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Answers

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Certificate Examination Paper 7(M) Tax Framework (Malaysia)

Answers and Marking Scheme Marks

Kualitech Sdn Bhd Year of Assessment 1998 Note Profit before taxation Interest income Provision for stock obsolescence Warranty reserve Bonus Employees Provident Fund Lease amortisation Replacement of tools Lease rental of car Lease rental of lorry Repair of factory roof Repainting of factory Renovation of office premises Architects fees General provision at 31.12.97 Specific provision at 31.12.97 (190 170) Bad debts recovered (30 17) General provision at 1.1.97 Depreciation Registration of trademark Donation Development expenditure Cost of exhibits Overtime pay Rental of space Entertainment RM000 + 3,000 180 49 77 14 5 13 145 7 250 20 13 120 500 8 2 80 3 5 24 4,294 (921) Adjusted income Add: Balancing charge Less: Capital allowances Statutory income Interest income Aggregate income Less: Donation Total/chargeable income Notes: (1) Provision for stock obsolescence is an unrealised loss therefore not deductible. Warranty reserve of RM49,000 (05% x RM98 million) is a provision therefore not deductible. (2) Deduction for bonus is restricted to two months of the employees salary as follows: RM000 40 30 20 22 112 (189) 77 12 3,373 9 3,382 330 3,052 620 3,672 2 3,670 921 RM000 700 1 1 2 3 4 5 6 6 05 05 05 05 1 1 05 05 1 05 05 05 05 05 05 05 05 05 05 05 05 05 05 05 05 1

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Mr Mr Mr Mr

Beh RM240,000 x 2/12 = Nathan RM180,000 x 2/12 = Long RM120,000 x 2/12 = Rais RM132,000 x 2/12 =

Restricted to Bonus actually paid Add back

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(3)

Deduction for Employees Provident Fund contributions is restricted to 19% of the employees remuneration as follows: RM Mr Behs salary and bonus: RM280,000 x 24% = RM280,000 x 19% = Add back 67,200 53,200 14,000

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(4) (5) (6)

Lease amortisation is a capital expenditure therefore added back. Deduction for tools is allowable on a replacement basis, hence no adjustment necessary. Deduction for lease rental of the car is restricted as follows: Lease rental 1.4.96 to 31.12.96 RM3,000 x 9 Lease rental 1.1.97 to 31.12.97 RM3,000 x 12 Restricted to Add back RM000 27 36 63 (50) 13

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No restriction for lorry as it is for commercial transportation of goods, hence no adjustment necessary. (7) Bad and doubtful debts are adjusted as follows: Specific provision for non-trade debt is not deductible, therefore add back RM20,000. Recovery of non-trade debt RM13,000 is not taxable as it was not deductible when it was written off. Registration of trademark is a capital expenditure therefore added back. Donation to an approved institution will be deducted in arriving at the total income. Payment for the services of an approved research company qualifies for double deduction under s.34B(1)(b) of the Income Tax Act, 1967.

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(8)

(9)

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(10) Revenue expenditure (excluding the cost of exhibits) incurred in participating in international trade fair qualifies for double deduction as both the fair and the companys participation were approved by the Minister. (11) Entertainment expense is specifically disallowed under s.39 (l) of the Income Tax Act, 1967. (12) Interest accrued for the period 1 January 1997 to 31 October 1997 is 10/12 x RM480,000.

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Marks 2 Mr Gan Video rental business profit as per accounts Add back: Fine Statutory income Rental semi-detached house Gross rental RM4,000 x 6 Less: Quit rent RM200 x 6/12 Assessment RM600 x 6/12 RM 12,000 3,000 3,000 15,000 1 05

24,000 100 300 400 23,600

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Royalties (RM9,000 6,000 exemption) Section 11 deemed income flat Less: Assessment Interest on loan Repairs and repainting

3,000 7,200 350 3,000 4,000 7,350 Nil

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Aggregate income Less: Donation restricted to Total income Less: Personal relief: Self Chargeable income Tax on RM10,000 Tax on 6,600 at 6% Tax payable Mrs Gan Salary Entertainment allowance Directors fees Furnishings Car: Volvo RM5,000 x x 9/12 Fuel RM1,500 x 9/12 Proton RM3,600 x 3/12 Fuel RM1,200 x 3/12 Driver RM300 x 3 Leave passage to Paris Leave passage to Australia Accommodation defined value Less: Entertainment expense restricted to RM 25000 39600 64600

