TAXATION II (ATX10203)

ASSIGNMENT 2
100 Marks (10%)

TOPIC: ALLOWABLE AND NON-ALLOWABLE EXPENSES

CAPITAL ALLOWANCE
COMPUTE TAX LIABILITY FOR SOLE PROPRIETORSHIP, PARTNERSHIP, AND
COMPANY

PROGRAM OUTCOME(S)
PO5: Assist in preparation of tax computation, audit process and finance functions
PO7: Apply values, ethics, morality and professionalism in their work
PO9: Communicate effectively with the management team

COURSE LEARNING OUTCOMES

CLO2: Identify allowable and non-allowable expenses.

CLO3: Calculate capital allowances.
CLO5: Compute tax liability for a sole proprietorship, partnership, and company.

INSTRUCTIONS:

1. This is a group assignment. Students are required to be in group (2 persons in each

group).

2. Students are required to coordinate and do a discussion to answer all the questions
together. DO NOT SEGREGATE THE QUESTIONS INTO PARTS FOR EACH
TEAM MEMBER.

3. Students also need to type the answer by following the format below:
Font : Arial
Size : 11
Spacing : 1.5
Text : Justified

4. Please use the attached cover page format.

 TAXATION II (ATX10203)

FACULTY OF BUSINESS MANAGEMENT

AND PROFESSIONAL STUDIES

SEMESTER FEBRUARY 2020

TAXATION II

ATX10203

ASSIGNMENT 2

PREPARED BY:

No Name ID No
.
1. AGILAAN A/L MURTHI 012017071007

PREPARED FOR:
Madam Farah binti Abdul Aziz

SUBMISSION DATE:
10TH MAY 2020
 TAXATION II (ATX10203)

ALL 25 questions are compulsory and MUST be attempted.

PART A
MCQ

Kite Sdn Bhd (KSB), a resident company, trades in recycling products. KSB closes its
accounts annually on 31 May, and in its year ended 31 May 2018, the company acquired the
following asset:

Lorry

The lorry was acquired under a hire purchase scheme and the relevant details are
as follows:
Cost RM 210,000
Deposit paid on 10 January 2018 RM30,000
Loan RM180,000
Interest RM2,000
Instalment period 24 months
First instalment due on 1 February 2018

1. What is the Residual expenditure for the lorry in year 2018?

(A) RM37,000
(B) RM36,000
(C) RM35,000
(D) RM38,000
Answer’s Working
2018 RM Installment
Deposit 30,000 Cost - Deposit
Installment (RM7,500 × 4) 30,000 ¿
Installment
QPE 60,000
(12,000
(RM210,000 - RM30,000)
¿
Less : Initial Allowance (20% × RM60,000) 24
)
(12,000 = RM7,500/month
Less : AnnuaL Allowance (20% × RM60,000)
)
Residual Expenditure 36,000 Answer : (B) = RM36,000
(6 MARKS)
 TAXATION II (ATX10203)

2. What is the total capital allowance for year 2018?

(A) RM28,000
(B) RM27,000
(C) RM24,000
(D) RM21,000

Answer’s Working
Capital Allowance = RM12,000 + RM12,000
= RM24,000
Answer : (C) = RM24,000
(5 MARKS)

Yap and Viji opened a new car wash centre. It was agreed that Yap would manage the
operations of the centre and receive a fixed salary each month and Viji would receive a fixed
salary and any profits or losses remaining after deduction of expenses and taxes.

3. Is a partnership exists in the above situation?

(A) yes
(B) No
Answer : (A) = Yes
(2 MARKS)

Tara and Neem are partners of T&N Enterprise and have been carrying on a business as
taxi operators for many years. The partnership deed provides the following:

(1) Monthly salary of RM5,000 for each partner.

(2) 5% interest per annum to be paid to Tara and Neem on their respective capital
contributions of RM100,000 and RM200,000.

(3) A profit sharing ratio of 75% for Tara and 25% for Neem. Details of the partnership’s
income statement for the year ended 31 December 2018 are as follows:

 Provisional adjusted income RM120,000

 TAXATION II (ATX10203)

 Capital allowances RM10,000

Additional information:
 Neem has a brought forward business loss of RM10,000 from the year of
assessment 2017.
 Tara also runs a travel agency as a sole proprietorship. During the year of
assessment 2018, the business made an adjusted loss of RM7,000.

