SA Giye ACCA P6 Advanced Taxation Ms Ong Siyu Su Lecture Plan - ACCA Paper P6 Advanced Taxation Lecturer: Ms Ong Siyu Su (eee97046@yahoo.com) Session | Topics BPP Study | Class Revision Kit text | Questions | Questions ‘Session | ACCA F6 ASPECTS Q1,10,12,,16,17,18,19, 182 Chapter 4 20,21,23,29,30,22,46,4 1, 77,87,90,101,102,103,1 06,117,132,134 | ‘Session | TAX INCENTIVES Q35,37,38, 384 | 4, Pioneer Status Chapter 6 39,40,42,43, 2. Investment Tax Alowance 75,88,91,97,113,133, 3. Reinvestment Alowance 4, R&D ‘Session | 1. Double Taxation Agreements Chapter QI3.85 8 | 2. Withholding Tax 283 | Session | Dividend and interest Chapter t @aii5 6 | 1. interest on money borrowed 2. interest on debts 3. Interest estiction 4, Interest as business source Session | Other income tax incentives Chapter (Q36.41,52 788 | 1. Deduction for Cost of Acguistion of proprietary 80,92,93 Rights 2. Acquisition of foreign owned company 3. Multimedia Super Cortidor 4. Approved Food Production Project (AFPP) 5. Investment in AFPP 6. Malaysian International Trading Co T. Export of Manufactured Goods & Agricultural Produce 8. Income Tax (Allowance for Increased Export) 8, Income Tax (Exemption No 9) Order 2002 ~ Export of services 410. Motor vehicles, automobile components and parts, income Tax Exemption ‘1. Incentive for Private Healthcare Centre ‘Session | Labuan = International Offshore Financial Centre | Chapter 7 QH4.45.94 9 Session | Leasing Companies Chapter 12 (66.67 10 | 1. lease agreement or arrangement shall be deemed tobe @ sale agreement (Reguiaton 4) 2. Taximplcation of TLR 1986 3.__Cross border leasing - ‘Session | Investment Holding Company Chapter (49.5051, 11812 | 1. Basis of assessment 187 53,54,55 2. Sources of income 3. Permitted fraction of expenses Listed Investment Holding Company Unit Trust Real Estate Investment Trust/Property Trust Fund Venture Capital Companies (VCs) ‘Session | Real Property Gain Tax Chapter 5 Q56,61,62, 13814. | Real Property Company att 63,64,65,68,69,82, ‘Stamp Duty 95,96,107 Jun 2018 Exam Page 7 of 170{Phocxrioxss ACCA P6 Advanced Taxation Ms Ong Siyu Su Session 15 ‘Anti Avoidance S140 Tax Audit Transfer Pricing, Controlled Sales Chapter 10 813 8.283171, 72,73,14,89 Session Tax Planning 4. Company as a business vehicle 2. Corporate Tax Plenning 3. Method of Asset Acquisition 4. Tax Planning for Interest restriction Chapter 1489 Q14,27,57, 58,70, 76,85,135, 16 Session Business Trust Limited Liability Partnership Chapter f (QB1,108, 110,117,112 Gross Border Activities Derivation of employment income Section 7(1)(8) 813(1)(a) Gratuity 13(1)(a) Tax exemgt allowances Perguiste: Share option $19(1)(@) Compensation for loss of employment Foreigners Working in Malaysia Personal Tax planning 1. Benefits of resident vs Non resident individual 2. Income segregation involving income, investments and properties. 3. Segregation of investment and property 4, Structuring a remuneration package 5. Choice of Business vehicle : Sole proprietorship VA Company (Sd Bho) Personal finance Chapter 15 26,2634, 78,79,84,98, 104,105 Session 19 Estate Settlement Trust Chapter Q59,60,99, 100 Session 20 Goods and Service Tax (GST) ‘Chapter 16 Q1122,25, 32,86,119, 120,121,122,123,125, 126,127,128,129,130 _| Mock Exam Cover topics that are important forthe coming exam sitting ‘Students are advice to work on the BPP revision kit questions during the term. Also if possible read more than study materials given during the term, ‘The success of passing ACCA’s to study consistently ie asking questions inthe class, practise past year questions, doing tests and mock exam, ete signin ‘email: p6materals128@gmail.com passwords: osspématerials Jun 2018 Exam Page 8 of 170Mikio ACCA P6 Advanced Taxation Ms Ong Siyu Su ADVANCED TAXATION (MALAYSIA) ACCA PS (3 HOURS 15 MINUTES) (Questions wil be scenario based and wil normaly involve consideration of more than one tax together with some elements of planning and the interaction of taxes. Computations wil normally only be required in suppor of explanations or advice and natin isolation The examination is a three hour paper, with 15 minutes additional reading and planning ime. Tax rates, allowances and information on certain reliefs willbe given in the examination paper. Pass marks : 50% Section A consists of two compulsory questions. ‘Question t wll have 35 including professional marks, and Question 2 will have 25 marks. Section B consists of three 20-mark questions, two of which must be answered, ‘ACCA GUIDE TO EXAMINATION — October 2017 to 30 September 2018 CUT OFF DATE FOR EXAMINABLE LIGISLATIONS IS 31 MARCH 2017 2017 BUDGET PROPOSALS REAL PROPERTY GAINS TAX GOODS AND SERVICE TAX Professional marks/@ONUS MARKS) Format and presentation of letter, report or memorandum Clarity effectiveness of communication including logical flow Appropriate use of appendix ||" Jun 2018 Exam Page 9 of 170TAX RATES AND ALLOWANCES The following tax rates, allowances and values aro to be used in answering the questions Income tax rates Re Chargeable income nt individuals First Next Next Next Next Next Next Next Next Next Exceeding RM 5,000 16,000 18,000 16,000 20,000 30,000 150,000 160,000 200,000 400,000 1,000,000 Paid up ordinary share capital £RM2,500,000 or less ‘More than 2,500,000, Non-residents Company Individual Al chargeable profits ACCA P6 Advanced Taxation Cumulative tax 160 00 2,400 5,600 11,900 47,900 84,650 134,650 238,650 Excess over RM500,000 Rate % ORM (0-500) 0 (6,001-20,000) 1 (20,001 35,000) 5 (36,00 50,000) 10 (60,001(70,000)) 16 (70,001- 100,000) 2 (100,001-250,000) 24 (250,001-400,000) 245 (400,001-600,000) 25 (600,001-1,000,000) 26 2B Resident company First RM 500,000 18% 28% 20% 28% Labuan entity- income from a Labuan trading activity 20% 28% 3% ‘Trust body - resident or nonsesident © «4 RECT Ms Ong Siyu Su All chargeable income 24% Personal relies and allowances RW Set 9,000 Disabled set, adaltional 6,000 Medical expenses expended on parents maximum) 5,000 “Medical expenses expended on self, spouse orchid with serious disease, (maximum) 6.000 including up to RM500 for medica examination Parental care (each) 4,500 Basic supporting equipment for disabled self, spouse, child or parent maximum) 6.000 Study course fees for skils or qualticatons maximum) 7.000 Lifesiyle allowance maximum) 2,500 Spouse relief 4,000 Disabled spouse, additional 3.500 CChil-basic rate (cach) 2.000 Child — higher rate (cach) 8,000 Disabled child (cach) 6,000 Disabled child, additional (cach) 8,000 Jun 2018 Exam Page 10 of 170mie: TH ACCA P6 Advanced Taxation Ms Ong Siyu Su Childcare (below sik years old) (each, maximum) 1000 Breastfeeding equipment (evaxinum) 1000 Life insurance premiums and contributions to approved funds (maximum) 6,000 Private retirement scheme contibutions, deferred annuity premiums (maximum) 3,000 Medical and/or education insurance premiums for sat, spouse or child (maximum) 3,000 Deposit fora child nto Natonal Education Saving Scheme (ovaximum) 6,000 Contribution to Social Security Organisaton (SOCSO} (ovaximum) 250 Rebates Chargeable income not exceeding RM35,000 RM Individual ~ basic rate 400 Individual ented to a deduction fora spouse or a former wife 800 Capita allowances Initial Annual rate% rate Industrial buildings 10 3 Piant and machinery - general 20 “4 Motor vehicles and heavy machinery 20 0 Office equipment, furiture and tings 20 10 Agriculture allowance Buildings forthe welfare of employees ni 2 Other buildings used inthe business nil 10 Allother qualifying agriculture expenditure nil 50 Real property gains tax Companies Individuals All others (non-citzens and non- permanent residents) Date of disposal Rate % Rate % Rate % Disposal within three years ftom date of aoquisition 30% 30% 30% Disposal in the fourth year ater date of acquisition 20% 30% 20% Dispos inthe fith year ater date of acquisition 18% 30% 15% Disposel in the sixth year ater date of acquisition or thereafter 5% 3% 0% Goods and services tax (GST) Standard rate 6% ‘Stamp duty Rates of duty under the First Schedule Conveyance, assignment, transfer or absolute bil of sale Rate % Sale of property For every R10 or fractional part thereof On the fist RM100,000 1 On the next RN400,000 2 (On the excess over RMS00,000 3 Sale of company shares 03 (On every RIMt,000 or fractional part thereof Jun 2018 Exam Page 11 of 170ACCA P6 Advanced Taxation Ms Ong Siyu Su Lotter format Wiiter’s name Address Date Recipient's name Address: Dear Sir, Subject: As instructed, | append below the tax implication ofthe \We hope the above explanation serve to clarity and help in your deliberations. Please do not hesitate to contact us if you require futher assistance, Yours faithfully Pasion Co's name Appendix Report format To: From: Date: Report onthe... As instructed by you, | present herewith my report onthe above matter | hope the above clarifies the... End of Report ‘Appendix Jun 2018 Exam Page 12 of 170Bly Memorandum format ACCA P6 Advanced Taxation Ms Ong Siyu Su To: From: Date: ‘Subject: Various issues relating tothe years 2012 and 2013 as requested Appendix Jun 2018 Exam Page 13 of 170ACCA P6 Advanced Taxation Ms Ong Siyu Su [Chapter 7 F6 MYS syllabus included in P6 MYS syllabus 1d 12 13 14 15 16 17 18 19 4.10 1M 142 143 ‘Computation of Chargeable Income ‘Approved donation Basis period & change in accounting periods Business Income Business Expenses Other income : Interest income & Rental income Miscellaneous Receipts Relief for capital expenditure : Capital Allowance Industrial Building Allowance Agriculture Allowance Self assessments, Appeal, Tax Audit, Investigation, Responsi of Employers Collection and Recovery of Tax Questions Jun 2018 Exam Page 14 of 170ACCA P6 Advanced Taxation Ms Ong Siyu Su 414 Computation of chargeable income Computation of Char ‘Sd{a)Business income RM RM Net profit before tax (om statement of profit or loss) x ‘Add: non allovabe expenses x Less: oher source of income % Capital gain ®) Special deduction % Double deduction w Adjusted Income ‘Note 1 x ‘Add: Balancing charge x Less: capt alowance — curent ® = bi ®) Balancing allowance oo Statutory Income (business 1) ‘S4() Statutory income (business 2) ‘Agoregate statutory Business income (ASB!) Less: unabsorbed business loss bf Net ASB) >fB oxo > Non business source ( S4{c) (4) Gross income x Less: allowable expenses oo ‘Adjusted income/Statutony Income Aggregate Income Less: Curent year business loss Qualifying pre-operating expenditure *Note 2 ‘Approved donation Defined Aggregate Income Less: current year loss surendered by elated 00 Total income Less: Personal reliefs Chargeable income ‘Note 1: Another format for S4la >< xB xBRE xo ‘Gross income x less: Wholy & exclusively expenses (X) Less: Special deducton ) Less: double deduction ri Adjusted Income x *Note 2: Qualifying Pre-operating business exsenses [include feasibly studies, market research, travelling expenses , accommodation and sustenance max RNMO0 per day per person for acc & sustenance) io overseas investment in countries designated by MOF Lnabsorbed amount can be cif to future YA to be offset against aggregate income after current year business loss Jun 2018 Exam Page 15 of 170aie ACCA P6 Advanced Taxation Ms Ong Siyu Su 41.2 Approved Donation Individual | Company | others 7 | Cash donation to approved instuton orto Yund eld by approved Inetuion or v v y organisation (restricted to 7 or 10% of aggregate income) 2 | Cash contribution to approved sports acy (resticted oT or TO% oF aggregale v v q income) -approved by Minister -approved by Commissioners of Sports 3 [Cash contribution orn kind fr project of national erst - approved by Minister 7 T T (restricted to 7 or 10% of