SOLUTIONS TAX PLANNING 11 SEMESTER (JULY 2022-DEC 2016)

JULY 2022 Q5
A. a. Tax treatment on the following expenses:
i. Donation of laptop is non allowable expenses in arriving at the adjusted business
income. √ However, it can be deducted against aggregate income but for any cash
donation to government. Since the donation was gift of laptops to school, it is non
cash donation and therefore it is not deductible against aggregate income.

ii. Cost of souvenirs for the promotion of product in an approved international trade fair
outside Malaysia √ is entitled for double deduction expenses.

iii. New signature board is a capital expenditure, therefore it is non allowable expenses
in arriving at adjusted business income.

iv. The interest on loan is restricted for the interest on loan taken to finance the
investment in fixed deposit (130,000/450,000 x 31,500 = 9099). √ The remaining of
interest on loan (22,401) which is used for working capital of the business is
deductible.
(8√ x 1 = 8m)
b. MLSB is entitled for group relief due to the following reasons:
- Both are resident companies
- The paid up capital of CB and MLSB are more than RM2.5 million
- They have the same financial year end which is 31 December
- Both companies are related companies because the shareholding of CB in MLSB is
90%, which is at least 70% shareholding in another company.
- They are not enjoying any form of tax incentives.
(any4 x 1 = 4m)

c. Chargeable income of CB for YA 2021

RM
Aggregate income 2,100,000
(-) Approved donation (laptop) NIL
Defined Aggregate Income 2,100,000
(-) Loss surrender
(700,000 x 70% = 490,000) (490,000)
Chargeable income 1,610,000

MLSB – loss c/fwd (RM210,000)

(6√ x ½ = 3m)
B. a. Existing Machine
RM
YA 2019 QPE 78.000
(-) IA (78,000 x 20%) (15,600)
AA (78,000 x 14%) (10,920)
RE 51,480
 2020 (-) AA (78,000 x 14%) (10,920)
RE 40,560
2021 DV 47,000
Balancing charge 6,440

The disposal of the machine is within 2 years of acquisition (acquired date, 10/8/2019 –
disposal date, 20/3/2021), therefore all capital allowances claimed RM37,440
(15,600+10,920+10,920) will be withdrawn by way of balancing charge.

It is advisable to dispose the machine after 2 years of acquisition to avoid being charged
the capital allowances claimed in the previous years as balancing charge.

(10 √ x ½ = 5m)

b. Machine AXA

YA 2019 QPE 139,000

(-) IA (139,000 x 20%) (27,800)
AA (139,000 x 20%) (27,800)
RE 83,400
2020 (-) AA (139,000 x 20%) (27,800)
RE 55,600
2021 Disposal price = RE (55,600)
BC/BA NIL

Disposal of machine AXA from BSB to NSB is under controlled transfer as BSB owns
shares in NSB more than 50% (75%). The disposal price is deemed equal to residual
expenditure √ and no balancing charge or balancing allowance arise from the disposal.
The selling price of RM87,000 is ignored.
(10 √ x ½ = 5m)
(Total: 25 marks)

FEB 2022,Q5

Solution 5(A) – Dabeena Investment Holding Bhd (DIHB)

a. Yes, the companies have fulfilled the conditions for the eligibility for the group relief provision.

The conditions fulfilled are:

1. The two subsidiaries are 100% held by Dabeena. They are therefore related companies (at
least 70%) of ordinary share is either owned by surrendering company or claimant company
or commonly controlled by another Malaysian resident company.
2. and the companies must be related companies during the current basis period and the
immediately preceding 12 months.
3. They all have a full 12-month basis period ending on the same date (on 31 October 2021).
4. As their issued capitals are RM10 million and RM7 million, they satisfy the minimum RM2.5
million threshold requirement.
5. All three companies have not enjoyed any form of tax incentives.
 b. i) Loss which may be surrendered by GISB
The loss which may be surrendered is 70% of its current year adjusted loss, i.e
RM2.5 million x 70% = RM1·75 million.

ii) Amount of unabsorbed loss carried forward by GISB

RM750,000 (2.5M-1.75M) loss to be carried forward to future years.

iii) The defined aggregate income

(i) Dabeena Holding Bhd (DHIB)

RM
Aggregate income 1,100,000
Less Approved cash donation ( 90,000)
(rest to 10%AI)
Defined aggregate income 1,010,000
––––––––

(ii) Maju Investment Sdn Bhd (MISB)

RM
Statutory income/Aggregate income 2,000,000
Less Approved donation (rest to 10%AI) (25,000)
––––––––––
Defined aggregate income 1,975,000
––––––––––

Solution 5(B)

Kancil Plantation Sdn Bhd (KPSB)

a. Tax planning strategies for KPSB’s which will minimize the income tax liability.

