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student accountant ISSUE 07/2011
27

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STUDENT ACCOUNTANT 08/2011
28 DIRECTORY
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all you need to know
Articles on key examinable
topics to support your studies
technicAl
30 withholding tax
Relevant to AccA Qualifcation
Paper F6 (SGP)
subsequent events
Paper F8
provisions
Paper P2
online resources
Find online study resources for the cAt Qualifcation at
www.accaglobal.com/students/cat
Find online study resources for the AccA Qualifcation at
www.accaglobal.com/students/acca
technical archive on the acca website
Access the Student Accountant technical article archive at
www.accaglobal.com/students/student_accountant/archive/
foundations in accountancy
AccAs entry-level suite of qualifcations: www.accaglobal.com/fa
real property
gains tax
Relevant to AccA
Qualifcation Paper
P6 (MYS)
withholding tAX
relevant to acca
qualification paper f6 (SGp)
This article starts by looking at the
various payments that are subject
to withholding tax in Singapore, and
the applicable withholding tax rates.
Next it focuses on the compliance
obligations of the payer and the
penalties for failing to discharge
these responsibilities. Turning to
the non-resident, it then looks at
how his interest can be taken care
of in cases where certain payments
which are ordinarily subject to
withholding tax may be exempted
either under existing legislation or
administrative concessions.
acceSS reSourceS relevant
to acca qualification paper f6
www.accaglobal.com/students/acca/
exams/f6/
subsequent events
relevant to acca
qualification paper f8
Students of financial reporting and
auditing papers will have to gain an
understanding of how subsequent
events (also known as events after the
reporting period) affect the financial
statements of an entity. This article
will consider the financial reporting
aspects concerning subsequent events
using a case study type scenario,
and will then discuss the auditing
requirements candidates need to be
aware of.
to acca qualification paper f8
exams/f8/
provisions
relevant to acca
qualification paper p2
This article focuses on a question
about provisions, and aims to give you
guidance on how to tackle an exam.
to acca qualification paper p2
exams/p2/
reAl property gAins tAX
relevant to acca
qualification paper p6 (myS)
This article is aimed at candidates
preparing for Paper P6, Advanced
Taxation (MYS). The reader is assumed
to already have a comprehensive
understanding of the provisions of the
Real Property Gains Tax (RPGT) Act
1976. This article aims to highlight
some of the salient features and
discusses advanced issues/aspects
related to the Act.
to acca qualification paper p6
exams/p6/
AccA quAlificAtion
technicAl Articles
paper f1
exams/f1/technical_articles/
paper f2
paper f3
paper f4
paper f5
paper f6
20 april 2011 relevant to all StudentS
technicAl Articles
30 technical
paper f7
paper f8
paper f9
paper p1
exams/p1/technical_articles/
paper p2
paper p3
paper p4
paper p5
paper p6
paper p7
cAt quAlificAtion
technicAl Articles
paper 1
www.accaglobal.com/students/cat/
exams/t1/tech_articles/
paper 2
paper 3
paper 4
paper 5
paper 6
paper 7
paper 8
paper 9
paper 10
AccA online study resources
www.accaglobal.com/students/
chAnges to the AccA
quAlificAtion from
june 2011
read more at www.
accaglobal.com/students/
student_accountant/
archive/2010/108/3333957
foundAtions
in AccountAncy
learn more about accas
suite of entry-level
qualifcations foundations
in accountancy at
www.accaglobal.
com/fa
resources
www.acca
global.com/
students/acca
www.acca
global.com/
students/
cat
31
Student accountant issue 08/2011
ACCA is committed to providing
support to all its students. As part of
this support, a range of materials
in a variety of media to reach as many
students as possible is available
specifically to address the ACCA
Qualification exams. Information from
ACCAs examiners including examiner
reports, examiner interviews and a
wide variety of technical articles are
available in a range of different media
on the ACCA website.
The two sets of examiner interviews are
available on www.accaglobal.com
and are extremely valuable resources.
Each set of interviews can help
you prepare for your exams in
different ways and, when used in
conjunction with the paper resources
available, they can make a big
difference to your studies.
ExaminErs approach intErviEws
The examiners approach interviews
are very useful when you are
undertaking a particular paper for
the first time, giving you a real insight
into what examiners are looking
for in terms of exam performance.
They cover the main themes of each
paper and give information on the
style of the exams and how they
are structured. They also advise on
exam technique, with tips on how to
succeed and potential pitfalls to avoid.
The examiners approach interviews
complement the examiners approach
articles, which were written to
give guidance on how to tackle each
exam paper. These resources contain
similar information but the difference
in delivery method can be a useful
advantage when studying and may
give you a better chance of absorbing
the examiners advice. The examiners
approach interviews also contain
useful links to other relevant resources
for your exam.
ExaminErs analysis intErviEws
The examiners analysis interviews build
on the examiners approach interviews.
They highlight where students
are performing well, where students are
performing less well, and give advice on
how students can improve performance
in problem areas.
Its never too soon to start listening
to the examiners analysis interviews,
but they would probably be most useful
once you have covered the syllabus and
are starting to think about the detail of
a paper and how to apply what you have
learned in the exam.
They are designed to give guidance
around which areas of the syllabus
students have been struggling with
in recent exam sittings and how
students can tackle the difficulties
others have been having. The analysis
interviews are closely related to
the examiners reports, which are
published after each exam session.
They bring together the examiners
reports from the first three sessions
of the ACCA Qualification, illustrating
that some mistakes are being repeated
consistently and highlighting critical
areas of the syllabus to focus on.
Remember, this does not mean one
of those areas will necessarily be
examinable in the next session. The
ACCA website will soon feature new
examiner interviews recently recorded
at this years Learning Providers
Conference look out for details in
upcoming issues of Student Accountant.
It is still very important to make use
of the individual examiners reports
available in Student Accountant and on
the ACCA website, as well as listening to
the analysis interviews. After you have
worked through a practice question,
refer to the relevant examiners report
and you will find an analysis of that
question, what the examiner is looking
for in a good answer, typical answers
given by students, why they might not
be relevant and so on.
All of these resources and others
such as the Syllabus and Study
Guide, past papers, examinable
documents and technical articles can
be accessed at www.accaglobal.com/
students/acca/exams/
ExaminErs approach and ExaminErs analysis intErviEws
exam support
32 tEchnical
acca is committEd to providing support to
all its studEnts. ExaminEr rEports, ExaminEr
intErviEws, Exam notEs (which providE
guidancE on ExaminablE matErial including
rElEvant accounting and auditing documEnts
for papErs f3, f7 and p2) and a widE variEty
of tEchnical articlEs arE availablE in a rangE
of diffErEnt mEdia on thE acca wEbsitE at
www.accaglobal.com/studEnts/acca/Exams

