Answers

Professional Level – Options Module, Paper P6 (MYS)

Advanced Taxation (Malaysia) June 2014 Answers

All statutory references are to the Income Tax Act 1967, as amended, unless otherwise stated.

1 Ayer Batu Sdn Bhd

Cekap Tax Services

168, Jalan Besar
50000 Kuala Lumpur
Malaysia
General Manager
Ayer Batu Sdn Bhd
Lot 899, Jalan Sejuk
60000 Shah Alam
Selangor
Malaysia
Dear Sir,
With reference to your enquiries regarding various tax matters in relation to Ayer Batu Sdn Bhd (ABSB), we set out our advice
below.

(a) Donations
ABSB’s donation of ice to the schools constitutes a withdrawal of stock for a non-business purpose [under s.24(2)], i.e. for
its own use. An amount equal to the market value of the stock ice at the time of its withdrawal should be treated as gross
income from business. In other words, ABSB is deemed to have sold the stock to itself at market value. The tax adjustment
to be made with regard to this is that RM25,000 should be recognised as gross income of the ice-manufacturing business
for the year of assessment 2013.
As for the gift of the delivery van to the School for the Disabled, it must be noted that the van was a fixed asset and qualifying
plant for the purposes of capital allowance. With the gifting of the van, ABSB ceased to use it for business with effect from
1 December 2013. ABSB is therefore deemed to have disposed of the said van on 1 December 2013.
In determining the disposal price of the delivery van, the disposal proceeds (zero in this case) should be compared to the
market value (which is RM38,000), taking the greater of the two amounts. In this case, the market value of RM38,000 is
the disposal price, which, when compared to the residual expenditure of RM35,000, will yield a balancing charge of
RM3,000.
The charge of RM45,000 as donations is not deductible in arriving at the adjusted income as the donations are not incurred
in the production of gross income. However, the cost of stock of RM10,000, though not allowed as a donation, will be allowed
as cost of goods sold to itself, i.e. ABSB is effectively taxed on the profit of RM15,000 (RM25,000 – 10,000).
In arriving at the total income, these donations are again not deductible because they were not donations in the form of
money.

(b) Technical service fees

As regards each option, the respective tax treatments from the perspectives of ABSB and Mr Oksijen are as discussed below:
(i) Mr Oksijen is an independent consultant
Tax deductibility to ABSB
The deductibility of the RM180,000 technical service fees payable to Mr Oksijen as an independent consultant depends
on the nexus of the service with the existing business of ice-manufacturing. If a nexus can be established, the amount
will be tax deductible to ABSB, provided the withholding tax requirements have been complied with. However, if the
bottled water project is deemed unconnected to the existing business, the RM180,000 may not pass the deductibility
tests as it relates to a pre-commencement expense.
Withholding tax compliance
If Mr Oksijen is engaged as an independent consultant, and given that Mr Oksijen will be physically present in Malaysia
to render the services, his non-resident status will render the payment of RM180,000 subject to withholding tax
[pursuant to s.109B]. ABSB will be obliged to withhold 10% of each payment to Mr Oksijen and pay this over to the
Inland Revenue Board (IRB) within one month of paying or crediting the payments to him.
Mr Oksijen’s liability to tax in Malaysia
Mr Oksijen will not have a fixed base in Malaysia as his stay in Malaysia is only for 12 weeks. Therefore the tax due
will effectively be assessed and collected by way of withholding tax (as above). Mr Oksijen will not be required to furnish
a tax return: the 10% tax collected is the final tax.

13
 (ii) Mr Oksijen is an employee
Tax deductibility to ABSB
Under normal circumstances, remuneration paid to an employee will rank for tax deduction, provided it is not a
pre-commencement expense. However, in this case, the duties of Mr Oksijen as an employee may be perceived to be
unrelated to the existing income-producing business of ice-manufacturing. If so, the tax deductibility may be challenged.
Even in this scenario, it may be counter-argued that it is an extension of the existing business activity, thereby
establishing nexus.
Withholding tax compliance
As Mr Oksijen is an employee, the withholding tax provisions will not be applicable. Instead, ABSB, as the employer,
will have to arrange for monthly tax deductions to be made from his monthly remuneration.
Mr Oksijen’s liability to tax in Malaysia
Mr Oksijen will be required to furnish a tax return in the prescribed form to the IRB at the end of his tenure in Malaysia,
reporting all his income derived from Malaysia during the 12-week period. However, as his stay in Malaysia is for only
12 weeks, he will be a non-resident of Malaysia for tax purposes; as such he will be subject to tax at the fixed rate of
26% without the benefit of any tax reliefs.