aggregate income) 4 | agit of money for he provision ofibrary facies which are acoessble tothe publ, to | —V v pubic libraries, orto Ibraries of schools and institutes of higher education (estcted to -Rw20 000) 5_| Cash or medica equipment to approved healthcare falty(esrcted to RM20,000) v 5 5 | Cash or contbuon in kind for provision of fais in public places or disabled person | V 5 - {The value of th deduction is determined by the relevent ocal authority) T_[ Zakat pemiagaen (restricted to 2.5% of aggregate income) 5 T T | Cash donation to Government, State Government, local authorly T q y | Gift of Arefact, manuscript or painting to Government, State Government qv v v (The amount tobe deducted isthe value as determined by the depertment of museums |__| Malaysia or the National Archives) 7 | Git of panting to natonal or state at gallery (The deduction fs oqualo the vale oF T v the painting, as determined by the national or state art gallery) L (Others: trust, club, co-operative society oF trade association or Limited Liabilty Partnership Item (142+3) s 10% of aggregate income for companies Item (1243) < 7% of aggregate income for individuals and others Note: Cash (Ang pow) to inmates of approved institution do not constitute approved donation. Jun 2018 Exam Page 16 of 170ACCA P6 Advanced Taxation ‘Ms Ong Siyu Su 41.3 Basis period & change of accounting periods Basis period (PR 8/2014) ] Determining the basis period for a YAis important as it determines the period in which income arising is recognized, expenses are tveated as incurred, and capital expenditure on assets i treated as incurred. Correctly determining the basis period is therefore significant in the flowing aspects of tax management: * Accurately determining the adusted income, the correct claim for capital allowances and, thus, the chargeable income and tax lablty for a YA ‘+ Providing a basis for the estimation of tax chargeable for the relevant basis periods, and ‘+ Identiving the compliance resnonsbiltis forthe respective YAS, New Operation WEF YA 20"4, the basis period for a co, an LLP. a trust body and co-operative society on commencement ofits operation is determined as follows: Ifthe accounts are prepared for ) a period less than 12 mths ending on a day inthe same year (basis period for the frst YA) ) any petiod ending in the second year, no basis period forte frst YA ( basis period for the 2% YA) c} a period of more than 12 months ending inthe 3° year and there are no basis periods for the fist YA and the second YA (basis perio for the 3" YA) Example First Accounts Ya Basis period T, | 12-14=30.9-14 (8 mths) 2014 2015 [2 | 16:19-39.3.14 (17 months) 2014 No basis period forthe YA 2013 2015 3 | 1143— 90.4-15( 18 months) 28 No basis period for the YA 2013 & 2014 2016 If above co has paid up ordinary share capital of not exceeding RM2.5m atthe commencement of ts operation, not required to furnish an estimate of tax 4.YA2014 and YA 2015 first estimate to fumish is YA 2NA2014 and YA 2015 first estimate to fumish is YA 3.YA 2013, YA 2014 and YA 2015 first estimate to furnish is YA i ti Commencing from the YA 2014, an entity which isin operation fais to cose its accounts on the same date in the following year (flue year) the DGIR wil determine the basis periods forthe failure year and the folowing the failure year The accounting period made up by the taxpayer in the failure year would generally be accepted by the DGIR provided that (i) there is no missing YA {i there shall not be two or more accounts closed in the same YA (ii) where an accounting period must be divided between 2 YAS, there is an uneven division ofthe basis period between 2 YAs, any fraction of a month should be treated as falling into the first period. (W)_ No overlapping of basis periods The provision apples to all cases iespecive of whether the accounts before falue year are closed on 31 Dec or on date other than 31 Dec. ‘Accounting period YA Basis period 1. ] Changing Aci Period forless | 4.313-28.2.14 (Tam) 2015 than 42 mths and ending in the | 1.3.14 ~34.12.14 (10m) 2016 same year 4.4.15 ~31.12.15 (12m) (combine 2sots of accounts) | Failure year 2 | Changing Acclg period for less | 1.1.13-31.12.13(12m) 2014 than 12:mths and ending in the | 1.1.14-30.4.14 (4m) 2015 following yr 41.5.14-30.4.15(12m) Failure year. 3 | Changing Acctg period for more | 1.8.12-31.7.13(12m) 2013 than 12 mths and ending in the | 1.8.13 ~31.10.14(15m) 2014 following yr 4.44-44-31.40.18(12m) 2015 Faire year Jun 2018 Exam Page 17 of 170Bix ACCA P6 Advanced Taxation Ms Ong Siyu Su E_] Changing Aocig period for mare | 1.1.13~ 34.42.19 (12m) 2013 than 12 months and ending in| 1.1.14 ~31.1.15 (19m) 2014 the third year 4.2.15-31.1.16 (12m) 2015 Idvide the acca pesiod ito 2)_| Failre year 2016 Co with Existing Operations Commencing New Operations the basis period forthe new operation is the same asthe basis period ofthe existing operation, Co oining a partnership, the partnership will regarded as a new operation, the basis period forts exstng operation is also the basis, perio for the partnership source regardless of partnership's accounting period ‘Summary New business Prepared for 12 months, required by law, follow group of alc, closed alc on 31.12, fist set of accounts end in the same year, inthe following year or in the 3* year — Accept accounting period as basis period ( date of commencement to date of casing ofits accounts) Commencement of second or subsequent operations —> date of commencement to date of closing of existing accounts Change of accounting period: (i) Newalc ends in the folowing year —> accept acct period as basis period {i New & last ac ends in the same year —» agoregate new alc with te following basis period as YA {il)__New ales ends inthe 3 year —» apportion the new ales into 2 basis period for 2YAs dune 15.03(@) On 1 June 2016 Best Sdn Bhd (Best) a trading company which makes up its accounts annually to 30 June, was taken over by Excallent Bhd (Excelen) Excellent makes up is accounts annually to 30 Soptember. In 2016 Best intends to change its year end to be coterminous with its new holding company, Excelent It wil apply to the Director General af Inand Revenue (DGIR) to direct its bass periods. Best's accounting periods are as flows: 1 ay 200 30 ne 20 4 July 20'&to 30 Septembe? 2018, ‘Thereatter annually to 30 September Explain how Best Sdn Bhe!’s basis periods for the years of assessment 201Kand 201f,will be determined, whether by direction by the Director General of rland Revenue or otherwise, demonstrating how the underying principles are satisfied, (mark) ‘normat account The t forth Yara Assessment 20 oven tho prod om July 20"Blo 30h 2016 6st ay to makeup is accounts to nom da ning ct of 30 Sop Therefore, . TOY is the flue year and DGIR wel direct the dior YAM ins, DGIR wi fas the ounis were prepared from 1 July 201010 30 Sep basis poriod (ends the following year) for YA 201k, a period of 15 0 2181030 Saptomber 2016 for mos, hi ee ee Nit ey20%8 cous ifre\ 2005 « aolalroib dno ale Wewdlvarand mS ween mont, Ne yoar of as Jun 2018 Exam Page 18 of 170Mailhen 41.4 Business Income + Businass income include profession, vocation and trade and every manufacture, adventure or concern inthe nature of trade but excludes employment + Profession can be carried out either by aco or an vd include engineering, auditing, legal etc * Vocation eg a person who attend races, make systematic bets + Trade involves! (buying & soing (i). consists series of transaction, having continuity and repetition of buying & seling or manufacturing & selling (i). includes isolated transaction, 1 purchase, 1 sale, or 1 purchase, many sales (i) intention at time of acquisition to make profit (¥) intention may change through time, must documented * Adventure or concer inthe nature of trade: a) existence of an organization ) activites which lead to maturing ofthe asset tobe sold ) existence of special sil, opportunites in connection withthe article dealt with 4) nature ofthe asset tse should lend itself to commercial transaction ACCA P6 Advanced Taxation Ms Ong Siyu Su Badges of Trade Sila) taxable Capital gain 1 | Subject mater: eg Land) (@) income generating No yes (b) personal enjoyment to its owner No 08 2 | Period of ownership <5 years 35 years 3 | Formation of company e8 no 4 | Frequency of transactions Repeated & transactions are similar ~=atimes ina year 5 | Alteration to property (6) sub-division of and yes no (b}exoertise in the field yes. no 6 | Circumstances responsible to realization | i) assets trading stock iyemergency i) anticipate opportunity to sell i) unexpected needs of fund _ i) approacted by buyers 7 | Intention - | ‘Short term investment | long tem Investment 8 | Methods emplayed in disposing a property | Proper setup of ofce, employ staf_| Ad hoc: engage agent 9 | Financing arrangement (@) term Loan 0 yes (0) overdraft yes no {6) financed amount 70-100% <70% {6) ability to hole tong term No es 410 | Accounting evidence Current Asset Fined Asset Capital receipts: not taxable (0) Consideration forthe sale o forthe destruction ofthe profit-making apparatus Eq 1: consideration received forthe cancelation of future rights under the agreement (which are not ordinary commercial contract made in the course of business) which relate tothe whole structure of the person's profit making apparatus g2: compensation received fr termination of an unexpired agreement asit was for the loss ofthe co's only major asset whict affect the structure ofthe organisation, (i) Consideration forthe sale of fixed assets Eg. Consideration received from the disclosure of secret processes where no part oft was retained However, where par ofits retained and the vendor stil able to make profit from the ‘asset eg "know-how, the receipt for sale of such “know-how” was held tobe revenue in nature (i) Consideration for sterlisalion/ deprivation ofa capital asset (or loss of a source of income) (Ww) Consideration for restive covenant or forthe imposition of substantial restriction onthe activities ofa trader * Single or separate businesses? = depends entiely on the nature and interdependence( nexus) of such activities = manufacturing and trading —> two business sources Jun 2018 Exam Page 19 of 170Sine ACCA P6 Advanced Taxation Ms Ong Siyu Su * Commencement date of business is important because: i) pre commencement revenue expenses is not deductible (permanent loss) except for recruitment cost & training exp ii) qualifying capital expenditure eligible for capital allowance in the first basis period from date of commencement iil) affect the selection of year end ‘Date of commencement of business: when the company is in the position to commence its principal activities ‘eg for manufacturing business: when the co is in the position to star its production + Basis of assessment: Business income would be assessed on accrual basis Effective from YA 2016, Section 24 (1A) Any sum received by any person in the course of carrying on a business in respect of (a) Any service to be rendered, or (b) The use or enjoyment of any property to be dealt with In the relevant period or in any folloning basis period, the sum shall be treated as gross income of the person forthe period the sum is received notwithstanding that no debt is owing tothe person iro such services or such use or enjoyment ‘Advance payment or deposi isto be treated as business income al the time of recelot. Any subsequent amount refunded would however be accorded a business deduction ‘= For business income tobe taxed in M’sia sa) exist, revenue profit and deemed derived from Msia + Derivation of business income —» S12 + $12(1(@ tax whatever gross income thets not alibutable