TAX

MIA QE/SEPT 2012

QUESTION 1
(a)

FB Cleaners Sdn Bhd

Tax computation for the year of assessment 2012
Add (+)
RM000

Note
Business income
Profit before taxation
Cost of sales
Less:
Dividends
Interest
Rent (Note 1)
Insurance
Insurance recovery (stocks)
Insurance recovery (keyman policy-director)
Add/Less:
Salaries and wages
Director's salary
EPF- director [33k - (200k x 19%)]
Medical insurance
Overseas trip for director
Hotel charges for Korean national
Salary to Korean national
Interest
Interest on borrowings for investment
Interest for working capital
Late payment charges for goods received
Entertainment
Company annual dinner
Entertainment expenditure disbursement (Disallow 50%)
Family day
Entertainment of suppliers (50%)
Entertainment expenditure wholly for sales
Depreciation
Repairs and maintenance
Repair of machine (initial repairs)
Repairs and maintenance
Bad and doubtful debts
Bad debts written off (trade)
General bad debts provision
Specific provision
Bad debts written off (personal loan)
Motor vehicle expenses
Repairs and maintenance

Deduct(-)
RM000 RM000
135,283

5
40
110

1
2
3
4

Nil
Nil

155
135,128

5
Nil
5
Nil
27
Nil
16
6

3
Nil
Nil

7
Nil
77
Nil
23
Nil
609
8

78
Nil

9
Nil
697
Nil
Nil
10
Nil
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Compound and fines

Lease charges
Trailer
Car [(35+35)-50 max]
Advertisement
Newspaper, magazines and radio
Promotions with models and celebrities
Presents of wall paintings
Professional fees
Termination of supply contract
Bad debts recovery
Lease arrangement for vehicles
Compensation - covenant with ex-employee
Insurance
Keyman policy (endowment)
Insurance of cargo import
Fire and flood insurance
Foreign exchange loss
Unrealized loss on stock imports
Realised loss on purchase of machinery
Realised loss on stock imports
Donation
Donation of equipment to orphanage
Scholarship (DD: 60k x 2)
Other donations - 'ang pow'

MIA QE/SEPT 2012

25
Nil
20
11
Nil
Nil
Nil
12
Nil
Nil
Nil
Nil
14
4
Nil

15
6
8
Nil
16
120
Nil
10
1,738

Add
Adjusted income from business
Less: Capital allowance
Add: CA on initial repairs

135,128
1,738
138,604

629
IA
AA

Statutory income
Add: Other income
Dividend - deemed total income (see below)
Interest - exempted
Rent (W1)
Aggregate income
Less: Donation
Total income
Add: Dividend
Less: Interest
[Deemed total income-Sec 53 Transitional provisions)
Chargeable income

16
11

27

0
0
150

5
3
2

656
137,948

150
138,098
10
138,088

2
138,090

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Note 1
W1
Rental income adjustment
Net rent
Add:
Extension of parking lot
Less:
Refundable security deposit
Adjusted rental income

MIA QE/SEPT 2012

RM000
110
70
180
30
150
(60 = 15 marks)

(b) 1. Purchase and repair of used cleaning machine

The company had bought a machine that is no longer in production, for RM8,000 - and
immediately incurred additional expenditure of RM70,000 (about 875% of the purchase
price) on repairs and refitting to enable the machine to be used economically. The repair
expense is disproportionately high compared to the acquisition cost, in addition to the
repair expense being incurred immediately upon acquisition.
Based on the Law Shipping principle, the repair expenses would be considered a capital
expenditure and accordingly disallowed. In the Law Shipping case, a shipping company
spent substantial sum on a ship sometime immediately after its acquisition to keep it
seaworthy. The sale price of the ship was to some extent affected by its state of
disrepair. The claim for a deduction was refused because the repair expenditure related
to capital.
This case could be contrasted with the Odeon Associated Theatre case where
substantial repairs were carried out to a newly acquired theatre but there was evidence
that the sale price of the theatre was not affected by its state of disrepair and therefore
the repair was allowed.
Similar arguments as in the Law Shipping case was advanced in the case of S Ltd
[(1953) Sdn Bhd VIII] where a company that obtained the lease of some old building
incurred large sums on repairs to restore the building to a usable condition, but was
denied a deduction for the repairs.
However the company could claim capital allowance under schedule 3 in respect of the
cost of the machine (being the cost of acquisition and repairs immediately upon
acqusition).
Case Law: Law Shipping Co Ltd v CIR v 12 TC 621; Odeon Associated Theatres Ltd v
Jones; S Ltd [(1953) Sdn Bhd VIII]
(2 marks)
2

Bad debts written off being advance to a senior manager

The Public Ruling No 1/2002 provides guidance as to the deduction permissible for bad
debts including specific provisions, general provisions and bad debts written off. These
relate to trade debts and not advances and/or personal loans.