4. What is divisible income or divisible loss for the partnership above?

(A) RM18,000
(B) RM (18,000)
(C) RM15,000
(D) RM (15,000)
Answer’s Working
RM RM
Provisional Adjusted Income 120,000
Less : Partner's Private Expenses
Salary : Tara (60,000)
Neem (60,000)
Interest On Capital
Tara (RM100,000 × 5%) (5,000)
Neem (RM200,000 × 5%) (10,000) (135,000)
Divisible Loss (15,000)

Answer : (D) = RM (15,000)

(10 MARKS)
5. What are the chargeable income for Neem and Tara?
(A)
Neem RM39,250
Tara RM53,750

(B)
Neem RM37,250
Tara RM53,950

(C)
Neem RM38,250
 TAXATION II (ATX10203)

Tara RM51,750

(D)
Neem RM36,250
Tara RM53,790

Answer’s Working
Divisible loss = RM15,000
Tara : 75% × RM15,000 = RM11,250
Neem : 25% × RM15,000 = RM3,750

Adjusted Loss Tara (RM) Neem (RM)

Share of divisible loss (11,250) (3,750)
Tara's adjusted loss (7,000)
Add : Partner's Private Expenses
Salary 60,000 60,000
Interest on Capital 5,000 10,000
Less : Capital Allowance (7,500) (2,500)
Current Year Losses (10,000)
Total Chargeable Income 39,250 53,750

Answer : (B) = Neem ; RM39,250

Tara ; RM53,750

(15 MARKS)

6. For expenditure to qualify for deduction,

I It must be related to the taxpayer’s business
II It should not be of a personal nature
III It cannot be pre-operation expenses
IV The expenditure cannot be incurred after the cessation of business
A I only
B I, II
C I, II, V
 TAXATION II (ATX10203)

D All of the above

Answer : (B) = I It must be related to the taxpayer’s business
II It should not be of a personal nature

(2 MARKS)

7 Which of the following statements is NOT true?

A To be deductible, the expenditure must be wholly and exclusively
incurred in the production of gross income. This is the cardinal
requirement of Section 33 of the Income Tax Act 1967.
B A business expense must be incurred before the period in which the
income is brought to charge.
C The issue of whether expenditure is revenue or capital depends on the
facts of the case.
D Expenditure must be of a revenue character to be allowed as a
deduction.
Answer : (B) = A business expense must be incurred before the period in
which the income is brought to charge
(1 MARK)

8. Which of the following “entertainment” is not tax deductible?

A Aladdin Sdn Bhd’s annual dinner for staff.
B Jasmine Travel Sdn Bhd gives out souvenirs, bags and travel ticket to
visitors at trade fairs.
C Aladdin, after discussing his business proposal with his prospective
client Jasmine, takes her and her assistant out for dinner at Genie
Restaurant.
D Aladdin Sdn Bhd gives free samples of its candles to guests at the
launch of its new therapeutic candles.
Answer : (B) = Jasmine Travel Sdn Bhd gives out souvenirs, bags and travel
ticket to visitors at trade fairs
(1 MARK)
 TAXATION II (ATX10203)

9. Capital allowances include two components, namely:

I initial allowance
II Industrial building allowance
III Investment allowance
IV annual allowance
A I, II
B I, III
C I, IV
D III and IV
Answer : (C) = I Initial Allowance
IV Annual Allowance
(2 MARK)

10. Which of the following do NOT qualify for capital allowance?

A plant
B Machines
C Rental
D Furniture
Answer : (C) = Rental
(1 MARK)

11. Which of the following statements are TRUE?

I Capital allowances are given only in respect of a business source and only
for the person who incurs the qualifying expenditure.
II Capital allowance is computed for a year of assessment and is deducted
from the adjusted income of the business in arriving at statutory income.
III Capital allowance is provided for plant and machinery.
IV A person deriving employment income can claim capital allowances on
machinery from that employment income.
A I, II only
B I, II, III only
C III only
D All of the above
Answer : (B) = I, II, III only
(2 MARK)
 TAXATION II (ATX10203)

12. JustTwo Sdn Bhd bought a new machine costing RM400,000. As the noise it
made disturbed other staff working on the floor above it, JustTwo installed sound-
proof walls at the cost of RM120,000. What is total qualifying expenditure?
A RM520,000
B RM400,000
C RM120,000
D RM320,000
Answer’s Working
RM
Cost of printing machine 400,000
Install sound-proof walls 120,000
QPE 520,000

Answer : (A) = RM520,000

(4 MARKS)

