MAICSA – ICSA INTERNATIONAL QUALIFYING SCHEME (IQS)

TAXATION
DECEMBER 2016 - SUGGESTED ANSWERS
 Taxation
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Table of Contents

SECTION A.............................................................................................................................. 3
QUESTION 1 – ...................................................................................................................... 3
SUGGESTED ANSWER: .................................................................................................. 6

SECTION B .............................................................................................................................. 9
QUESTION 2 – ...................................................................................................................... 9
SUGGESTED ANSWER: ................................................................................................ 10

QUESTION 3 – .................................................................................................................... 13
SUGGESTED ANSWER: ................................................................................................ 14

QUESTION 4 - .................................................................................................................. 16
SUGGESTED ANSWER: ................................................................................................ 17

QUESTION 5 – .................................................................................................................... 18
SUGGESTED ANSWER: ................................................................................................ 18

QUESTION 6 – .................................................................................................................... 21
SUGGESTED ANSWER: ................................................................................................ 21

QUESTION 7 – .................................................................................................................... 23
SUGGESTED ANSWER: ................................................................................................ 23

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SECTION A
(This section carries 28 marks. This question is compulsory.)

QUESTION 1

Jaringan Emas Sdn Bhd is a resident company that specializes in producing women and kids
clothing for local and export markets. The paid up capital of the company as at 30 June 2015
was RM6 million. The company submitted its profit and loss account for the year ended 30
June 2016 as follows:
Jaringan Emas Sdn Bhd
Profit and Loss account for the year ended 30 June 2016
Note RM'000 RM'000
Sales 15,400
less: Cost of sales 1 7,800
Gross margin 7,600
less: operating expenses
Salary and wages 2 2,250
Royalty 3 64
Foreign exchange loss 4 135
Professional fees 5 128
Promotion and publicity 6 455
Provision for doubtful debts 7 155
Repairs and maintenance 8 163
Interest expense 86
Depreciation 210
Lease and rental 9 15
Miscellaneous expenses 10 245 3,906
3,694
Add: other incomes 11 114
Profit before taxation 3,808

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Notes:
1. Cost of sales includes the following:
a. RM30,000 loss on damaged stocks.
b. Provision for warranty on defective products sold. The amount is based on 1% of
the sales for the year. During the year, warranty payments of RM72,000 were
incurred by the company.

2. Salary and wages include the following:

a. Salary and wages of five disabled staff amounting to RM240,000.
b. Leave passage to Jakarta for excellent staff amounting to RM10,000
c. Annual premium of RM15,000 paid for ‘keyman’ endowment insurance policy
on the life of the managing director, with the company as the beneficiary.

3. Royalty was paid to a non-resident company for the use of a patented design. No
evidence has been shown that withholding tax was paid on this royalty payment.

4. Foreign exchange loss consists of:

RM
Unrealised loss in relation to trading stock 66,000
Realised loss on the settlement of trade debts 31,000
Realised loss on the purchase of sewing machines 38,000
135,000

5. Professional fees include the following:

a. Training fees related to GST implementation amounting RM8,000.
b. Secretarial and tax filing fees of RM6,000 and RM12,000 respectively.
c. Legal fees incurred in defending a charge for violation of customs regulations
amounting to RM25,000.

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6. Promotion and publicity include the following:
a. RM30,000 incurred on advertisement in newspapers and magazines in Indonesia.
b. Hampers worth RM10,000 for customers during festive seasons.
c. Gifts with business logo worth RM15,000 were distributed during the opening of
a new outlet.

7. Provision for doubtful debts consists of:

RM
Increase in general provision 86,000
Increase in specific provision 27,000
Trade bad debts written off 42,000
155,000

8. Repair and maintenance includes the following:

a. Cost of upgrading the existing office amounting to RM73,000.
b. Rewiring of the entire factory amounting to RM12,000.