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MIA QE/SEPT 2012

Based on the information provided in the notes, there is no issue of defalcation or

financial indulgence [as in the case of Curtis v J&G Oldfield Ltd where a managing
director passed some private transactions through the companys books] or even a loss
arising from the deputation of a monetary function as in the case of Lords Dairy Farm v
CIT (where a cashier who was delegated the duty of drawing money from a bank,
retained a sum of money for his own use that subsequently constituted a trading loss).
In this instance the amount written off is an advance to an old time employee under a
written contract that provided for such advances to be extended to him. The sum so
extended could have been, in the normal course of events, recovered by way of a
repayment or set off from any commissions or bonus due to him at the end of the
financial year. However such recourse to the recovery was not possible on account of
his sudden demise, and the amount advanced earlier had to be written off.
In the case of Ralph Harris (Insurance) Ltd v CIT, under the terms of employment,
insurance agents were given advances against anticipated commission; one of the
agents went bankrupt and the sum advanced to him was subsequently written off and
the courts held that such sum as was written off was part of the cost of engaging the
employee.

It is important to note that the advance was provided for in writing as part of the term of
employment contract. In the circumstances, the sum written off in the present case
could therefore be considered as part of the cost of, and a loss arising from, engaging
the senior manager.
Case law: Curtis v J&G Oldfield Ltd; Lords Dairy Farm v CIT; Ralph Harris (Insurance)
Ltd v CIT
(2 marks)
Compounds and fines under motor vehicle expenses
A fine or a penalty imposed by the authorities for a breach of the law falls on the
taxpayer as an offender; and it is therefore not incurred wholly and exclusively in the
production of gross income nor is it an expenditure related to a trading transaction.
Thus, a British company that exported goods to an enemy country and infringed the
Customs (War Powers) Act of 1915 was refused a deduction for the fines paid ( CIR v
Alexander von Glehn & Co Ltd). In Sheppard v McKnight, the British court disallowed a
deduction for fines and legal expenses incurred by a stockbroker found guilty of
infringing the stock market rules.
However there seems to be a divergent view across the Atlantic Ocean where it is
considered that fines and penalties are part and parcel of the operating cost of business
particularly in the fiercely competitive transportation industry like trucking. In the
Canadian case of Day & Ross for example, fines and compounds paid by a firm
engaged in the trucking business was allowed as an expenditure necessarily incurred in
the production of gross income.
While fines and compounds paid for traffic offences are very much related to trades that
involve some transportation of cargo, workers and passengers, the IRB stand in
Malaysia seems to be that fines and compounds are not an expenditure that falls within
the meaning of expenditure wholly and exclusively incurred in the production of gross
income, even by a business that is very much exposed to such risks.
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MIA QE/SEPT 2012

(2 marks)
4

Donation
The donation of the equipment to the orphanage does not fall within the meaning of any
of the provisions under section 44 allowing a deduction for such donations.
The ang pow given to the institution, to be given to the orphans, would qualify for a
deduction but would be restricted to 10% of the aggregate of that company under
section 44(6)(2).
Under the 2012 budget proposals, a double deduction was proposed for scholarship
awarded to students who fulfill the existing conditions prescribed under section 34(6)(l).
(2 marks)
[Total: 23 marks]

QUESTION 2
a)
(i)
Computation of industrial building allowance
Year of assessment 2011
Qualifying industrial building expenditure:
Expenditure
Cost of land
Legal fee for transfer of land
Clearing of land
Cutting and leveling land
Excavation and preparation of site for construction
Piling and foundation works for building
Construction of building
Construction of perimeter wall
Architect fee-building
Legal services for obtaining various building approval
Subcontract charges for wiring and plumbing works
Landscaping charges
Total qualifying building expenditure

RM
NQ
NQ
NQ
NQ
43,826
78,454
194,782
18,937
75,749
35,169
40,038
NQ
486,955
(12 = 6 marks)

(ii)
Industrial building allowance computation
Year of assessment 2011
Qualifying building expenditure
Less:
IA
10'%
AA
3'%
Residual expenditure c/f

486,955
48,696
14,609

(63,304)
423,651
(4 = 2 marks)

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MIA QE/SEPT 2012

b)
Acquisition price

RM

289,835
2,898
292,733

Consideration paid
Add: Stamp duty on transfer
Less:
Compensation received
Insurance recoveries
Deposit forfeited
Acquisition price

RM

25,340
9,275
8,000

(42,615)
250,118
5 = 7 marks
(Total: 15 marks)

QUESTION 3
(a)

(i) Co-operative societies are exempted from tax on all its income for a period of 5 years
commencing from the date of its registration.
(ii) After the five years, the co-operative would be exempted on all its income if its
members funds as at the first day of the basis period for the relevant year of
assessment is less than RM750,000.
(2 marks)

(b)

The Alor Gajah Co-operative society would be exempted from income tax for the years
of assessment 2010 to 2014 under Para 12 Schedule 6 Income Tax Act 1967 (as
amended) being the first five years after registration. Thus, it is not liable to income for
the year of assessment 2011.