1. The company could donate more cash to approved institutions. This donation can be
deducted against the Aggregate Income of the company but the amount is restricted to
10% of the Aggregate Income. However, a donation in kind is not allowed for deductions.

2. The company should send its employees to a training program approved by the Minister
of Finance. This expense will be entitled to double deductions.

3. The lease rental for the motor car (non-commercial vehicle) is restricted to RM50,000
because the cost of the car exceeds RM150,000. The excess amount of lease rental will
be added back in arriving at the adjusted income. It is advisable to lease a vehicle that
does not exceed RM150,000.

4. The company could provide for specific doubtful debt rather than general provision
because only the specific provision is allowed for tax purposes.

5. The company could employ more disabled employees because their remuneration will be
given double deductions.
b) Tax impact of each of the two alternatives (set up new co or extend the business)

i) Deductibility of feasibility studies and other preparatory expenses related to the

establishment of the mill.

If the mill project is carried out by PSB as an extension of its plantation, it can be argued
that the plantation activity and the mill activity are part of the same business of producing
palm oil for export. As such, the cost of any feasibility studies and other preparatory
expenses may arguably be claimed as allowable expenses against the existing
plantation business.

If the mill project is treated as a new business to be carried out by a new company, then
the feasibility expenses are not deductible as they would be pre-operating.

ii) Initial losses

If the mill is operated under PSB and the two activities are treated as a single source,
any loss arising from the mill will be automatically offset against profits from PSB’s
existing business.

If the mill operation is treated as a separate business source within PSB, then any loss
recorded for the mill will be a current year loss and so will be deductible from the
company’s aggregate income from all other sources for the year of assessment.

If the mill is operated by the new company, the current year adjusted loss sustained by
the new company can be surrendered to PSB under group relief. However, the amount
surrendered is restricted to 70% of the loss for the year and it can only be transferred in
the second financial year. This will be tax-inefficient as PSB will continue to pay tax on
its chargeable income.

JULY 2021, Q5
Question 5A

a. Related companies mean at least 70% of paid-up capital ordinary shareholding is

either owned by surrendering/claimant companies or commonly controlled by
another Malaysian resident company. Thus, YIN, RAC and SAM are related
companies, as YIN owns 100% of RAC and YIN also owns SAM through 60%
direct acquisition of RAC and 20% indirectly (RAC owns 20% paid-up ordinary
shares capital of SAM).

YIN

100% 60%

RAC SAM
20%

Yin control RAC = 100% (related)

Yin control SAM = 60% + (100 % x 20% = 20%) =80% (related)
RAC and SAM = related (commonly control by Yin)
 b. Computation of chargeable income for YA 2020.
YIN RAC SAM
RM’000 RM’000 RM’000
s 4(a) Business
Adjusted income Nil 4,000 Nil
Less: Capital allowance Nil (1,400) Nil
(c/f: 2.4k)
Statutory income Nil 2,600 Nil
s 4 (c) Dividend (EXEMPT) Nil -
s 4 (d) Rental income 1,800 200
Aggregate income 1,800 2,800 Nil
Less: Approved donation (20) (160)
Defined aggregate income 1,780 2,640
Less: Loss surrendered by SAM (1,780) (2,420)
(70% x RM6,000 = 4200)
Chargeable income Nil OF 220 OF Nil

c. With effect from YA 2019, it is mandatory for the surrendering company to have
commenced business for a period of 12 months to be eligible for group relief. This would
effectively mean that the first year current year loss of the surrendering company would
not be allowed to surrender to its related companies. Hence, SAM Sdn Bhd could not
surrender its business loss to YIN Bhd because they commenced the business for a
period of nine months only . Such current year business loss would remain and to be
carried forward as unabsorbed business loss.

Question 5B

i. It is crucial to determine if rental income is to be classified as business source under S.4(a)

or rental source under S.4(d) of the ITA 1967. There is evidence that QSB has put its
assets to gain full use, i.e., it has incurred expenses to renovate, beautify and procure
tenants and has also provided maintenance, administration and amenities to the tenant.
√Hence, the income derived from the rental of its factory should be classified as business
income under S.4(a) of the ITA 1967

ii. As the expenses were evidently incurred in the production of gross income from business
source, the amount would rank for deduction under S.33 (1) of ITA 1967, in arriving at the
adjusted business income.

iii. On the assumption that the loss constituted loss under S.4(a) of ITA 1967 and the rental
income is classified as business income, then the brought forward losses would be
deductible in pursuant to S.43(2) of ITA 1967.