9. Lease and rental includes lease payment of RM25,000 for a second-hand motor car
(Jaguar) for the use of the general manager. The total amount of lease payments
already paid for this vehicle was RM45,000 as at 1 July 2015.

10. Miscellaneous expenditures consists of the following:

a. Annual dinner for staff amounting to RM28,000.
b. Sponsorship amounting to RM75,000 to a sports activity approved by Ministry of
Youth and Sports.
c. Business zakat of RM142,000.

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11. Other incomes consists of the following:
RM
a. Interest income received from convertible bonds issued by FCW 48,000
Berhad
b. Dividend income from Berjaya Berhad (Single Tier) 14,400
c. Dividend income received from a non-resident company 51,600
114,000

The company has unabsorbed business losses and unabsorbed capital allowances
brought forward from the previous year of assessment of RM40,000 and RM18,000
respectively. The capital allowance claim for the current year of assessment is
RM138,000.

REQUIRED:

(a) Compute the income tax chargeable of Jaringan Emas Sdn Bhd for the year of
assessment 2016.

Note: Your computation should start with the net profit before taxation figure and
follow the descriptions used in the notes to the profit and loss account indicating ‘nil’
in the appropriate column for every item that does not require adjustment. Show all
workings.
(22 marks)
SUGGESTED ANSWER:
Jaringan Emas Sdn Bhd
Computation of Chargeable Income for Year of Assessment 2016 /
RM'000 RM'000
add minus
Profit before taxation 3,808
Loss on damaged stocks nil
Provision of warranty (154 - 72) 82
Salary of disabled staff 240
Leave passage 10

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Annual premium on keyman insurance 15
Royalty paid to non-resident 64
Unrealised loss on trading stock 66
Realised loss on trade debts nil
Realised loss on purchase of asset 38
Training fee on GST implementation 8
Secretarial fee (RM5,000 allowed in 2016) 1
Tax filing fee (should be RM10,000 allowed in
2016) 2
Legal fee in defending violation of law 25
Advertisement in overseas magazines 30
Hamper for customers 5
Gift with business logo nil
Increase in general debt provision 86
Increase in specific debt provision nil
Trade bad debts written off nil
Upgrading existing office 73
Rewiring of factory 12
Interest expense nil
Depreciation 210
Lease payment 20
Annual dinner to staff nil
Sponsorship for approved sports event 75
Business zakat 142
Interest income 48
Dividend income from Berjaya Bhd 14.4
Dividend income from non-resident 51.6
4,734 392
(392)
Adjusted business income 4,342
less: capital allowance - current 138
- b/f 18 156
Statutory business income 4,186

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less: unabsorbed business loss b/f 40
4,146
add: other income
Interest 48
Dividends exempt
Aggregate income 4,194
less: donation - sponsorsorship of sports event 75
Business zakat (restricted to 2.5% of aggregate
income) 104.85
Total income 4,014.15
dividend income exempt
Chargeable income 4,014.15

Income tax payable @24% 963,396

(b) Explain the reason(s) for your treatment of the following items:
(i) Note 2(c): Annual premium on ‘keyman’ endowment insurance policy.
(ii) Note 3: Royalty payment to non-resident without deduction of withholding tax.
(iii) Note 9: Car lease payments.
(6 marks)
SUGGESTED ANSWER:
(i) Although the company is the beneficiary of the insurance policy, the annual
premium on keyman endowment insurance policy is not allowable because it
has an element of investment. The company will receive the sum insured plus
bonuses declared by the insurance company at the maturity date of the policy.
(ii) Royalty was paid to a non-resident person. However, the company had failed
to account and pay for withholding tax, it is not deductible as stipulated in s
39(1)(f) of ITA 1967.
(iii) Leased car rental for a second hand car is restricted to RM50,000 as stipulated
in s39(1)(k) of ITA 1967. Since the company has accumulated RM45,000
total amount of lease paid as of 1 July 2014, the company can only claim
RM5,000 and the remaining amount (RM20,000) is disallowed.
[Total 28 marks]
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SECTION B
(This section carries 72 marks. Answer FOUR (4) questions from this section.)

