TAX 1 MIA QE/SEPT 2011

QUESTION 1

(a) Stainless Steel Products Sdn Bhd.

Tax computation for the year of assessment 2010
Add (+) Deduct(-)
Note RM000 RM000 RM000
Business income
Profit before taxation √212,537
Cost of sales
Less:
Dividends 1 √98
Interest 2 √41
Rent 3 √115
Insurance recovery (term life policy) 4 √√0
Insurance recovery (lorry) 4 √30 (284)
212,253
Add/Less:
Salaries and wages 5
Disabled employees √√50
EPF contributions √13
Company retirement fund √100
Purchase of new computers √√15
Interest on borrowings: investment 6 √14
working capital √Nil
Entertainment 7
Relating wholly to sales √√Nil
Annual dinner for staff √Nil
Promotion disbursement (1/2 of 200,000) √√100
Family day √Nil
Depreciation √734
Repair and maintenance: entrance 8 √35
maintenance √Nil
Bad and doubtful debts 9
Profit & loss A/C √1444
Debts written off √1097
Bad debts recovery √√212
Specific provision √605 √1234
General provision √472 √452

Motor vehicle expenses 10

Fines √78
Lease charges:
Trailer √Nil
Motor car 1 √Nil
Motor car 2 (max= RM100,000√) √5
Advertisement (billboards) 11 √140
Professional fees: 12
Termination of supply contract √√Nil
Bad debts recovery √Nil
Private retirement fund √12
Miscellaneous expenses 13 √Nil
Insurance: 14
Key man endowment policy √√3
Key man term life policy √Nil
TAX 2 MIA QE/SEPT 2011

Company stock, plant etc √Nil

Foreign exchange loss 15
Unrealized loss √12
Realized loss √√Nil
Donation: 16
Student medical course √20
Approved √3 ___ ______
3982 2868 212,253
Add 3982

Less (2868)
Adjusted income 231,367
Less: Capital allowance (√614)
Statutory income √ 230,753
Add: Other income
Dividend - treated as deemed total income√ √Nil
Interest - exempt√ √Nil
Rent (W1) √139 139
Aggregate income√ 212892
Less: Donation √3
Total income √ 212,889
Add: Dividend √98
Less: Interest √14
[Deemed total income-Sec 53 Transitional provisions) 84 84
Chargeable income √ _212,973_

W1
Tax Computation: Rental income RM000
Net rental income per accounts √115
Less: Refundable security deposit √17
98
Add:
Flooring √41
139

(11 marks)

(b) Explanation of tax treatment

1. Insurance recovery (Note 4)

Insurance policies taken to cover any possible losses that may arise in the course of carrying
on a business would be allowable and the recoveries taxed accordingly [Section 22 Income
Tax Act 1967 (as amended)]. √

In the case of an individual in the employ of the company and whose disablement or death
would result in a significant reduction of the company’s income and/or profit would be
allowable, if it has no element of investment, and the recoveries, if any, would be taxable. √

The premium payable on a term life policy or an accident policy of “key-man” insurance is
allowable as a deduction against gross income from a business since it has no element of
investment.
The premium payable on a whole life or an endowment policy is NOT allowable in arriving at
the adjusted income from a business of a company as it has an element of investment.√
TAX 3 MIA QE/SEPT 2011

The proceeds receivable on a term life policy or an accident policy is taxable on the
employer or the company. On the other hand, the proceeds receivable in connection with a
whole life or an endowment policy is not taxable as the insurance premium has not been
allowed. √

Law :Section 22(1); Public Ruling No 2-2003

2. Salary and wages (Note 5)

The salary paid to the disabled persons qualifies for a double deduction [Income Tax
(Deduction for the Employment of Disabled Persons) Rules 1982]. √

The penalty arising from the late payment of the EPF contributions is not an allowable
expenses. √

The retirements fund contribution to the fund created with the assistance of the investment
company would not qualify for a tax deduction, since there is no indication in the question
that it has approved by the Director General of Inland Revenue. √

