Unofficial Suggested

Unofficial Suggested




Unofficial Suggested

Answers and

Examiners’ Reports



Module C

Advanced Taxation


This booklet contains the questions, unofficial suggested answers and examiners’ reports for MODULE C of ADVANCED STAGE EXAMINATION for the November 2005 examination session.

The unofficial suggested answers were prepared by the MACPA Students Society and are not purported to be the official positions of The Malaysian Institute of Certified Public Accountants (MICPA).

While every care has been taken to anticipate and satisfy the examiners’ requirements in the preparation of the suggested answers, these should not be regarded as the only solutions.

Some of the answers set out are considerably more substantial than even the best candidate could achieve in the time available in and examination. It is felt, however, that longer, more detailed answers can be great help for study purposes and that shorter answers would not always be as helpful.





Advanced Stage Examination - Module C


1.Time allowed: 3 hours

2.This paper consists of SIX questions totalling 100 marks.

3.Answer ALL questions.

4.Any reference to "the Act" means the Income Tax Act, 1967 (as amended).

5.Workings that support the answer should be submitted with your answer.

6.After the instruction to stop writing at the end of the paper, you will be given five minutes to assemble your answers. Fasten your answer sheets to the respective folders provided using the tags.

7.The answer folders and examination stationery, used or unused, must not be removed from the Examination Hall.



(Answer ALL questions)

Question 1

Gloria Confectionery (M) Sdn Bhd is principally involved in the manufacture of biscuits, snacks and other packaged food products.

The company prepares its accounts to December 31 annually. The company’s profit and loss account for the year ended December 31, 2004 is as follows:


Sales 90,000

Less: Cost of sales

Opening stock4,500

Cost of goods manufactured176,000



Closing stock5,500



Gross profit15,000

Add:Other operating income

Dividends 25,045

Rental income3250

Profit on disposal of fixed assets420

Foreign exchange gain535



Less:Selling expenses

Promotional expenses63,000

Travelling expenses7500

Fees & allowances 3,500



Less:Administrative expenses

Staff remuneration83,500

Depreciation 700

Utilities 800

Repairs and maintenance9840

Legal & professional fees10800

Printing & stationery600

Miscellaneous expenses11230

Provision for doubtful debts13200



Less:Finance cost12500


Profit before taxation5,180



1.Cost of goods manufactured includes:

(i)Depreciation RM’000

Factory building320

Plant and machinery2,090

Furniture & fittings150




(ii)Provision for wages35

2.Dividends comprise the following:

Tax exempt dividends 2,500

Taxable dividends from Malaysian investments1,000

Dividend from Singapore subsidiary1,545




3.Assume that rental income, which is derived from the shophouses owned by the company, qualifies for treatment as income from a separate business source for tax purposes.

4.Profit on disposal of fixed assets comprises the following:


(i)Motorcar 1 (purchased on January 1, 2002)


Accumulated depreciation(160)


Net book value240

Sales proceeds(300)


Profit on disposal60

(ii)Motorcar 2 (purchased on January 1, 2002)

Cost 148

Accumulated depreciation (58)


Net book value90

Sales proceeds(90)


Profit on disposalNil

(iii)Office equipment transferred to holding company

Cost 150

Accumulated depreciation(60)


Net book value90

Sale proceeds(50)


Loss on disposal(40)


Net profit on disposal of fixed assets20


  1. Foreign exchange gain comprises:


Gain realised on settlement of trade debts50

Loss realised on settlement of purchase price for

factory equipment (15)




6.Promotional expenses include the following:


Samples of biscuits given to supermarkets300

Gifts to suppliers during Chinese New Year100

Reimbursement of entertainment expenses incurred by staff200

7.Travelling expenses include lease rental of a motorcar for the managing director at a monthly rental of RM2,500 commencing from January 1, 2003. The cost of the motorcar is RM250,000.

8.Staff remuneration includes:


(i)Leave passage provided to staff150

(ii)Employer’s contribution to EPF is at the statutory rate of 12% with the exception of contributions for the managing director and chief accountant, which are at the rate of 20%. The total annual salary of the managing director and chief accountant for the year ended December 31, 2004 is RM600,000

9.Repairs & maintenance comprise revenue expenditure and include repairs amounting to RM150,000 on shophouses rented out.

10.Legal & professional fees comprise:


Technical fees paid to a foreign consultant in India for services rendered in Malaysia.