QUESTION 2

Talha was employed by Wira Sdn Bhd (a company based in Ipoh) as a marketing manager
since 1 April 2008. At the age of 48, Talha’s employment with the company was terminated
on 30 June 2015. The termination of Talha’s employment was not due to ill health. Upon
termination of his employment, he received a gratuity of RM15,000 and compensation for
loss of employment of RM80,000.

Upon his termination, he also withdrew RM12,000 from the company’s retirement fund (an
unapproved scheme) of which RM5,500 was his total contributions and RM3,500 was the
accumulated interest income earned on the overall total contribution. The balance was
contributed by the employer.

For the period 2015 (1 January to 30 June 2015), Talha received the following income from
Wira Sdn Bhd:
1. Monthly gross salary of RM6,000 and monthly entertainment allowances of RM500.
2. A car costing RM100,000 for his use until the termination of his employment. The car
was acquired by the company in 2010. No fuel was supplied to him.
3. In February 2015, Talha was hospitalised for an appendicitis surgery. The medical
bills amounting to RM15,000 was paid by the company.
4. Talha was provided with a fully furnished house until the termination of his
employment. The annual rental value of the house was RM24,000 inclusive of
RM5,000 furnishings value. He was required to contribute RM300 per month for
occupying the house.
5. A refrigerator costing RM5,000 was also provided to him in the house. The prescribed
average lifespan for the refrigerator is 10 years.
6. The company paid for his utilities bills. Total amount of utilities paid from January to
June 2015 was RM1,200. All bills were under Talha’s name.

Other information:

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1. Talha received RM1,100 interest income from Merdeka Bonds issued by the
government.
2. Talha incurred RM3,500 to entertain the company’s clients from January to June
2015.
3. Talha’s total EPF deduction for 2015 was RM4,290.
4. Talha paid annual premium on his life insurance policy amounting RM5,500.
5. In December 2015, Talha’s mother in law was hospitalised and he paid RM5,500 for
the treatment.
6. Talha bought a new wheelchair for his disabled daughter worth RM7,400.
7. Talha donated RM1,200 cash to National Kidney Foundation (an approved
institution).
8. Talha is married to Aisyah, (a housewife with no income) and has two daughters:
(i) Amira, aged 18 years old studying at Multimedia University.
(ii) Anisa, aged 11, disabled, studying in a special school.

REQUIRED:

(a) Compute Talha’s income tax liability for the year of assessment 2015. Show all your
workings.
(13 marks)
SUGGESTED ANSWER:
Computation of Chargeable Income for Talha YA 2015
s13(1)(a)
Salary (6,000 x 6) 36,000
Entertainment allowance (500 x 6) 3,000
Perquisite: Utilities bills 1,200
Gratuity (15,000 / 5) 3,000 43,200

s13(1)(b)
Car (5,000 x 1/2 x 6/12) 1,250
Medical expenditure 0
Furniture (280 x 6) 1,680
Refrigerator (5,000/10) x 6/12 250 3,180

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s13(1)(c)
Defined value (24,000 -5,000 ) x 6/12 9,500
or
30% of sec13(1)(a) income (30% x 43,200) 12,960
whichever is lower 9,500

s13(1)(d)
Withdrawal from unapproved pension fund
12,000 - 5,500 6,500

s13(1)(e)
Compensation for loss of employment
80,000 - 70,000 10,000
Gross employment income 72,380
less:
Entertainment expenses (restricted) 3,000
Contribution to house (300 x 6) 1,800 4,800
Adjusted/Statutory Employment income 67,580