Question 5C

Cerdik Sdn Bhd (CSB) and Pandai Sdn Bhd (PSB) are related companies because both are under
the common control of Mutiara Bhd. Since the conditions for group relief have been met by both
companies, PSB may surrender a maximum of 70% of its adjusted loss for that year of
assessment to CSB. The amount shall be deducted from the defined aggregate income of CSB.
Hence, tax liability is reduced.
FEB 2021, Q5

A. MAHS SDN BHD

i. The salary paid to a senior citizen staff is an allowable expense incurred in
the production of gross income. However, the salary is not entitle for double deduction
since the amount is more than RM4000 per month. Therefore, no adjustments required.

ii. The lease rental for the motor- car (non-commercial vehicle) is restricted to
RM50,000 because the cost of the car exceeds RM150,000. Therefore, the excess
amount of lease rental (RM7,000) should be added back in arriving at the adjusted
income. (RM3k x 19 months = RM57k – RM50k = RM7k NA).

iii. The donation was not incurred in the production of gross income. However, since
MAHS Sdn Bhd want to apply a deduction under Section 34 (6) (g), the maximum
amount allowed for deduction (either cash/goods) restricted to RM100,000 in arriving
at adjusted income. Therefore, the excess amount (RM30k) should be added back in
arriving at the adjusted income.

iv. The replacement of the damaged office tiles incurred was capital in nature because the
office tiles was replaced using different specification and size. Therefore, the amount
should be added back to the net profit in arriving at the adjusted income.

iv. The insurance premium is allowable expenses because this is a normal business
expenses. However, it is not entitle for double deduction because it is not approve by
Minister of Finance. Therefore, no adjustments required.

b. i. MAHS Sdn Bhd should pay salary not more than RM4,000 per month to senior
citizen staff aged 60 years and above in order to entitle for double deduction.

ii. MAHS Sdn Bhd should lease a car with cost not exceeding RM150,000.
Therefore, the qualifying capital expenditure will be increased up to
RM100,000. Hence all the lease rental expenses are allowable for deduction.
iii. MAHS Sdn Bhd should donated not more than RM100,000 either in cash or kind
if they want to fully utilize Section 34 (6) (g).

iv. MAHS Sdn Bhd should replace the damaged office tiles with the same material
and size. This expense will be revenue in nature and deducted as an allowable
expense.

v. MAHS Sdn Bhd should insure the risk with a company approved by the Minister of
Finance to entitle for double deduction.
B. KALAMANDA SDN BHD (KSB)

i. The computation of the disposal price for KSB is as follows:

ASB (Disposer)
YA 2018 QE 150,000
Less: IA (20% x 150,000) (30,000)
: AA (14% x 150,000) (21,000)
RE 99,000
YA 2019 Less: AA (14% x 150,000) (21,000)
RE 78,000
YA 2020 Disposal Price = RE (actual DP 95k) 78,000
BC or BA Nil

(10√ x 1/2 = 5 marks)

ii. Since the disposal of the P&M is under controlled transfer, the actual selling price of the P&M
(RM95,000) by KSB (disposer) to TSB (acquirer) is disregarded in determining the disposal
price. The residual expenditure of RM78,000 is deemed to be the disposal price. No balancing
charge or balancing allowance is imposed on KSB.
(4√ x 1 = 4 marks)

C. GAHARU SDN BHD

Gaharu Sdn Bhd would not be able to surrender its current year tax losses to other companies
within the the group because Kayu Sdn Bhd owns only 68% of the paid-up capital of Gaharu and
the current paid-up capital of Gaharu is RM2 million. To be able to utilize the group loss reliefs, it
is recommended to increase Kayu’s percentage of shareholding in Gaharu to at least 70% so that
both companies become related parties and to increase Gaharu’s paid-up capital to more than
RM2.5 million before the beginning of the basis period for that year of assessment.
(6√ X 1 = 6 marks)
(Total: 25 marks)

JULY 2020, Q2, S2

a.
RM
YA’ 2018 QE 80,000
Less: IA (20% x 80,000) (16,000)
AA (14% x 80,000) (11,200)
RE 52,800
YA ‘ 2019 Disposal value (50,000)
B.Allowance 2,800

