Professional Documents
Culture Documents
15
Chimney construction
The old chimney of the existing factory building was damaged and needed to be rebuilt. However, as SGSB will also be
undertaking the yarn weaving activities in the building, the chimney had to be heightened to meet the environmental
requirements.
A repair involves the replacement of a subsidiary or component part of the whole asset (the entirety) whereas a renewal refers
to the replacement of a substantial part of the whole asset. Generally, repair and renewal expenses, which do not materially
add to the value nor appreciably prolong the life of an asset, but merely keep it in good and efficient operating condition, are
tax deductible. If the replacement of the asset is of its entirety, then it will not be deductible, as it does not connote repair.
Only the replacement of a part of the asset will rank for deduction.
In this particular case, as the chimney forms part of the larger factory building, it can be said that the chimney forms part of
a larger asset. However, as there is an improvement being made to the chimney to cater for the yarn weaving activities, the
replacement of the chimney will be regarded as capital in nature and so will not rank for a tax deduction. It follows that the
chimney cost is eligible for industrial building allowance (IBA).
Additionally, it should be noted that, based on established case law, even the cost of the notional repairs (i.e. the repair
expenses which would have been incurred if the chimney had not been heightened) is not allowed for tax deduction. Hence,
the notional repair amount of RM200,000 cannot qualify for tax deduction.
Light bulbs
The cost of replacing the light bulbs is allowed as a tax deductible expense as it is a repair and renewal cost.
Compensation payment to TMSB
TMSB proposed to venture into the manufacture of cotton garments. In order to stop this development and the resulting
competition, SGSB made a compensation payment to TMSB of RM300,000. As part of the settlement, it has been agreed
that TMSB will refer its orders for cotton garments to SGSB, while in return SGSB will refer its orders for silk garments to
TMSB.
In determining the tax deductibility of the expenditure, a distinction must be made in regard to compensation relating to the
profit yielding structure of the business as opposed to the process by which the entity operates. Based on established case
law, it has been held that compensation paid to buy out competition which relates to the profit 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 competitor in the production of cotton
garments, the amount is capital in nature and so not tax deductible.
On the other hand, if the RM300,000 is to induce TMSB to enter into a mutual cooperation trade agreement, under which
each party will refer the cotton or silk orders to the respective producer, then it is made for a trade pact which directly relates
to the profit-making machinery of SGSB. Hence, it may be argued that the amount is revenue in nature and is duly deductible.
On balance, we are of the view that the payment was made to buy out a potential competitor or to induce a potential
competitor to mutually cooperate instead, and hence is capital in nature.
[Marking note: Marks should be awarded for a contrary conclusion to the extent that it is reasonably and cogently argued.]
(iv) Income tax deductibility on the input tax incurred by the company
Chimney construction
The input tax incurred on the chimney construction has been claimed as a credit in SGSB’s goods and services tax (GST)
return. Therefore, the input tax is not a cost to the business and the issue of income tax deductibility is not relevant.
Light bulbs
SGSB did not claim the input tax on the light bulbs in its GST returns on the basis that the tax invoice was not issued in the
name of the company. As such, the input tax becomes a cost to the business. Under the income tax legislation, it is provided
that GST expenses are to be disallowed for income tax deduction in respect of GST input tax paid or to be paid by the company
if the company is entitled under the GST legislation to a credit of the amount as input tax.
Therefore, in determining the income tax deductibility of the input tax, it is necessary first to establish whether SGSB is entitled
to claim a credit on the input tax under the GST legislation. In the present case, SGSB should be entitled to claim an input
tax credit in its GST return as the light bulbs expense was incurred for the furtherance of the company’s business. But, as the
tax invoice for the expense was not issued in the name of SGSB, this has invalidated the claim of an input tax credit. However,
SGSB will still be able to claim the input tax if it gets the supplier to re-issue the tax invoice under its own name.
On this basis, as SGSB would be entitled to a credit for the input tax in its GST return had a valid tax invoice been obtained,
the GST input tax should not be allowed as an income tax deduction.