The cost of the computers purchased will be disallowed in determining the adjusted income
but the computers would qualify for capital allowance under Schedule 3. As it is an
information technology equipment it would qualify for accelerated capital allowance (IA=
20%; AA=80%) under the Income Tax (Accelerated Capital Allowance)(Information and
Communication Technology Equipment)Rules 2008 [P.U. (A) 358/2008] √

Law: Section 33, 34(4), (5) and 39 Income Tax Act 1967 (as amended) Income Tax
(Accelerated Capital Allowance)(Information and Communication Technology
Equipment)Rules 2008 [P.U. (A) 358/2008]

3. Motor vehicle expenses (Note 10)

Deduction will not be allowed for the fines and compound paid for various traffic offences as
these are expenditures incurred for breaking the law [Alexander von Glenn]. √

The lease charges would be fully allowed where the lease rental paid is in respect of a motor
vehicle licensed by the appropriate authority for the transportation of goods and passengers.
In any other case, the maximum amount allowed for a deduction is RM50,000 [Section
39(1)(k)]. √

However if the motor vehicle has not been used by any person for any purposes prior to the
rental and the total cost of the motor vehicle does not exceed RM150,000, then any sum
paid by way of rental in excess of RM100,000 would be disallowed [ proviso to Section
39(1)(k)].. √

The other charges for repairs, maintenance, road tax and insurance would qualify fully for a
tax deduction. √

4. Donation (Note 16)

The company would be given a deduction in an amount equal to the expenditure incurred by
the company in the relevant period on the provision of a scholarship to a student for any
course of study leading to an award of a diploma or degree including a Masters or a
Doctorate, undertaken at an authorized higher educational institution established or
registered under the law regulating such establishment or registration in Malaysia or
TAX 4 MIA QE/SEPT 2011

authorised by any order made under section 5A of the Universities and Universities Colleges
Act of 1971. √

To qualify for a deduction, the scholarship should be given to a student who is receiving full
time instruction at a higher educational institution, who has no means of his own and whose
parents or guardian’s total monthly income does not exceed RM5,000. √

The payments shall not include payments other than payments required by such higher
educational institution relating to the course of study, and the cost of educational aids and
reasonable cost of living expenses during the student’s period of study at the higher
institution of learning (e.g. books and stationeries, notes, fees, food, living accommodation
and traveling expenses). √

However in this case the students are studying in a university not established in Malaysia
under the relevant laws or rules, and therefore will not qualify for any deduction. √
The balance ie approved donation is not treated as allowable expenses but can be claimed
from aggregate income.

Law: Section 34(6)((l) Income Tax Act 1967 (as amended)

(4 marks)
(Total: 15 marks)

QUESTION 2

A) (i)
Entertainment is defined in section 18 as including the provision of food and drinks,
recreation or hospitality of any kind. √

It also includes the provision of accommodation or travel in connection with or for the
purpose of facilitating entertainment. Entertainment expenses are disallowed under
section 39(1)(l) which includes any expenses incurred in the provision of entertainment
including any sums paid to an employee in the provision of entertainment. √

Some exceptions are made to the prohibition including entertainment to employees,

promotion of gifts at foreign trade fairs, promotional samples and promotional gifts
among others. √

In this case, the Inland Revenue Board could disallow the expenditure consisting of the
all-paid overseas trips, sales promotion and sponsorship costs paid to the distributors
and dealers on the basis that it falls within the meaning of ‘entertainment’ – √this will be
disallowed under section 39(1)(l) if the expenses are incurred in the provision of
entertainment, including any sums paid to an employee of that person for the purpose of
defraying expenses incurred by that employee in the provision of entertainment. √

(5 marks)

(ii)
If Shiny Hair Sdn Bhd. Could prove that the expenditure on the all-paid overseas trips,
sales promotion and sponsorship costs were in fact incurred for the purposes of
promoting the sales of the company’s products – and that the expenditure incurred were
not incurred gratuitously and furthermore that it was strictly for business purposes only,
then it could succeed in its claim. √

Under the Public Ruling No 3 of 2008, free trips as an incentive to sales agents for
achieving sales target is given full deduction √
TAX 5 MIA QE/SEPT 2011

It is important that it keeps proper and sufficient records for the expenditure incurred
and link the expenditure to the promotion effort. Such records must be kept for a period
of at least seven years. √