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CAT quAlifiCATion
Paper 3
exams/t3/examinable_documents
Paper 6
Paper 8
Paper 9
exams/t9/exam_docs
ACCA quAlifiCATion
Corporate and Business law
Paper F4
exams/f4/docs
financial reporting
Paper F3 (International)
www.accaglobal.com/pubs/students/
acca/exams/f3/examinable/f3int_
examdoc2011.pdf
Paper F3 (UK)
acca/exams/f3/examinable/f3uk_
examdoc2011.pdf
Paper F7 and P2 (INT and UK)
acca/exams/f3/examinable/f7p2int_
examdocs2011.pdf
Paper F7 and P2 (Hong Kong)
acca/exams/f3/examinable/f3f7p2hkg_
examdoc2011.pdf
Paper F7 and P2 (Malaysia)
acca/exams/f3/examinable/mys2011_
examdoc.pdf
Paper F7 and P2 (Singapore)
acca/exams/f3/examinable/sgp2011_
examdoc.pdf
CBE (International)
acca/exams/f3/examinable/cbe_
J08examdocs.pdf
CBE (UK)
acca/exams/f3/examinable/f3uk_
J08examdocs.pdf
Tax
Papers F6
exams/f6/exam_docs/
Paper P6
exams/p6/exam_docs
Audit
Papers F8 and P7 (Hong Kong)
acca/exams/f8/examinable/
examnotesHKG2011.pdf
Papers F8 and P7 (INT and UK)
acca/exams/f8/examinable/
IntUK2011examnotes.pdf
Papers F8 and P7 (Malaysia)
acca/exams/f8/examinable/f8p7mys_
examnotes.pdf
Papers F8 and P7 (Singapore)
acca/exams/f8/examinable/f8p7_
sgpexamdocs.pdf
Guidance Notes for Irish
Stream students
acca/exams/f4/docs/irish_notes.pdf
Examinability of the Clarity
Auditing Standards
acca/exams/f8/examinable/clarity_
audit_standards.pdf
examinable
documents
34 TeChniCAl
relevAnT To The june 2011 session

RELEVANT TO ACCA QUALIFICATION PAPER F6 (SGP)
2011 ACCA
Understanding withholding tax rules in Singapore
In a nutshell, withholding tax is an efficient mechanism to collect corporate
income tax from certain groups of non-residents. Normally the tax liability
rests with the non-resident who earns the income, unless this is otherwise
provided in a contract, whereby the payer chooses to undertake this tax
burden. On the other hand, the onus of tax reporting and payment is shifted
from the non-resident to the payer and the tax is collected upfront. Under this
system, the payer has the legal obligation to withhold tax at source before
making certain payments to another person who is not known to be a resident
of Singapore. The tax withheld which is based on a prescribed percentage of
the gross payment would then have to be paid over to the Inland Revenue
Authority of Singapore (IRAS). As the obligation to withhold tax does not apply
to payments to residents, it is important that the tax status of the recipient be
ascertained.

This article starts by looking at the various payments that are subject to
withholding tax in Singapore, and the applicable withholding tax rates. It then
focuses on the compliance obligations of the payer and the penalties for failing
to discharge these responsibilities. Turning to the non-resident, it then looks at
how his interest can be taken care of in cases where certain payments that are
ordinarily subject to withholding tax may be exempted either under existing
legislation or administrative concessions.

Payments subject to withholding tax
Generally, a person has to withhold tax when he makes payments of the
following nature to a non-resident person:

Interest, commission, fee in connection with any loan or indebtedness.
Under Section 12(6) of the Singapore Income Tax Act (SITA), any
interest, commission, fee or any other payment in connection with any
loan or indebtedness or with any arrangement, management, guarantee,
or service relating to any loan or indebtedness is deemed to be sourced
in Singapore if it is borne directly or indirectly by a person resident in
Singapore, or a permanent establishment in Singapore, or the payment
is a deductible expense to the payer. These deemed source rules also
apply to any income derived from loans where the funds provided by
such loans are brought into or used in Singapore.

However, the Minister of Finance has, since 1977, clarified that any
commission, fees or any other payments in connection with any
arrangement, guarantee, management or service relating to any loan or
indebtedness where such activities are performed by a non-resident
outside Singapore will not be caught under Section 12(6)(a) ie they are
not deemed to be derived from Singapore under Section 12(6)(a). This is
provided that the relevant transactions are at arms length and not
2
UNDERSTANDING WITHHOLDING TAX RULES IN SINGAPORE
APRIL 2011
2011 ACCA
entered into with the intention to siphon off Singapore income. It should
be noted that this ruling does not cover interest payments. This
Ministerial concession was given legislative effect when Section 12(6A)
was introduced in December 2009.

Royalty or other payments for the use of or the right to use any movable
property.
Under Section 12(7)(a) of the SITA, any royalty or other payments in one
lump sum or otherwise for the use of or the right to use any movable
property is deemed to be sourced in Singapore if it is borne directly or
indirectly by a person resident in Singapore, or a permanent
establishment in Singapore, or the payment is a deductible expense to
the payer.

It is important here to distinguish between outright sale of the movable
property (eg software or intellectual property) and royalty-type payments
that grant the payer the right to use such movable properties. The
former is not subject to withholding tax while the latter is.

Payment for the use of or the right to use scientific, technical, industrial
or commercial knowledge or information.
Under the first limb of Section 12(7)(b) of the SITA, any payment for the
use of or the right to use scientific, technical, industrial or commercial
knowledge or information is deemed to be sourced in Singapore if it is
borne directly or indirectly by a person resident in Singapore, or a
permanent establishment in Singapore, or the payment is a deductible
expense to the payer.

As far as Singapore tax is concerned, this payment has the same
consequences as royalty payments.

Payment for the rendering of assistance or service in connection with the
application or use of scientific, technical, industrial or commercial
knowledge or information.

Under the second limb of Section 12(7)(b) of the SITA, any payment for
the rendering of assistance or service in connection with the application
of scientific, technical, industrial or commercial knowledge or
information is deemed to be sourced in Singapore if it is borne directly
or indirectly by a person resident in Singapore, or a permanent
establishment in Singapore, or the payment is a deductible expense to
the payer.

The Minister has also clarified since 1977 that payments for the
assistance or service in connection with the application or use of
scientific, technical, industrial or commercial knowledge or information
will not be caught by Section 12(7)(b) where the services are performed
3
APRIL 2011
2011 ACCA
wholly outside Singapore ie they are not deemed to be sourced in
Singapore. The concession is subject to the relevant transactions being
conducted at arms length and not entered with the intention to siphon
off Singapore income. This ministerial concession was also given
legislative effect when Section 12(7A)(a) was introduced in December
2009.

Management fee.
Under Section 12(7)(c) of the SITA, any payment for the management or
assistance in the management of any trade, business or profession is
deemed to be sourced in Singapore if it is borne directly or indirectly by
a person resident in Singapore or a permanent establishment in
Singapore or the payment is a deductible expense to the payer.

The Minister has clarified since 1977 that payments to related parties,
which are for the reimbursement or allocation of costs as well as
payments to unrelated parties for management services, will also not be
caught by Section 12(7)(c) provided that the payments are at arms
length, and all the services are performed outside Singapore, and there
is no intention to siphon profits from Singapore.

From 29 December 2009, this cost reimbursement requirement was
removed for management services paid to related parties, when Section
12(7A)(b) was introduced to give legislative effect to this concession.
With this new legislation, all payments of management fees to both
related and unrelated parties are not deemed to be sourced in Singapore
so long as the services are performed wholly outside Singapore. For
payments to related parties, the arms length requirement must be met.