Although the disposal of machine was made within 2 years of acquisition, Para 71, Sch 3 will not
be apply because such disposal was made with a valid commercial reason (bona fide). Hence,
CA previously claimed (RM27,200) will not be ‘clawed back’ as BC in the year of disposal.
Balancing Allowance arises because the disposal value of the machinery is lower than the
residual expenditure. BA is allowed as a deduction from the adjusted income which subsequently
reduce the chargeable income of CCSB and reduce tax liability of CCSB.

b. Interest restriction (investment related): (160,000/260,000) x 26,000 = 16,000 (NA)

Interest expense (business related): 26,000 – 16,000 =10,000 (A)

Interest on loan amounting RM10,000 is deductible from gross business income because
the loan facility was employed in the production of gross business income (Sec 33 ITA).
The remaining RM16,000 interest expense is non-deductible/ subject to interest restriction
because it is non-business related. Nonetheless, the amount is deductible against interest
income from fixed deposit (investment income), subject to a maximum deduction of
RM12,000. The remaining amount (RM4,000) is disregarded due to insufficient income.

d. Deductibility of preliminary expenses:

Single business : Preliminary expenses are deductible against the gross

(extend the income of the profitable operation (existing operation)
manufacturing biz) because plantation activity and the manufacturing activity
are part of the same business.

Distinct & separate : Preliminary expenses are not deductible because these
business (form a expenses not wholly and exclusively incurred in the
new company) production of income.

Availability of capital allowances:

Single business : The capital allowances on the QE incurred by both activities
will be deducted against the adjusted business income of
CCSB’s combined operations.

Distinct & separate : CA will have to be carried forward because the initial years
business are expected to be loss-making. This will result in tax
inefficiency with manufacturing bus having to pay tax
while the plantation bus have substantial unutilised CA.

Treatment of initial losses:

Single business : Loss arising from the plantation will be offset against the
gross income of profitable business (existing business).

Distinct & separate : Loss recorded by the plantation business will be treated as
business a current year business loss and so, will be deductible from
the company’s aggregate income for the year of
assessment. Any unabsorbed loss will be carry forward to
future years.
d. It is recommended for CCSB to treat the plantation activity as an extension of its existing
business because it is tax efficient to do so as compared to the other alternative.

DEC 2019, Q4

a. i. Disposal of plant & machineries

RM Million
YA 2018 Qualifying expenditure 5.0
Less: Initial Allowance 20% (1.0)
Less: Annual Allowance 20% (1.0)
RE 3.0
YA2019 Annual Allowance 20% (1.0)
Residual Expenditure 2.0
YA2020 Disposal Value 2.5
Balancing Charges 0.5
BC ( Total IA + AA ) 3M

Based on the above computation, disposal of the heavy plant and machineries will give rise to
Balancing charge of RM0.5 million. However, since the disposal is within 2 years (15 August
2017 to 2 July 2019), all capital allowances claimed (RM3 million) will be withdrawn and became
Balancing charge. The adjusted income will increase. Thus, it is advisable to dispose the heavy
plant & machineries after 15 August 2019.

ii. Disposal of industrial building

ASB and DSB are related companies (>70% shareholding). ASB has control in DSB because
it own more than 50% shares in DSB. Thus disposal of industrial building from ASB to DSB is
subject to Controlled Transfer/sales.

ASB RM
YA 2011 Qualifying expenditure 450,000
Initial Allowance (10%) (45,000)
Annual Allowance (3%) (13,500)
Residual Expenditure 391,500
Annual Allowances:
YA2012 - YA2018 (3% x 450K x 7 yrs) (94,500)
YA 2018 Residual Expenditure 297,000
YA 2019 DV = RE (297,000)
BC/ BA NIL

Asset deemed to be transferred at the residual expenditure of the asset (RM297,000) and there
will be no balancing allowance or balancing charge. The Acquirer (DSB) will continue to claim the
same industrial building allowance (RM450,000*3%=13,500) as disposer (ASB) but restricted to
RE amount transferred. Controlled sales/ transfer would normally benefit the disposer, but not the
acquirer.
b. To claim group relief, claimant and surrendering companies, each must have paid up
capital of ordinary shares exceeding 2.5 million.
Since DSB only have a paid-up capital of RM2.4 million, thus DSB cannot surrender the
adjusted losses to ASB.