16
– it must involve a consideration.
On the basis that TMSB is prevented from venturing into 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%.
(vi) To illustrate the tax impact of the above items on the company’s tax return, computations of SGSB’s total income for tax
purposes for each of the YAs 2017 and YA 2018 are set out in the appendix attached herewith.
------- End of report ---------
Appendix
Serene Garment Sdn Bhd
Computation of total income for the year of assessment (YA) 2017 and YA 2018
YA 2017 YA 2018
RM’000 RM’000 RM’000 RM’000
Adjusted loss (500)
Add: Chimney construction (excluding GST) 500
Add: Light bulbs nil
Add: GST input tax – light bulbs 9
Add: Compensation to neighbouring company 300
––––
Adjusted income (recomputed) 309 5,000
Less: Capital allowance
As calculated 2,000 2,000
IBA on chimney ((10% + 3%) x RM500,000) 65
(3% x RM500,000) 15
Claimed (309) (309)
–––––– ––––
Carried forward 1,756 1,756
–––––– ––––––
(3,771)
––––––
Statutory income nil 1,229
Less: Reinvestment allowance (working) (nil) (860)
–––– ––––––
Total income 369
––––––
Working: Reinvestment allowance
YA 2017 YA 2018
RM’000 RM’000
Eligible capital expenditure
Factory building 0 2,500
Machinery – 1,100
Yarn weaving machine (not eligible) nil –
––– ––––––
nil 3,600
––– ––––––
Reinvestment allowance at 60% 2,160
Utilisation of claim (restricted to 70% of statutory income) (860)
––––––
Reinvestment allowance carried forward 1,300
––––––
17
(ii) Quantitative test – based on the information provided for the financial year ended 31 March 2017, LB’s investment
income constitutes 90% (i.e. more than 80%) of its gross income, computed as follows:
RM’000
Investment income
Dividend from local subsidiaries 3,000
Dividend from foreign subsidiaries 1,400
Interest from local subsidiaries 4,600
–––––––
9,000
Non-investment income
Fees for management services from subsidiaries 1,000
–––––––
10,000
–––––––
Percentage of investment income over total income 90%
Therefore, LB meets both IHC conditions and will be treated as an IHC for tax purposes.
As LB is a listed company and an IHC, any income it derives from the holding of investments is deemed as a business source.
Each source of income has to be assessed as a separate business source. In this respect, the dividend and interest income
derived by the company are deemed as separate business sources.
In ascertaining the adjusted income and statutory income of the deemed business sources, the special treatment is applied
as follows:
(1) The amount of allowable deduction for expenses is restricted to the amount of gross income from that source for that
year of assessment. Any excess of those expenses is to be disregarded (cannot be absorbed by any other source of
income or carried forward to subsequent years of assessment).
(2) Capital allowances on qualifying capital expenditure incurred by the company are allowed to be deducted in arriving at
the statutory business income of the respective sources but the claim will be restricted to the amount of adjusted income
from that source. If there is no adjusted income or the adjusted income is not sufficient to absorb those allowances, any
excess of allowances cannot be carried forward to subsequent years of assessment.
The above special treatment is not applicable to the genuine business income of a listed IHC (e.g. fees for the provision of
management services) where the normal tax rules will apply. For genuine business income, where there is an excess of
expenditure over income, the excess would constitute a tax loss available to be deducted against other income. Similarly, any
excess of capital allowances over the adjusted income can be carried forward to subsequent years of assessment.
18
Working 1: Allocation of interest expenses based on investment balance
Dividend Interest
RM’000 RM’000
Investment in local subsidiaries 80,000
Investment in foreign subsidiaries (excluded) 0
Amount owing by local subsidiaries (interest bearing) 110,000
Amount owing by local subsidiaries (non-interest bearing) 10,000
––––––– ––––––––
80,000 120,000
––––––– ––––––––
Allocation of common interest expenses
(600 – 100 = 500) based on investment balances 200 300
Add: Interest on loan for foreign subsidiaries 100
Less: Interest allocated to non-interest bearing loan (10,000/120,000 x 300) (25)
–––– ––––
Deductible interest expenses 300 275
–––– ––––
[Tutorial note: The investment in foreign subsidiaries is excluded as it is financed specifically by a Labuan loan.]
