Advanced Taxation

(Malaysia)
Friday 6 December 2013

Time allowed
Reading and planning:
Writing:

15 minutes
3 hours

This paper is divided into two sections:

Section A BOTH questions are compulsory and MUST be attempted
Section B TWO questions ONLY to be attempted
Tax rates and allowances are on pages 24
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.

The Association of Chartered Certified Accountants

Paper P6 (MYS)

Professional Level Options Module

SUPPLEMENTARY INSTRUCTIONS
1.
2.
3.
4.

You should assume that the tax rates and allowances shown below will continue to apply for the foreseeable
future.
Calculations and workings should be made to the nearest RM.
All apportionments should be made to the nearest whole month.
All workings should be shown.

TAX RATES AND ALLOWANCES

The following tax rates, allowances and values are to be used in answering the questions.
Income tax rates
Resident individual
Chargeable income
Band
RM
2,500
2,500
15,000
15,000
15,000
20,000
30,000
Excess

Tax payable
Rate
Cumulative
%
RM
10
0
10
0
12
300
16
1,200
11
2,850
19
6,650
24
13,850
26

Cumulative
RM
2,500
5,000
20,000
35,000
50,000
70,000
100,000

Non-resident individual
All chargeable income

26%

Paid up ordinary share capital

On the first RM500,000
On the remainder

Resident company
RM2,500,000
or less
20%
25%

More than
RM2,500,000
25%
25%

Non-resident company
All chargeable income

25%
Labuan entity income from a Labuan trading activity

All chargeable profits

3%
Trust body resident or non-resident

All chargeable income

25%

Personal deductions
Self
Self additional if disabled
Spouse
Spouse additional if disabled
Child basic rate
Child higher rate
Disabled child
Disabled child additional
Life insurance premiums, approved scheme contributions
Deferred annuity premiums, private retirement scheme contributions
Medical expenses for parents
Medical expenses for serious disease of self, spouse or child, including
up to RM500 for medical examination
Basic supporting equipment for self, spouse, child or parent if disabled
Educational and medical insurance for self, spouse or child
Study course fees for skills or qualifications
Broadband subscription
Purchase of a personal computer
Purchase of books, magazines etc for personal use
Purchase of sports equipment
Deposit for child into the National Education Savings Scheme

each
each
each
each
maximum
maximum
maximum

RM
9,000
6,000
3,000
3,500
1,000
6,000
5,000
6,000
6,000
3,000
5,000

maximum
maximum
maximum
maximum
maximum
maximum
maximum
maximum
maximum

5,000
5,000
3,000
5,000
500
3,000
1,000
300
6,000

Rebates
Chargeable income not exceeding RM35,000
Individual basic rate
Individual entitled to a deduction for a spouse or a former wife

RM
400
800

Capital allowances

Industrial buildings
Plant and machinery general
Motor vehicles and heavy machinery
Office equipment, furniture and fittings
Agriculture allowance
Buildings for the welfare of employees
Other buildings used in the business
All other qualifying agricultural expenditure

Initial
rate %
10
20
20
20

Annual
rate %
3
14
20
10

nil
nil
nil

20
10
50

Real property gains tax

Disposal by all persons (except non-citizen individuals)
Date of disposal
Disposal within two years after the date of acquisition
Disposal in the third year after the date of acquisition
Disposal in the fourth year after the date of acquisition
Disposal in the fifth year after the date of acquisition or thereafter
Note: an exemption is granted which reduces the effective rate of tax as follows:
where the disposal takes place within two years of acquisition
where the disposal takes place in the third, fourth or fifth year of acquisition
where the disposal takes place in the sixth year or thereafter

Rate %
30
20
15
5
15
10
0

[P.T.O.

Sales and service tax

Rate %
10
6

Sales tax
Service tax

Stamp duty
Rates of duty under the First Schedule
Conveyance, assignment, transfer or absolute bill of sale
For every RM100 or fractional part thereof:
On the first RM100,000
On the next RM400,000
On the excess over RM500,000

Rate %
1
2
3

This is a blank page.

Question 1 begins on page 6.

[P.T.O.

Section A BOTH questions are compulsory and MUST be answered

1

Hijau Sdn Bhd (Hijau), with a paid up capital of RM250 million, is a well-established and profitable company with
1,000 acres of oil palm plantation spread out over East and West Malaysia. Hijau makes up its accounts annually to
30 September.
During the financial year ended 30 September 2013, Hijau incurred capital expenditure as follows:
RM
830,500
505,000
950,000

New planting of oil palm

Buildings for plantation workers accommodation
General equipment and machinery

Hijau is exploring a proposal to set up a technical college with a 200-acre campus on its plantation land in Sabah.
The said Sabah plantation land had been acquired by Hijau on 8 October 2010 and RM6 million had been incurred
on new planting, roads and bridges in August 2011.
The college project requires a capital outlay of RM200 million which will be funded by bank borrowings by Hijau.
The project may be implemented under:
1.