JUNE 2019, Q4

A. (a)(i) Restricted interest expenses (not deductible):

Investment cost / Total borrowings x Total Interest expenses
= (100,000 / 210,000) x 27,000
= 12,857

(ii)
Net Profit 2,653,900
Less: Non-Business Income
Rental Income (36,000)
Add: Non-Deductible Expenses
 Wages and salaries Nil
 PFDD - Specific (50%) Nil
- General (50% x 5600) 2,800
 Interest expense 12,857
 Donation (sec 44) 8,000
 Repair & Maintenance Nil
ADJUSTED BUSINESS INCOME 2,641,557
Less: Capital Allowance (6,600)
STATUTORY BUSINESS INCOME (Sec 4a) 2,634,957
Add: Non-Business Income
Rental Income 36,000
Less: Interest Exp (12,857) 23,143
AGGREGATE INCOME 2,658,100
Less: Donation Sec 44 (Restricted to 10% of AI) (8,000)
TOTAL/ CHARGEABLE INCOME 2,650,100

(b) The RM27,000 interest expense on money borrowed is subject to interest

restriction, governed under s 33(2). RM12,857 is non-deductible as a business
expenses. However, this amount is deductible under investment income (Rental
Income). The remaining interest expense (RM14,143) is a deductible business
expense because it is wholly and exclusively incurred in the production of business
income (Sec 33).

(c) Under hire purchase financing, the company can utilize the HP interest
payments √ in reducing its adjusted business income and capital allowances in
lowering its statutory business income.

The computation of CA will be based on the amount deposited and capital portion
of installments paid, which will be further restricted to RM50,000 because the
passenger vehicle exceeds RM150,000 in cost. This will reduce the quantum of
CAs claimed.
 On the contrary, if the co choses lease rental method, it can utilize lease rental
payments in reducing the adjusted business income, subject to a restriction of
RM50,000. CAs are not available since the company is not considered the owner
of the vehicle.

The company should purchase a vehicle that cost less than 150k, therefore the
QCE will be 100k for lease rental or capital allowance. And it is advisable to use
lease rental instead of hire purchase financing because full amount of lease rental
is given as revenue deduction in the year of incurred while the claim of CA need
to be spread to various years in accordance with the specific rate.

(d) The eligibility or conditions that must be fulfilled are:

1. Both companies are related companies, i.e., BSB owns more than 70%
shareholding in RRSB.
2. Both companies are resident and incorporated in M’sia.
3. Paid up capital of ordinary shares for both companies exceeded RM2.5 million
at the beginning of the basis period, and the companies were related
throughout the basis period 2018 and the 12 months preceding the basis
period 2018 (YA2017).
4. BSB is not eligible for other tax incentives, and
5. Both companies have the same financial year end.

(e) The plant and machinery is deemed to be transferred at the Residual Expenditure.
The sales price of RM90,000 is ignored. This leads to no balancing adjustments
(balancing allowance or balancing charge does not arise). The capital allowances
claimed by BSB are no difference from what RRSB would have claimed as RRSB
continue owning the asset but restricted to RE amount transferred.

B. (a) Dial Sdn Bhd could adopt the ‘Resale Price’ method√ when determining the
purchase price of the smartphone from MMS Multinational. This method is
appropriate because Dial Sdn Bhd purchase products from its related party and
sell to the third party ,an independent distributor.

(b) - The acquirer owns at least 70% ordinary shareholdings of the disposer.
- The disposer owns at least 70% ordinary shareholdings of the acquirer.
- Both acquirer and disposer are commonly controlled by another party.

(c) i) Documentation is prepared at the point when the taxpayer is

developing or implementing any arrangement or transfer pricing policy
with its associated person; and
ii) If there are material changes, when reviewing this arrangements
prior to, or at the time of, preparing the relevant tax return of his income
for the basis year for a year of assessment.
DEC 2018, Q4

Question 4 a
Item 1
Cash donation is not allowed for deduction in arriving at adjusted income from business because
it is not wholly and exclusively incurred in the production of business income. However, It is
allowed to set off against the aggregate income which will reduce the total income of the company.
But, the cash donation is restricted to 10% of aggregate income.

Item 2
Allowances for two accountancy students are not deductible as the students are not residents for
tax purposes.

Item 3
Promotion expenses of RM50,000 is not deductible as the promotional gifts were without
company’s logo.

Question 4 b – Group Relief Loss

Zain Agus
(surrendering (claimant co)
co)
RM RM
Aggregate income 235,000 620,000
Less: Current year losses (loss 500k. loss c/f: (235,000)
265k)
Approved donation (restricted to 10% (62,000)
of AI) 65k @ 62k WIL
Defined Aggregate income nil 558,000
Group Relief Loss (265,000 x 70% ) (185,500)
Total/ Chargeable income Nil 372,500
Tax Payable (24% x 372,500) nil 89,400

Question 4 c

i. Current year losses can be set off against the aggregate income while unabsorbed
business losses brought forward can be set off against the aggregate of the statutory
income from ALL business sources Thus reducing the tax liability of Agus.