Working 2: Allocation percentage based on gross income for common expenses and capital allowance
Dividend Interest Management
service fees
RM’000 RM’000 RM’000
Dividend income
– Local subsidiaries 3,000
– Foreign subsidiaries 1,400
Interest income from local subsidiaries 4,600
Management service fee income 1,000
–––––– –––––– ––––––
4,400 4,600 1,000
–––––– –––––– ––––––
Percentage of allocation 44% 46% 10%
Working 3: Allocation of common expenses
RM’000
Total amount of common expenses 1,000
––––––
Allocation of deductible common expenses
Dividend income (44%) 440
Interest income (46%) 460
Management service fee income (10%) 100
––––––
1,000
––––––
Working 4: Allocation of common capital allowance
RM’000
Common capital allowance 200
––––
Allocation of capital allowance
Dividend income (44%) 88
Interest income (46%) 92
Management service fee income (10%) 20
––––
200
––––
19
Disposal of shares on the stock exchange market
When LB subsequently disposes of its own shares on the stock exchange market, the company could make either a gain or
a loss. As the share buyback exercise is undertaken to improve the share price of the company, rather than a transaction
entered into to make profits for the company, it cannot be said that the disposal of the shares will be regarded as a trading
transaction. The dealing in its own shares relates to the capital structure of the company. Therefore in this case, any gains or
losses arising from the disposal should neither be taxable nor tax deductible.
3 ForinCo
20
Branch Subsidiary
Repatriation or As the Malaysian branch is part of ForinCo, As a separate and distinct entity from its
distribution of profit any profits made by the branch intrinsically parent company, the Malaysian subsidiary of
belong to ForinCo: there is no need to invoke ForinCo can only distribute its profits to its
the process of dividend distribution. The parent through a dividend, subject to the
branch can freely repatriate the profits to availability of retained earnings. The dividend
Ruritania as and when it sees fit. There is no is deemed to be derived from Malaysia. In
restriction on the amount which can be Malaysia, there is no dividend withholding
repatriated, to the extent that the prevailing tax, so the distribution of dividend will not be
Malaysian foreign exchange rules are subject to withholding tax.
complied with.
21
(b) One Two Three Sdn Bhd (OTT)
The law on time bar [s.91] states that the Director General of Inland Revenue (DGIR) has up to five years after the expiration
of a year of assessment to raise any assessment or additional assessment for that year of assessment (YA).
The time bar does not apply if it appears to the DGIR that there is fraud, wilful default or negligence involved.
With reference to OTT, the DGIR does not allege fraud, wilful default or negligence; the additional assessments arose out of
a disallowance of director’s remuneration being deemed excessive and the return deemed ‘incorrect’. The tax audit process
does not defer or extend the five-year period.
YA 2010 – For YA 2010, the statutory time bar of five years ended on 31 December 2015. The additional assessment was
raised on 18 May 2017. Therefore, the additional assessment for YA 2010 was raised out of time and is time-barred.
YA 2011 – For YA 2011, the statutory time bar of five years ended on 31 December 2016. The additional assessment was
raised on 18 May 2017. Therefore, the additional assessment for YA 2011 was raised out of time and is time-barred.
YA 2012 – For YA 2012, the statutory time bar of five years ended on 31 December 2017. The additional assessment was
raised on 18 May 2017. Therefore, the additional assessment for YA 2012 was raised within the five-year period and is
therefore a valid assessment.
YA 2013 – For YA 2013, the statutory time bar of five years ended on 31 December 2018. The additional assessment was
raised on 18 May 2017. Therefore, the additional assessment for YA 2013 was raised within the five-year period and is
therefore a valid assessment.