41,600 20,000 21,600 5,000 16,600

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RM 48,000 6,000 10,000 64,000 1,680 1,875 1,125 900 300 900 Exempt 2,000 36,000 108,780 6,000 102,780 5,000 5,000 (max) 1,300 3,200 14,500 88,280 RM 8,95000 4,75280 13,70280 40000 13,30280

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Total income Less: Personal relief Self Employees Provident Fund and life insurance premium Medical premium Child Chargeable income Tax on RM70,000 Tax on 18,280 at 26% Less: Rebate on computer

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Tax payable

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Marks 3 (a) (i) The badges of trade present in the above situation are: Existence of business interest in similar field Method of finance Profit-seeking motive Nature of asset Modification of asset Organisation of sales Period of ownership. (ii) Frequency of transactions Acquisition method Formation of a company 1 1 1 1 1 1 1 1 1 1 1 1 1

(b) High Court Court of Appeal Federal Court

Fairway Sdn Bhd (a) Dividend franking account Balance as at 1.1.95 Tax chargeable for YA 96 RM3m x 30% Tax on dividends paid 1.1.95 to 31.12.95 Balance as at 1.1.96 Tax chargeable for YA 97 RM4m x 30% Tax on dividends paid: 12.1.96 RM14m x 30/70 11.7.96 RM42m x 30/70 Tax charge Balance as at 1.1.97 Tax chargeable for YA 98 RM7 x 28% Tax on dividends paid (deemed): 10.1.97 RM432m x 28/72 Balance (b) Fairway could pay gross dividends up to one million computed as follows: RM280,000 x 100/28 2 RM000 Nil 900 Nil 900 1,200 2,100 (600) (1,800) (300) Nil 1,960 1,960 (1,680) 280 1 05 05 05 05 05 05 1 1 15 1 05

(a) Encik Indot is not liable to real property gains tax as the transaction falls under Paragraph 3(b), Schedule 2 of the Real Property Gains Tax Act,1976, whereby the disposal price is deemed equal to the acquisition price, hence no gain/no loss situation for Encik Indot. Puan May is liable to real property gains tax as follows: Disposal price Less: Acquisition price Permitted expenses RM 280,000 220,000 30,000 250,000 Chargeable gain Less: Exemption 5% of chargeable gain or RM5,000 whichever the greater Tax payable at 30% = RM7,500 (disposal within 2 years 10.3.97 to 2.3.99) (b) The (i) (ii) (iii) acquirer has the following obligations: File a return to the Inland Revenue Board within one month of the date of acquisition Retain 5% of the consideration i.e. RM10,000 until a certificate of clearance is received from the IRB and Remit the money to the IRB when directed to do so. 30,000 5,000 25,000

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Marks 6 (a) A taxable person has the following responsibilities: (i) Issue invoices to include service tax (ii) Keep record of sales and service tax for six years (iii) File service tax return within the stipulated period (iv) Make payment within the stipulated period (b) (i) Meals Drinks Cigarettes Inter-branch billing Cover charges Food Parking fees RM 35,000 20,000 8,000 30,000 2,000 5,000 100,000 Service tax payable at 5% RM5,000 (ii) Blossom must file the return and pay the tax by 28 May 1998 i.e. within 28 days after the end of the taxable period (March April). 1 1 1 1

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(a) Year of assessment 1997 Employment: Salary Allowance Leave pay 1.12.96 to 31.1.97 Section 25(6)* Statutory income Royalties RM22,000 less 20,000 exemption Total income Year of assessment 1998 Interest income deemed derived from Malaysia Section 15(b) i.e. the interest was paid by a resident in Malaysia and the debt was secured by the land situated in Malaysia. Total income

RM 77,000 11,000 14,000 102,000 2,000 104,000 1 05 05 05 15

5,500 5,500

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* The leave pay appropriate to the year 1997 could have been dealt with as income for YA 98 if Miss Watson had chosen to do so but this would not be beneficial because she is not resident for the basis year 1997. (b) The employment income of RM80,000 is deemed to be derived from Malaysia as the employment was exercised in Malaysia, therefore it is liable to Malaysian tax.

(a) (i) (ii)

Rantop can by 15 April 1998 request for revision of instalment payments in terms of the amount and the number of instalments. Computation of the balance payable and the penalty Tax payable as per notice of assessment 10.9.98 Less: Instalment payments Difference and balance payable 30% of tax payable Excess which would attract penalty Penalty at 10% RM7,100 RM 280,000 125,000 155,000 84,000 71,000

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(b) A claim for repayment must be made by 31 December 1999 i.e. within six years from the end of the year of assessment (1993) in which the assessment was made.

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