However, unabsorbed capital allowances suffered by the discontinue operation will be

treated as permanent loss as capital allowances must be set off against the same business
source.

ii. Compensation paid to employees during or after the cessation of business is not allowable
to be deducted against the gross income.
Question 4 d

The most appropriate method is Resale price method (RPM) because Agus has acquired a
product from an associated enterprise (Zain) and resold to independent distributor (Enlina).The
resale price method focuses on the gross profit margin obtained by the distributor.
In this case, Resale price margin can be compared to margins earned by other independent
enterprises (Enlina) performing similar functions, bearing similar risks and employing similar
assets.

Agus’ gross profit per unit is RM3 (Selling Price less cost = 15-12). Hence Gross profit ratio to
Agus is 20%. Compare to the other independent party, Enlina Bhd who has a Gross profit ratio of
25%.
Therefore, using formula, the arm’s length price for the product purchased:
Resale price - (Resale price x resale price margin of ID )
= 15 - (15 x 25%)
= 11.25

JUNE 2018, Q 4

(A) a) The retail business such as hardware shop commences business when the purchase
activities took place. Thus the date of commencement of the shopware business is on 1
June 2017.

b) 1st year: Basis Period : 1 June 2017 to 31 January 2018 (8 months) YA 2018
2nd year: Basis Period 1 Feb 2018 to 31 January 2019 (12 months) YA 2019

c) The first capital allowance can only be claimed in YA 2018 when the company start
to commence business on 1 June 2017.
B
a) Based on the following facts:
• Advanced Sdn Bhd is a company incorporated for purposes of making profits for
its shareholders;
• it is putting to gainful use its assets in that a factory which would otherwise be idle
would be let out to derive income; apart from letting out the factory, ASB will
provide various onsite services to its tenants

Therefore, Advanced Sdn Bhd is advised that payments collected from its tenants will
be assessed as business source income under s.4(a).

b) According to s.43 of the ITA 1967:

• Adjusted losses from a business of the taxpayer from previous years of
assessment are to be deducted from the aggregate of the tax payer’s statutory
business income from similar business or other businesses;
• It cannot be deducted from income of other non-business sources;
• The unabsorbed losses can be carried forward to future years of assessment.

Thus, the accumulated losses from the manufacturing business can be utilized or
absorbed from statutory income of business of letting out the factory.
 c) Schedule 3 of the ITA 1967:

• The capital allowance of manufacturing business is available to reduce the

adjusted income arising from manufacturing business;
• However, the capital allowance is limited to income from that source ie.
manufacturing business only;
• If unabsorbed, unabsorbed capital allowance can be carried forward and to be set
off against income from the same business only.

Therefore, since Advanced Sdn Bhd derived its unabsorbed capital allowances from the
business of manufacturing fruit juice, the unabsorbed capital allowances cannot be
utilized to set off income derived from business of letting premises.

JAN 2018, Q4

A. a) Arm’s length price is the price which would have been determined if such
transactions were made between independent entities under the same or
similar circumstances.

b) The TNMM is a method that uses the margin approach, which examines the net
profit margin relative to an appropriate base (such as costs, sales or assets)
attained by a MNE from a controlled transaction.

c) The RPM is a method used when the price at which a product purchased from
an associated enterprise is reduced by an appropriate gross margin (resale
price margin) before being sold to an independent enterprise.

B. a) Current Year Business Loss of surrendering companies:

Ayie Sdn Bhd 23,000 - (30,000) = (RM7,000)

Bee Sdn Bhd 0 - (12,000) = (RM12,000)
Cee Sdn Bhd 18,000 - (20,000) = (RM2,000)
Total
21,000

b) CLAREMONT BHD
RM’000
AGGREGATE INCOME 50,000
Less: CY Business Loss (2,000)
Less: Approved Donation (5,000)
(10% x 50,000 or RM7,000 - WIL)
DEFINED AGGREGATE INCOME 43,000
Less: Group Relief (Loss surrendered)
(7K + 12K + 2K) x 70% (14,700)
TOTAL INCOME 28,300
C.

a) The winding up of Impa Sdn Bhd would result in the permanent loss of tax relief to utilize
the unabsorbed capital allowance and the unabsorbed business losses.
b) i) Impa Sdn Bhd (Impa) should continue to exist to expand in carrying out the new
furniture business and with Azman joining the company as a shareholder . Hence, the
brought forward losses of Impa could be utilized to set off against the forecasted profits
of the new furniture business thereby reducing the tax liability of the new business.
Amir will step down from active participation in the business but will remain as a
shareholder in order to avoid the possibility of IRB invoking section 140.

ii) With regard to fixed assets, it does not matter if it is purchased before the
commencement date since it is deemed to be incurred on the date of commencement of
business and capital allowance can be claimed accordingly.