Rent or other payments for the use of any movable property.
Under Section 12(7)(d) of the SITA, any rent or other payments under
any agreement or arrangement for the use of any movable property is
deemed to be sourced in Singapore if it is borne directly or indirectly by
a person resident in Singapore, or a permanent establishment in
Singapore, or the payment is a deductible expense to the payer.

It is important here to distinguish between rent or other payments for
the use of movable property from those concerning immovable property.
The former is subject to withholding tax while the latter is not.

Payment of any remuneration to a non-resident director.
Payment for the purchase of real property from a non-resident property
trader.
Payment to non-resident professionals, including consultants, trainers,
coaches, etc.
Payment to non-resident public entertainers, including artistes,
musicians, sportsmen, etc.
4
APRIL 2011
2011 ACCA
Distribution of real estate investment trust (REIT).
Withdrawals from Supplementary Retirement Scheme (SRS) Account by
foreigners and Singapore permanent residents.

The tax to be withheld is based on a certain percentage of the gross income
depending on the nature of the income. The taxes to be withheld for the
various payments are as shown below:

Nature of income Tax rate
Interest, commission, fee or other payment in connection with
any loan or indebtedness
15%
1

Royalty or other lump sum payments for the use of movable
properties

Payment for the use of or the right to use scientific, technical,
industrial or commercial knowledge or information
10%
1,2

Technical assistance and service fees
Prevailing
corporate tax
rate
3

Management fees
Prevailing
corporate tax
rate
3

Rent or other payments for the use of movable properties 15%
1

Directors remuneration/directors fee 20%
Proceeds from sale of any real property by a non-resident
property trader

15%
Non-resident professionals
15%, 20% if
non-resident
opts to be
taxed on net
income
Non-resident public entertainers
15% (10%
during the
period 22 Feb
2010 to 31
Mar 2015)
Distribution of taxable income (except distribution out of
Singapore dividends from which tax is deducted or deductible
under Section 44) made by REIT to unit-holder who is a
non-resident (other than an individual)
10%
4

Withdrawals from SRS Account by foreigners and Singapore
permanent residents
20%
3

5
APRIL 2011
2011 ACCA
Table footnotes
1. The withholding tax at 15% or 10% on the gross payment is a final tax. No
deduction for expenses incurred in the production of the income will be
granted. These rates apply provided that the income is not derived by the non-
resident person through its operations carried out in or from Singapore. For
operations carried out in or from Singapore, the tax rates applicable on the
gross payment are as follows:
Non-resident person (

Non-resident person (other than individuals): Prevailing corporate tax rate
Non-resident individuals: 20%

2. The reduced withholding tax rate of 10% applies to payments due and
payable on or after 1 January 2005. Prior to this date, the rate was 15%.

3. For payments made to non-resident individuals, tax is to be withheld at 20%
on the gross payment. For payments to non-resident companies, the prevailing
corporate tax is 17% with effect from the year of assessment 2010. The tax is
not final and the non-resident is able to file a tax return for the income to be
taxed on a net basis ie after claiming all tax-deductible expenses and, in the
process, seek a refund for tax withheld in excess of the eventual tax liability.

4. The reduced withholding tax rate of 10% applies to distributions made
during the period from 18 February 2005 to 31 March 2015. With effect from
16 February 2007, withholding tax shall not apply to any distribution made by
the trustee of the REIT where tax has been paid by the trustee of the trust on
the income from which the distribution is made (Income Tax (Amendment) Act
2007 refers).

The above are domestic withholding tax rates. Where a double tax agreement
is applicable, the rates specified in the agreements of the respective countries
would apply.

Compliance obligations of the payer
Before making payments that are subject to withholding tax to non-residents,
the payer is required to withhold the relevant tax and remit the amount
withheld to the IRAS by the 15th of the month following the date of payment.

For example, if the payer is liable to make an interest payment to the non-
resident person on 1 April, he has to notify the comptroller and remit the tax
withheld to IRAS by 15 May. Even if the date of payment falls on 30 April, the
deadline to IRAS will still be by 15 May.

When withholding tax is due and payable
The date of payment is based on the earliest of the following dates:
When the payment is due and payable based on agreement or contract
(or date of invoice in the absence of agreement or contract).
6
APRIL 2011
2011 ACCA
When the payment is credited or deemed credited to the account of the
non-resident.
Date of actual payment.

In the case of directors fees, the date of payment is the date the fees are voted
and approved at the companys annual general meeting.

Penalties
Penalties will be imposed on failure to withhold tax, failure to notify IRAS of tax
withheld and late payment of tax withheld.

(a) Penalties for failure to withhold tax
Section 45(1) of the Act provides that any tax amount deducted shall be a debt
due from him to the government and shall be recoverable in the manner
provided by Section 89 of the Act. In addition, Section 45(3) of the Act
provides that where the payer fails to make a deduction of tax that he is
required to make under Section 45(1) of the Act, the amount of withholding tax
shall be recovered from him.

(b) Penalties for failure to notify IRAS of tax withheld
If the payer has deducted the withholding tax due from the non-resident, but
did not submit the relevant form IR37 and/or remit the amount deducted to
the IRAS, the payer shall be guilty of an offence. On conviction, the payer will
have to pay a penalty equal to three times the amount deducted and will be
liable to a fine not exceeding $10,000, or imprisonment for a term not
exceeding three years, or both.

(c) Penalties for late payment of tax withheld
Where taxes withheld are not paid by the due date, late payment penalties (up
to a maximum of 20% of the withholding tax due) would be imposed. This
comprises an immediate 5% penalty if the withholding tax is not remitted to
the IRAS by the due date plus an additional 1% penalty for each completed
month that the tax remains unpaid from the date it is due, up to a maximum of
15% additional penalties.

Exemptions from withholding tax
Although withholding tax may generally apply for certain payments, there may
be instances where certain payments are exempted from withholding tax.

Several categories of payments have been exempted from withholding tax and
these include:

Specified software payments
Generally, software payments are construed as royalty payments for tax
purposes. As such, software payments are subject to withholding tax at 10%
(15% prior to 1 January 2005) unless reduced or exempted by an applicable
tax treaty.
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The following software payments are, however, exempted from withholding tax
subject to certain conditions:
shrink-wrap software
downloadable software by end-users
site licences
software bundled with computer hardware
use of or the right to use scientific, technical, industrial or commercial
knowledge or information, and digitised goods by end-users (for the
period from 28 February 2003 to 27 February 2013 both dates
inclusive).

Generally, to qualify for these exemptions, the buyer must not have obtained
any right granted to either commercially exploit the copyright of the software;
or to duplicate, reverse engineer and modify the software, information or
digitised goods.

Payment for satellite capacity
Payments made to a non-resident person for the leasing of capacity on a space
satellite will be exempt from the 15% final withholding tax for the period from
11 July 1997 to 10 July 2012.

Payments for the use of international submarine cable capacity, including payments
for Indefeasible Rights of Use (IRUs)
Any payments for the use of or the right to use international submarine cable
capacity (including payments for an IRU) are subject to withholding tax at
15%, or such reduced rates as provided under an applicable tax treaty.

Tax exemption has been granted to such payments made to non-residents for
payments accruing in or derived from Singapore during the period from 28
February 2003 to 27 February 2013 (both dates inclusive).