to operations of business carried on outside Malaysia Business is said to be attributable o operation in M'sia and be deemed derived from Misia if one of more folowing factors are present ( derived from Malaysia, taxable) {@) contract concluded in M'sia (0) stocks are maintained in Msi fr which orders are fufled (©) passing of ownership & risk of trading stocks in Msia (@) sales proceeds received in M'sia (©) services rendered in M'sia = 812(1)() applies specically to business lke manufacturing, plantation and mining. Gross income is ether based on: i) sale value ofthe article, product or produce sold overseas or i) market value when sale value does not apply (related party transaction) Q ‘Amanufacturing company in Malaysia exports 20% ofits products to Australia. The sales prooeeds are credited tothe company’s bank account in Australia Require Explain the taxabilty ofthe income retained in the company's Australian bank account. (5 marks) A As the company cats on a manufacturing business in Malaysia, any income from the export of products manufactured in Malaysia in the course ofits manufacturing business is deemed to be gross income from that manufecturing business derived from Malaysia The fact thatthe sales proceeds are not repatriated to Malaysia does not change the fac thatthe income is derive from Malaysia ‘As the soope of charge in Malaysia is that all income derived from Malaysia is chargeable to income tax in Malaysia, the sales proceeds {rom the 20% export to Australia is subjctto income tax in Malaysia * Gross income from a business 1. insurance, indemnity, recoveries in respect of deductible expenses or under a contact of indemnity + revenue receipts —circulating capitalicurent asset, eg recoveries for lossidamage of trading stock ~ insurance recoveries from aecident policy of Keyman, where premium is deductible ~ where the amount received relates to ited capital, capital receipt would nat be chargeable 2. compensation for loss of income from that source = revenue receipts — not cover future income (eg receipt of restrictive covenants —» capital receipts) 3. Trading debt (business income assessed on acervl basis) New Section 48 & Section 24() : interest charged to debiors on payment that are overdue willbe subjected to tax as non- business income ( effective YA 2013) od sales at meakel value Siock wilhuiawn fom husinass for private use, lt, donation — money actually lad out or which a legal liiy to pay has arisen, pad, payable or become payable Provision — not deductible —-ontingent liability —> remote possibilty of payment Accrued liability —> committed liability + deductiole Inthe production of gros income —ouiay was fr the purpose of earning income whether in the year under review or future years + good connection btw expenses incurred and the earning of income ofthe trade » expenses after commencement of biz (neurrent inthe production of income) — pre-commencement exp incured in order to praducs income —+ not deductible ACCA P6 Advanced Taxation Ms Ong Siyu Su The determination of whether an expense is capital or revenue in nature is dictated by soveral tests which are as follows: (very important) 1. The enduring benefit asset test The cost of bringing into existence an asset or an advantage of enduring benefit to the trade (e.9. an inal contribution to estabish a pension fund forthe company’s clerical and technical staf However, if payment to an approved fund, allowable. 2. Fixed and circulating capital test Fixed capital is what an omner tums to prof by Keeping i in his possession (e.g. xed asset), while ciculating capital is what he ‘makes profit by parting with and letting itchange masters (@..slock-n trade). However, expenses incurred in preserving or mainaining capital assets or cicuatng capital are revenue in nature 9. The identifiable asset test The expense relate to the acquisition of an asset of a capital nature, whether tangible or intangible (e.g. a lump sum payment to vary the terms ofa lease. The variation has made the lease a more valuable asset othe business). 4. Business structure versus process test ‘The expense of establishing a business structure as compared to the continual flow of working expenses related to the operating process ofa trade 5. Initial expenditure test Expenciture incurred to start the business of profit making (e.g. a company buys a dlspdated ship and recondions it before using it for the purpose ofits trade), 6. The once and forall test Whether the expense is a recurring expense (generally, revenue) or a one-off payment (generally, capital).This may not be true as Certain capital expenditure are made on instalment basis and certain revenue expenditure are made in one lump sum which includes prepayment Jun 2018 Exam Page 24 of 170ACCA P6 Advanced Taxation Mss Ong Siyu Su EXPENSES(S39) 4 pe eds one gene 4 agyeetel fn iereer Domestic or private expenses (eq costo traveling rom house to offoe, office clothes) Exp not WAE incurred (og excessive remuneration paid to directors fami) Contribution to unapproved fundischeme Contbuton to approved schemes > of 19% of employee's remuneralion (wef YA2012, include contribution made to private retirement schemes approved by Securities Commission) Payment made to NR person where withholding tax provision have not been complied with Payment {10 @ person other than the State Gov or statutory authority forthe use ofa license or permit to.extract timber from forest 7. Lease rental for passenger cars exceeding RMS0,000 (second fand or cost > RM750,000) oF RM100,000 (new vehicle costing not more than RWM150,000 [does not apply to commercial vehicle such as lorry, taxi used in biz] sox plaanns 4 do canta) WP Cane Cam Long, Comb ata ' Interest expenses not atributable to business 3. pre-commencement expenses 10. Incorporation expenses wih an auth cap exceeding RN25m 1. Annual corporate fiing & meeting exp including secretarial fees(Budget 2015 sec fee: max allowed up to RMS,000) incurred and paid 12. Cost oftax appeals 73, Cost offing of ax returns and tax computation (Budget 2016 tax fling fee max allowed up RM10,000) incuared and pnd Expenses that are not incurred "4. general provision for bad debt, gratulty, warranty, stock obsolescence 18. depreciation, amortisation of capital asset 16. unrealised exchange loss Capital expenditure 1. forex gainfoss on acquTstion of plant & machinery, repayment of foreign Toan 18. entrance fees to clublinital) 79. stock isting expenses. 20. stamp duly and secretarial fees for ineased share capital — 21. loan written off iro employees’ or suppiirs' non trade), 22. fees for designing o's logo (nal exp) 23. lumo sum payment for early termination of fease or premiums paid for leases 24, donations (approved or unapproved) 25. fine or violation of aw 26. penalty on withholding Tax 27. cost of printing and distribution of annual reports 26. registration of trade mark (initial exo) (exclude SWE) 29. compensation fo competitor to restrict compeiiion (enduring benefit), 30. loss of disposal of LT investment 31, Expenses related to Investment — set off against individual investment source 32, Capital asset expense off to Income Statement alc (cenovaton, improvement for repairs, small value capital items, installation cost of machine, cost of stand used in advertising, deposits for bites and replacement of electrical alarm system—> replacement of whole system) Legal Fees 33. violation offaws 34, capital structure of co[foatation, registration, winding up or liquidation of @ company) — — 35, obtaining trading license inital exp) '36. acquisition of capital asset 37. collection of non trade debt 38. renewal ransfer of a morgage on Business premises 3, acqusitonfrenewal of loan (capital structure) 40. grant ofa lease of business premises unless In connection wih the renewal ofa lease 41, valuation charges relating fo probate, company reconstruction and change of ownership (probate process of proving the validity of a wil 42. cost of legal proceedings incurred in pursuing a claim for unlawful or unjust dismissal by an employee 43, Legal expenses incurred to vary vehicle licenses Jun 2018 Exam Page 25 of 170mm! ERATIONS ACCA P6 Advanced Taxation Ms Ong Siyu Su “Budget 2076: Non deductibility of Goods and Service Tax (GST) ‘44, No tax deduction for any input tax paid orto be paid by a person who is liable to be registered under GST Act 2014 but has failed to do 0 orif he's entitled tothe input tax credit under the GSTA 2014, 45, No tax deduction for any amount of GST output tax paid orto be paid which is borne by a person who is regi registered under the GSTA 2014, ered or able to be Entertainment expenses (with or without consideration 46. 50% entertainment expenses(eg entertainment allowance given to employees, entertain supple, customers, others) with certain exception ® 47. Leave passage (cost of fare) oer than annual event provided to employees and family within Msia {Exception (100% allowable) ‘provision fo employees entertainment business ‘promotional gifts at overseas trade fairs/industrial exhibition ‘promotional samples of co's product provision of entertainment for cultural/sporting events open to the members of public leave passage to employees and his immediate fay uth the ‘employer to faclitate yearly event within M'sia ‘promotional gits incorporating conspicuous advertisementilogo of business in M'sia provision of entertainment relates wholly to sales # Entertainment relates wholly to sales expenditure on trips to dealers b. light efteshment at bz premises . food & drinks forthe launching of new product 4. free maintenancelservice charges or contribution to sinking fund by property developers e. redemption gifts based on points . redemption vouchers ‘8. discount, shopping, cash or gt vouchers, movie tickets fh. free gis for purchases exceeding a certain amount i. lucky draw prizes to customers Entertainment Expenses (100% Not allowed) 41. Entertainment given to potential customer 2. Wedding git to customer 3. Entertainment to employees of related co 4, Entertainment for Annual General meeting 5. Cash contribution for customer's annual dinner Entertainment qualify for 80% deduction (not wholly related to sales) 4. Gitwithout business logo for customer's annual dinner 2. Gi of flower for customers opening of new outlet 3. Entertainment to suppliers 4. Hampers for customer during festive seasons. Jun 2018 Exam ‘Page 26 of 170Biers ACCA P6 Advanced Taxation Ms Ong Siyu Su ‘Special deduction S34) 2) not required to satisfy 533 business usage test or maybe capital expenditure b)_ social responsi expenses }_ onetime deduction against any business income [7 Provision of equipment to disabled employee necessary to assist in the performance of employee's duties 2. Expenditure incurred on the alteration or renovation ofthe premises to ensure a safe and conducive working environment for disabled workers, be allowed as tax deduction, effective from YA 2008, 3. Translation/Publcation Cultural, iterary, professional scienif, technical books - in Bahasa Malaysia - approved by Dewan Bahasa dan Pustaka 4, Provision of library facies (cash or in kind) + accessible to the public Contribution to public!Schoolluniversity/ colege libraries Max: RM100,000 5. Provision of services, public amenities or contribution to charity or community project (pertaining to education, health, housing, infrastructure and Information Communication Technology). Also include projects relating to conservation or preservation ofthe environment, as well as those for enhancement of income of the poor. Beneficiaries: charity centres, schools, university, colleges, gov hospital and various ministry Education, Health, and