13. JustThree Sdn Bhd bought a new machine costing RM500,000. Assuming
initial allowance and annual allowance rates for both is 20%, what is the capital
allowance for the first year?
A RM500,000
B RM250,000
C RM200,000
D Not eligible to claim capital allowance
Answer’s Working
RM
QPE 500,000
Less : Initial Allowance
(100,000)
(20% × RM500,000)
Less : Annual Allowance
(100,000)
(20% × RM500,000)
Residual Expenditure 300,000

Answer : (C) = RM200,000

(5 MARKS)
14. Which Section of the Income Tax Act 1967 below prescribes the prohibited
deductions?
A Section 33
 TAXATION II (ATX10203)

B Section 34A
C Section 39
D Section 40
Answer : (C) = Section 39 (1 MARKS)

15. Which Section of the Income Tax Act 1967 below prescribes the allowable
deductions?
A Section 33
B Section 34A
C Section 39
D Section 40
Answer : (A) = Section 33
(1 MARKS)

16. For an expense to be deductible as a trade or business expense:

I It must be related to carrying on a trade or business activity
II It must be ordinary and necessary
III It must be reasonable
IV It must be paid or incurred during the taxable year.
A I, II, III
B I, II, IV
C I, III, IV
D I, II, III, IV
Answer : (D) = I, II, III, IV
(2 MARKS)

17. Which of the following cannot be deducted from gross rental income (disallowed
expenses)?
A Renovation of property
B Repair of property
C Sewage charge
D Interest on loan borrowed for purchase of property
Answer : (A) = Renovation of property
(1 MARKS)
 TAXATION II (ATX10203)

18. Elvis Ltd, a company resident in the United States, sold 2 units of printing machines
to Senja Sdn Bhd (SSB), a printing company in Malaysia at a price of
RM500,000. SSB closes its accounts on 31 December each year. On 01.12.2017, an
additional sum of RM120,000 was paid to Elvis Ltd for the services, i.e. installation
and handling of the printing machines in Malaysia. Calculate the amount of
capital allowances SSB can claim.
A RM500,000
B RM608,000
C RM620,000
D RM632,000
Answer’s Working
RM
Cost 500,000
Installation and handling 120,000
QPE 620,000
Less : Initial Allowance
(124,000)
(20% × RM620,000)
Less : Annual Allowance
(86,800)
(14% × RM620,000)
Residual Expenditure 409,200

Answer : (C) = RM620,000

(5 MARKS)

PART B
TRUE OR FALSE?
 TAXATION II (ATX10203)

19. Capital receipts and capital expenditures are not taxable under the Income
Tax Act 1967.
Answer : True
(1 MARK)
20. Repairs, which includes improvements, to a business premises are tax deductible.
Answer : True
(1 MARK)
21. The cost of developing a website is capital in nature, while the cost of
maintaining a website is deductible because it is a revenue expense.
Answer : True
(1 MARK)
22. Generally, expenses incurred by a person prior to the commencement of his
operations or his business would not be allowable as a deduction against the gross
income of his business as they are considered not wholly and exclusively incurred in
the production of the income.
Answer : True
(1 MARK)
23. Accounting and audit fees for preparing a company’s tax return as well as for tax
advice are generally tax deductible.
Answer : True
(1 MARK)

PART C

STRUCTURED QUESTIONS.
 TAXATION II (ATX10203)

24. Delkin Sdn Bhd was incorporated in March 2001 and commenced the business of
manufacturing air-conditioner. It closes its accounts to 31 December each year. The
trading results for the year ended 31 December 2015 is appended below:

Delkin Sdn Bhd

Statement of Comprehensive Income for the year ended
31 December 2015
Note RM’000 RM’000
Sales 263,079
Less: Cost of sales (143,737)
Gross profit 119,342

Add: Other income

Dividend (i) 14
Interest (ii) 36
119,392
Less: Expenses
Loan interest (iii) 62
Entertainment (iv) 104
Depreciation 54
Repair and maintenance (v) 67
Bad and doubtful debts (vi) 285
Motor vehicle expenses (vii) 53
Professional fees (viii) 53
Insurance (ix) 35
Donation (x) 12 ( 725)
Profit before taxation 118,667

Notes to the account:

(i) Dividend

A single tier dividend was received during the year from an investment in a
local company amounting of RM14,000.

