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1 Kualitech Sdn Bhd Year of Assessment 1998

Note RM000 RM000+ –

Profit before taxation 3,000Interest income 700Provision for stock obsolescence 1 180Warranty reserve 1 49Bonus 2 77Employees Provident Fund 3 14Lease amortisation 4 5Replacement of tools 5 –Lease rental of car 6 13Lease rental of lorry 6 –Repair of factory roof –Repainting of factory –Renovation of office premises 145Architect’s fees 7General provision at 31.12.97 7 250Specific provision at 31.12.97 (190 – 170) 7 20Bad debts recovered (30 – 17) 7 13General provision at 1.1.97 7 120Depreciation 500Registration of trademark 8 8Donation 8 2Development expenditure 9 80Cost of exhibits 10 –Overtime pay 10 3Rental of space 10 5Entertainment 11 24

4,294 921(921)

Adjusted income 3,373Add: Balancing charge 9

3,382Less: Capital allowances 330

Statutory income 3,052Interest income 12 620

Aggregate income 3,672Less: Donation 2

Total/chargeable income 3,670

Notes:(1) Provision for stock obsolescence is an unrealised loss therefore not deductible.

Warranty reserve of RM49,000 (0·5% x RM9·8 million) is a provision therefore not deductible.

(2) Deduction for bonus is restricted to two months of the employee’s salary as follows:

RM000Mr Beh RM240,000 x 2/12 = 40Mr Nathan RM180,000 x 2/12 = 30Mr Long RM120,000 x 2/12 = 20Mr Rais RM132,000 x 2/12 = 22

Restricted to 112Bonus actually paid (189)

Add back 77

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

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(3) Deduction for Employees Provident Fund contributions is restricted to 19% of the employee’s remuneration as follows:

RMMr Beh’s salary and bonus:RM280,000 x 24% = 67,200RM280,000 x 19% = 53,200

Add back 14,000

(4) Lease amortisation is a capital expenditure therefore added back.

(5) Deduction for tools is allowable on a replacement basis, hence no adjustment necessary.

(6) Deduction for lease rental of the car is restricted as follows:RM000

Lease rental 1.4.96 to 31.12.96 RM3,000 x 9 27Lease rental 1.1.97 to 31.12.97 RM3,000 x 12 36

63Restricted to (50)

Add back 13

No restriction for lorry as it is for commercial transportation of goods, hence no adjustment necessary.

(7) Bad and doubtful debts are adjusted as follows:Specific provision for non-trade debt is not deductible, therefore add back RM20,000.Recovery of non-trade debt RM13,000 is not taxable as it was not deductible when it was written off.

(8) Registration of trademark is a capital expenditure therefore added back. Donation to an approved institution will be deducted inarriving at the total income.

(9) Payment for the services of an approved research company qualifies for double deduction under s.34B(1)(b) of the Income Tax Act,1967.

(10) Revenue expenditure (excluding the cost of exhibits) incurred in participating in international trade fair qualifies for double deductionas both the fair and the company’s participation were approved by the Minister.

(11) Entertainment expense is specifically disallowed under s.39 (l) of the Income Tax Act, 1967.

(12) Interest accrued for the period 1 January 1997 to 31 October 1997 is 10/12 x RM480,000.

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2 Mr Gan RMVideo rental business – profit as per accounts 12,000Add back: Fine 3,000

3,000

Statutory income 15,000

Rental – semi-detached houseGross rental RM4,000 x 6 24,000Less: Quit rent RM200 x 6/12 100

Assessment RM600 x 6/12 300400

23,600

Royalties (RM9,000 – 6,000 exemption) 3,000Section 11 deemed income – flat 7,200Less: Assessment 350

Interest on loan 3,000Repairs and repainting 4,000

7,350Nil

Aggregate income 41,600Less: Donation restricted to 20,000

Total income 21,600Less: Personal relief:

Self 5,000

Chargeable income 16,600Tax on RM10,000 RM 250·00Tax on 6,600 at 6% 396·00

Tax payable 646·00

Mrs Gan RMSalary 48,000Entertainment allowance 6,000Director’s fees 10,000

64,000Furnishings 1,680Car : Volvo RM5,000 x ½ x 9/12 1,875

Fuel RM1,500 x 9/12 1,125Proton RM3,600 x 3/12 900Fuel RM1,200 x 3/12 300Driver RM300 x 3 900

Leave passage to Paris ExemptLeave passage to Australia 2,000Accommodation – defined value 36,000

108,780Less: Entertainment expense restricted to 6,000

Total income 102,780Less: Personal relief

Self 5,000Employees Provident Fund and life insurance premium 5,000 (max)Medical premium 1,300Child 3,200

14,500

Chargeable income 88,280Tax on RM70,000 RM 8,950·00Tax on 18,280 at 26% 4,752·80

13,702·80Less: Rebate on computer 400·00

Tax payable 13,302·80

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3 (a) (i) The badges of trade present in the above situation are:

Existence of business interest in similar fieldMethod of financeProfit-seeking motiveNature of assetModification of assetOrganisation of salesPeriod of ownership.