Add: interest income from Merdeka bonds exempt

Aggregate Income 67,580
less: Approved donation 1,200
Total income 66,380
less: Relief
Self 9000
Wife 3000
Child - Amira 6000
Child - Anisa (disabled) 6000
Life insurance policy and EPF contribution 6000
Medical expenses on mother in law nil
Purchase of basic supporting equipment 6000 36,000
Chargeable income 30,380

Income Tax on the 1st RM20000 150

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Remaining RM10,380@5% 519
Income tax payable 669

(b) Explain briefly your treatment for the following items:

(i) Gratuity.
(ii) Compensation for loss of employment.
(iii) Withdrawal from unapproved pension fund.
(5 marks)
SUGGESTED ANSWER:
(i) Gratuity should be spread back equally to five years of assessment including
the current year of assessment because Talha has been working with the
company for more than 5 years.
(ii) RM10,000 exemption is given for every completed year a person worked with
the same company. Since Talha has worked for full 7 years, RM70,000 of the
compensation is exempted and the remaining RM10,000 is taxable.
(iii) Withdrawal from unapproved pension fund is taxable in the year of
withdrawal. However, the employees’ contribution is not taxable. Hence, out
of RM12,000 withdrawn from the pension fund, only RM6,500 is taxable.
[Total 18 marks]

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QUESTION 3

Melissa, a Malaysian citizen, signed a sale and purchase agreement to acquire a serviced
apartment in Petaling Jaya for RM750,000 on 24 February 2012. On 6 May 2012, she made
full payment of the purchase price and received the key to the apartment on 1 September
2012. The title to the apartment was transferred to her on 2 December 2012. She paid
RM5,500 in stamp duty and RM2,450 in legal fees for the acquisition.

Before moving in, she renovated the apartment. She incurred the following expenditures:
RM
Kitchen cabinet installation 30,000
Upgrade of bathroom 24,000
Interior design fees 5,800
Lightings and fittings 28,000
87,800

On 3 March 2015, she advertised the apartment for sale and received RM10,000 deposit from
a Taiwanese couple. The deal was not successful and the full deposit was forfeited. She
eventually sold the apartment for RM980,000 on 1 November 2015. The expenditures
incurred during the disposal were:
RM
Valuation fees 1,300
Real estate agent’s commission 18,500
Advertisement for sale 1,800
21,600

Melissa has an RPGT allowable loss carried forward from 30 June 2011 amounting to
RM5,650.

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REQUIRED:

(a) Given the three dates i.e. (i) S&P Agreement, (ii) Full Payment and (iii) Transfer of
title, explain which of the dates ought to be the acquisition date. Will your answer
differ if there is no sale and purchase agreement between Melissa and the seller? State
your reason(s).
(5 marks)
SUGGESTED ANSWER:
The date of acquisition of the apartment is the date of the sale and purchase
agreement. Hence, Melissa acquired the apartment on 24 February 2012.
If there was no written agreement, the date of acquisition will be the date when the
transaction was completed. The date the transaction was completed is either the date
of the full payment or the transfer of asset, whichever is earlier. Hence, in the absence
of written agreement, the date of acquisition would be 1 September 2012.

(b) Compute the real property gains tax (RPGT) liability of Melissa on the disposal of the
apartment.
(8 marks)
SUGGESTED ANSWER:
Computation of RPGT for Melissa
Disposal date: 1 Nov 2015
Consideration received 980,000
less: Enhancement cost
Kitchen cabinet installation 30,000
Upgrade on bathroom 24,000
Interior design fees 5,800
Lightings and fittings 28,000 87,800

less: incidental cost of sale

Valuation fee 1,300
Real estate agent’s commission 18,500
Advertisement for sale 1,800 21,600
Disposal price 870,600

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Acquisition date: 24 February 2012

Consideration paid for the apartment 750,000

Add: incidental cost of purchase
Stamp duty 5,500
Legal fee on acquisition 2,450
less:
deposit forfeited 10,000
Acquisition price 747,950
Chargeable gain 122,650
less: Schedule 4 exemption
10% of 122,650 or 10,000
whichever is higher 12,265
110,385
Allowable loss c/f 2011 5,650
104,735