(b) Sub-lease
The 30-year lease from Mr Pemilik secured a right for DEF over land situated in Malaysia. The lease therefore became a
chargeable asset; DEF acquired this chargeable asset on 1 May 2010.
By sub-leasing the land to XYZ Sdn Bhd, DEF has effectively disposed of the said chargeable asset, namely the lease
[paragraph 25, Schedule 2, RPGT Act].
DEF has therefore disposed of the lease asset on 1 May 2017 and the premium of RM295,000 constitutes the disposal
consideration.
22
Although the disposal of the shophouse occurred after the disposal of the lease, the loss of RM77,000 is allowable against
the chargeable gain arising on the earlier transaction because the law [s.7(4), RPGT Act] provides that an allowable loss is
deductible against the total chargeable gain of a person for the same year of assessment in which the disposal was made.
23
Professional Level – Options Module, Paper P6 (MYS)
Advanced Taxation (Malaysia) March/June 2017 Sample Marking Scheme
Marks
1 (i) Eligibility for reinvestment allowance (RA)
RA qualifying period conditions (0·5 x 2) 1
Old RA period expired 0·5
Special RA period 1
Expiry of special RA 0·5
–––––
Available 3
–––––
Maximum 2
–––––
25
Marks
(vi) Tax computation
YA 2017
– Tax adjustments to arrive at adjusted income (0·5 x 4) 2
– CA – correct stage, IBA on chimney, CA c/f 0·5 + 0·5 + 0·5
YA 2018
– CA – IBA, CA b/f 0·5 + 0·5
– RA computation – factory, machinery, yarn machine, 60% 0·5 + 0·5 + 1 + 0·5
– 70% restriction, RA c/f 0·5 + 0·5
– Total income 0·5
–––––
Available 8·5
–––––
Maximum 7
–––––
Professional marks
Format and presentation of the report 1
Clarity and effectiveness of communication including logical flow 2
Appropriate use of appendix 1
–––––
4
–––––
35
–––––
26
Marks
2 (a) Status of investment holding company
Definition of IHC – two conditions 1+1
Application:
– Qualitative test 1
– Quantitative 80% test 1
Impact of being an IHC:
– Deemed business source, assessed separately for each source 1 + 0·5
– Treatment of expenses 1
– Treatment of CAs 1
– Treatment of genuine business source income 1
–––––
Available 8·5
–––––
Maximum 7
–––––
27
Marks
3 (a) Permanent establishment (PE)
2017
– No PE, reasons 1+1
2018
– PE arises, reasons 1+1
–––––
4
–––––
28
Marks
4 (a) (i) Commencement of business
Rent of premises, renovations, fitting out – all preparatory, not commenced 1 + 0·5
Raw materials arrived – production began, commenced 1 + 0·5
First shipment of goods – already commenced 0·5
Basis period:
– Individual basis period = calendar year 1
– YA 2017, 1 May to 31 December 2017 1
–––––
Available 5·5
–––––
Maximum 5
–––––
(ii) Computation of aggregate income
Adjusted income 0·5
CA – P&M, explanation 0·5 + 1
IBA, explanation 0·5 + 1 + 1
Statutory income 0·5
Rental income, exempt, reason 0·5 + 0·5
Singapore dividend, exempt, reason 0·5 + 0·5
Malaysian dividend, exempt, reason 0·5 + 0·5
–––––
8
–––––
(iii) Madam Rich
Prior to renovation storage only no claim 1
Post renovation used as IB by tenant 1
Claim for IBA, reason 1
QBE/residual QBE 1
–––––
Available 4
–––––
Maximum 3
–––––
29
Marks
5 (a) Premium and annual rent
Premium:
– Capital in nature, reason, not deductible 0·5 + 1 + 0·5
Annual rent received in advance:
– Revenue in nature, reason, deductible 0·5 + 1 + 0·5
– Received in advance, treatment, reason 1 + 0·5
–––––
Available 5·5
–––––
Maximum 5
–––––
30