Option A: by Hijau itself with effect from 2 January 2014; or

2.

Option B: by a newly-incorporated company (NewCo) which will:

acquire the land from Hijau on 2 January 2014 in exchange for shares in NewCo as the consideration; and
borrow RM200 million from Hijau to establish the college campus structures and facilities.

NewCo will make up its accounts to 30 September annually.

Whether under Option A or B:

the education business is expected to commence on 1 October 2014; and

the education business is projected to incur losses for the first three years, generate substantial capital allowances
and only be profitable in the fourth year.

Required:
As a trainee Chartered Certified Accountant in Pandai Tax Firm, prepare a memorandum to your tax partner,
which explains the following:
(a) In respect of the capital expenditure, the capital allowances (under Schedule 3 of the Income Tax Act)
available to Hijau Sdn Bhd (Hijau) in the year of assessment 2013, together with a supporting computation.
(5 marks)
(b) In respect of the college project, the tax implications of:
(i)

Option A;

(11 marks)

(ii) Option B.

(11 marks)

Your explanations in part (b) should comment on:

the implications of the absorption or withdrawal of capital allowances (including agriculture allowances)
under Schedule 3 for both the plantation and education businesses;
the tax treatment and absorption of the losses of the education business in the first three years;
the tax deductibility of the interest incurred on the money borrowed by Hijau and/or NewCo to develop
the campus;
the real property gains tax implications and compliance requirements on the usage or
disposal/acquisition of the 200 acres of land for Hijau and NewCo; and
the stamp duty implications of the usage or acquisition of the 200 acres of land.

Note: You should assume that the proposed college project and the transfer of land are not eligible for any tax
incentives, relief or exemptions.
(c) The relative merits of each option, and your recommendation, with reasons, as to the preferred option to
adopt.
(4 marks)
Professional marks will be awarded in question 1 for the appropriateness of the format of the memorandum and
the effectiveness with which the information is communicated.
(4 marks)
(35 marks)

[P.T.O.

Sini-Sana Sdn Bhd (SSSB) is an expanding tour agency in Malaysia offering group tours covering Malaysia and China.
Responding to the need for some form of presence in China, SSSB intends to station an employee as its liaison
representative in each of the four most popular tourist destinations in China. The duties of these liaison representatives
will be:

to liaise with the local tour guides who lead tourist groups from Malaysia;
to continually source good local tours; and
to act as contact points, enter into tour contracts for SSSB and to finalise arrangements for tourists from China
who wish to join tours in Malaysia.

SSSB does not maintain any office in China as the liaison representatives merely occupy and operate a Malaysia desk
in the office of an associated Chinese tour agency.
SSSB pays the basic salary of the four liaison representatives into their bank accounts in Malaysia. It also pays an
overseas living allowance to each of them into their bank accounts in China.
There is a double taxation agreement between Malaysia and China based on the generally prevailing concepts in
accordance with the OECD model.
Required:
(a) Determine whether Sini-Sana Sdn Bhd (SSSB) has a permanent establishment in China under the double tax
agreement between Malaysia and China.
(6 marks)
(b) Assuming that SSSB does have a permanent establishment in China, explain:

the significance with respect to the companys liability to tax in China;

how much of its income is potentially involved; and
how the potential double taxation by both Malaysia and Peoples Republic of China will be resolved.
(6 marks)

(c) As regards the income and expenditure relating to the tours in China, determine:

whether the income from the tours conducted in Peoples Republic of China is derived from Malaysia;
and
whether the salary and living allowance payable to the liaison representatives are tax deductible in
arriving at the adjusted income of the tour business in Malaysia.
(8 marks)

(d) With reference to the four Malaysian liaison representatives, determine whether their income from
employment is derived from Peoples Republic of China, or Malaysia, or both.
(5 marks)
(25 marks)

Section B TWO questions ONLY to be attempted

3

Mr Tai Koon, a citizen of Malaysia, set up the Taikoon Trust in 2012 by transferring to the trust both a rental property
situated in Kuala Lumpur and cash to be placed as fixed deposits in a Malaysian bank. The two trustees of the Taikoon
Trust are residents of Malaysia, as are the beneficiaries, who are Mr Tai Koons wife and their two children. The two
children were aged 18 and five respectively in 2013.
Among others, the terms of the trust are:

The trustees are each to be paid RM8,000 per annum.

An annuity of RM20,000 is payable to each child beneficiary from the age of 18.
A sum of RM30,000 is to be accumulated each year and distributed to each child when he attains 30 years of
age.
Mrs Tai Koon is entitled to 80% of the distributable income of the Trust annually.
A cash donation of RM15,000 must be made to a charity approved for tax purposes annually.