As for future purchases, it should be done by the financial year end 30 sept 2018 rather
than at the beginning (5/10/2018) of the following financial year and put into use
immediately after purchase in order to expedite claiming capital allowance.

c) YA 2018 ( basis period 1.10.2017 to 30.9.2018)

Business 1 (car accessories business) ( 1.10.17 to 31.7.2018)

RM
Adjusted Business Income (loss:1,000) Nil
Less: Capital allowance Nil
c/f and foregone forever√
RM4,600 √+ rm500 = RM5,100√
Statutory Business/ Chargeable Income NIL

Business 2 (new furniture business) ( 1/4/2018 – 30/9/2018) 6mths

RM
Adjusted income 800,000
Less : Capital allowance
I.A 200,000 X 20% (40,000)
A.A. 200,000 X 14% (28,000)
Statutory Business income/Agg SBI 732,000
Less: Unabsorbed loss b/f (851k) restricted to (732,000) (loss c/f : 119k)
Total/Chargeable income Nil

YA 2019
Business 2 (new furniture business) (1/10/2018 – 31/9/2019)
RM
Adjusted income 2,000,000
Less : Capital allowance
I.A 1,000,000 X 20% (200,000)
A.A. 1,200,000 X 14% (168,000)
Statutory income 1,632,000
Less: loss b/fwd (851,000-732,000) (119,000)
Agg Income/ Total/ Chargeable income 1,513,000
JULY 2017, Q4

Solution 4A

a. The two traditional methods of determining the arm’s length price under Malaysia’s
transfer pricing guidelines are:

(1) Comparable uncontrolled price (CUP) method

This may be used to examine the price at which a Malaysian enterprise sells its
product to a related enterprise. It involves comparing the selling price of the product
with that of an independent manufacturer of the same product. Where the
transactions being compared are not identical, the comparison is still possible if
reasonably accurate adjustments can be made to eliminate any material
differences.

(2) Resale price method

This method can be applied where a Malaysian enterprise has acquired a product
from an associated enterprise. The starting point is the price at which the product
is sold to an independent enterprise by the Malaysian enterprise. The objective is
to adjust the buying price so as to give the Malaysian enterprise the profit margin
it would have enjoyed under an independent transaction.

(3) Cost plus method

This method can be used when a Malaysian manufacturer sells to an associated
enterprise. The starting point is the cost to the manufacturer. The objective is to
determine how much mark up the manufacturer could have expected to earn on a
similar sale to an independent enterprise. If necessary, the selling price will be
adjusted.

b. The Transfer Pricing guidelines is applicable for the transaction because Taipan
Berhad controls Elektrik Sdn Bhd and Marcus Sdn Bhd through share ownership. As
Taipan controls both companies, Elektrik and Marcus are associated enterprises.
Therefore, transfer pricing guidelines apply to the transaction between the two.

c. Cost Plus Method is appropriate for the transaction because the product is highly
customisedand there are no product comparable.The transaction is between a
Malaysian manufacturer to its associated company and the focus is on the cost of
manufacturing the product. Furthermore, mark-ups earned by independent parties
performing comparable functions, bearing similar risks and using similar assets are
available.

4B

(B) When a company disposed its non-current assets, balancing adjustment arose, namely,
balancing charge or balancing allowance. Balancing charge arise when the disposal value
is higher than the residual expenditure. The balancing charge increases the statutory
income of business.

Whereas when the disposal value is the residual expenditure, balancing allowance arose.
The balancing allowance would reduce the statutory income of business.
b.

Residual Expected Balancing Balancing allowance in

expenditure disposal charge in YA 2017
as at 31 price YA 2016
December
2015
RM RM RM RM
Machine A 200,000 350,000 150,000
Machine B 800,000 300,000 500,000

With regards to Machines A, it is not advisable to dispose the machine on 31 December

2016 as there will be a balancing charge of RM150,000 upon disposal. The balancing
charge will increase the taxable income, hence, Machine A should be disposed in next
year, i.e on 2 January 2017 (YA 2017) because the company is expected to have an
adjusted loss.