RPGT at 20% (disposal was in the fourth year) 20,947

(c) Briefly explain the responsibilities of both Melissa and the acquirer, under the RPGT
Act, 1976.
(5 marks)
SUGGESTED ANSWER:
Responsibilities of acquirer are:
 Required to withhold either the whole amount of money or 3% of the total value
of consideration, whichever is lower
 Remit the amount to IRB within 60 days from the date of acquisition.
 Submit form CKHT 2A within 60 days of the date of acquisition
Responsibilities of Melissa are:
 Submit form CKHT 1 within 60 days of the date of disposal
 Pay RPGT payable based on notice of assessment issued by IRB within 30 days
from the date of notice of assessment
[Total 18 marks]

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QUESTION 4

(a) Segitiga Sdn Bhd is a toy manufacturer that caters to both local and export markets.
The company has registered to collect goods and services tax (GST) based on the
Goods and Services Tax Act 2014. Below are the selected transactions that occurred
in the April 2015.

 Sale of toys worth RM200,000 to Hightime Ltd (a company based in Taiwan).

 Sale of toys worth RM10,000 to Happy Sdn Bhd ( a local company based in
Selangor).
 Sale of a company car to a local second hand dealer.

REQUIRED:

(i) Explain briefly the scope of charge for Goods and Services Tax (GST). State the
conditions that need to be satisfied before GST can be charged.
(6 marks)
SUGGESTED ANSWER:
GST is charged and levied on :
 Any supply of goods or services made in Malaysia, including the supply of
imported services and anything treated as supply under the GST Act 2014,
and
 Any importation of goods into Malaysia

For GST to be chargeable, all of the following conditions need to be satisfied:

 The supply is made in Malaysia
 It is a taxable supply of goods or services
 It is made by a taxable person
 It is made in the course of furtherance of any business carried on by that
taxable person.

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(ii) Determine whether or not all of the above transactions are subject to GST.
(6 marks)
SUGGESTED ANSWER:
Sale of toys worth RM200,000 to Hightime Ltd (a company based in Taiwan) is
subject to GST at zero rate because it was exported to Taiwan.
Sale of toys worth RM10,000 to Happy Sdn Bhd (a local company based in Selangor)
is subject to GST at standard rate because it fulfils all of the above conditions.
Sales of a company car to a local dealer is subject to GST at standard rate because the
car was bought before GST era.

(b) Merdu Sdn Bhd is a food chain operator. The company has registered the Group of
outlets under the Goods and Services Tax Act 2014. Among the transactions made
during the month of April 2015 were the following:

(i) Supply of raw materials from head office to chain outlets.

(ii) A cash deposit from a client to book one of the restaurants for his birthday
celebration party. The deposit was later deducted from the agreed price.
(iii) Sponsorship of a competition organized by a local radio station. In return, the
radio station gave free advertisements to the company for 3 days.

REQUIRED:

Determine whether or not the above transactions are considered as supply for the
purpose of GST.
(6 marks)
SUGGESTED ANSWER:
(i) Supply of raw materials from head office to outlets is not considered as supply
because the supply was made within the company.
(ii) A deposit received from a client is considered as supply because the deposit was
part of the consideration for the supply of the goods and services.
(iii) Sponsorship to a competition is considered as supply because there is a clear
identification of benefits given in return for the sponsorship to the company.
Consideration here is free advertisement.
[Total 18 marks]

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QUESTION 5

(a) Hasrat Megah Sdn Bhd carries on a business of selling scarves and head covers. In
conjunction with its fifth anniversary, the company offered free promotional gifts of
watches to customers who made purchases exceeding RM1,500 in a single receipt.
The logo and the company’s name were not printed on the watches. Total cost
incurred on the watches was RM10,000.