Conclusions
Withholding tax is an area that continues to be overlooked by individuals and
entities, as many mistakes continue to be made. As there are hefty penalties
levied on the payer for failing to discharge his legal obligations, individuals and
entities operating in Singapore should be aware of their compliance obligations
so as to avoid unwarranted tax costs. As the burden of the withholding tax
rests on the non-resident, the non-resident should be acquainted with the
possible exemptions under existing legislation as well as administrative
concessions. Where withholding tax is unavoidable, the non-resident should be
aware of the possibility of filing a tax return for the income to be ultimately
assessed on a net basis for cases where withholding tax is imposed at the
prevailing corporate tax rate. All these will go a long way to minimise the tax
burden and optimise the cashflow positions of the non-resident.

Simon Poh is examiner for Paper F6 (SGP)

RELEVANT TO ACCA QUALIFICATION PAPER F8
2011 ACCA

Subsequent events

Students of financial reporting and auditing papers will have to gain an
understanding of how subsequent events (also known as events after the
reporting period) affect the financial statements of an entity. This article will
consider the financial reporting aspects concerning subsequent events using a
case study type scenario, and will then discuss the auditing requirements that
candidates of Paper F8, Audit and Assurance need to be aware of.

Financial reporting considerations
In almost all circumstances, financial statements will not be finalised until a
period of time has elapsed between the year-end date and the date on which
the financial statements are (expected to be) issued. Therefore, regard has to
be given to events that occur between the reporting date and the date on which
the financial statements are (expected to be) authorised for issue.

IAS 10, Events After the Reporting Period stipulates the accounting and
disclosure requirements concerning transactions and events that occur
between the reporting date and the (expected) date of approval of the financial
statements. Among other things, IAS 10 determines when an event that occurs
after the reporting date will result in the financial statements being adjusted,
or where such events merely require disclosure within the financial statements.
Such events are referred to in IAS 10 as adjusting or non-adjusting events.

Students who have studied Paper F3, Financial Accounting will have come
across such terminology and it is imperative that they can differentiate
between an adjusting and a non-adjusting event. IAS 10 prescribes the
definitions of such events as follows:

Adjusting event
An event after the reporting period that provides further evidence of conditions that
existed at the end of the reporting period, including an event that indicates that the
going concern assumption in relation to the whole or part of the enterprise is not
appropriate.
1

Non-adjusting event
An event after the reporting period that is indicative of a condition that arose after the
end of the reporting period.
1

Example 1

You are the trainee accountant of Gabriella Enterprises Co and are preparing
the financial statements for the year-ended 30 September 2010. The financial
statements are expected to be approved in the Annual General Meeting, which
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is to be held on Monday 29 November 2010. Todays date is 22 November
2010. You have been made aware of the following matters:

1. On 14 October 2010, a material fraud was discovered by the
bookkeeper. The payables ledger assistant had been diverting funds into
a fictitious supplier bank account, set up by the employee, which had
been occurring for the past six months. The employee was immediately
dismissed, legal proceedings against the employee have been initiated
and the employees final wages have been withheld as
part-reimbursement back to the company.

2. On 20 September 2010, a customer initiated legal proceedings against
the company in relation to a breach of contract. On 29 September 2010,
the companys legal advisers informed the directors that it was unlikely
the company would be found liable; therefore no provision has been
made in the financial statements, but disclosure as a contingent liability
has been made. On 29 October 2010, the court found the company
liable on a technicality and is now required to pay damages amounting
to a material sum.

3. On 19 November 2010, a customer ceased trading due to financial
difficulties owing $2,500. As the financial statements are needed for the
board meeting on 22 November 2010, you have decided that because
the amount is immaterial, no adjustment is required. The auditors have
also confirmed that this amount is immaterial to the draft financial
statements.

Required:
(a) For each of the three events above, you are required to discuss whether the
financial statements require amendment.

Answer:
When presented with such scenarios, it is important to be alert to the timing of
the events in relation to the reporting date and to consider whether the events
existed at the year-end, or not. If the conditions did exist at the year-end, the
event will become an adjusting event. If the event occurred after the year-end, it
will become a non-adjusting event and may simply require disclosure within the
financial statements.

1. Fraud
Clearly the fraud committed by the payables ledger clerk has been ongoing
during, and beyond the financial year. Fraud, error and other irregularities that
occur prior to the year-end date but which are only discovered after the year-
end are adjusting items, and therefore the financial statements would require
amendment to take account of the fraudulent activity up to the year-end.
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2. Legal proceedings
At the year-end, the company had made disclosure of a contingent liability.
However, subsequent to the year-end (29 October 2010), the court found the
company liable for breach of contract. The legal proceedings were issued on
20 September 2010 (some 10 days before the year-end). This is, therefore,
evidence of conditions that existed at the year-end. IAS 10 requires the result
of a court case after the reporting date to be taken into consideration to
determine whether a provision should be recognised in accordance with IAS
37, Provisions, Contingent Liabilities and Contingent Assets at the year-end. In
this case, the financial statements will require adjusting because:
the conditions existed at the year-end
the recognition criteria for a provision in accordance with IAS 37 have
been met.

3. Loss of customer
A customer ceasing to trade so soon after the reporting period indicates non-
recoverability of a receivable at the reporting date and therefore represents an
adjusting event under IAS 10, Events After the Reporting Period. Assets should
not be carried in the statement of financial position at any more than their
recoverable amount and, therefore, an allowance for receivables should be
made.

Auditors responsibilities
So far we have considered the financial reporting aspects relating to events
after the reporting period. The second part of this article will now consider the
auditors responsibility in relation to ensuring all events occurring between the
reporting date and the (expected) date of the auditors report have been
adequately taken into consideration, and sufficient appropriate audit evidence
has been gathered to achieve the objective. It is important that where students
have studied Paper F3, Financial Accounting, knowledge of accounting
standards such as IAS 10 is not set aside or forgotten when it comes to papers
such as Paper F8, Audit and Assurance. There is a very close relationship
between accounting standards and auditing standards.

ISA 560, Subsequent Events outlines the auditors responsibility in relation to
subsequent events. For the purposes of ISA 560, subsequent events are those
events that occur between the reporting date and the date of approval of the
financial statements and the signing of the auditors report.

The overall objective of ISA 560 is to ensure the auditor performs audit
procedures that are designed to obtain sufficient appropriate audit evidence to
give reasonable assurance that all events up to the (expected) date of the
auditors report have been identified, properly accounted for/r disclosed in the
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ISA 560 also covers events that are discovered by the auditor after the date of
the auditors report but before the financial statements are issued.

Audit procedures
In Example 1 above, we identified that fraud and the legal proceedings were
adjusting events that gave rise to an adjustment within the financial statements
as at 30 September 2010. We also identified that the loss of the customer was
also an adjusting event, but as the value of the receivable was considered
immaterial, no adjustment was made to the financial statements. Let us
expand on the requirement in Example 1 as follows:

Required:
(b) Describe the audit procedures that should be performed to obtain
sufficient appropriate evidence that the subsequent events have been
appropriately treated in the financial statements.