Rural Development Eg_ Donation to a womens’ cancer centre (this is an. approved community project) 66. Expenses incured by a company inthe provision of infastructure in relation tots business which is avaiable for public use and approved by the Minister of Finance, be allowed as tax deduction, effective from YIA 2008. Eg oad, carpark, tlt, jogging tracks, gardens etc tothe community free of charge 7. Establishing and managing a musical or cultural group approved by MOF 8. Sponsoring any aris/cultural activity -approved by Ministry of Culture, Arts and Heritage Max: RIW'700,000 foreign arts/cultural activities: Max: R1M1300,000 9, Revenue expenses incurred by the co for obtaining accrediation for laboratory, or as a certification body, as evidence by certificate issued by Department of Standards Malaysia (deemed incurred in YA which the certificate is issued) 10. Practical training in M'sia to resident non employees "1. Expenditure incurred for participation in international standardization activities approved by Department of Standards Malaysia - conference, seminar, meetings ( Malaysia/overseas) 12, Provision and maintenance of child care centre for employees (Only revenue expense) Jun 2018 Exam Page 27 of 170ACCA P6 Advanced Taxation Ms Ong Siyu Su Other exnenses 1 ag capital in nature avenue in nature -not deductible = deductible |} improvement onan asset ')repirs of premises, pm, fixtures employed in i) acquisition ropair the production of gross income i) replacement on whol ofthe asset i) replacement on par ofthe asset (entirety) i) Renewal (replacement of substantal pat) iv) maintaining the commercial ably of an asset 2 Bad aebig Trading L advances a. Ounbiz— deductible a. inline with biz, ancitary to biz —+ deductible b. taken ver debt not deductbie bt secure contacts, to secure raw matarial -» not deduce * Advances fo employee ,iform part and parcel of general term of employment —» loss is allowable if not the default of oan is not allowable # specific provision, eg providing for doubtful debts on a spect debtor would rank for deduction ifthe folowing conditions are satisfied: (i) itmust be a trade debt (i) the debts must nave been included in that person's gross income ofthe previous year and (i)_the amount provided must be irecoverable or estimated tobe irrecoverable and must be proven tothe satisfaction of the IRB Trading debt can be bad i any one of te following occurs (a) the debtor has died without leaving any assets from which the debt can be recovered; (b) the debtors a bankrupt or in liquidation and there are no assets from which the debt can be recovered (c) the debtis statue-barred (@) The debior cannot be traced desoite various attempts and there are no known assets from which the debt can be recovered; (0) Attempts at negotiation or arbitration of a disputed debt have fled and the anticipated cost of itaaion is prohibve; or () Any other circumstances were there is no lkenood of cost effective recovery 3 ‘Alowable expenses in respect of i) trade debt recovery i) preparing agreements for sale of trading goods i) renewing existing oan (nly allowable for fnance company) iv) defending of tie forthe business eg trademarks \} defending tite to property ( ownership of an asset) Tite tothe ownership by the person remains the same and had been maintained with nothing added or taken away) \%)Iiigation cost incurred on renewal ofa lease vi) dofending an action connected witha trade or breach of trading contract broken of trading contract unless the breach was deliberate and dishonest, ~ avetinglprtect a threat fo the goodwil of business ensues after customer withhold payment for inferior workmanship, sub-standard material ete = litgetion against claim for bel arising from published documents iro newspaper or publishing biz = defending legal action taken against a professional io negigence in undertaking work fora clan, (lve: pubished statement falsely damaging a person's reputation) vii) legal cost incurred in disputes over trading contracts (og enforcement of contact of supply of goods) ix) renewal of eases and licenses 1x) dim for compensation for trading goods destroyed, defective or lost in transit Xx) ligation in connection with employees’ normal couse of duties 4 Theft Embezalement if by directors, sole proprietor, partner —+ not deductible since the director was in a position to do exactly as he kes ifby employees — is allowable provided tat a. action laken against the person involved, eg a police repr, termination of service, recovery of loss b, the incident is recognized incident of the taxpayer's biz and has to occur in the ordinary course of carrying on the biz €.__amount of loss is within the expected risks ofthe business Jun 2018 Exam Page 28 of 170Mie Ms Ong Siyu Su ACCA P6 Advanced Taxation 5. Key-man Insurance) = premium is allowable provided! 1) Insurance has no element of investment (eg termite and accident policies) —» these policies expire atthe end ofthe insured period and there isno return on the premium paid ifthe insured person lives ori nt injured ithe right tothe insurance proceeds insurance must remain with the employer or company i) absence of key person would result in 8 reduction inthe profits ofthe employer or the company * whole-ife policy and an endowment plcy have elements of investment ~sceptal asset premium isnot alowable 6. fniormation technology related expense: operating exp onthe use of for improvement of mgmUproducton process 7. ialulony auc ea compulsory auclt ~» i allowable (external autor) 8. Cost of developing webs = which is ‘electronic commerce enabled (transaction involve transfor of inf, products, pymt) given 20% deduction ofthe cost and each of 4 following YAS 9, Requisition of Proprietary ights (Available to manufacturing co) * given 20% deduction of the cost and each of 4 following YA * cost include purchase consideration, consultancy fe, egal fees and stamp duties + manufacturing co must be 70% Malaysian owned ‘proprietary rights refer to patents, industrial designs or trademarks 10, Pre-commencement - Training expensed Quaifying training expenses incurred by a company in respect of potential employees porto the commencement of business is deductible atthe time of commencement. Qalfying traning expenses means expenditure inoue: (a) onthe training of potential employees to impart basi skils lo enable the company to commence its business; (b) within the period of one year prior tothe commencement of business; (c) being the kind allowable under s 33 of the Act. ‘Companies qualifying fora deduction shall not include: ()Acompany receiving training grants from the Government {@) Smal and medium companies claiming double deduction of training expense under the Income Tax (deduction for Approved training) Rules 1992 11, fPre-commencement - Recruitment of employeq|- Effective YA 2009 deductible it (a} expenses on the recruitment of employees to enable the person to commence its business (0) expenses ofthe kind allowable under $33 ofthe Act (c) expenses incurred within the period of one year prior tothe commencement ofits business ‘The expenses incurred under this paragraph shall be deemed tobe incurred on the day the business commences ‘Such costs include expenses incurred in participation at ob fair, payment to employment agencies and head-hunters. 12. frearporalion expensed —» allowable against it business income al the time the business commences if authorized capital < M25 milion on date of incorporation expenses include 4) cost of preparing and printing memorandum, the Article of Association, prospectus, circulating & advertising of prospectus ) cost of registering the co and the statutory document together with fees & stamp duties payable ©) cost of drawing up preliminary contracts and stamp duties payable 4) costof printing and stamping debentures, share certificate and leters of allotment ) costof the seal ofthe company and {underwriting commission 13. [Unsatisfactory/inefficient employeeidirector, ~ compensation paid to employee for dismissal of employment for purpose of commercial expediency > allowable Jun 2018 Exam Page 29 of 170Biiicr 4, [vation t potenti importerg ‘A special revenue deduction shall be allowed forthe folowing expenses incurred by a resident company primarily and principally for the purpose of promoting expotof its product (2) expenses incurred in respect of hotel accommodation up to a maximum of 3 nights subject to a maximum of RM30O per day; and (b) expenses incurred in respect of sustenance upto a maximum of 3 nights subject to a maximum of RM150 per day, ACCA P6 Advanced Taxation Ms Ong Siyu Su provided to potential importers who have been invited to Malaysia ‘The potential importers invited to Malaysia must be ftom a follow-up ofa trade and investment mission participated by the resident company. The trade and investment mission must have been organized by a Malaysian government agency, or the Ministy of Intemational Trade and Industry, or an industial or tade association inthe period preceding 12 months from the date of potential importer’ visi to Malaysia. proof of participation inthe trade and investment mission together with verification by MATRADE is required. 15, Cessation of Business] ‘c temporary cessation (assots are under working conditions and constant upkeep & maintenance, co intends to operate biz as and when any opportunity arises, a minimum # of staff continued to be employed) —» revenue expenses deductible ‘© permanent cessation (ascertained from board minutes, or disposal ofall p&m) revenue exp —» nat alowable 16. Retrenchment payment « if arising from liquidation exercise — not allowable « ifbusiness sill going on —+ allowable (2g cost saving) 17. Premium paid for professional indemnly Inurancebe allowed as tax deduction against business income, wef YA 2008. 18. Resident person carrying on business providing the fllowing benefits to employees willbe tax deductible: (2) Payment of monthly bill for subscription of broadband, fixed line telephone, mobile phone or pager issued in the name of employeeemployer (b) Traveling allowance, petrol cardalowance provided for empioyees|home to office or vie versa); and (o) Personal digital assistance, telephone, mobile phone or pager 19, [Devcon for expenditure on treasury shares WEF YA 2013, a deduction be given to co on the cost of acquiring treasury shares which are to be transfered to its employees Under the employee's equity-based remuneration scheme in the basis period when employee exercise his rights to acauire the treasury shares. Amount to be deducted shall be the cost of aoquiing the treasury shares wich are transferred tothe employee, reduced by any amount payable by the employee for the treasury shares. ‘Treasury shares is defined as a share ofa co that was previously issued by was repurchased, redeemed or othenvise acquired by the co and not cancelled 20, Palentand Trademark registration Qualifying person carrying on business shall be given tax deduction on qualiying expenditure incured on the registration of trademark or patent in Malaysia Qualthing person refers to @ SME company where the paid up capital of ordinary shares are s RM2.5 milion at the beginning of basis period and not within a group of companies where holding or subsidiary company's paid up ordinary shares are > RM2.5 milion. The company must be involved in either: a) Manufacturing industry, manufacturing related services industry, or agro based industry (resident in Malaysia) wih; (). $150 ful times employees; or (i) Annual sales s RM25 milion b} Services industries, Primary Agriculture, information and communication technology industry (resident in Malaysia) ()) $50 