(No withholding tax has been deducted from the fees)430

Legal fees for purchase of shophouse 10

Legal fees for recovery of trade debts60

Audit & tax filing fees100

Provision for renovation works to office90

Professional fees for tax appeal to the High Court60

Staff recruitment fees50




11.Miscellaneous expenses comprise the following:-


Cash donations to approved institutions90

Cash donations to non-approved institutions 40

Expenses incurred for obtaining ISO and halal certification

from Jabatan Kemajuan Islam Malaysia (JAKIM)30

Quit rent and assessment on shophouses10

Insurance premium on factory50

Insurance premium on shophouses10




12.Finance cost is incurred on loans obtained for working capital of the manufacturing business but includes interest on loans to finance the acquisition of shophouses amounting to RM95,000.

13.Other information

(i)Movement and balance in provision accounts

Balance ProvisionProvisionBalance

as atfor thewrittenas at

January 1,yearoffDecember 31,



Provision for doubtful debts

Non-trade debtors4050-90

Trade debtors (specific)100120(50)170

Trade debtors (general)3080-110

Provision for general expenses-50-50


(ii)Loss brought forward from prior year (manufacturing business)3,200

(iii)Capital allowance claim on qualifying capital expenditure for

manufacturing business800


Compute the chargeable income of Gloria Confectionery (M) Sdn Bhd for the year of assessment 2004, showing all relevant tax adjustments.

(20 marks)

Question 2

A&N Motel Sdn Bhd (ANM) was incorporated by Alan Yap and his brother Nicky Yap on July 1, 1999 with an initial paid-up capital of RM1,000,000 comprising 1,000,000 ordinary shares of RM1.00 each. The shares are held equally by Alan and Nicky, both Malaysian citizens.

On August 1, 1999, ANM signed an agreement to acquire a piece of commercial land for RM1,900,000. ANM incurred stamp duty of RM50,000 for the acquisition. The acquisition was financed partly by a term loan of RM1,000,000 and partly by ANM’s share capital. ANM completed the construction of a motel on the land on June 1, 2000 at a total cost of RM1,500,000. The construction cost of the motel was financed by way of a rights issue of 1,500,000 ordinary shares of RM1.00 each. Both Alan and Nicky subscribed equally for the rights issue on June 1, 2000.

On May 1, 2002, Alan transferred his entire shareholding in ANM to his son, Bobby Yap as a gift. Bobby faced financial difficulties in 2003 and was thus forced to sell his entire shareholding in ANM to his friend, Daniel for a consideration of RM2,000,000. The sale and purchase agreement for the shares was signed on June 1, 2003.

Both Daniel and Nicky sold their shareholdings in ANM to Perdana Merdu Sdn Bhd on June 1, 2004 for a total consideration of RM4,500,000.

ANM then sold the motel to another hotel chain on December 1, 2004 for a consideration of RM5,500,000.


Compute the real property gains tax payable, if any, by Alan, Bobby, Daniel, Nicky and ANM for the relevant years.

(15 marks)

Question 3

(a)4D Gaming Bhd awarded a pension to its founder director on his retirement in 1998 after 30 years of service. In 2004, the company incurred a premium of RM1 million for the purchase of an annuity for the retired director. The annuity was purchased to replace the annual pension payment and the amount of annuity payable to the retired director is actuarially equivalent in value to the amount of pension payable to him.

In the same year, the company also made a one-off cash contribution of RM5 million to a pension fund newly established by the company for the benefit of its existing staff. The amount contributed was calculated actuarially as being the sum required to enable the existing employees to qualify for pension based on their past services.


State, with reasons, whether the amounts of RM1 million and RM5 million are deductible for tax purposes.

(8 marks)

(b)Mast Shipping Sdn Bhd (MSS) carries on a shipping business. In 2004, it bought a second-hand ship and sent it to a shipyard for repair. The time stipulated for completion of the repairs was exceeded and the shipyard paid a compensation of RM300,000 to MSS. The compensation was calculated by reference to the estimated profit which would have been earned had the ship been used for MSS’s business during the additional time taken for the repairs.

MSS entered into contracts with a petroleum company for the supply of diesel for its ships at a predetermined price for 2 years. It was later found that the diesel due under these contracts was in excess of its requirements. MSS thus allowed another company to take delivery of the surplus diesel in return for a sum of RM1 million.


State, with reasons, whether the amounts of RM300,000 and RM1 million are taxable.

(7 marks)

(Total: 15 marks)

Question 4

(a)Mr Arumugam has been carrying on a sole proprietorship business in Klang for the past 12 years. As his tax agent, you have been submitting his annual tax returns for him to the Inland Revenue Board (IRB) together with his accounts.