Answer:
Candidates who are faced with scenarios such as those in Example 1 should
think about the information needed that would prompt an accountant or
finance director to go back to the year-end and retrospectively amend the
financial statements. You could interpret the question as asking what
information would I need in real-life to justify a provision or disclosure within
the financial statements before making such provision or disclosure? Where
candidates have studied Paper F3 and have knowledge of IAS 10, thinking
about the provisions contained in this IAS 10 will often lead you into thinking
about the audit evidence you would need to satisfy yourself that the
requirements in IAS 10 have been met, as well as offering ideas as to how you
would go about obtaining this evidence for the audit file.

Fraud
Fraud risk factors are covered in ISA 240, The Auditors Responsibilities Relating
to Fraud in an Audit of Financial Statements. The fact that fraud has occurred at
Gabriella Enterprises Co will increase the risk of material misstatement due to
fraud.

The audit procedures to be performed to ensure the fraud has been correctly
accounted for in the financial statements may include:
Recalculation of the amounts involved.
Discussions with management as to how such a fraud occurred and why
it took six months to discover the fraud (controls should prevent, detect
and correct material misstatements on a timely basis).
Establishing how the bookkeeper discovered the fraud and what controls
(if any) contain weaknesses to allow the employee to commit the fraud.
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Note that employee fraud usually involves the manipulation of controls,
whereas management fraud often involves the overriding of controls.
Performing substantive procedures on journal entries (particularly those
close to, or at, the year-end).
Confirming directly with suppliers the account activity for the period
under audit.
Reviewing the purchase invoices and being on alert for any doctored or
copy invoices and making enquiries as to their authenticity.
A review of human resources files for evidence of disciplinary
proceedings taken against the employee. This will also confirm
compliance with laws and regulations, particularly in relation to
employment legislation and the withholding of monies.
Testing of other controls to identify other weaknesses that may indicate
employee or management fraud.
Obtaining written representations from management concerning the
fraud.
Test checking after-date cash for evidence of reimbursements by the
employee, such as the withheld wages/salaries by the entity.
Discussions with the entitys legal advisers as to the possibility of
reimbursement of the balance of the misappropriated funds.

Legal proceedings
Obtaining a copy of the court order or other correspondence confirming
the company has been found liable to pay compensation to its customer.
Test checking after-date cash to confirm payment to the customer.
Ensuring a provision has been recognised as opposed to disclosure as a
contingent liability to meet the requirements in IAS 37, Provisions,
Contingent Liabilities and Contingent Assets.
Ensuring the provision is reasonable in relation to the outcome of the
court case.
Obtaining written representation from management to confirm the
treatment of the provision.

Loss of customer
Discuss with management the reason for not adjusting the irrecoverable
receivable.
The auditors have already agreed this amount is immaterial to the
financial statements, so this amount would be put on an audit error
schedule. Provided this amount remains immaterial at the completion
stage, both individually and when aggregated with other misstatements,
the auditor can still express an unmodified opinion.

Financial statements amended af ter the date of the auditors report, but
bef ore the financial statements are issued.
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Circumstances may arise when the auditor becomes aware of facts that may
materially affect the financial statements and, in such situations, the auditor
will consider whether the financial statements need amending. The auditor is
required to discuss with management how they intend to deal with events that
will require the financial statements to be amended after the auditors have
signed their report, but before the financial statements are issued.

Where the financial statements are amended, the auditor is required to carry
out necessary audit procedures in light of the circumstances giving rise to the
amendment. The auditor will also be required to issue a new auditors report
on the amended financial statements and, therefore, must extend their
subsequent events testing up to the (expected) date of the new auditors
report. The revised auditors report must not be dated any earlier than the date
of the amended financial statements. In situations where management refuses
to make amendments to the financial statements, the auditor must take all
steps required to avoid reliance by third parties on the auditors report. The
auditor should also consider the need to resign from the audit.

Conclusion
Subsequent events are a key examinable area in auditing papers and it is
crucial that students have an understanding of the types of audit evidence that
the auditor should obtain to confirm that the accounting and disclosure
requirements (particularly in IAS 10) have been applied correctly within the

Candidates who simply write obtain a management representation cannot
expect to pass a question on subsequent events because written
representations, on their own, are not a substitute for alternative audit
evidence. Where candidates have knowledge of IAS 10 through studying Paper
F3, you should not be afraid to think about the accounting requirements in
order to help you consider how you will obtain sufficient appropriate audit
evidence to achieve the auditing objectives. However, sticking to the question
requirement is vital. If you are asked about the types of procedure(s) you
should perform in determining whether the accounting treatment has been
correctly applied, this is exactly what you must do.

Candidates should take care not to digress into irrelevant areas by writing
everything they know about IAS 10, and instead should just answer the
question set by the examiner.

Steve Collings is assessor for Paper F8

Reference
1.

IAS 10, Events After the Reporting Date, Paragraph 3.

RELEVANT TO ACCA QUALIFICATION PAPER P2
2011 ACCA

Provisions

The Paper P2 examiner often features one question per exam that focuses on a
single International Financial Reporting Standard (IFRS). But be warned while
these questions take their lead from a single IFRS, the examiner also brings in
other issues from other IFRS.

The December 2010 exam included a share-based payment question called
Margie. Before that, in the December 2009 exam, there was a question on
impairment and, in June 2009, another on financial instruments.

In the last exam, the Margie question was not just about share-based payment.
It also included financial instruments, fair value and simple share issues. Also,
the question was highly analytical. There were few marks for regurgitation of
knowledge. The bulk of the marks were reserved for analysis.

So to give you an idea of how these questions work, and to revisit a subject
that has not been the subject of focus for a while, I am going to resurrect an
old Paper P2 question called Satellite. It is a focus question that looks at
provisions, but also has plenty of other accounting issues to consider. Of
course, I have had to change the question slightly to bring it up to date.

The purpose of this article is to give you a feel as to how to tackle such
questions.

Satellite
Satellite, a public limited company, has produced draft consolidated financial
statements as at 30 November. The group accountant has asked your advice
on several matters. These issues are set out below and have not been dealt
with in the draft group financial statements:
1 Satellite has buildings under an operating lease. A requirement of the
operating lease for the corporate offices is that the asset is returned in
good condition. The operating lease was signed in the current year and
lasts for six years. Satellite intends to refurbish the building in six years
time at a cost of $6m in order to meet the requirements of the lease.
This amount includes the cost of renovating the exterior of the building
and is based on current price levels. Currently, there is evidence that due
to severe and exceptional weather damage the company will have to
spend $1.2m in the next year on having the exterior of the building
renovated. The company feels that this expenditure will reduce the
refurbishment cost at the end of the lease by an equivalent amount.
There is no provision for the above expenditure in the financial
statements. (3 marks)
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2 An 80% owned subsidiary company, Universe, has a leasehold property
(historical cost $8m, acquired at the year start). It has been modified to
include a sports facility for the employees. Under the terms of the lease,
the warehouse must be restored to its original state when the lease
expires in 10 years time or earlier termination. The present value of the
costs of reinstatement are likely to be $2m measured at the year start
and the directors wish to provide for $200,000 per annum for 10 years.
The lease was signed and operated from the current year start and the
modifications occurred immediately after. The directors estimate that
the lease has a recoverable value of $9.5m at 30 November year-end and
have not provided for any of the above amounts. (9 marks)
3 Additionally, Satellite owns buildings at a carrying value of $20m, which
will require repair expenditure of approximately $6m over the next five
years. No provision has been made for this amount in the financial
statements and depreciation is charged on leasehold buildings at 10%
per annum and on owned buildings at 5% per annum, on the straight-
line basis. (3 marks)
4 Universe has developed a database during the year to 30 November and
it is included in intangible non-current assets at a cost of $3m. The asset
comprises the internal and external costs of developing the database.
The cost of such intangible assets is amortised over five years and one
years amortisation has been charged. The database is used to produce
a technical accounting manual, which is used by the whole group and
sold to other parties. Net revenue of $2m is expected from sales of the
manual over its four-year life. It has quickly become a market leader in
this field. Any costs of maintaining the database and the technical
manual are written off as incurred. The technical manual requires
substantial revision every four years. Therefore, Universe is considering
providing for the cost of revision. (2 marks)
5 Satellite purchased a wholly owned subsidiary company, Globe, on 1
December, at the prior year start. The vendors commenced a legal action
on 31 March during the current year over the amount of the purchase
consideration, which was based on the performance of the subsidiary. An
amount had been paid to the vendors and included in the calculation of
goodwill but the vendors disputed the amount of this payment. The court
made a decision on 30 November at the current year-end that requires
Satellite to pay an additional $8m to the vendors within three months.
The directors do not know how to treat the additional purchase
consideration and have not accounted for the item. (3 marks)