fulltime employees’ or ‘Annual sales < RMS milion Effective from YA 2012, deduction for one-off payment fee or local franchise brand, incurred by a qualifed person before the ‘commencement of franchise business. The amunt paid which is non-tfundable shall be deemed incurred when the qualifed person commenced its franchise business 22, Tax deduction on the folowing expenses incurred by Private Higher Education Institutions be allowed over a period of three years i) development of new courses; and |i) compliance with regulatory requirements for introducing new courses 2 Jun 2018 Exam "Page 30 of 170MA Mbem Double Deductions (DD) (2) revenue expenses for promotional of export -expenses such as advertisement in any media outside Mia, provision of samples to prospective customer outside Msia, preparation of tender, travel fare oversea, accommodation subject to max of RM300 per day and RM150 per day for sustenance from departure fil return to M'sia, giving technical info outside Msi, provision of exhibits outside M'sia, cost of maintaining sales offices oversea and packaging design, profession fees for export qualty goods. {double deduction is ony given fo representative ofthe co eg sales & marketing personnel, is nol given to appointed dealers-dec 2014 01) {b) Overseas expenses incurred by resident co carrying ona hotel or tour operating business for promotion of tourism {c) approved intemational trade fair —> expenses incured for participation in an approved international trade fair held in Malaysia forthe promotion of exports. » The trade fer must be approved by the Minister of Intemational Trade and Industry. — The expenses must be allowable under s 33 of the Act but excludes the cot of exhibits. ACCA P6 Advanced Taxation Ms Ong Siyu Su (@) promation of export of services by service sector such as transportation, communication and utlty sector include education —+ Revenue expenses incued pertaining to the promotion of export of services include promotion of export of professional series include legal, accounting architectural, engineering and integrated engineering services and medical and dental (e) Registration of patent, trademarks and produc licensing in overseas \Wit effect from YA2006, resident company incuring expenses i respect of- (a). registration of patents, trademarks and product licensing in overseas; and (b) primarily and principally for the purpose of promoting the exports of goods, agricultural products manufactured, produced, processed graded or sorted and assembled in Malaysia, (f Exgenditure incurred on advertising Malaysian brand names overseas Malaysian brand names registered overseas and professional fees paid to companies promoting Malaysian brand names. (c) export credit insurance premium —» provided it i paid to the Malaysian Export Credit insurance Bhd (MECIB) Effective from YA 2011, payments of insurance premium for export credit based on takaful cnncept be given double tex deduction Insurance premium based on takaful concept must be purchased from takaful operators approved bythe Minster of Finance (t) revenue expenses for approved training ~ course fees, traveling, trainer's fees, training materials, allowance to trainer up to max of RM4OOper day, alowance to trainee max cof RM100 per day (local training) and RN200 per day (oversea traning) - given to manufacturing co, nn manufacturing co, hte o tour operating business for taining programmed approved by Malaysian Industrial Development Authority, Minister of Finance and Minister of Cuture, Arts and Tourism respectively & the training programmed conducted by a training institution, ‘Training of non-emplovee handicapped person ‘0 handicapped person registered withthe Ministry of National Unity and Social Development (© training programmed approved by MOF and conducted by training institution (i) research expenditure (approved research projects undertaken by @ company elther In-house or contracted to external research companies or institutions (ithe company is participating in industrial adjustment approved under s 31A of the PIA 1986 and such expenses were incured within 10 years (i) expenses incurred by companies forthe use of facies and services provided by approved research companies or institutions; or research and development companies(thatflfis the conditions specified by the relevant ministry ora contract research and development companies(that fui the conditions specified by the relevant ministry); {)_contibutions in cash to approved research companiesinstiutions; ()_approved research expenditure bythe Minister. Research expenditure quaifs for double deduction include a) raw materials used in research excluding the purchase of fixed assets used inthe research, incude transportation cost b) manpower in the research project ( only basic salary qualfis for double deduction) [o)_ Technical services (consultancy fee, for use of testing equipment, analytical services, data evaluation processing) with condition that nol more tan 70% of the allowable exp for technical services undertaken outside Misia 4) Traveling cost incurred by research employees related to visting research station, inude dally allowances (resticted to RM4OO per person per day), Allowance include cost of food and lodging e} Traveling cost related to attending courses!seminars forthe purpose of obtaining scientific information relevant to research projects locally or overseas. Allowable exp includes traveling costs, daly alowances(esticted to RM400 per person), seminar or course fee) 1) Maintenance cost (motor vehicles, buildings, equipment & machinery) which are rely used for research project a) Rental ( motor vehicles, buildings, equipment & Machinery) which are directly used for esearch projact, Jun 2018 Exam Page 31 of 170MB kere JEF YA 2016, companies with paid up ca R&D project exzenditures up to RMS0,000 for e IRB ACCA P6 Advanced Taxation Mss Ong Siyu Su exceeding RM YA, However, 5m are to be allowed to claim a double deduction automaticaly for jompanies are stil required to submit R&D project application to the () remuneration of handicapped employees remuneration paid to an employee who is physically/mentally disabled and isnot able to perform the work of a normal person, Such remuneration must be allowable under s 33, {() advertising on Malaysian brand name aoods expenditure incurted on advertising Malaysian brand name goods within Malaysia provided (2) company is at least 70% Malaysian owned; (b) brand name is owned by the company or ts related company and is registered in Malaysia or outside Malaysia; and (c) company’s product must achieve export quality standard. ( Export sales must be atleast 20% of total sales) Related company is defined to mean more than 50% ordinary shares is owned, being owned or commonly owned by two companies. (0 quality standard and halal certification ‘With effet from YA 2005, revenue expenditure incured by a company inthe relevant period for the purpose of obtaining certfication for recognized qualty systems and standards, and hell certification evidenced by a certficate issued by a certification body as determined by the Minister, (deemed incured in YA which the certificate is issued) Dec 2012.04 ‘Yummy Wok Sdn Bhd (Yummy) owns a chain of popular and famous restaurants. Ithas a paid up share capital of RMS milion, In the year ended 31 December 2017, Yury incurred legal expenses in respect of the following = Defence against a sult brought by 2 restaurant customer who alleged discrimination by the restaurant staf. ~ Legal action taken against a conractor for supplying sub-standard food ingrecints o Yummy. ~ Registration of "Yummy Wok’ as a trademark in Malaysia, Requit State, with reasons, whether each item of legal expense is tax deductible in ariving at the adjusted income of Yummy Wok Sdn Bhd (6marks) mber 2014 Qt (b {As an established manufacturer of specialised fibreglass , AtoZ Sdn Shd{AloZ) have many suppliers of raw materials and services, and ‘many customers. In the forthcoming financial year, we expect to incur a considerable amount in legal fee for: ~ the renewal of existing supply and tenancy contracts; ~the renewal of existing loans; ~ the preparation of claims for insurance compensation in respect of loss or damage to raw materials and finished products while in transit, same of which may be unsuccessful the recovery of trade debts which are subject to dispute; and — iigation regarding breaches of contract by our trade suppliers We need an explanation of how these legal expenses wil be treated for tax purposes. Required: State, givin reasons, the income tax treatment of each of the categories of legal fees sted inthe letter from AtoZ. (7 marks) Jun 2018 Exam Page 32 of 170ACCA P6 Advanced Taxation Ms Ong Siyu Su 1015.22 | deductibilty of expenses, penalty for incorrect return and at ‘Two months ago, the Inland Revenue Board (IRB) conducted a tax audit on your client, Inovasi Sdn Bhd (Inovasi), a producer of home: appliances. Subsequently, the IRB ralsed an additional tax assessment on Inovasi dated 5 May 2017 wich included a 45% penalty for an incorrect tax return. The IRB also issued a letter datod 5 May 2017 listing the tax adjustments made. Both the notice of assessment and the letter were delayed inthe post and only received by Inovasi on 30 May 2017. Extracts from an email from your manager outlining the IRB's acjustments and from the cient’ fle records are set out below. Extracts from the email from your manager _ | am prepatig fora meeting with Inovasi tomorrow regarding the adaltional assessment of tax raised. As you are aware, the IRB raised an addtional tx assessment relating to cartain tax adjustments made in respect of items in Inovas!'s siatement of profit or oss forthe year ended 31 March 2016, | have lsted below the items which the IRB have cisalowed: () 50% of RU78,000 being catering services. The IRB have argued that, as an entertainment expense item, 50% is dsallowable, (i) Commission of RW100,000 paid to @ non-resident. The IRB have argued that, 28 the withholding tax provisions have not been ‘complied with this commission is disallowable (iy Repair and maintenance of machinery of RM180,000 relating to an engine overhaul The IRB have argued that the substantial ‘amount of this expense indicates that tis is capital n nature and thus disalowable; and (i) Product improvement of RM,250,000 The IRB have argued that ths expense is capital in nature and thus disallowable, In advance of my meeting, | woul ike you to bref me on th following (2) Deductbilty ofthe expense items.The grounds, with detailed reasoning in defence agains the disallowance of each ofthe above ‘our expense items and your conclusion onthe deductbilty of each ite; (b) Penalty for incorrect return, Your advice on whether oF not the 45% penalty included in the tax assessment for YA 2016 is appropriate in ight of your conclusions on the deductbity ofthe expense tems in a); and (©) Valid appeal. Whether or not the additional assessment can stil be appealed against by Inovasi and the procedure which must be followed for such an appeal tobe vai. Extracts from inavasis fle records (The RM76,000 catering services cost represents the catering (food and beverage) expense forthe product launch ofthe latest range cof home appliances, {i) The commission was paid to Mr Carlos Santiago of Bazi for introducing customers to Inovas. Mr Santiago operates a wel-known business of sales introductory services in Brazil. He charges a commission for inroducing customers to businesses. (i) The machinery was acquired at a cost of RMS milion two years ago, The overhaul, involving replacement of pars, is recommended ‘once every 24 months to