(c) Treatment of business activities

(i) Single source
The core ingredient of the existing business of ice-manufacturing is water. Producing bottled water uses the same core
material. It may therefore be reasonably argued that producing bottled water is an extension of the current activity of
producing ice. It may also be argued that the bottled water merely represents a higher value added product from water.
The overall control and management of both the activities will be the same as they are run by the same company.
Therefore, the two activities may be considered as coming under the same business source.
(ii) Separate sources
On the other hand, it may be argued that the processes involved in producing cubed ice and oxygenated bottled water
are entirely different, requiring different equipment and expertise. The employees engaged in the respective activities are
likely to be separate and distinct. Further, the hands-on or day-to-day control and management will rest with different
teams.
Therefore, the two activities may be considered as representing two separate and distinct business sources.

(d) Tax computations

Attached is an appendix laying out draft tax computations for the year of assessment (YA) 2014, illustrating the difference in
tax treatment if the two activities are treated as a single business source and as two separate and distinct business sources.
Single source
Under the single source treatment, the gross sales of both activities are merged into a single figure of RM13 million, producing
a combined adjusted income of RM2,360,000 (RM3,000,000 – RM640,000). The capital allowances (CA) of both activities
are similarly merged into a single amount of RM2,663,000, of which RM2,360,000 can be deducted from the adjusted
income of RM2,360,000 to yield a zero statutory income. The RM303,000 unabsorbed CA is carried forward to YA2015.
As a result, ABSB’s total income is the interest income for YA2014 of RM200,000.
Two separate and distinct sources
If it is deemed that there are to be two business sources, the CA for the bottled water activity will have to be carried forward
to be set off against the adjusted income of the bottled water business in YA2015. However, the adjusted loss of RM640,000
represents a current year loss which may be deducted from the aggregate income.
Because of the restriction on the offset of the CA, the total income under this scenario is much higher at RM2,467,000.
Thus, the tax liability for YA2014 is substantially higher if the two-source treatment is adopted and as a result ABSB will be
faced with a higher tax bill even though it will have substantial CA to carry forward, which may reduce its tax liability in future
years.
We hope that the tax issues are now clear. Should you require further clarifications, please do not hesitate to contact us.

Yours faithfully,

………………………
Cekap Tax Services

14
 Appendix
Tax computation Year of assessment 2014
Single source Separate sources
RM’000 RM’000 RM’000 RM’000
Ice Bottled water
Gross sales 13,000 12,000 1,000
––––––– ––––––– ––––––
Adjusted income/(loss) 2,360 3,000 (640)/(nil)
CA current year (2,663) (93) (2,570)
CA absorbed (2,360) (2,360) (93) (93) nil
–––––– ––––––– ––– ––––––– ––––––
CA carried forward (303) nil (2,570)
–––––– ––– ––––––
Statutory income nil 2,907 nil
––––
Statutory income nil
Statutory income from all businesses nil 2,907
Interest income 200 200
––––––– –––––––
Aggregate income 200 3,107
Less: Current year loss nil (640)
––––––– –––––––
Total income 200 2,467
––––––– –––––––

2 Domestik Group

(a) A Sdn Bhd

Incentive measure and pre-requisites
The incentive measure suitable for A Sdn Bhd is the allowance for increased exports (AIE) because it fulfils the necessary
conditions as follows:
– it is a resident company engaged in manufacturing a consumer product;
– it consistently achieved at least 30% of value added;
– it has export sales, and expects to increase its export sales year-on-year; and
– it does not enjoy any tax incentive in the year of assessment (YA) 2014.
Computations and mechanism
RM
Gross export sales for YA2013 1,000,000
20% increase in export sales in 2014 200,000
AIE of 10% of the increase 20,000
The RM20,000 is set off against 70% of the statutory income (SI) for YA2014. Any amount unabsorbed may be carried
forward, to be added to the AIE for YA2015, and set off against 70% of the SI for YA2015, and so on.