(ii) Interest

During the year, the company charged a total of RM25,000 interest to

customers who settled their overdue account. RM11,000 was interest on fixed
 TAXATION II (ATX10203)

deposit account received from a local bank.

(iii) Loan Interest

The company took a bank loan to make an investment (from which the
dividend was received). The interest charged was RM14,000. The company
took another loan for working capital. The interest paid was RM48,000.

(iv) Entertainment

Particulars RM
Annual dinner for staff and their family 14,000
Entertainment expenses on clients 90,000

(v) Repair and maintenance

The company had incurred the following expenses during the year to the
factory premises:

Particulars of expenditure RM’000

Construction of a covered car park 17
Replacing the factory door 50
Total 67

(vi) Bad and doubtful debts

 General provision RM190,000

 Specific provision trading debts RM95,000

(vii) Motor vehicle expenses

 RM4,000 relates to traffic offences.

 Motor vehicle maintenance charges of RM49,000 is made up of
repairs, spares, insurance, and road tax for the company vehicles.

(viii) Professional fees

 TAXATION II (ATX10203)

The company incurred RM31,000 for income tax appeal and due to the
company’s record keeping system that was not satisfactory the company on
the advice of its accountants, set up a new integrated accounting and audit
system that will comply with the Inland Revenue Board’s requirements, at a
cost of RM22,000.

(ix) Insurance

 The company paid a total of RM12,000 to a local insurance company,

being premium for insurance on cargo imported as well as exported
overseas during the year.

 Another RM23,000 was incurred on premium for insurance on the

company’s assets, plant and machinery. .

(x) Donation

On social responsibility program for the year, the company distribute cash
gift of RM12,000 to an approved charitable institution.

(xi) For the year of assessment 2013, the company is claiming capital allowance
of RM26,000 on its assets used in the business.

Required

Based on the information given, compute the chargeable income of Delkin Sdn Bhd
for the year of assessment 2015.

Note:

Your computation should start with the profit before taxation figure and follow the
description used in the Statement of profit or loss and where applicable the
description used in the notes to the accounts. In making your tax adjustments to the
entries, you should indicate ‘Nil’ where no adjustments are made or are not required.
Answer’s Working
       
  Delkin Sdn Bhd  
 TAXATION II (ATX10203)

  Computation Of Chargeable Income  

  for the year of assessment 2015  
  RM RM  
  Profit before taxation 118,667,000  
  Less : Non-business Income  
  Dividend from Malaysia (14,000)  
  Interest on Debtors NIL  
  Interest on Fixed Deposit (11,000)  
   
  118,642,000  
Add : Non-Allowable Expenses
Interest on loan 14,000
  Interest on working capital NIL  
  Depreciation 54,000  
  Entertainment Expenses (client) NIL  
Annual Dinner for Staff and their family
7,000
  (50%x14,000)  
  Construction of Covered Car Park 17,000  
  Replacing the Factory Door 50,000  
  General Provision 190,000  
  Specific Provision trading debts NIL  
  Traffic Offences NIL  
  Motor Vehicles Maintenance 49,000  
  Fees on Income Tax Appeal 31,000  
  Donation Approved 12,000 424,000  
  119,066,000  
  Less : Double Deduction  
  Insurance - Local 12,000  
  - Premium 23,000 (35,000)  
  ADJUSTED BUSINESS INCOME 119,031,000  
  Less : Capital Allowance (26,000)  
  STATUTORY BUSINESS INCOME 119,005,000  
   
  Add : Business Income  
  Dividend - Single Tier Exempted  
  Interest on Fixed Deposit 11,000  
   
  AGGREGATE INCOME 119,016,000  
   
  Less : Approved Donation  
  Approved Institution  
(10%x of AI )
  = 10%X119,016,000 (12,000)  
   
  TOTAL CHARGEABLE INCOME 119,004,000  
 TAXATION II (ATX10203)

       

(25 marks)

25. Briefly discuss the tax treatment in respect of loans or advances to a director
made from internal funds and external funds.

ANSWER:

Company that provides loans or advance from directors without interest or

with interest rate lower safe rate is deemed to receive interest income from the loans
from advance for the basis period for year of assessment and assessed under
paragraph 4(c) of the ITA. If the company provides loans or advances to directors
which are fully funded from internal funds, the company shall be deemed to have
gross income consisting of interest such loans or advances for that basis period and
section 140B of the ITA is applicable. If the loans or advances to directors are
financed from external funds or third party, the provision of section 140B of the ITA is
not applicable.

(5 MARKS)