(ii) Frequency of transactionsAcquisition methodFormation of a company

(b) High CourtCourt of AppealFederal Court

4 Fairway Sdn Bhd

(a) Dividend franking account RM000Balance as at 1.1.95 NilTax chargeable for YA 96 RM3m x 30% 900Tax on dividends paid 1.1.95 to 31.12.95 Nil

Balance as at 1.1.96 900Tax chargeable for YA 97 RM4m x 30% 1,200

2,100Tax on dividends paid:12.1.96 RM1·4m x 30/70 (600)11.7.96 RM4·2m x 30/70 (1,800)

Tax charge (300)

Balance as at 1.1.97 NilTax chargeable for YA 98 RM7 x 28% 1,960

1,960Tax on dividends paid (deemed):10.1.97 RM4·32m x 28/72 (1,680)

Balance 280

(b) Fairway could pay gross dividends up to one million computed as follows:

RM280,000 x 100/28

5 (a) Encik Indot is not liable to real property gains tax as the transaction falls under Paragraph 3(b), Schedule 2 of the Real Property GainsTax Act,1976, whereby the disposal price is deemed equal to the acquisition price, hence no gain/no loss situation for Encik Indot.

Puan May is liable to real property gains tax as follows:RM

Disposal price 280,000Less: Acquisition price 220,000

Permitted expenses 30,000250,000

Chargeable gain 30,000Less: Exemption – 5% of chargeable gain or RM5,000 whichever the greater 5,000

25,000Tax payable at 30% = RM7,500(disposal within 2 years 10.3.97 to 2.3.99)

(b) The acquirer has the following obligations:(i) File a return to the Inland Revenue Board within one month of the date of acquisition(ii) Retain 5% of the consideration i.e. RM10,000 until a certificate of clearance is received from the IRB and(iii) Remit the money to the IRB when directed to do so.

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6 (a) A taxable person has the following responsibilities:(i) Issue invoices to include service tax(ii) Keep record of sales and service tax for six years(iii) File service tax return within the stipulated period(iv) Make payment within the stipulated period

(b) (i) RMMeals 35,000Drinks 20,000Cigarettes 8,000Inter-branch billing –Cover charges 30,000Food 2,000Parking fees 5,000

100,000

Service tax payable at 5% RM5,000

(ii) Blossom must file the return and pay the tax by 28 May 1998 i.e. within 28 days after the end of the taxable period (March –April).

7 (a) Year of assessment 1997 RMEmployment:Salary 77,000Allowance 11,000Leave pay 1.12.96 to 31.1.97 Section 25(6)* 14,000

Statutory income 102,000

Royalties RM22,000 less 20,000 exemption 2,000

Total income 104,000

Year of assessment 1998Interest income deemed derived from MalaysiaSection 15(b) i.e. the interest was paid by a resident in Malaysia andthe debt was secured by the land situated in Malaysia. 5,500

Total income 5,500

* The leave pay appropriate to the year 1997 could have been dealt with as income for YA 98 if Miss Watson had chosen to do sobut this would not be beneficial because she is not resident for the basis year 1997.

(b) The employment income of RM80,000 is deemed to be derived from Malaysia as the employment was exercised in Malaysia, thereforeit is liable to Malaysian tax.

8 (a) (i) Rantop can by 15 April 1998 request for revision of instalment payments in terms of the amount and the number of instalments.

(ii) Computation of the balance payable and the penaltyRM

Tax payable as per notice of assessment 10.9.98 280,000Less: Instalment payments 125,000

Difference and balance payable 155,00030% of tax payable 84,000

Excess which would attract penalty 71,000

Penalty at 10% RM7,100

(b) A claim for repayment must be made by 31 December 1999 i.e. within six years from the end of the year of assessment (1993) inwhich the assessment was made.

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