(b) B Sdn Bhd

Incentive measure and pre-requisites
B Sdn Bhd should consider reinvestment allowance (RA) as it fulfils the following necessary conditions:
– it is a resident company;
– it has been in operation for more than 36 months;
– it does not enjoy any tax incentive in YA2014; and
– it will incur qualifying capital expenditure of RM6 million in connection with a qualifying project, i.e. the automating of
its operations.
Computations and mechanism
The RA is an additional relief over and above the claim for capital allowances on the same capital expenditure.
The RA is the amount of SI to be exempted from tax based on the amount of qualifying capital expenditure incurred. The
amount of RA is 60% of the qualifying capital expenditure, i.e. RM6,000,000 x 60% = RM3,600,000.
The amount of SI for a YA to be exempted will be the lower of the available RA or 70% of SI. The RM3·6 million is set off
against 70% of the SI of the business source. Any amount unabsorbed may be carried forward to the following YA to be
similarly set off against 70% of the SI, and so on.

(c) C Sdn Bhd

Incentive measure and pre-requisites
The most suitable incentive is the investment tax allowance (ITA). The reasons are that it has no previous operating history,
substantial capital investment over three years and is not profitable in the initial years.

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 The pre-requisites satisfied are:
– it is a company intending to manufacture a promoted product;
– it does not enjoy any tax incentive; and
– it will incur qualifying capital expenditure of RM100 million over three years, which is within the five-year timeframe
allowed.
Computations and mechanism
The ITA is an additional relief over and above the claim for capital allowances on the same qualifying capital expenditure.
ITA is the amount of SI to be exempted from tax based on the amount of qualifying capital expenditure incurred. The quantum
of ITA is 60% of the qualifying capital expenditure incurred each year, i.e.:
RM million
Year 1 RM50 million x 60% 30
Year 2 RM30 million x 60% 18
Year 3 RM20 million x 60% 12
–––
Total 60
–––
The SI to be exempted for each YA is the lower of the available ITA or 70%/100% of the SI. As there will be no SI in the first
four years, the RM60 million will be carried forward to be set off against 70%/100% of the SI of the business source in the
fifth year and thereafter until it is fully absorbed.

(d) D Sdn Bhd

Incentive measure and pre-requisites
The most suitable incentive for D Sdn Bhd is pioneer status (PS) because it expects to be profitable shortly after
commencement, thus taking full advantage of the five-year tax relief period (TRP).
The pre-requisite fulfilled is that it proposes to participate in a promoted activity.
Computations and mechanism
PS is an incentive whereby 70%/100% of the SI for a YA is exempted from tax during the TRP, which is a period of five years
from the date of production day. The SI exempted in each YA is reduced by any current year non-pioneer loss and pioneer
loss before the exempted SI is credited to the tax exempt account for payment of an exempt dividend. After allowing for the
70% exemption, the remaining 30% of the SI will be deemed total income and subject to tax.
As an illustration, the computation of D Sdn Bhd’s total income for Year 1 will be as follows:
RM’000 RM’000
Statutory income 10,000
70% thereon 7,000
Less: Current year non-pioneer loss nil
Pioneer loss nil
––––––
Exempted 7,000 (7,000)
–––––– ––––––
30% to be fast-tracked to total income 3,000
––––––
Aggregate income nil
––––––
Total income 3,000
––––––

3 Beli-Jual Sdn Bhd

(a) Real property company (RPC) status

An RPC is a controlled company holding real property or shares in another RPC of which the defined value is not less than
75% of the value of the company’s total tangible assets.
Before 1 July 2010, BJSB did not own any real property or investments, so BJSB was not an RPC.
On 1 July 2010, on acquiring the real property, and applying the formula of real property and RPC shares over total tangible
assets, the percentage will likely exceed 75% as BJSB had minimal tangible assets beside the land. Coupled with its being
a controlled company, BJSB will have fulfilled the conditions for being an RPC.
On 1 December 2012, BJSB was already an RPC, and it acquired not disposed of real property. Hence there was no need
to re-assess its RPC status on that day. BJSB remained an RPC.
On 1 July 2014, when it disposes of all its real property, BJSB will cease to be an RPC as it no longer owns any real property.

