Unofficial Suggested
MICPAEXAMINATION
NOVEMBER 2005
Questions,
Unofficial Suggested
Answers and
Examiners’ Reports
ADVANCED STAGE
EXAMINATION
Module C
Advanced Taxation
Published by MACPA STUDENTS SOCIETY
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.
ALL RIGHTS RESERVED : NO PART OF THIS PUBLICATION MAY BE TRANSMITTED IN ANY FORM OR BY ANY MEANS, ELECTRONIC, MECHANICAL PHOTOCOPYING, RECORDING OR OTHERWISE, WITHOUT THE PRIOR PERMISSION OF THE MACPA STUDENTS SOCIETY.THE MALAYSIAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
(INSTITUT AKAUNTAN AWAM BERTAULIAH MALAYSIA)
NOVEMBER 2005
Advanced Stage Examination - Module C
ADVANCED TAXATION
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.
DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO
ADVANCED TAXATION
(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:
NoteRM’000RM’000
Sales 90,000
Less: Cost of sales
Opening stock4,500
Cost of goods manufactured176,000
------
80,500
Closing stock5,500
------75,000
------
Gross profit15,000
Add:Other operating income
Dividends 25,045
Rental income3250
Profit on disposal of fixed assets420
Foreign exchange gain535
------
5,350
Less:Selling expenses
Promotional expenses63,000
Travelling expenses7500
Fees & allowances 3,500
------
7,000
Less:Administrative expenses
Staff remuneration83,500
Depreciation 700
Utilities 800
Repairs and maintenance9840
Legal & professional fees10800
Printing & stationery600
Miscellaneous expenses11230
Provision for doubtful debts13200
------
7,670
Less:Finance cost12500
------
Profit before taxation5,180
======
Notes
1.Cost of goods manufactured includes:
(i)Depreciation RM’000
Factory building320
Plant and machinery2,090
Furniture & fittings150
------
2,560
------
(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
------
5,045
------
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:
RM’000RM’000
(i)Motorcar 1 (purchased on January 1, 2002)
Cost400
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
------
- Foreign exchange gain comprises:
RM’000
Gain realised on settlement of trade debts50
Loss realised on settlement of purchase price for
factory equipment (15)
------
35
------
6.Promotional expenses include the following:
RM’000
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:
RM’000
(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:
RM’000
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
------
800
------
11.Miscellaneous expenses comprise the following:-
RM’000
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
------
230
------
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,
20042004
RM’000RM’000RM’000RM’000
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
RM’000
(ii)Loss brought forward from prior year (manufacturing business)3,200
(iii)Capital allowance claim on qualifying capital expenditure for
manufacturing business800
Required:
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.
Required:
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.
Required:
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.
Required:
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:
RM
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:
RM
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.
Required:
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:
RM’000RM’000
Members’ subscriptions 3,000
Gross Malaysian dividends500
Fixed deposit interest1,500
------5,000
Less: Salaries and bonus 400
EPF and allowances50
Travelling & accommodation20
Rental 30
Depreciation 100
------600
------
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
RM’000RM’000
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
------
17,00021,500
======
Required:
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.
Required:
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.
Required:
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:
RM’000RM’000
Rental income from letting of property5,000
Malaysian gross dividends 3,000
Interest income2,000
------10,000
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.
Required:
(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
KSB
100%100%100%
KS HealthcareKS GlovesKS Plantations
Sdn Bhd (KSH)Sdn Bhd (KSG)Sdn Bhd (KSP)
100%100%60%
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.
Required:
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)
NOVEMBER 2005 EXAMINATION
SUGGESTED ANSWERS
ADVANCED TAXATION
Question 1
Gloria Confectionery (M) Sdn Bhd
Chargeable Income for Y/A 2004
RM’000RM’000
Manufacturing business
Profit before taxation5,180
Add/(Less)
Depreciation (2,560,000 + 700,000)3,260
Provision for wages35
Dividends (5,045)
Rental income(250)
Profit on disposal of fixed assets(20)