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Required
(a) Discuss the recognition criteria for the recognition of a provision (IAS
37). (5 marks)
(b) Discuss how the above five issues should be dealt with in the group
financial statements of Satellite. (20 marks)
(Total: 25 marks)

Possible answer
The marking guide was based on the usual one mark per idea well expressed.
So the following would look good on a markers screen.

(a)

Three
There are three recognition criteria.

Reasonably reliable estimate
It must be possible to make a reasonably reliable estimate of the outflow that
will result from the obligation before a provision is permitted.

Obligation
There must be a present legal or constructive obligation at the year-end before
a provision is permitted.

Transfer
There must be an expectation that economic benefit will flow out in the future
as a result of the obligation.

Comment
Frankly, the IAS argues it is always possible to estimate the outflow and it is
very rare for a transfer out to be avoidable. So, in practice, the accountant can
focus purely on the obligation criteria.

Framework
Perhaps it should be noted how the above closely follows the focus of the
framework on assets and liabilities. The framework also defines a liability in
terms of present obligations.

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(b)

1 Operating lease
Actually, it is irrelevant whether the above is operating or finance lease in the
context of analysing related provisions. Either type of lease creates an
obligation.

Present obligation
But the trick here is to spot the present obligation. Satellite does have a
present obligation for the damage done during the tenure ($1.2m) but not for
the damage that might be done in the future (maybe $4.8m).

Conclusion
So Satellite should provide $1.2m and should probably recognise the charge to
the p/l as super-exceptional on the face of the income statement given its
unusual nature.

2 Universe
First we must eye this problem form the perspective of the subsidiary. It is the
subsidiary that will be putting through the double entry. Then we can look at
the effect on the group.

Modification
The key term in this paragraph is modify. We can see that Universe already
has made the modifications and therefore has a present obligation as a result
of this past obliging event.

Provision
So a provision is required for the cost of restoration. The provision is required
at the point of modification. The modification occurred at the year start.

Measurement
However, the restoration will not take place until the end of the lease; so the
time value of money must be considered. But we need to be careful here, as
the $2m is already discounted.

Double entry
So the year start double entry is:
Dr Non-current asset $2m
Cr Provision $2m

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Non-current asset
In fact, the above non-current asset entry goes on top of the initial premium:
Premium $8m
Restoration $2m
_____
Initial cost $10m

Depreciation
Then, of course, the above is depreciated over its life, which is 10 years.

Depreciation double entry
This is the same every year:
Dr i/s $1m
Cr NCA $1m

Unwinding
And, of course, quite separately the liability unwinds. The scenario does not tell
us the discount rate, so I have assumed 10%.

Unwinding double entry
This snowballs every year (grows exponentially), but the first year journal would
be as follows:
Dr i/s $0.2m
Cr Prov ($2m)(10%) $0.2m

Impairment test
There is even data for an impairment test. However, there is no impairment as
the carrying value of the asset at the year-end ($9m) is less than the
recoverable value ($9.5m).

Group effect
The above double entry will be accommodated by the sub. However, because
this is a partially owned sub, the group/non-controlling interest effect will be
80%/20%.

3 Repairs
There appears to be no obligation for the repairs. Just an intent to repair
sometime in the future.

Conclusion
So I suggest there can be no provision for the repairs.

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Depreciation
Buildings should be depreciated over their useful lives regardless of being
owned or otherwise.

4 Intangible
An intangible is recognised if it is purchased. Also, development is recognised
if it is recoverable. It sounds like the external costs are the former and the
internal costs are the latter.

Conclusion
So it appears to be reasonable to capitalise and depreciate the asset.
However, I would advise Satellite to adjust the life down to four years, as that
appears to be more realistic. Also, there is no obligation to revise. So no
provision is possible.

5 Goodwill
Clearly, if Satellite had predicted the extra $8m, it would have put it in the
consideration and the acquisition goodwill would have been higher.

Prior period adjustment (PPA)
But the only way to adjust last years goodwill is via a PPA (restatement). This
is only permissible if the $8m is a material error. But to me it sounds like a
change in an estimate. So the $8m will simply have to be costed to the i/s.

IFRS 3
IFRS 3 supports this view, by giving a 12 months limit on playing with goodwill
after acquisition.

Conclusion
I hope the above gave you a feel for how you can think about addressing a
focus question and how to address wider issues so that you can broaden your
analysis.

Martin Jones is a lecturer at the London School of Business and Finance

RELEVANT TO ACCA QUALIFICATION PAPER P6 (MYS)
2011 ACCA
Real Property Gains Tax

This article is targeted at candidates preparing for Paper P6, Advanced Taxation
(Malaysian variant). The reader is assumed to already have a comprehensive
understanding of the provisions of the Real Property Gains Tax (RPGT) Act 1976.
This article aims to highlight some of the salient features and discuss advanced
issues/aspects related to the Act.

General

Real property and Land
For purposes of RPGT, real property means:
any land situated in Malaysia, and
any interest, option or other right in or over such land.

Land includes the following components:

Comments
The surface of the earth and
all substances therein
For example, land includes any clay deposits (with
commercial value for the making of bricks) found on
the land.
The earth below the surface
and substances therein
If a piece of land is found to contain oil, minerals or
other valuable substances, the gross sale value of
such land, including the value of such deposits, will
be the disposal value subject to RPGT.
Buildings on land and
anything attached to land,
and anything permanently
fastened to anything
attached to land
A piece of land with a building put up on it will
include the land, the building erected, and anything
permanently fastened to the building for example,
air-conditioning systems, solar panels etc.
Standing timber, trees,
crops and other vegetation
growing on the land
If teak trees or rice or any other crops are planted on
the land, they form part of land.
The operative word is standing. Thus, if the crop is
felled/harvested and sold, there is no disposal of
land, neither does the felled/harvested crop
constitute part of land.
Land covered by water A piece of land with lakes, rivers or disused mining
pools on it would include such water bodies.

Gain defined
Gain, for purposes of the RPGT Act, must not be a gain or profit that is chargeable
to or exempted from income tax under the Income Tax Act.