16
 (b) Real property gains tax (RPGT) or income tax
(i) (1) RPGT
When it purchased the land at a bargain price, it was merely seizing an opportunity which came its way. Since the
purchase, BJSB has consistently used the 90 acres of land as its fixed asset in a plantation business. When it
acquired the additional 20 acres, it was to expand the plantation acreage and to gain accessibility to the main road.
Its actual conduct was to continue running the land as a plantation, i.e. using the land as its capital asset.
The fact that the land has appreciated was merely fortuitous. BJSB had a profit motive, but not a profit-seeking
motive. No effort has been taken to seek out a buyer, instead, an offer was made by the prospective buyer.
Therefore, this is a realisation of a capital gain.
Therefore, disposal of the 110 acres should be treated as a disposal of a fixed asset, and subject to RPGT.
(2) Income tax
BJSB is in the trading business, completely unrelated to the plantation business. When it purchased the 90 acres,
it probably had in mind an intention to sell for a profit. When it purchased the additional 20 acres, it was to
enhance the marketability of the enlarged land for property development purposes. The fact that it was a
loss-making plantation demonstrates that BJSB could not have intended to keep the plantation going for much
longer. It had operated the plantation for a relatively short period of four years only. This is indicative of its intention
to sell.
The intention was to acquire at a low price, enhance its marketability by gaining accessibility to the main road and
then dispose of it for a good profit.
Therefore, its conduct indicates its profit-seeking motive and the profit will be subject to income tax.
(ii) The course of action taken by BJSB has been consistent with the running of the land as a plantation. That the 20 acres
enhanced the suitability of the land for property development was fortuitous. On balance, the land did not cease to be
a fixed asset to BJSB. Therefore, RPGT should be applied rather than income tax.

(c) Arguments against non-deduction of losses

In invoking the general anti-avoidance provision [of s.140], the Director General must have reason to believe that the
acquisition of the land and its operation as a plantation was meant to:
– alter the incidence of tax,
– relieve any person from tax,
– evade or avoid tax, or
– hinder or prevent the operation of the Act.
The 90 acres were acquired under a willing-seller–willing-buyer circumstance as the parties involved are not related.
Therefore, this was a bona fide transaction with commercial substance.
After its acquisition, BJSB continued to operate the land as a plantation. The losses were genuinely incurred in the ordinary
course of carrying out business.
The acquisition of the additional 20 acres of adjoining land shows that BJSB is serious about the plantation business.
Therefore, the proposed invocation of anti-avoidance provisions to deny the deduction of the losses is not justified.

4 Mr Si-Kaya

(a) Controlled sale: computation of capital allowances (CA)

As Mr Si-Kaya owns more than 50% of the share capital of both Blue Sdn Bhd (Blue) and Orange Sdn Bhd (Orange), the
companies are controlled by a common shareholder. As such, the disposal of business assets by Blue to Orange constitutes
controlled sales.
Applying the controlled sales provisions, the disposal date of 3 June 2014 fell into the basis period 1 June 2014 to
31 December 2014 for the year of assessment (YA) 2014 in respect of the acquirer. Orange is therefore first eligible to claim
CA in YA2014. Blue, the disposer, is eligible for CA up to and including YA2013.
As a controlled sale, the disposal price is deemed to be equal to the residual expenditure, leading to no balancing charge or
balancing allowance for Blue, the disposer.
For YA2014, Orange’s claim for CA is computed as follows:
Factory building Plant and machinery
RM RM
Cost 400,000 800,000
–––––––– ––––––––
Residual expenditure 288,000 304,000
Annual allowance at 3% (12,000)
Annual allowance at 14% (112,000)

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 (b) Stamp duty
The combined market value of the factory land and building is RM3,480,000 (RM2,800,000 + RM680,000) while the
transaction price is RM2,180,000 (RM1,500,000 + RM680,000).
The greater of the market value and the transaction price is taken as the basis for levying stamp duty, as below:
RM
First RM100,000 at 1% 1,000
Next RM400,000 at 2% 8,000
Remaining RM2,980,000 at 3% 89,400
–––––––
Total 98,400
–––––––