keep the machinery in proper working order. (jv) The RM1,250,000 comprises the cost of testing additional improved features to existing product models in order to maintain the performance of these appliances. Required Carry out the work as instructed by your manager, ‘The folowing marks are avalable: (a) Deductblty of the expense items: (i) Catering services expense; (marks) (i) Commission; (6 marks) (i) Repair and maintenance; (5 marks) (jv) Product improvement (marks) (b) Penalty for incorect retum, (&marks) (6) Valid appeat (marks) Jun 2018 Exam Page 33 of 170vas Biynow. (a) Deductibity ofthe expense items (i) Caterng services expanse of RM78,000 ‘According to our fie recor, th catering food and beverage) expense is fora product lunch oth latest range of home appliances Therefore, the expense qualifies for deduction funder s.33(1)] as its wholy and exclisivel ineuredin the production of gross income from the manufacturing business However, the expense, being on food and beverage, is also caught under the defaton of entertainment (under s.18. Under the law f.39(1)], gneral, 60% of any entertainment expense is disallowed. However ifan entertainment expense item comes under any one ofthe exclusions to the sai law, 2 100% tax claim wil be granted ‘As the purpose ofthis entertainment expense is forthe launch of new products, tis related whol to sales. As such, the expense comes under ane ofthe exclusions frovso (vi to the prohibition of entertainment expense [under s.39(1)(). Furthermore, this treatment is confirmed by the IRB in ther Pub ting (3 of 2008] on ‘Entertainment Therefore, the entertainment expense, being wholly related to sales, is eligible fora 100% (i) Commission of RM100,000 This paymient was made fo a non-resident for a sales introduction service. Hence, this does not fall under technica!’ services and is thus not caught as a special class of income [under s 4A ACCA P6 Advanced Taxation Ms Ong Siyu Su (25 marks) tax deduction The non-resident recipient operates business of sales introductory servos in Brazi He charges a commission for introducing customers fo businesses. This commission therefore constitutes business income fo Mr Santiago. Therefore, the commission does not fall under ‘other income’ funder s.4(f} to Mr Santiago. As such, contrary to the IRB's assumption, the commission payment i aot subject to withholding lax for ‘ther income [under s. 109F]. As Inovasi has not breached any withholding tax provisions, the payment of commission should be accorded full 100% (i) Repair and maintenance of machinery of RM 180,000 The engine overhaul is @ routine repair scheduled every 24 months to keep the machinery in proper working order. tis therefore ‘nothing mere than proper and regular maintenance of a business asset, There appears tobe no element of addon, enhancement “or improvement The replacement is ofthe component parts only, nol the entirety. Therefor, itis not capital in nature. The expense of RM180,000, as an absolute amount, may appear substanial. However, when viewed against the cost of the asset, RMS milion, itis nota significant cost. | conclusion, despite the substantial amount, the RM180,000 is a revenue expense for the maintenance of a business asset, and replacing parts thereot. Therefor, the enti sun of RM180,000 should be elgibie for a 100% tax deduction. (iv) Product improvement of RMt, 250,000 The descrintion ‘product improvement’ suggests an improvement eleinent. However, in substance, the said expense is not for improvement of the products, but for testing the improved features of existing products The claim for tax deductian is based on it being wholly and exclusively incured in the production of gross income [under s.33(1)]. being merely testing expenses of existing products, and not falling under ‘scientific researoh’ funder 3.247) as the expense is not esearch par se Therelore, the expense of RMI, 250,000 should be given a full 100% tax deduction (6) Penalty for incorect return Under the law [s.113(2), the IRB is authorised to impose a penalty of up to 100% ofthe tax undercharged if no prosecution action is instituted in respect ofan incorrect return. inthis case, the 45% ponaltyis within the leg jimi However, ifthe IRB concedes/agree to the taxpayer's defence on all four tems, there should be no penally at al. Moreover, Inovasi ald not omit or understate any income. nether was there any misepresentation nor non-disclosure. The facts show tha Inovasi took reasonable care inthe tax treatment ofthe four ems. Therefore, no penalty should be imposed. (2) Vail appea! For a valid appeal to the Special Commissioners of Income Tax, Inovasi must lodge its appeal inthe prescribed form [Form Qy ‘against the additonal assessment withia 30 days after the date of service ofthe adational assessment. For practical purposes, the ‘ate of service is normaly faken (0 be the date stated on the noice of assessment, ie, § Mey 2017. This would mean thatthe deadline for appeals 4 June 2017. As the nolice of assessment and the letter rom tho 1RB were only delivered fo Inovasi on 30 May 2047, Inovasi has vali reasons for ‘nol being able fo file its appeal within te said 30 days. Therefore, Inovasi may apply to the Director General of Inland Revenue for an extension of time to submit its appeal against the adkitional assessment. The application must be made in a prescribed form [Form N] as soon as possible. Jun 2018 Exam’ Page 34 of 170ACCA P6 Advanced Taxation Ms Ong Siyu Su June 2017 Qt You are a tax associate of Tax Firm. You and your tax director met wih Tax Firm's new client, Serene Garment Sdn Bhd (SGSB), a ‘company involved in the manufacturing of ladies’ cotton garments. Below are the notes taken from this lent meetin. Notes of meeting with SGSB = SGSB has a paid up ordinary share capital of RMI millon and is registered for goods and services tax (ST), SGSB's factory is located in Shah Alam, Malaysia, Chimney construction The old chimney, forming part ofthe existing factory bung, was damaged and needed to be rebut, Due to SGSB undertaking the yarn weaving acivities inthis building (Project B), the chimney needed to be heightened to meet the environmental requirements. The ‘ew chimney cost RMS30,000 (incusive of GST of RM30,000). According to the contractor, had the chimney not been required to be heightened, the replacement cost would only have been RWM200,000. The input tax on this tax invoice has been claimed in SGSB's GST retutn Light bulbs SSGSB replaced the light bubs used in its office ata cost of RM159,000 (inclusive of GST of RM®,000). The suppliers tax invoice was ‘erroneously issued in the name of SGSB's parent company. AS a result, the input tax on this tax invoice was not claimed in SGSB's GST retum and the ful amount of RM159,000 was expensed. ‘Compensation payment to a neighbouring company ‘A neighbouring company to SGSB, Taylormade Sdn Bhd (TMB), is curently involved in the manufacturing of sik garments. TMSB proposed fo venture into the manufacturing of cotton garments. As the production of cotton garments would have been in direct ‘competition to SGSB, it managed to persuade TMSB not to venture into the manufacturing of coton garments. Instead, it was agreed that TMSB will rte il its orders for cotton garments to SGSB and that SGSB wil reciprocate by referring all its orders for sik garments to TMSB. As part of this arrangement, SGSB is requied to make a compensation payment of RM'300,000 to TMSB. TMSB is 2 GST registrant Your tax director has sent you an email requi addresses the following: 19 you to prepare a report for the board of directors of SGSB, which (ii) The income tax deductibility of the expenditure incurred on the construction of the chimney, light bulbs and the compensation paid to TMSB. In relation to the compensation payment, you should present the arguments for both its deductibility and non-deductibility and draw an appropriate conclusion (8 marks) {iv) Tax deductibility ofthe input tax incurred on the chimney construction and the light bulbs. (4marks) {(v) Goods and services tax (GST) implications of the compensation payment. (marks) Jun 2018 Exam Page 35 of 170we $Bhsgnowe BE ‘Compensation payment to TMSB TTWSB proposed to venture into the manufacture of cotton garments. In order to stop tis development and the resulting competion, 'SGSB made compensation payment to TMSB of RM300,000. As part of the setlemant, thas been agreed that TMISB wil refer its orders for cotton garments to SGSB, while in return SGSB wil refer its orders for sk garments to TSB. ACCA P6 Advanced Taxation Ms Ong Siyu Su In determining the tax deductibility ofthe expenditure, a distinction must be made in regard to compensation relating to the prof yielding structure ofthe business as opposed to the process by which the ently operates, Based on established case law, it has been held that Compensation paid to buy out competition which relates to the profi yielding structure of the company is a capital payment and, therefore, not tax deductible. {in this particular case, if the RM300,000 paid to TMSB is to pre-empt a potential competilor in the production of cotton garments, the ‘amount is capital in nature and so nol tax deductible (On the other hand, ifthe RM300,000 isto induce TMB to enter into a mutual cooperation trade agreement, under which each party will refer the cotton or sik orders to the respective producer, then itis made for a trade pact which directly relates to the profit-making machinery of SGSB, Henee, it may be argued thatthe ammount is revenue in nature and is duly deductible. On balance, we are of the view thatthe payment was made to buy out a potential competitor or to induce a potential compettor to mutually cooperate instead, and hence is captain nature [Marking note: Marks should be awarded for a contrary conclusion to the extent tha itis reasonably and cogently argued. | {iv) Income tax deductibility on the input tax incurred by the company Chimney construction The input tax incured on the chimney construction has been ciaimed as a credit in SGSB's goods and services tax (GST) retum Therefore, the input tax is nota cost tothe business and the issue of income tax deductibity is not relevant Light butbs ‘SGSB did not claim the input taxon the ight bulbs in its GST returns onthe basis tat the tx invoice was not issued inthe name ofthe company. As such, the input lax becomes a cost othe business. Under the income lax legislation, itis provided that GST expenses are tobe disallowed for income tax deduction in respect of GST input tx paid orto be paid by the company fhe company is entited under the GST legsiaton to 2 credit ofthe amount as input tax. ‘Therefore, in determining the income tax deducibilty ofthe input tax iLis necessary fist to establish whether SGSB is entitled to claim 2 credit onthe input tax under the GST legislation. nthe present case, SGSB shouldbe ented to claim an input ax cred ints GST return a the light bulbs expense was incurred forthe furtherance af the company’s business. But, 2s the tax invoice for the expense was not issued inthe name of SGSB, this has invalidated the claim of an inpul tax cred However, SGSB wil sill be able fo claim the input tax ft gets the supplier to reissue the tax invoice under its own name. On this basis, as SGSB would be entitled to a credit forthe input tax in its GST return had a valid tax invoice been oblained, the GST input tax should not be alowed as an income tax deduction {v) GST implications of the compensation payment In order for GST to be applicable, the compensation payment must be made in relation to a supply under the GST legislation, Essentially, in order for a supply to occur, te