It follows that a gain must be excluded from being income before it is subject to
RPGT. The question of capital gains versus revenue income is, therefore, of utmost
importance.
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Computation of chargeable gain

Section 7 of the RPGT Act states that if the disposal price exceeds the acquisition
price, there is a chargeable gain.

Disposal price is defined in Paragraph 6 of Schedule 2, summarised below:

Disposal price is:
Sale consideration for the disposal of the asset
less
(a) expenditure incurred on the asset after its acquisition for the purpose of
enhancing or preserving the value of the asset
(b) expenditure incurred by the disposer after its acquisition in establishing,
preserving or defending his title to, or to a right over the asset, and
(c) the incidental costs to the disposer of making the disposal.

Note that the manner of arriving at the disposal price is by deducting any
enhancement, preservation expenses, etc, incurred after the acquisition from the
sale consideration.

The quirk here is that the expenses (ie items (a) and (b) above) are deducted from
the sale price rather than the normal accounting approach of adding the additional
cost to the purchase cost of the asset.

Enhancement/preservation expenses
If a property comprising land and building is acquired, the total cost is the
acquisition cost. However, if the land is acquired, then subsequently a building is
erected on it, or renovations are carried out on a land-with-building, the
enhancement or preservation costs must be reflected in the state of the asset at the
time of disposal.

Paragraph 5(1), Schedule 2:
(a) the amount of any expenditure wholly and exclusively incurred on the asset at
any time after its acquisition for the purpose of enhancing or preserving the value of
the asset, being expenditure reflected in the state of nature of the asset at the time
of the disposal

Note the difference in RPGT treatment in Examples 1 and 2 where the only factual
difference is the demolition of the house erected after purchase of the land.

Example 1
A piece of land was acquired at RM100,000 on 1 February 2009, with legal fee and
stamp duty of RM2,500. A house was constructed on the land in 2010 at a cost of
RM300,000. On 1 December 2011, the land with building was disposed of for
RM500,000. The disposer paid RM30,000 to the real estate agent for the successful
sale.
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Chargeable gain is computed as follows:
RM RM
Sale price 500,000
Less Enhancement cost (house construction) 300,000
Incidental cost (real estate agent fee) 30,000
(330,000)
Disposal price 170,000

Purchase cost 100,000
Add Incidental cost 2,500
Less Acquisition price (102,500)

Chargeable gain 67,500

Example 2
A piece of land was acquired at RM100,000 on 1 February 2009, with legal fee and
stamp duty of RM2,500. A house was constructed on the land in 2010 at a cost of
RM300,000. On 1 May 2011, the house was demolished. On 1 December 2011, the
land (now vacant) was disposed of for RM500,000. The disposer paid RM30,000 to
the estate agent for the successful sale.

Chargeable gain is computed as follows:
RM RM
Sale price 500,000
Less Enhancement cost (house demolished) nil
Incidental cost (real estate agent fee) 30,000
(30,000)
Disposal price 470,000

Purchase cost 100,000
Add Incidental cost 2,500

Less Acquisition price (102,500)


Year of assessment
Pursuant to Section 10 of the RPGT Act, the year of assessment is based on the
corresponding calendar year. Therefore the year of assessment 2011 refers to the
calendar year 2011 (1 January 2011 to 31 December 2011).

Do bear this in mind when considering the absorption of allowable loss, as seen
below.

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Allowable loss
Where there are more than one transactions of real property in a year of
assessment, allowable loss from one transaction may be set-off against another
transaction that yields a chargeable gain.

Question: Must the loss-making transaction be after the profitable one in the same
year of assessment?

Section 7(4) reads:

Where there is an allowable loss in respect of a disposal, such allowable loss shall
be allowed as a reduction to reduce the total chargeable gain of a person for a year
of assessment in which the disposal was made.

The provision enables the deduction of an allowable loss from a transaction against
the total chargeable gain of the person from other transaction/s in the same year of
assessment, regardless of whether the loss transaction occurred before or after the
profitable transaction/s during that year of assessment.

Of course, Section 7(4)(b) goes on to state that any unabsorbed loss may be carried
forward to the subsequent year/s of assessment until it is absorbed.

Do be mindful that, for an individual, any allowable loss is absorbed after the
exemption under Schedule 4 ie the greater of 10% or RM10,000. This is provided
for in Section 7(5) of the RPGT Act.

Conditional contract
The significance of a conditional contract is that the disposal and acquisition date of
the chargeable asset concerned depends on the date the condition or the last of the
conditions is/are fulfilled.

A contract is conditional for purposes of RPGT if the contract requires the approval
of the government or a state government, or an authority or committee appointed
by the government or a state government. The date such approval is given would
constitute the date of disposal.

Example: Approval required from the Securities Commission for proposed transfer
of assets.

Inter-company transfer of shares under Paragraph 17
Under Paragraph 17 of Schedule 2, three types of transfer of assets between
companies are deemed at no-gain-no-loss. Such transfers must have prior approval
of the director-general to avail themselves of the treatment.
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In compliance with governments
participation policy

To achieve greater
efficiency in group
operations
Scheme of
reorganisation,
reconstruction, or
amalgamation
Liquidation
Transfer of
assets
Transfer between
companies in the
same group of
companies
Transfer between
any two
companies
Distribution on
liquidation
Consideration 75% 100% in
shares
Consideration in
any form
No consideration
Transferee Resident company Resident company Resident company
Acquisition
date of
transferee
Actual date of
transfer
Acquisition date of
transferor
Actual date of
transfer
Condition for
transferee
Must remain in the
same group as
transferor for three
years after approval
Must remain
resident in
Malaysia for three
years after
approval
Must remain
resident in
Malaysia for three
years after
approval
Asset is taken
in as trading
stock by
transferee
At the date of taking in, asset is deemed disposed of and any
excess is the chargeable gain of the transferee duly subject to
RPGT provisions.

Transfer of fixed assets into stocks

Under Paragraph 17A of Schedule 2, any reclassification of real property from fixed
asset to current asset (trading stock) is deemed to be a disposal of chargeable
asset for RPGT purposes.

The disposal price is deemed to be at the market value of the asset at the date of
reclassification.

Example 3

Facts
A Sdn Bhd, a plantation company, has a land bank of 500 acres acquired in 2008 at
RM5,000 per acre. The 500 acres were reflected as a fixed asset of the company.

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On 19 October 2011, it decided to venture into property development and
transferred 100 acres from its fixed asset to current asset. The market value as at
the date of transfer into stock was RM20,000 per acre.

Treatment
As at 19 October 2011, the 100 acres were deemed to have been disposed of at
RM2m (RM20,000 x 100 acres). The actual acquisition price was RM500,000
(RM5,000 x 100 acres). Therefore, the chargeable gain of RM1,500,000 (RM2m
RM500,000) is subject to RPGT in 2011.

Consequently, A Sdn Bhd will be able take into the stock 100 acres of land at
RM20,000 ie RM2m. In other words, the land cost for the development business is
now stepped up to RM2m, but it has to bear a RPGT of RM75,000 (RM1,500,000 x
5%).