(c) Estimate/revised estimate of tax

Blue Sdn Bhd
Blue’s 12-month basis period for YA2014 ends on 30 June 2014, so 3 June 2014 is long past the ninth month. Blue is
therefore not eligible to revise its tax estimate for YA2014.
For YA2015, the tax estimate would have been furnished to the Inland Revenue Board (IRB) by 1 June 2014. In view of the
expected 50% reduction in its tax charge for YA2015, Blue should furnish a revised (reduced) tax estimate to the IRB in the
sixth month of its financial year, i.e. in December 2014.
Orange Sdn Bhd
Being a company with a share capital exceeding RM2·5 million and which has newly commenced a business, Orange must
furnish a tax estimate to the IRB for YA2014 within three months of the commencement of operations, i.e. by 2 September
2014.
For YA2015, Orange will have to furnish its tax estimate as normal which is not later than 30 days before the basis period
begins, i.e. by 2 December 2014.

5 (a) Mr Korporate
(i) Computation of tax liability
Cash package Cash + benefits package
RM RM
Cash remuneration 250,000 150,000
School fees 20,000
––––––––
S.13(1)(a) income 170,000
Accommodation benefit
30% of RM170,000 = 51,000
Defined value: RM7,000 x 12 = 84,000
The lower 51,000
–––––––– ––––––––
Statutory/Aggregate/Total income 250,000 221,000
Personal reliefs RM
Self 9,000
Wife 3,000
Child x 2 2,000
EPF (maximum) 6,000
––––––
(20,000) (20,000)
–––––––– ––––––––
Chargeable income 230,000 201,000
–––––––– ––––––––
Tax charged:
On first RM100,000 13,850 13,850
On remaining RM130,000 at 26% 33,800
On remaining RM101,000 at 26% 26,260
–––––––– ––––––––
Tax charged/payable 47,650 40,110
–––––––– ––––––––

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 (ii) Computation of available cash
Cash package Cash + Benefits package
RM RM RM RM
Cash remuneration 250,000 150,000
EPF at 12% 30,000
EPF at 19% 28,500
–––––––– ––––––––
Total cash received 280,000 178,500
Less: Income tax (as in (i)) 47,650 40,110
School fees 20,000 –
Rent 84,000 –
––––––– –––––––
(151,650) (40,110)
–––––––– ––––––––
Available cash 128,350 138,390
–––––––– ––––––––
(iii) Relative merits
The cash package has the advantage of a larger base for the purposes of EPF contributions, bonus payment, and salary
increment. Its disadvantage is every ringgit of remuneration is subject to tax.
Under the cash-and-benefits package, the base figure for EPF contribution, bonus and salary increment is substantially
smaller. But it has the advantage of Mr Korporate bearing only the tax in respect of his fixed expenditure items of school
fees and rent. Also, the rental value is restricted to 30% of his remuneration, thus is not fully taxed. There is also more
available cash under the cash-and-benefits package.

(b) Hafiz
A scholarship is exempt income and this is the case even if the payment is connected to an employment.
As Hafiz is under the age of 21 and unmarried, any income arising from the settlement arrangement will be ignored [s.65
ITA]. Consequently, Hafiz will not pay any tax on this income but it will be taxed in the hands of the settlor, Hafiz’s father.
Hafiz’s wages from his part-time employment is income subject to tax. However, the total wages received will not exceed the
personal tax reliefs and tax rebate applicable to him. Therefore, he will not be liable for any tax payment.