following should be present ~ there musl be a Wransfer of ownership of goods (in the case of a supply of goods) or be for something which is done or to be dane including the granting, assignment or surrender of any night oF the making available of any fac or advantage (for a supply of services); and ~ it must involve a consideration On the basis that TMSB is prevented from venturing inta cotton garment manufacturing, this involves the surrender of certain rights and, therefore, would be regarded as a supply of services. The compensation payment of RM300,000 represents the consideration for the transaction, so should be subject to GST at 6%, Jun 2018 Exam’ Page 36 of 170ray Feitixynoya Brie ACCA P6 Advanced Taxation Mss Ong Siyu Su 16 Other Sources of Income (Interest, Rental and Premium) Interest Income $4(c) ‘© Compensation for delayed payment, payment by reference to time fr the use of money ‘© Refer tolump sum called principal 0 Would be assessed under S¢(a) if i) received in the ordinary course of business include adventure in the nature of trade i) eamed by specialized industries like bank or insurance co © Derivation of interes income 4. payers governmentstate goverment or 2. payer is resident and (0) money borrowed is employed in or lai out on assets usediheld for production of Malaysian derived income OR (i) loan is secured by propertyiasset situated in M'sia or 3. Interests charged as an outgoinglexpense against any income acorn (© Basis of Assessment (refer to examiner's aril ax treatment of nterst income) ‘$27(4) when it frst become receivable, taxed in period when entitledable to obtain receipt on demanclonly when itis received) $.27(2) Interest income is receivable overlaps twolmore basis period —» time apportionment (2)(0) overlapping, part of which elapsed more than 4 years — taxed over part ofthe inc which dd not elapse (2\() interest income elapsed > than 4 years —> treated as income which began 4 years before the beginning of YA (@) Interest income received in advance —» taxed inthe period in which tis received Deduction of expense — $33 Interest expense incured on loan which is obtained to secure interest income Exemption 1 inlerest income received by individual in respect of: (@) securities or bonds issued or guaranteed by the government (}. debentures other than convertible loan slock approved by Securities Commission(SC) (©). Bon Simpanan Malaysia issued by the Central Bank of M'sia (6). Merdeka Bonds issued by Bank Negara Malaysia (6) Non convertible ian stocks paid by Companies listed in MESDEQ. 2. Interest income received by any person in respect of (@) any saving certificates issued by goverment (0) premium saving certificate under the scheme of Bank Simpanan Nasional (6). bonds and securities issued by Pengurusan Danaherta Nasional Berhad (¢)_ non convertible Islamic Securities originating from M'sia issued in non Ringit and approved by the SC or derived from Mia 3, Interest income received by NR coin respect of: (a) securities issued by gov () non convertible Islamic Securtles/debentures issued in RM & approved by SC {exemption shall not apoticable to interest paid or credited to a co in the same group) 4, Interest income received by NR individual rom: Banks, fnance or any other institution approved by the Minister to NR in tax exempt provided such NR does not have a place of biz in Msi Approved institution include Hong Leong Islamic Bank Bhd, Am islamic Bank Bhd 5. Interest income received by resident individuals rom money deposited in all aproved insttutions be fully exempted ‘Approved instutions incude (a bank or fnance company licensed under Banking and Financial Institutions Act 1989 (ia bank icensed under the Islamic Banking Act 1983 (i) a development fancialinsttution prescribed under the Development Financial Insitutions Act 2002 (fv) the Lembaga Tabung Haji established under the Tabung Haji Act 1995 {\) the Malaysia Building Society Bertad incorporated under the Companies Act 1965 (wi) the Borneo Housing Finance Berhad incorporated under the Companies Act 1965, Jun 2018 Exam Page 37 of 170Brien» ‘ACCA P6 Advanced Taxation Ms Ong Siyu Su Rental Income 84(@)-Examinersfavourle top + Sum paid for use of any premises or hiring of anything = For movable & immovable property * Letting of real property(RP) is deemed as a business source and the income received from itis charged to tax under paragraph 4(a) of the ITA if maintenance services or support services are provided i relation tothe real property * Maintenance services or support services should be comprehensively and actively orovided means serves which include: (2) doing general al things necessary (eg. cleaning services or repairs) forthe maintenance and management ofthe real property such a8 the structural elements of the building, staiways, fre escapes, entrances and exits, lobbies, coridors, litslescalators, ‘compounds, drains, water tanks, sewers, pipes, wires, cables or other fixtures and fitings; and (b) doing generally all things necessary forthe maintenance and management of the exterior parts ofthe rel property such as playing fields, recreational areas, driveways, car parks, open spaces, landscape areas, walls and fences, exterior lighting or other extemal fixtures and fitings; or If @ person only provides security services or other facilites, that person is not providing maintenance services or support services comprehensively * Services actively provided means the person who owns or lets out the RP: (a) provides himself or (b) hires another person or another fim to provide the maintenance services or support services as mentioned above. * The letting of RP is treated as non-business source if a person lets out the RP without providing maintenance services or support services comprehensively and actively (eg only provides security services) or maintenance services or support services are passively derived from the ownership ofthe RP (eg by management corporation) * Ifa building, whether owned or rented, is used for business purposes and part of the building is lt ou, the rent arising from te letting is treated as part of income from the existing business source, Source of income 4. Sa): Rental income will be assessed as one business source but seperately assessed from other business income totaling rental income forall landed properties ~ revenue expenses are deducted therefrom + commencement of rental income = date the property is made availabe for letingready for occupation 2. S4{d): Investment income wil be assessed as one source = rental income commence on the dat of fist ieting of the property Derivation of rental income 4. location of landed propertes isin M'sia notwithstanding owner is outside Msi o tenancy agreement is concluded outside M'sia 2. Movabe properties — pace the property is usedipace where the biz o the lessor arid on In Misia — Sa(a) — Outside sia —+ subject to WT itis deemed derived from Msia (154) Basis of assessment ( Sd) '$27(t) rental income is assessed on receivable basis ( can obtain the receipt on demandidue or payable) when received 827(3) Advance rental assessed inthe year of receipt not withstanding that it may be subject to refund If deposit —+ not taxable, only assessable at time of conversion torent Deduction of Expenses (s33) Expenses not allowable |) cost of repairs & maintenance of property {) cost of obtaining first tenant initial expenses ji) insurance premium on firefourglary eg advertising, commission & legal exp on frst ii) cost of supervision & rental collection rental agreement becoz they are incurred iv) cost of obtaining evant to replace old tenant to create the source of income (capital exp) V) interest paid on loan faiity taken to ance property _| Expenses before RP'S let cut vi) cost of renewing rental agreement & other misc exp Exp for gross inc received in advance vi) temporary non occupation** ~> related back to the basis period in which vill) quit rent and assessment the gross income is assessed"? ** temporary non occupation due to repair or renovation ofthe building, absence of tenancies for a period of 2 years after termination of tenancy, legal inuncton(directve) or other official sanction or other circumstances beyond the contol ofthe person wa lets out the RP. — expenses allowable provided that RP is maintained in good condition and is ready to be let out If absence of period exceeded 2 years, related expenses are not deductible “In the case where there is more than one RP and rental income from one or several RP is received in advance, expenses related to that source is deductible from other RP in that basis period in which the expenses are incurred. The treatment is only applicable to ‘ental income from RP wihich are assessed as one source Jun 2018 Exam Page 38 of 170Capital allowance - Only for $a) S4(@) — 00 CA + assels such as furniture & air cond can be deducted ona replacement basis However, if person owns a building lets out the building and the building i in used as an industrial building, IBA can be claimed by the ‘ower ofthe building even though te lating isa non-business source. Rental loss (Rental exp > rental income) ‘S4(d) — permanent oss ‘S4(a) — current year business loss deduct from aggregate income —» any unabsorbed amt to set off agains future ASB! ACCA P6 Advanced Taxation Ms Ong Siyu Su Budget 2015 If both payer and recipient are related (transaction’) ‘Any income {other than income from business and dividend) which is frst becomes receivable inthe relevant period shal be deemed to be obtainable on demand inthe folowing basis period and be treated as gross income inthe following basis period “transaction between: 2} Person one of whom has contol over the other b)individuals who ae relatives of each other or €) Person both of whom are controlled by some other persons eg Rental income derived in YA 2015 but receled in YA 2017 or no yet received: tax in YA Premiums S4(d) © one off payment © consideration connected withthe granting of a lease on immovable properties © paid to acquire rights under tenancy © determined a the time of taking the lease & fs payable regardless of whether the lease works fora fied term or not © rents payable in instalments & continues so long as the lease is in effect © derivation of income: the lease by reference to the immovable property in M'sia © Basis assessment: assessed on ‘eceivable basis” means landlord is able to obtain the receipt on demand © Eg premium for period of 12 years —» full amount assessed in the year of receipt —» not ented to spread over period of lease © Premium paid by tenant would sil remain capital expenditure > not deductible Jun 2018 Exam’ Page 39 of 170tun a INtHligarionar uestion: Dec 05 Q7 (Rental income) Dragonfire Sdn Bhd (Dragonfr), a trading company which makes up its accounts to 30 April each year, owns two two-storey shop- houses and one bungalow in Petaling Jaya, \With the exception ofthe upper flor of one shop-house, which is used as Dragonfire's office, the shop houses ae fuly rented out. For the year to 30 April 2017 the rents receivable from the shop houses were RM70,000 and assessment tax was RMB,000, Interest of RM100,000 was paid ona loan to purchase the two shop-houses, ‘The bungalow was rented furnished up to 31 May 206, when the tenant lf, having paid one month's rent of RME,500 due on t May 2016, He was repaid RM17,000, being his deposit of RM15,000 less a deduction of RM4,000 for diapidations to the property and contents, The bungalow was completly refurbished in June 2016 at a cost of RM35,000 consisting of: RM ACCA P6 Advanced Taxation Ms Ong Siyu Su repairs and redecoration 40,000 replacement of furniture and fitings 15,000 instaling