Case law: Pensonic Sales and Services Sdn Bhd. √

Societe Francais de Cosmetiques Sdn Bhd. √
(5 marks)

B) (i)
Interest income could be assessed under section 4(c) of the Income Tax Act 1967 (as
amended) as a non-business source, or under section 4(a) as a business source
depending on the circumstances of the case. In situations where the interest is received
in the normal course of a trade, it could be treated as a business income falling to be
assessed under section 4(a). Examples are interest income of banks and finance
companies or interest charges imposed on a debtor’s late payment by a trader. On the
other hand if it is a non-business source, then the interest income would be charged to
tax under section 4(c) – for example, interest received by a trader from excess funds
placed in a fixed deposit. The facts of the case have to be examined very carefully to
arrive at a conclusion.

The Inland Revenue Board possibly took the view that the interest from the fixed
deposits were interest income falling within the meaning of section 4(c) since the
taxpayer is not in a business where the interest income could be considered to be an
income falling to be treated as a business income under section 4(a) – i.e. it is not a
financial institution nor is it engaged in a business similar to that engaged by a financial
institution.
(5 marks)

(ii)
The company could establish that providing bank guarantees and performance bonds
are a necessary and inextricable part of its business. In this connection, the placing of
fixed deposits was necessary to obtain the guarantee and the performance bond issued
by the bank. √

The fixed deposit were not placed voluntarily, but were specifically placed to comply with
the bank’s requirement to provide the guarantees and the performance bonds.
Moreover, the money for the fixed deposit was not excess funds available to the
company but was derived from the overdrafts taken to provide the cash for this
purposes. √

The fixed deposit as investment made from the overdraft would not make any sense
since the interest derived from it is much lower than the interest paid on the overdraft
facility. √
As the whole purpose of placing the fixed deposit was to obtain the bank guarantee and
the performance bond, and not for investment, any income derived from the deposit is
income incidental to the business i.e. section 4(a) income and not interest income falling
under section 4(c). √

Case law: Isyoda (M) Sdn Bhd. √

Pan-Century Edible Oil Sdn Bhd. √
(5 marks)
TAX 6 MIA QE/SEPT 2011

QUESTION 3

A) Serdang Farmer's Co-operative Society

Tax computation for year of assessment 2010
RM RM
Audited net profits √73,050
Add: Secretarial fees (PR 6/2006) √5,351
Depreciation √241
Donation √3,000 8,592
Adjusted income 81,642
Add: Balancing charge √9,883
Less: 91,525
Balancing allowance √2,130
Capital allowance √21,265 (23,395)
Statutory income 68,130
Less: Sec 60(A)(a) deduction
Lower of
Contribution to statutory reserve fund (note 1) √16,651
or
25% of net audited accounts √18,262 √16,651
Less: Sec 60(A)(b) deduction
8% of member's funds at 1/1/2010 (Note 2) √71,360 (88,011)
Aggregate income √Nil
Less: Approved donation √Nil
Chargeable income √Nil

Note 1 RM
Statutory contribution 4,995
Transfer to statutory fund 11,656
16,651
Note 2
Member's fund as at 1 January 2010 RM
Paid up share capital 800,000
Share premium account 18,510
Statutory reserve fund 27,765
Unappropriated profits 47,183
893,458
Less: Reserves out of fixed assets 1,458
Member's fund at 1.1.2009 892,000

8% of member's funds 71,360

(5 marks)
TAX 7 MIA QE/SEPT 2011

(B) (i) Hang Seng Shipping Co

Tax computation for year of assessment 2010
Shipping income - 5% method
RM
Passenger fares √277,120
Cargo fares √467,029
Transshipment √0
Aggregate of statutory income from business 744,148

Deemed income derived from Malaysia RM

5% of aggregate statutory income from business √37,207
Less: Donation √5,000
Less: Restricted to 10% of agg. Income √3,721 (3,721)
Chargeable income 33,486

Tax RM
Tax on chargeable income √25% of 33,486 8,371.50

(5 marks)

(ii) Hang Seng Shipping Co

Tax computation for year of assessment 2010
Shipping income - Ratio Certificate method