The tax position is as follows:

Alor Gajah Co-operative Society
Tax computation for the year of assessment 2011
0
0
0
0
(5,000)
5,000

Statutory business income

Statutory dividend income
Aggregate income/Chargeable income
Income tax charged
less: Section 110 set off
25% of 20,000
Income tax refundable

(5 = 5 marks)
(c) MKG Farmer's Co-operative Society
Tax computation for the year of assessment 2011
RM
Audited net profits
Add:

RM
144,096

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MIA QE/SEPT 2012

Secretarial fees
Depreciation
Donation
Zakat perniagaan

11,199
1,800
26,730
8,910

Less: Interest on member's savings

Adjusted income
Lees: Capital allowance
Statutory income / Aggregate income
Less:
Donation RM26,730
(restricted to 7% of aggregate income)
Zakat (restricted to 2.5% of aggregate income)

12,901
4,608

Less: Sec 65A(a) deduction

Lower of :
Amount paid (Note 1)
25% of audited net profit(25% x 144,096)

32,400
36,024

Less: Sec 65A(b) deduction

8% of member's fund (Note 2)
Chargeable income
Note 1
Statutory contribution
Contribution to co-op fund
Transfer to statutory fund
Note 2
Balance of member's fund as at 1.7.2010
Paid up share capital
Subscribed capital
Share premium account
Statutory reserve fund
Balance of profit and loss appropriation account b/f
Member's funds as at the first day of the BP
8% of member's funds

48,639
192,735
2,430
190,305
6,000
184,305

17,509
166,796

32,400
134,396
77,904
56,492

RM
9,720
22,680
32,400
RM
810,000
36,000
2,700
49,500
75,600
973,800
77,904
(5 marks)
(Total: 12 marks)

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QUESTION 4
A. YA
Period of stay

B.

MIA QE/SEPT 2012

2007

1/1 - 3/8

No. of
days
215

Status

Section

Reasons

7(1)(a)

Stayed at least 182 days

2008

1/12 - 7/12

7(1)(d)

Resident in 3 immediate preceding

years (2007, 2006, 2005) and also
resident in the immediate following
year (2009)

2009

15/5 - 15/8

93

7(1)(c)

In BY 2009 stayed at least 90 days

and in three out of four immediate
preceding years, she is resident for 3
years (2008, 2007, 2006)

2010

15/12 - 31/12

17

7(1)(b)

BY 2010 is linked to BY 2011 and in

the link period, he stays at least 182
consecutive days

2011

1/1 - 31/12

365

7(1)(a)

Stayed at least 182 days

(15 x 1/3 mark = 5 marks)

YA
2007

Basis Period
1/6/07 31/12/07

Working/ Adjusted income/loss (RM)

7/15 x 120,000
56,000

2008

1/1/08 31/12/08

1/1/08 - 31/8/08 = 8/15 x 120,000

= 64,000
(+) 1/9/08 - 31/12/08 = 4/12 x150,000 = 50,000
114,000

2009

1/9/08 31/8/09

2010

1/9/09 31/10/10

2011

1/11/10 31/10/11

1/9/08 - 31/12/08 is overlapping period, profit of

RM50,000 is taxed in YA 2008
1/1/09 - 31/8/09 = 8/12 x 150,000
= 100,000
1/9/09 - 31/10/09
= (60,000)
(+) 1/11/09 - 31/10/2010 = 100,000
40,000
140,000
(14
x = 7 marks)

C.)

S.112: Failure to furnish return or give notice of chargeability.