The IRB suspects Mr Arumugam of under-declaring his income and has thus issued him a notice to furnish a capital statement for the years 2001 to 2003. Mr Arumugam has requested you as his tax adviser to prepare the capital statement based on the following information in respect of his assets and liabilities:

(1)A double storey bungalow located in Klang was bought in 1995 at a cost of RM800,000. It had a market value of RM1,200,000, RM1,300,000 and RM1,500,000 in 2001, 2002 and 2003 respectively.

(2)In 1990, Mr Arumugam inherited a shophouse located in Banting from his grandfather who had acquired it in 1980 for RM100,000. He sold it in 2002 for RM200,000.

(3)Mr Arumugam acquired a Mercedes Benz car in the middle of 2001 on hire purchase. He paid a downpayment of RM100,000 and took a 3-year hire purchase loan of RM350,000. The outstanding loan balance as at end of 2001, 2002 and 2003 amounted to RM300,000, RM200,000 and RM100,000 respectively.

(4)Mr Arumugam also bought a Toyota Camry for RM120,000 for his wife in 1998.

(5)The following savings accounts were opened in January 2003 and the balances as at December 31, 2003 were as follows:


Public Bank Bhd – self150,000

Malayan Banking – wife45,000

(6)Cash in hand as at end of 2001, 2002 and 2003 was estimated at RM15,000, RM20,000 and RM30,000 respectively.

(7)Cost of jewellery belonging to Mrs Arumugam as at end of 2001, 2002 and 2003 was estimated at RM50,000, RM60,000 and RM90,000 respectively.

(8)His remisier confirmed that the cost of quoted shares held by Mr Arumugam were as follows:


December 31, 2001900,000

December 31, 20021,600,000

December 31, 20032,000,000

(9)Mr Arumugam recalled writing off an interest-free loan of RM100,000 in 2003. The loan was given to his mother-in-law in October 2002.

(10)Mr Arumugam has two children, both of whom are studying in the United Kingdom. Public Bank Bhd was instructed by him to remit RM12,500 monthly since January 2001 to each child’s bank account in the United Kingdom.

(11)Mr Aurmugam has declared income of RM300,000, RM400,000 and RM500,000 for the years of assessment 2001, 2002 and 2003 respectively, and paid income taxes of RM100,000 (in 2002) and RM120,000 (in 2003). His wife had no income for the respective years of assessment.

(12)According to Mrs Arumugam, she estimated their household expenses to be RM10,000 per month in 2001, RM15,000 per month in 2002 and RM18,000 per month in 2003.

(13)The sole proprietorship business started with a capital of RM50,000 and the balance of the profit and loss account submitted to the IRB was RM70,000, RM90,000 and RM120,000 as at December 31, 2001, December 31, 2002 and December 31, 2003 respectively. The drawings account balance was RM65,000, RM85,000 and RM95,000 as at December 31, 2001, December 31, 2002 and December 31, 2003 respectively.


Prepare Mr Arumugam’s capital statements (statements of assets and liabilities) as at end of the years 2001 to 2003 and determine his additional income, if any, for the years 2002 and 2003.

(10 marks)

(b)(i)Explain the meaning of “arm’s length approach” in the determination of transfer price between related parties.

(2 marks)

(ii)State THREE arm’s length pricing methodologies accepted by the Inland Revenue Board (IRB) as outlined in the Transfer Pricing Guidelines.

(3 marks)

(Total: 15 marks)

Question 5

(a)The National Estates Cooperative Society, which was registered in 1992, prepares its accounts to July 31 annually. The audited accounts of the Co-operative Society for the year ended July 31, 2004 show the following:


Members’ subscriptions 3,000

Gross Malaysian dividends500

Fixed deposit interest1,500


Less: Salaries and bonus 400

EPF and allowances50

Travelling & accommodation20

Rental 30

Depreciation 100



Excess of income over expenditure4,400


The details of the members’ funds as at July 31, 2003 and July 31, 2004 are as follows:

July 31, 2003July 31, 2004


Paid-up capital3,0003,500

Bonus shares (issued out of

revaluation surplus of building)500500

Share premium reserve2,0003,500

Statutory reserve 6,0008,000

Unappropriated profits5,5006,000





Compute the chargeable income of National Estates Co-operative Society for the year of assessment 2004.

(5 marks)

(b)(i) State any SIX circumstances which would give rise to a permanent establishment or a fixed place of business under a double tax agreement.