RM
Adjusted income 744,148 / 14,467,000 x 3,404,000√ √175,094
Less: Capital allowance 744,148 / 14,467,000 x 1,702,000√ (√87,547)
Statutory income / Aggregate income 87,547
Less: Donation (√5,000 )
(Donation does not exceed 10% of the agg. income ) √
Chargeable income 82,547
Tax RM
Tax on chargeable income √25% of 82,547 20,636.75
(5 marks)

(Total: 15 marks)
TAX 8 MIA QE/SEPT 2011

QUESTION 4

A)
1. The date of commencement of the business is 1 April 2010 i.e. the date the
supermarket is opened to the public. /

2. The basis periods for 2010 and 2011 are:

1.4.2010 – 30.12.2010 YA 2010 /
1.7.2010 – 30.6.2011 YA 2011 /

3. The company is categorised as SME since the paid up capital is not more than
RM2.5 million, hence is not required to submit the tax estimate for the first 2 years of
commencement of business. This is an incentive to facilitate the growth of SME in
Malaysia. [S. 107C(4A)] /

4. The company is not required to pay the monthly income tax installment. [S.
107C(4A)] /

5. The tax return form is Form C. The company is required to submit the tax returns
Form C within seven month of closing the final account. /

6. The responsibilities of the employer are:

File Form E (employer’s return) consists of a list of employees names,

addressess and full amount of gross pay. /

Form EA consists of details of remuneration paid to each individual employee
including the amount of contribution to EPF and amount of tax deducted
(STD). /

Form CP22 on the new employee who commenced employment during that
year of assessment. The notification should be done within 1 month from the
date of commencement. /

Schedular Tax Deduction – collect the tax deduction and pay to IRB within 10
days after every calendar month. /
(10 marks)

B) (i)
1. Deliberate omission of any income from a return,
2. Making a false statement or entry in a return,
3. Giving a false answer (orally or in writing) to a question asked or to a request for
information made for the purposes of the Act,
4. Preparing or maintaining false books of account or other records, or authorizing the
preparation or maintenance of false books of account or other records,
5. Falsifying books of account or other records, or authorizing the falsification of books
of account or other records and
6. Making use of any fraud, art or contrivance, or authorizing the use of any fraud, art or
contrivance

Any four correct answers.

(4 marks)

(c) The anti avoidance is S.140 of the ITA 1967. /

(1 mark)
(Total: 15 marks)
TAX 9 MIA QE/SEPT 2011

QUESTION 5

A) Computation of Statutory Income from employment of Mr Harris for the year of

assessment 2010
RM RM
Section 13(1)(a):
Salary 240,000 /
Laptop computer (exempt) Nil /
Share option [20,000 units x (6-1)] / 100,000 /
Reimbursement of entertainment expenses Nil / 340,000
(exempt)
Section 13(1)(b):
Car 7,000 /
Fuel exempt /
Driver 7,200 /
Servant 4,800 /
Leave passage [20,000 – 3,000 exempt] 17,000 /

Mobile phone (exempt) Nil /

Subscription for corporate membership 6,000 / 42,000

Section 13(1)(c):
Defined value 3,000 x 12 = 36,000 /
30% x [240,000] = 72,000 /
Take the lower 36,000 /

Gross income 418,000

Less: professional fees [600] /
Adjusted / Statutory income 417,400

(5 marks)

B)
(i) Income tax payable by the trust body for the year of assessment 2010:

Income from Malaysia : RM

Business 120,000 /
Rent 80,000 /
Dividend (exempt) Nil /
Interest 5,000 /
Income from outside Malaysia (exempt) Nil /
Aggregate income 205,000
Less: Annuity [10,650] /
Approved donations (restricted to 7% of Aggregate income) / [14,350] /
Trust fees NA /
Total income 180,000
Tax payable at 25% 45,000 /

Distributions:
Sally [180,000 x ½ ] 90,000 /
Randy [180,000 x ½ ] 90,000 /
(4 marks)
TAX 10 MIA QE/SEPT 2011

(ii) Income tax payable by Sally for the year of assessment 2010:

RM RM
Annuity 10,650 /
Income from trust body 90,000 /
Rent:
Gross income 24,000
Less: Kitchen cabinet NA /
Repairs and maintenance [2,500] /
Interest on loan [5,000] /
Quit rent [1,500] /
15,000
Aggregate / Total income 115,650
Self relief [9,000] /
Life insurance premium [3,650] /
Chargeable income 103,000
Tax charge at scale rate :
1st 100,000 14,325 /
Balance 3,000 x 26% 780 / 15,105
Tax credit S.110(8) :90,000 x 25% [22,500] /
Tax refund [7,395] /

(4 marks)
(iii) Income tax payable by Randy for the year of assessment 2010:

RM RM
Business:
Adjusted income 480,000 /
Balancing charges 4,000 /
Capital allowances:
Current year 2010 [20,000] /
Brought forward from previous years [6,000] / 458,000
Income from trust body 90,000 /
Aggregate / Total income 548,000
Personal reliefs:
Self [9,000] /
Wife [3,000] /
Medical expenses – child Nil /
Medical expenses - mother [4,500] /
Basic supporting equipment [4,500] /
Purchase of books [1,000] /
Laptop [3,000] /
Child relief:
1st child NA /
2nd child [4,000] /
3rd child (5,000 + 4,000) [9,000] /
4th child [1,000] /
Premium on education insurance [3,000] / [42,000]
Chargeable income 506,000
Tax charge at scale rate :
1st 100,000 14,325 /
Balance 406,000 x 26% 105,560 / 119,885
Tax credit S.110(8)
 TAX 11 MIA QE/SEPT 2011

90,000 x 25% [22,500] /

Tax payable 97,385 /
(7 marks)
(Total: 20 marks)
QUESTION 6

A) Computation of income tax payable and exempt income for HiQual Sdn Bhd for the year of
assessments 2010 to 2014:

As at 31 December 2010 2011 2012 2013 2014

RM RM RM RM RM
Income from promoted product:
Adjusted Income / nil 360,000 470,000 540,000 630,000
Capital Allowances / Nil [75,000] [120,000] [160,000] [180,000]
c/f 60k b/f [60,000]
Statutory income Nil/ 225,000/ 350,000/ 380,000/ 450,000/
70% exemption / [157,500] [245,000] [266,000] [315,000]
Statutory income (after 67,500 105,000 114,000 135,000
exemption)
Other income:
Interest / 7,200 10,800 8,640 5,760 8,640
Chargeable income 7,200 78,300 113,640 119,760 143,640
Tax payable at 20% / 1,440 15,660 22,728 23,952 28,728

Exempt income:
70% abatement nil 157,500 245,000 266,000 315,000
Adjusted loss nil [157,500]/ [142,500]/ nil nil
Transfer to tax exempt income Nil/ nil 102,500 266,000/ 315,000/
account

(7 marks)

B) The withholding tax implication on payments made by Mega Production Sdn Bhd is as
follows:

Payee Remarks Gross WHT Net amount

amount (RM)
(RM)
i K-Pop Public 100,000 100,000 x 85,000 /
Entertainer 15% =
S.109A / 15,000 /
ii Malaysian artists Not applicable 80,000 NA 80,000 /
– payment to
resident /
iii Singapore Vendor Special classes [80,000 – 60,000 x 54,000 /
of income 20,000 = 10% =
S.109B / 60,000] 6,000 /
30,000 30,000 x 27,000 /
10% =
3,000 /
iv Genting Highland Not applicable 150,000 NA 150,000 /
– payment to
resident. /
(4 marks)
 TAX 12 MIA QE/SEPT 2011

C) (i)

RM
Taxable goods (invoice value) 100,000
Import duty 20% 20,000
Value of goods for sales tax 120,000 /
Sales tax 10% 12,000 /
(1 mark)

(ii) The taxable period is July 2010 to August 2010. /

The due date of payment to the Royal Customs Department is 28 September 2010. /
(2 marks)
(iii)
RM
Amount due on 28.9.2010 penalty 12,000
29.10.2010 – 27.11.2010 10% / 1,200
28.11.2010 – 27.12.2010 10% 1,200
Amount due 14,400 /
(1 mark)

(Total: 15 marks)