S.113: Gives any incorrect information / returns by omitting or understating any income
that relates to a persons chargeability.
S.114: Wilful evasion.
(3
x 1 = 3 marks)
(Total: 15 marks)

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MIA QE/SEPT 2012

QUESTION 5
Dayang
A.
Computation of Statutory Employment Income for the Year of Assessment 2011
RM
RM
Section 13 (1) (a)
Gratuity (Exempted)
Nil
Salary [(13,350 / 0.89 x 8 mths]
120,000
Bonus
15,000
Entertainment allowance (RM1,500 x 8 mths)
12,000
Reimbursement food at hotel
2,000
Insurance premium
2,300
Individual membership (RM250 x 8 mths)
2,000
153,300
Section 13 (1) (b)
Furniture (RM280 x 7 mths)

1,960

Car (RM9,000 x x 8/12 mths)

3,000

Leave passage:
- Air fares (RM6,588 RM3,000 Exemption)
- Hotel
Corporate membership (RM350 x 8 mths)

3,588
4,450
2,800
15,798

Section 13 (1) (c)

House: DV [(RM4,000 RM1,000) x 8 mths] = 24,000
30% x 153,300 = 45,990
The lower = 24,000 x 7/8 = 21,000
Hotel: 3% x 153,300 x1/8 = 575

GROSS EMPLOYMENT INCOME

21,575

190,673

Less: Deductible expenses

MICPA fees
STATUTORY EMPLOYMENT INCOME

(550)
190,123
(16 x mark = 8 marks)

b)
Sec 4 (a)
Provisional adjusted income
Less : Benefit to partners
Interest on capital [250,000 x 5%] 2
Partners salary (120,000+60,000)
Partners entertainment allowance
Divisible income

RM
438,000
25,000
180,000
23,000
210,000
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10

MIA QE/SEPT 2012

Computation of Partners Total Income YA 2011

Sec 4 (a)
Share of divisible income (1 :1)

Peter
RM
105,000

Kamal
RM
105,000

Add :
Interest on capital (25,000 /2)
Salary
Entertainment allowance

12,500
120,000
23,000

12,500
60,000
-

Adjusted business income

Less: Capital allowance 37,000 (1 :1)

260,500
(18,500)

177,500
(18,500)

242,000

159,000
Nil

Statutory business income

Add : Dividend exempt
Rental
Aggregate income
Less : Approved donation 22,000 (limit 7%XAI)
Total Income
Self relief
Wife relief
Child relief Anne
Angelina
Andy
SSPN
Medical insurance (max)
Chargeable income
Tax at scale rate / flat rate 26%
Zakat
Net tax payable

24,000
266,000
(11,000)
255,000

159,000
(11,000)
148,000

(9,000)
(3,000)
NE
(4,000)
(5,000)
(1,800)
(3,000)

NE

229,200

148,000
38,480
(4,500)
33,980

47,917

(24 x mark = 12 marks)

(Total: 20 marks)

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11

MIA QE/SEPT 2012

QUESTION 6
a)

Adjusted income
Less: capital allowance
Statutory income

2011
RM000
Nil
Nil (45 c/f)
Nil

2012
RM000
190
(93)
97

2013
RM000
272
(65)
207

Less: ITA utilised (W1)

Nil

(67.9)

29.1
(20.0)

9.1

(106.1)

100.9
100.9

15
15
(15)

-

15
24.1
(2.41)

15
115.9
-

Nil

21.69

115.9

2011
RM000
Nil

2012
RM000
67.9

2013
RM000
144.9

108

108
108

-

66

108
174
67.9
106.1
67.9

-

106.1
106.1
106.1
106.1

2011
RM000
180
180
108

2012
RM000

2013
RM000

Less: business loss b/f

Statutory income
Add: other income
Interest

Aggregate income
Less: current year business loss (restricted to)
Approved donation
(restricted to 10% x AI)
Chargeable income
W1

70%
x statutory income

Set off against:
ITA: 60% x QCE (W 2)
: brought forward from previous year
Total ITA available
ITA utilised for the year
ITA unutilised carried forward to next year
Amount credited to exempt income a/c

W2

Plant and Equipment

Factory building
Office building
Machinery
Total QCE
ITA @ 60%

110
110
66
(18
x 1/2 mark = 9 marks)

b) The payments for the technical assistant is subject to withholding tax under special classes
of income Section 4A since it is paid by a resident to non-resident. It also derived from
Malaysia because the service is performed in Malaysia. However, cost of machine is not
subjected to withholding tax because is not payment for services rendered (i.e purchased
of asset).
(6
x 1/3 = 2 marks)
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c)

12

i)

MIA QE/SEPT 2012

Sale of goods to Allied Sdn Bhd

Purchase price
Insurance
Freight
Import duty
Add: 20% mark up

Sales value
Sales tax payable @ 10%
Sales tax is due on

RM
391,600
3,000
7,800
74,000
476,400
95,280

571,680
57,168

28/11/2011

(9
x 1/3 = 3 marks)

ii)

First penalty will be imposed on 29 November 2011
.

29/11/2011 28/12/2011
= 10%
x RM57,168
= RM5,716.80
(3 x 1/3 = 1 mark)
(Total: 15 marks)

CONFIDENTIAL