solar roof panels, 10,000 ‘The bungalow was let out tothe managing director's brother from 1 July 2016 at a rent of RMS, 500 per month payable three-monthiy in advance. Management of the new tenancy was given to professional agents who charged RME,000 during the year to 30 Apri 2047, Intaly, Dragonfre had been asking a monthly rent of RM7, S00 for the refurbished bungalow. Dragonfire submitted its Form C forthe year of assessment 2017 on 23 November 2017 without treating any ofits rental income as business income. Required: (@) Determine the amount of the adjusted income or adjusted loss of rental income and of the statutory income from renting for the year of assessment 2017 on the basis used by Dragonfire, that is without treating any of the company’s rental income as business income. Explain the treatment of each deduction from rental income, (10 marks) (b) Explain whether Dragonfire is eligible to claim business income treatment fo all or any ofits rental income for the year of assessment 2017 and, if so, how that can be done and what the tax consequences would be. (7 marks) () Explain transfer pricing issue and implication arose in the above scenario. (Smarks) (a)Renial income RM RM. incom: loan intere: jalow - repair and reclecoratios placement of furniture ranagement foe Adjusted income’Statutory incom Y Assessment and loan inlesest aro only allowed for % portion because 3 out of 4 floors of the shop house were rented ao Y Repair and redecoration and management fee are deductible expenses as revenue in nature, WEE incurred the the production of ental income ¥ Replacement of funiture cost is deductible as FA is treated on replacement basis for non-business rental income Installation of solar roof panol is capital expenditure assuming that the bungalow did not have solar roof panel previously Jun 2018 Exam Page 40 of 170aa Bree ACCA P6 Advanced Taxation Ms Ong Siyu Su By According to Public Ruling No 4/2071, Income from Telling of real properly (RP) is deemed as business source f maintenance Shvceso spor seves pov’ seb at eaprtensvayn sn fo. Nance eve coppers wich include maintenance of structure of building such as lift, cleaning service, centralised air conditioners and also outside the building ( exterior parts) such as playing fields, car parks, etc. If Dragonfie provides the abovementioned services comprehensively and acvely tothe tenants of shophouses and bungalow, then its rental income would be treated as business income IF the rental income is treated as business income, all ental income would be treated as one source on accrual basis. However the rental income of bungalow from May'6 to June 18 ( advance rental) is taxable inthe year of ecepte, in YA 2017 based on the new S24A The company should dam capital allowance on the cost of furniture and fings rather than clsiming on replacement basis. ©) Transfer Pricing Issue and Implication The rental charged tothe tenant who is managing director's is not al arms length basis ie. RM 5,500 per month compared to RM7500, per month ( market rate) This wil attract scrutiny from IRB. IRB would adjust upward the rental to market rate ( RM7,500 ) and raise additonal assessment accordingly together with penalty for incorrect return, Hence, its advisable Dragontre should charge the rental at market rat of RIT. 500 with immediate effect to avoid transfer pricing attack by RB Jun 2018 Exam Page 41 of 170My Dec 15 04 David acquired an unfurnished bungalow unit ftom his brother, Solomon, in 2013. There was no written agreement concluded in relation to the purchase. The agreed consideration of RM1,800,000 was paid to Solomon in full on 15 August 2013 and the ttle ofthe property was transferred to David on 28 December 2013, The stamp duty payable on the transfer ‘was RM48,000. Immediately after the acquisition, David rented out the bungalow to a tenant until December 2015. ACCA P6 Advanced Taxation Ms Ong Siyu Su In 2014, David received compensation of RM10,000 from his neighbour for causing damage to the fence of the bungalow. David attempted to sell the bungalow in 2015 but the sale was subsequently aborted. David forfeited the purchaser's initial deposit of RM20,000. From 1 January 2016 to 1 March 2016, the bungalow was unoccupied, but David maintained it in good condition and ready. to be let out. From 1 March 2016, David let out the bungalow to a car dealer who used it as a showroom. The rental ‘agreement required the tenant to pay RM36,000, being one year's rental in advance, on moving into the property. In order to obtain this letting, David had to incur renovation costs of RM150,000 and to install air conditioners worth RM30,000 by 1 March 2016, For the calendar year 2016, David also incurred the fllowing expenses: RM 2016 quit rent and assessment 1,200 Roof repair (incurred on 20 November 2016) 1,500 Mortgage interest 18,000 In 2017, the car dealer (tenant) decided to acquire the property from David for an amount of RM3,500,000 (inclusive of furishings valued at RM20,000). Consequently, no further rent was pai by the tenant but David continued to incur quit rent and assessment and mortgage interest costs for the period up to 28 February 2017 of RM1,000 and RM15,000 respectively. The sale and purchase agreement for the property was signed on 1 March 2017 and approval from the State Authority to transfer the property was obtained on 30 May 2017. The full consideration was received on 1 August 2017 and the tite of the property was transferred on 20 October 2017. David incurred legal fees of RM30,000 in relation to the disposal Required: {a) (i) Compute the statutory rental income of David for the year of assessment 2016. Note: You should clearly explain the tax treatment of every item of expenditure relating to the lelting ofthe property in 2016 and should indicate by the use ofthe word ‘nil’ any item which isnot included in the calculation of statutory rental income. (5 marks) (li) Explain the tax treatment of the quit rent and assessment and mortgage interest costs incurred by David in 2017. @ marks) (b) (i) State David's disposal and acquisition dates of the bungalow property for the purposes of real property gains tax (RPGT) and explain the basis on which these are determined, (4 marks) {ii) Compute the RPGT payable by David in relation to the disposal of the bungalow property to the car dealer. (8 marks) (20 marks) Jun 2018 Exam Page 42 of 170ACCA P6 Advanced Taxation ‘Ms Ong Siyu Su David (a) (i) Statutory rental income for the year of assessment (YA) 2016 RM RM Rental income received in advance Less Renovation cost (not deductible: capital) Ar conaitioners (not deductible: capital) 2016 quit rent and assessment (see note) Roof repair (revenue, deductible) Mortgage interest (see note) Adjusted income Less: Capital allowance on air conditioners (not available for non-business income) Statutory rental income Note: The full year's quit rent and assessment as well as the mortgage interest are allowable even though the property was not rented out from 1 January 2016 to 28 February 2016. Where the letting of a real property ceases temporarily due to the absence of tenants for a period of up to two years, the Inland Revenue Board (IRB) has taken the position that the expenses for the period the real property is not let out are allowable provided that the real property is maintained in good condition and is ready to be let out. (ii) The expenses relating to the quit rent and assessment as well as the mortgage interest for the first two months in 2017 will be allowed as a tax deduction when the amounts are incurred, ie. in YA 2017. In this particular case, as the rental income received in advance has already been assessed in the YA 2016, there would be no income available for set off against these rental expense deductions in YA 2017. ‘Where this is the case, any expenses incurred in relation to that rental income after the basis period in which the income is received are allowed as a deduction once incurred in the basis period in which the income is assessed, There would therefore be an amendment made retrospectively to the assessment for the YA 2016 when the expenses are subsequently incurred [Paragraph 9.2, Public Ruling 4/2011 - Income from Letting of Real Property). Jun 2018 Exam Page 43 of 170ATION Conic m\seve a DEF ACCA P6 Advanced Taxation Ms Ong Siyu Su Rental RPGT) DF Be (OF ao ebm of HE,000 on 1 May 200 0 soiree 20a lease of apiece of freehold land in Pahang from ‘ir Pm Thisis th fist ti Mr Perk has granted a lease of this propery. In addition, DEF paid rent of RAS6,000 to Mr Pemilk. The anal Feitls payabledrradvance every Three years. DEF used the land forthe erage oF goods in ts trading business. (On (ay 2617, DEF sib eased the land to XYZ Sdn Bhd (XYZ) ata premium of R&f295,000 for the remaining duration ofthe lease. XYZ willbe responsible or paying the annual rental to Mr Pri from this date. (On €-iune 2017, DEF disposed ofa gfiophduse in Selangor because the location had become prone to flooding due to poor drainage, DEF incurred &ioss of con his disposal, after taking into account al relevant and qualifying expenditure. Required: (a) Explain the income tax treatment of the pfemiuim and the anfaual rental gid t6 Mr Pemilk from the perspective of DEF Sdn Bhd (DEF). (Smarks) {(b) Explain the real property gains tax (RPGT) treatment ofthe grant ofthe sub-lease to XYZ Sdn Bhd by DEF, and the premium ‘of RM295,000 received from the sublease. (marks) {c) Compute the RPGT iabilty of DEF in the year of assessment 2017 in respect ofthe sub-lease, explaining the treatment of the loss of RMT77,000 from the sale of the shophouse, (7 marks) (4) Explain the income tax treatment of the premium and the annual rent received in advance from the perspective of Mr Pemilik. Where alternative feasible treatments are available, present both sets of arguments, (5 marks) (20 marks) (2) Premium and annual rent Premiu premium of R180,000 was paid by DEF to secure the 18, DEF has thus obtained aright to occupy the land for 30 years, The pa ment is capital in nature and isnot tax deductible ia arving at DEF's adjusted income in the 0-yoarloase,Itwas a one-off payment and its benef extended over 30 lent has created an asset of enduring benefit Hence, the ‘of assessment 2010, Annual rent recoived in advance The annual rent of RM36 000 is forthe use ofthe land each year. This is a recurring fore, the annual /enue expense in nature and lax dedk expenditure and does nol give rise lo an asset of ble in arriving atthe adjusted incom DEF ding busine Additionally, the deductbliy oft ast was paid three ically provided far inthe law .93(1)(b). Ho nla expense is also years in advanco, the same law [s33(1}()}provices that only the rent payable for thal period fs deductible, ie, only RM6, 000 will be Jeduclble in each year of assnssment. (a) Income tax assessabilty on Mr Pemiik Premium Mr Pemilik has rotnquished i land for the 30-year his was also the fist and only time so far that he has granted int of RMIN8O 1e RM180,000 repress one form of return froin his investment in the freehold land. Hence, premium is revenue in nature, ancl propery subject to ineome On the other hand, it may be aig it may ba argued that he RM180,000 lea Annual rent received in advance Annu fental incom years rent, ie. RM108,000 (RM36 000 x 3), race the use of ve in nature and should be subject to income tax. Pursuant to the law (.27(1)], wi received in advance, the entre sumis treated as gross incame in of receit, Therefore, the entire sum of three in year 1 willbe taxable on Mr Pemili in year 1 nt... and fist becomes racelvable in tho ne ofthe relevant person for Jun 2018 Exam, Page 44 of 170