Information regarding the Taikoon Trust for the year ended 31 December 2013 is as follows:
RM
Income
Interest on fixed deposits with bank
Rental income (gross)
Expenditure
Rental expenses (tax deductible)
Extension works to the rental property (capital in nature)
Trustees remuneration
Donation to charity
Annuity to beneficiary

30,000
120,000
18,000
31,000
16,000
15,000
20,000

Required:
(a) In respect of the Taikoon Trust for the year of assessment 2013:
(i)

determine its residence status;

(2 marks)

(ii) compute the distributable income of the trust; and

(4 marks)

(iii) compute the total income of the trust.

Note: You should indicate by the word nil any item of expenditure which is not tax deductible.
(5 marks)
(b) In respect of the year of assessment 2013:
(i)

explain the income tax treatment of the RM20,000 annuity received by the older child; and (3 marks)

(ii) determine the share of the total income of the trust for Mrs Tai Koon and explain its income tax
treatment.
(4 marks)
(c) Explain the income tax treatment of the distribution of the accumulated trust income made to the children
when they respectively attain 30 years of age.
(2 marks)
(20 marks)

[P.T.O.

Encik Abdullah acquired (with cash) two tranches of shares in the real property company, ABC Sdn Bhd, and a piece
of vacant land as follows:
Asset

Date of acquisition

Total cost
RM

Shares
Tranche 1 30% of share capital
Tranche 2 10% of share capital
Vacant land 100,000 sq ft

3 March 2007
4 April 2010
6 June 2012

100,000
250,000
175,000

Yesterday, Muthu Sdn Bhd made offers (both in cash) to Encik Abdullah to acquire all of his shares in ABC Sdn Bhd
for RM2 million and 40% of his vacant land for RM100,000.
Muthu Sdn Bhd, a share and property-dealing company, expects to dispose of both the shares and the vacant land
within six months to Interested Sdn Bhd.
Required:
(a) Assuming each tranche of shares constitutes a separate chargeable asset, compute Encik Abdullahs
potential liability to real property gains tax if the disposal of the shares and the vacant land takes place on
31 December 2013.
(13 marks)
(b) With reference to Muthu Sdn Bhd, explain the nature of the shares and the vacant land acquired and the
appropriate tax treatment on the subsequent disposal of these shares and the vacant land.
(4 marks)
(c) Explain the compliance requirements under the Real Property Gains Tax Act on the acquisition of the shares
in ABC Sdn Bhd and the vacant land by:

Muthu Sdn Bhd; and

Interested Sdn Bhd

(3 marks)
(20 marks)

10

Your manager, Miss Etika, runs a tax advisory firm in Kuala Lumpur. Among the tax issues she has encountered in
the past week are:
(a) Mr X, a prospective client, stated that he intends to pay income tax of about RM10,000 for the year of
assessment 2013 as compared to RM8,000 for the year of assessment 2012. He maintains his sales records
on a cash basis and discards his business records after five years because of a shortage of space.
(b) Vai Sdn Bhd received a notice of additional assessment for the year of assessment 2006, dated 1 December
2013, requiring the company to pay additional tax of RM68,000. The tax return for the said year had been
submitted by the due date. In 2011, the Inland Revenue Board conducted a tax audit on the company, raising
some questions and calling for further information, which was provided within the stipulated time. There were
no further developments until the receipt of the recent additional assessment.
(c) Gifted with a flair for style and fashion, Madam Kool loves to dress up and socialise. She started to design clothes
for her friends, and in time, friends of her friends, to help prepare them for special functions. Madam Kool does
not charge for her services, but the grateful friends would buy her expensive gifts and give her ang-pows (red
packets with money) in return. The Inland Revenue Board has learned about Madam Kool from the lifestyle
magazines and on 2 December 2013, raised an assessment based on an estimated income of RM100,000 for
the year of assessment 2012. Madam Kool is aggrieved and wants to know her rights in this matter.
Required:
As the trainee Chartered Certified Accountant employed in the tax advisory firm, prepare relevant notes for
Miss Etika explaining the following:
(a) With reference to Mr X:
(i)

With regard to his intention to pay a pre-determined income tax of RM10,000, the concepts of tax
avoidance and tax evasion, the difference between them, and the offence involved.
(5 marks)

(ii) With regard to his basis of accounting and practices regarding record keeping, the basis of recognition
of business income and the responsibility to keep business records.
(3 marks)
(b) In view of the chain of events regarding Vai Sdn Bhd:
(i)

The concept of statutory time bar for income tax purposes, and whether conducting the tax audit has
any impact on the parameters of the time bar in this case.
(3 marks)

(ii) Whether the additional tax is payable and if so, by when.

(1 mark)

(c) With reference to Madam Kool:

(i)

The arguments both for and against the assessability of the gifts and ang-pows.

(4 marks)

(ii) Whether she has a right of appeal, and if so, the time limit, the process of a valid appeal, and her
responsibility as regards the estimated tax assessment.
(4 marks)
(20 marks)

End of Question Paper

11