As for Machine B, it should be disposed on 31 December 2016, as it has a balancing

allowance of RM500,000 upon disposal. The balancing allowance will reduce the taxable
business income substantially.

c. Buying the machines on hire purchase

Under this method, the company is treated as incurring capital expenditure at the
time of payment. Any deposit paid and the capital portion of the instalment
payment would be eligible for initial and annual allowances from the time when the
machines are put into use for the company’s business. However, instalment
payments only attract initial and annual allowances at the time of payment so the
company’s capital allowances would be spread over the period of the hire purchase
arrangement.

The interest portion of the hire purchase instalment qualifies for deduction from
gross income of the company’s business over the period of years as the hire
purchase instalment are paid. There would be no grounds for interest restriction.

Leasing the machines

The company is not treated as the owner of the machines. Thus unable to claim
the capital allowances.

However, once the machines are put into use for the company’s business, the
lease payments would be deductible as a business expense (revenue expenses).
The lease payment would reduce the gross income of business. There is no
restriction on the lease payment for the machines.
DEC 2016, Q3

SOLUTION 3 (A)

(a) If the mill is treated as an extension of oil palm plantation, it is treated as a single business
source. The adjusted loss will be treated as part of gross income from oil palm plantation.
Likewise, the capital allowance of the mill, and plant and machinery will be set off against
the adjusted income of oil palm plantation.

If the mill operation is treated as a separate business source; then the unabsorbed capital
allowance from the mill operation would be carried forward to be set off in the next year of
assessment against the mill operation.
The revenue loss recorded for the mills, however is a current year loss and is to be
deducted from aggregate income of the company (oil palm business + investment
income).

(b) The plantation and mill activity is an integral part of the business, a same business
producing palm oil. Thus it is a single business source.

SOLUTION 3 (B)

(a) Income tax implications to WAJA Sdn Bhd on the disposal of the heavy plant and
machineries on 2 Jul 2016.

The plant and machineries were disposed off within 2 years of acquisition. Therefore,
the IRBM would clawback all the capital allowances given by way of balancing
chargein the year of disposal. As such, the statutory income from business would
increase because the balancing charge is added to the adjusted income of the business.
(b)
The disposal of the industrial building from WAJA to DBSB is subject to the controlled
sale provisions of the Income Tax Act 1967. The controlled sale provisions would apply
because the acquirer ( DBSB) is a person over whom the disposer (WAJA Sdn Bhd) has
control [para 38(1), Sch 3]. Under this provision, the disposal value is ignored in the
computation of the balancing adjustments. The assets would be deemed to be disposed
at the residual expenditure of the disposer and therefore no balancing charge or
balancing allowance arise on the disposal. In this case, the disposal will benefit the
disposer, WAJA Sdn Bhd.

SOLUTION 3 (C)

a) The interest restriction is computed using the formula in paragraph 6.2 of this Ruling as
follows:
Interest restricted = RM300,000 x RM40,000 = RM 30,000
RM400,000

RM30,000 has to be added back in the company's tax computation (which means only
RM10,000 is deductible as a business expense).
b) The company can claim interest expense against its investment income since the investments
are deemed to have been financed by the overdraft. The computation of interest expense for
each investment source is computed as follows:

Dividend income (RM) Rental income (RM)

Gross income Exempted 260 000 x 30,000 = 26,000
Less: Interest allowable (4k) Nil 300,000
Statutory income NIL
Gross Rental income 36,000
OR Less: Interest allowable 26,000
Revenue expenses 3,500
Dividend is exempted at gross income level thus, Statutory income 6,500
there is no issue of deductibility of interest
expense from dividend income.

SOLUTION 3( D)

a. The three traditional methods are:

i) The Comparable Uncontrolled Price Method
The method focuses directly on the price of the goods or services transferred in a
controlled transaction to the price charged for the goods or services in a comparable
independent transaction.

ii) The Resale Price Method

The resale price method focuses on the gross margin obtained by the distributor. This
method is suitable where the final transaction is with an independent distributor.

iii) The Cost Plus Method

The cost plus method focuses on costs incurred by the supplier of goods in a
controlled transaction for goods transferred to a related party. This method is suitable
where semi-finished goods are sold between related parties as the parties could have
concluded joint facility agreements or long-term buy and supply arrangements.

b. TONE Distribution Sdn Bhd could adopt the `Resale Price’ method when determining the
purchase price of the cartridges bought from SUMMIT Multinational. This method is
appropriate because the final transaction made by TONE Distribution Sdn Bhd is with an
independent distributor. The focus is on the gross profit margin and both independent
retailers carry out similar functions as distributor of the product.