(3 marks)

(ii)M Co Sdn Bhd (MCSB) engaged the services of Stansfield Services Ltd, a company resident in Hong Kong, to advise on the restructuring of its loans as MCSB has not been able to meet its obligations. The services were rendered partly in Malaysia and partly in Hong Kong over a period of one year from May 1, 2003 to April 30, 2004.


State the withholding tax implications, if any, in respect of the advisory fees payable to Stansfield Services Ltd on the assumption that the services provided by the company do not give rise to a place of business in Malaysia.

(2 marks)

(iii)Hi-Tech Equip Ltd, a German company engaged in the distribution of technology products, is proposing to market and sell its products in Malaysia and is exploring avenues to operate in Malaysia.


State the circumstances under which the appointment of a Malaysian agent would result in Hi-Tech Equip Ltd having a permanent establishment in Malaysia.

(5 marks)

(c)First-REIT, a real estate investment trust approved by the Securities Commission, commenced operations on November 1, 2004 and prepares its accounts to October 31 annually. The income and expenditure statement for the year ended October 31, 2005 is as follows:


Rental income from letting of property5,000

Malaysian gross dividends 3,000

Interest income2,000


Expenses (assume all deductible)(4,500)


Excess of income over expenditure5,500


On November 2, 2005, First-REIT distributed an amount of RM5,000,000 to the unit holders, of whom 20% are non-residents of Malaysia and the rest are Malaysian corporate and individual residents.


(i)Compute the tax payable/repayable of First-REIT for the year of assessment 2005.

(3 marks)

(ii)State the tax treatment applicable to the unit holders on the distributions made on November 2, 2005.

(2 marks)

(Total: 20 marks)

Question 6

Kuat Setia Bhd (KSB), a company principally engaged in investment holding, is controlled by Tan Sdn Bhd, which in turn is controlled by the Tan family. Its group structure is diagrammatically shown below:

Tan Sdn Bhd



KS HealthcareKS GlovesKS Plantations

Sdn Bhd (KSH)Sdn Bhd (KSG)Sdn Bhd (KSP)


KS VietnamKS ShanghaiP.T. KS Indonesia

Ltd (KSV)Ltd (KSS) (KSI)

Tan Sdn Bhd, KSB, KSH, KSG and KSP are resident in Malaysia.

KSV, KSS and KSI are resident in Vietnam, China and Indonesia respectively.

KSB only derives dividend income from its subsidiaries. Its expenses are financed solely from these dividends.

KSB manages the operations of its subsidiaries but does not charge any management fees. The level of management services provided to the subsidiaries has increased significantly over the years due to expansion of their operations.

KSH is engaged in the manufacturing of surgical rubber gloves. Due to stiff competition in the export market, it has been incurring significant losses over the years. KSH also has significant unutilised reinvestment allowances and capital allowances due to an aggressive expansion programme in the last 2 years.

KSH intends to manufacture a special range of surgical rubber gloves which have a huge potential in the European market. The additional capital expenditure required to acquire plant and machinery is estimated at RM20 million. KSH is contemplating incorporating a wholly owned subsidiary to undertake this project. Discussions with the Malaysian Industrial Development Authority indicate that the project is unlikely to qualify for pioneer status or investment tax allowance.

KSG is engaged in the manufacturing of household rubber gloves. It is a highly profitable company. Although it enjoys the reinvestment allowance incentive in respect of qualifying capital expenditure on plant and machinery for the expansion projects, it has been paying significant taxes.

KSP operates five oil palm plantations in Terengganu. The plantations were acquired more than 20 years ago. One of the plantations, measuring approximately 500 acres, is located strategically within 10 kilometers of the town of Kuala Terengganu. Due to the booming property market in Kuala Terengganu, KSP intends to undertake mixed property development on this parcel of land in the next 6 months. KSP is considering submitting an application to the State authority to convert the land for commercial use.

KSV is engaged in the manufacturing of household rubber gloves in Vietnam. It has yet to generate profits since it commenced operations two years ago.

KSS is engaged in the manufacturing of household rubber gloves in China. It is a highly profitable company and has been paying dividends.

KSI operates two oil palm plantations in Indonesia which were acquired a year ago. It has been generating profits but has not paid any dividends since the plantations were acquired.


Advise what steps the KSB Group of companies should undertake so as to achieve maximum tax efficiency. State the reasons for your answer.

(15 marks)




Question 1

Gloria Confectionery (M) Sdn Bhd

Chargeable Income for Y/A 2004


Manufacturing business

Profit before taxation5,180


Depreciation (2,560,000 + 700,000)3,260

Provision for wages35

Dividends (5,045)

Rental income(250)

Profit on disposal of fixed assets(20)