No-gain-no-loss transaction

Although this looks and feels like an exemption, it is not. It is a merely a
postponement of RPGT liability. Do remember that the acquirer is deemed to
acquire at the original acquisition price of the disposer, but the acquisition date is
now changed to the later date. This is illustrated in Example 4 below.

Example 4
Mr A transfers his land (which he acquired on 1 February 2004 for RM100,000) to A
Sdn Bhd on 1 March 2010 in return for 200,000 shares in A Sdn Bhd. This is a no-
gain-no-loss transaction under Paragraph 34: A Sdn Bhd is deemed to have
acquired the land for RM100,000 on 1 March 2010.

When A Sdn Bhd subsequently disposes of the land on 3 December 2011 for
RM500,000, the holding period is less than two years (1 March 2010 3 December
2011) while the chargeable gain of A Sdn Bhd is RM400,000 (RM500,000
100,000).

Real Property Company shares

General
Paragraph 34A was introduced as an anti-avoidance measure. Take note that
Paragraphs 34 and 34A are mutually exclusive.

Definition of Real Property Company (RPC):
A company is an RPC if it is:
a controlled company, as defined, and
owns real property or RPC shares whose combined defined value (market value
or in certain cases the deemed acquisition price) is at least 75% of total tangible
assets
1
(TTA).

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When does one determine whether a controlled company is an RPC?
The answer is:
on 21 October 1988 (when Paragraph 34A relating to RPC was first introduced)
if not an RPC on 21 October 1988, when it first acquires real property or RPC
shares after that date.

When does one re-examine whether a controlled company continues to be an RPC?
Once a controlled company is determined to be an RPC on a given date, it remains
an RPC. There is no necessity to re-examine its RPC status thereafter unless the
company:
ceases to be a controlled company, or
disposes a real property or RPC shares.

When an RPC ceases to be a controlled company
2
, it ceases to be an RPC on that
date.

When an RPC disposes of a real property or RPC shares, it is necessary to ascertain
whether the remaining real property and/or RPC shares continue to make up at
least 75% of TTA.

If the percentage falls below 75%, the company ceases to be an RPC on the date of
disposal of the real property and/or RPC shares.

If the percentage is 75% or more, the company will remain an RPC.

Thereafter there will be no need to review the percentage and its RPC status until
the next time it disposes of a real property or RPC shares.

Once RPC shares, always RPC shares
When an RPC ceases to be an RPC, a shareholder who acquires shares after that
date will acquire non-RPC shares.

However, existing shareholders who held shares while the company was an RPC
would hold RPC shares and continue to hold RPC shares, even after the company
had ceased to be an RPC. The RPC shares will not shed its RPC shares nature even
though the company had ceased to be an RPC.

When such shares are disposed of (ie after the company had shed its RPC status
because it ceased to be a control company or it disposed of real property or RPC
shares and the percentage falls below 75%), it constitutes a disposal of RPC shares
and is duly subject to RPGT provisions. Hence the quote: Once RPC shares, always
RPC shares.
3

Therefore, it is possible that, in a single and the same transaction, RPC shares are
disposed of by the disposer, but the shares acquired by the acquirer are not RPC
shares.
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Acquisition date
If a company was already in existence before 21 October 1988, and on 21 October
1988 it was determined to be an RPC, the shareholders are deemed to have
acquired RPC shares on 21 October 1988.
4

If the shares are acquired at a time when the company is not an RPC, the shares are
deemed acquired on the date when the company subsequently becomes an RPC.

Example 5

Facts
XYZ Sdn Bhd was not an RPC when it was incorporated on 1 February 2000 with Mr
X, Mr Y and Mr Z each holding 100,000 shares. The shares were, therefore, not RPC
shares.

On 31 March 2008, the company acquired its first and only real property (defined
value: RM1.2m) when its total tangible assets (including the said real property)
stood at RM1.5m.

XYZ Sdn Bhd did not dispose of its real property and it remains an RPC. Mr X
disposed of his 100,000 shares on 1 December 2011 for RM1m to Mr D.

RPGT treatment
Mr X, Mr Y and Mr Z are deemed to have each acquired 100,000 RPC shares on 31
March 2008 when the company became an RPC.

Therefore, the disposal of the RPC shares by Mr X occurred in the fourth year (31
March 2008 to 1 December 2011).

As for Mr D, he acquired RPC shares on 1 December 2011 (Paragraph 34A(2)(b)).

Acquisition price
What is the acquisition price of the RPC shares by Mr X in Example 5?

This is dealt with in Paragraph 34A(3)(a) of Schedule 2 and it is computed as
follows:

A/B x C
where

A is the number of shares held by the shareholder
B is the total issued shares of the company, and
C is the defined value of the real property at the date of acquisition of the
chargeable asset.
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The deemed acquisition price of Mr Xs 100,000 shares = 100,000/300,000 x
RM1,200,000 = RM400,000 even though Mr X had only paid RM100,000 for the
shares.

The disposal price being RM1m, Mr Xs chargeable gain is, therefore, RM600,000
(1m 400,000).

Mr Ds acquisition price is the price he paid for the shares, i.e. RM1m. (Paragraph
34A(3)(b)).

Withholding of tax at source

Withholding of 2% of the total consideration is applicable only if the transaction is
partly or wholly in cash. If the transaction is wholly non-cash, withholding does not
apply.

Exemptions

Exemption where the disposal is made after five years
RPGT (Exemption) (No.2) Order 2009 [P.U (A) 486] provides an exemption for all
persons where the disposal is made after five years from the date of acquisition of
the chargeable asset.

Exemption of the difference between appropriate rate and 5%
Where the disposal is made within five years from the acquisition date, the above
exemption order grants an exemption of the difference between the appropriate rate
and 5%, so that the final effective RPGT rate is of 5%.

The method by which the exemption is achieved is by way of the formula

A/B x C
where

A is the RPGT charged at the appropriate rate less the RPGT at 5%
B is the RPGT charged at appropriate date, and
C is the chargeable gain.

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Example 6
Facts are as in Example 5.

The computation of RPGT in respect of the disposal of RPC shares by Mr X is as
follows:

RM
Disposal price of 100,000 RPC shares
1,000,000
Acquisition price (400,000)
Less 10% of Chargeable gain or RM10,000, whichever is greater
(60,000)
Net chargeable gain 540,000
Acquisition date 31 March 2008
Disposal date 1 December 2011
Disposal in the fourth year, appropriate rate is 15%
Less Exemption per PU order 486:
A/B x C = (540,000 x 15%) (540,000 x 5%) x 540,000
540,000 x 15%

= 81,000 27,000 x 540,000 (360,000)
81,000

Chargeable gain after exemption 180,000

RPGT at appropriate rate of 15% 27,000

Siew Chuen Yong is examiner for Paper P6 (MYS)

References
1. Total tangible assets include real property, stock-in-trade, property plant and
equipment, trade receivables, cash at bank and cash in hand, investment in shares,
etc, stated at gross (rather than net) value.
2. A controlled company, as defined under the Income Tax Act 1967 the reader is
assumed to have a full understanding of the controlled company concept. Refer to
Sections 2 and 139.
3. It has often been erroneously stated as once RPC, always RPC. Note that the
correct quote is once RPC shares, always RPC shares.
4. The decision in the case of Md Dean v KPHDN is noted but is kept in view pending
further clarification/development.

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student accountant ISSUE 07/2011

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