on 18.7.96 11,000

Residual expenditure at 30.6.96 15,250Allowances for 1.1.96 to 30.6.96 15,250

Nil

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7 (a) Sales tax paid on import: RMPurchase price 3,000,000Insurance 65,000Freight 35,000

3,100,000Import duty at 25% 775,000

Sale value for sales tax purposes 3,875,000

Sales tax payable at 10% RM387,500

Processing cost is disregarded

Sales tax paid on output:Sale value for sales tax purposes 6,000,000Sales tax payable at 10% RM600,000

The drawback amount for goods exported: RMSales tax paid for import 50% 193,750Sales tax paid for output 50% 300,000

493,750

(b) Linco must submit its application to claim drawback within three months from the date the goods were exported i.e. by 9 February2000.

(c) Penalties payable by Linco are as follows:

RM Taxable Period Due Date

Sales tax per invoice 2,000 May–June 28.7.99dated 12 June 1999

Penalty Payment made during the period

Penalty at 10% 200 29.7.99 to 28.8.99 (30 days)



Penalties payable 280

8 (a) Gross income from royalties RM

Royalty from translation 16,000Less: exemption 12,000

4,000Other royalties (65,000 + 70,000) 135,000Less: exemption 20,000

115,000

119,000Less: expenses:

Editing/typing 500 500

Statutory income from royalties 118,500

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(b) (i) Soti Sdn Bhd

The qualifying building expenditure is RM1,584,000 computed as follows:

RMCost of construction 1,800,000Less: non-qualifying part of the buildingLess: (2,400/20,000 x RM1·8 million) 216,000

1,584,000

The part of the building used as an office and showroom is not an industrial building. However, industrial building allowanceswould have been granted on the entire building if the expenditure incurred on the non-qualifying part is not more than one-tenth of the entire building (i.e. RM180,000) which in this case, it is not.

The expenditure on the non-qualifying part is determined by reference to the respective floor area in view of the fact that thecost incurred on this part of the building is not identifiable.

(ii) Moden Sdn Bhd

The aggregate cost of the site preparation and the machine is treated as building expenditure as the cost of the site preparationis more than 75% of the aggregate cost. As the building is an industrial building it qualifies for industrial building allowancescomputed as follows:

YA 1999 RMQBE (RM50,000 + 190,000) 240,000IA 10% 24,000AA 2% 4,800

28,800

RE as at 31.12.98 211,200

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f6 1999 dec a

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