19
Professional Level – Options Module, Paper P6 (MYS)
Advanced Taxation (Malaysia) June 2014 Marking Scheme

Marks
1 Ayer Batu Sdn Bhd

(a) Donations
Identify as withdrawal of stock 1
Treatment: deemed sold at market value 1
Tax adjustment ½
Delivery van – disposal 1
Deemed at market value ½+½
Balancing charge ½
Donation charge: adjustment ½
Non-qualifying as donation in kind ½
–––––
6
–––––

(b) Technical fees

(i) As independent consultant
Tax deductibility to ABSB
Need to establish nexus with existing business activity 1
If bottled water project deemed unconnected, no deduction 1
Withholding tax compliance
Service rendered in Malaysia and non-resident status ½+½
Withholding tax applicable: 10% and pay over in one month ½+½
Tax liability of Mr Oksijen
Withholding mechanism triggered, no fixed base ½+½
Final tax, no return required ½+½
–––––
6
–––––
(ii) As employee
Tax deductibility to ABSB
Likely deductible ½
Possibility of non-deduction 1
Must establish nexus ½
Withholding tax compliance
Payment to employee, no withholding tax 1
Monthly tax deductions 1
Tax liability of Mr Oksijen
Must file tax return at end of 12-week period 1
Non-resident, at 26% ½+½
–––––
6
–––––

(c) Single or separate sources

(i) Single business source
Common core ingredients 1
High value added product 1
Common control and management 1
–––––
3
–––––
(ii) Two separate sources
Entirely different processes and expertise 1
Different team of employees 1
Different hands-on control and management 1
–––––
3
–––––

21
 Marks
(d) Computations of single source and separate sources
Narrative in the letter
Single source 2½
Separate source 1½
Computations 3
–––––
7
–––––
Professional marks
Format and presentation of letter 1
Clarity, effectiveness of communication including logical flow 2
Appropriate use of appendix 1
–––––
4
–––––
35
–––––

2 Domestik Group

(a) A Sdn Bhd

Allowance for increased exports 1
Conditions met 2
Computation and mechanism 3
–––––
6
–––––

(b) B Sdn Bhd

Reinvestment allowance 1
Conditions met 2
Computation and mechanism 3
–––––
6
–––––

(c) C Sdn Bhd

Investment tax allowance, reasons 1+1
Conditions met 2
Computations and mechanism 3
–––––
7
–––––

(d) D Sdn Bhd

Pioneer status, why suitable 1+1
Condition met 1
Computation and mechanism 3
–––––
6
–––––
25
–––––

22
 Marks
3 Beli-Jual Sdn Bhd

(a) RPC status

Definition of a RPC 1
Before 1 July 2010 1
On 1 July 2010 2
On 1 December 2012 1½
On 1 July 2014 1½
–––––
Available 7
–––––
Maximum 6
–––––

(b) RPGT or income tax

(i) (1) Arguments for RPGT 3
(2) Arguments for income tax 3
–––––
6
–––––
(ii) Reasoned conclusion 2
–––––

(c) Anti-avoidance
DG must have reasons to invoke provisions 1+1
Analysis of specific circumstances and conclusion 4
–––––
6
–––––
20
–––––

4 Mr Si-Kaya

(a) Controlled sale: computation of capital allowances

Why a controlled sale ½+½
Controlled sale rules applied:
Disposal date: first YA for acquirer 1+1
Disposer’s eligibility for CA 1
Disposal price deemed at RE 1
No BA/BC 1
Acquirer’s CA based on original QPE ½+½
Annual allowance: Building ½+½
Plant and machinery ½+½
–––––
9
–––––

(b) Stamp duty

Correctly combine land and building values 1
Compare market value and transaction price 1
Adopt market value as the base 1
Applying the rates 1
–––––
4
–––––

(c) Compliance requirements

Blue Sdn Bhd
Cannot revise for YA2014, reason 1+1
Can revise YA2015 downwards in sixth month 1+1
Orange Sdn Bhd
New company with issued capital of more than RM2·5 million commences operations 1
Tax estimate for YA2014 within three months of commencement, by 2 September 2014 1+½
YA2015 no effect/as normal ½
–––––
7
–––––
20
–––––

23
 Marks
5 (a) Mr Korporate
(i) Computation of tax liability
Cash package 3
Cash + benefits package 4
–––––
7
–––––
(ii) Computation of available cash
Cash package 3
Cash + benefits package 2
–––––
5
–––––
(iii) Relative merits
Cash package 1½
Cash + benefits package 2½
–––––
4
–––––

(b) Hafiz
Scholarship ½+½
Settled rental income 1+½
Part-time employment income 1+½
–––––
4
–––––
20
–––––

24