REQUIRED:

Determine the deductibility of the expenditure incurred on the promotional gifts. Give
your reason(s).
(6 marks)
SUGGESTED ANSWER:
Expenditure on promotional gifts falls within the definition of entertainment expense.
S18 of the ITA defined entertainment as provision of food, drink, recreation or
hospitality of any kind or provision of accommodation or travel in connection with or
for the purpose of facilitating entertainment of the kind mentioned above by a person
or an employee of his, with or without consideration paid whether in cash or in kind,
in promoting or in connection with a trade or business carried on by that person.
Even though the promotional expenses involve a consideration paid by its customers,
the expenses are still considered as entertainment expenses.
Since the watches did not have any printed logo or company name, it does not fall
under provisions (i) to (viii) of paragraph 39(1)(l) of the ITA.
Thus, only 50% (RM5,000) of the expenditure is deductible.

(b) Lembayung Sdn Bhd provides loan to its employees and advance to its sales agents.
One of the employee was terminated from the company and he failed to pay back the
loan of RM10,000. The company decided to write off the loan.

A second employee with a loan of RM5,000 was involved in an accident and is

currently in coma. Lembayung decided to treat the loan as a gift to the employee. The
company wrote off the amount in its profit and loss account.

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The company had also given an advance amounting to RM3,000 to a sales agent.
Under the terms of contract between the company and the sales agent, the advance is
given against the anticipated commission payable. The sales agent went bankrupt and
Lembayung could not collect back the advance and decided to write it off.

REQUIRED:

Discuss the deductibility of the losses resulting from the loans to the employees and
advance to the sales agent. Give your reason(s).
(6 marks)
SUGGESTED ANSWER:
Any form of loan to employees is generally not regarded as being consistent with
carrying on of a trade. Therefore, for the first employee, since the company has failed
to recover the loan, the loss is not allowed to be deducted against the business income.
For the second employee, the loan was converted into a gift to the employee. Gift to
an employee for personal reasons is not wholly and exclusively incurred in the
production of business income for Lembayung. Hence, it is not deductible against the
business income.
Loss on advance to the sales agent is deductible against business income because the
advance forms part and parcel of the general terms of engagement/contract agreement.
The sales agent is not an employee.

(c) Jaguh Sdn Bhd obtained a bank loan of RM200,000 to expand its business. Ten
percent of the loan was used to buy shares in Pertama Bhd and the remaining amount
was used as additional capital for the business. For year of assessment 2016, the
company paid interest of RM10,000 to the bank and received dividend (net) (now
single tier dividend) from Pertama Bhd amounting to RM8,500.

REQUIRED:

Determine the deductibility of the interest expense. Give your reason(s).

(6 marks)

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SUGGESTED ANSWER:
Deduction on interest expense should be claimed against business and dividend
income respectively. 90% of the interest (RM9,000) is deductible against business
income because the money was used as Jaguh’s capital. This is based on the principle
of wholly and exclusively (stipulated in s33 of the ITA 1967).
The interest expense fulfils the principle of wholly and exclusively. With effect from
1.1.2014, all companies in Malaysia are required to move to the single tier system.
Any dividend paid out under the single tier system will be tax exempt in the hands of
the shareholders. Hence, ten percent of the loan (RM1,000) is disregarded (para 12B,
Schedule 6) and is not deductible against dividend income received from Pertama
Bhd.
[Total 18 marks]

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QUESTION 6

(a) Donny was offered by his friend to buy powerbanks at a discounted price. He decided
to accept the offer and bought 500 units of powerbank. He used all of his savings and
also took a personal loan from a local bank to finance the transaction. Within four
months, he managed to sell all of the powerbanks by advertising it through social
media and gained substantial profit from the sales. He has never engaged in any
similar transactions before and he has no intention to repeat the transactions in the
future.

REQUIRED:

Determine whether or not the profit from the sales is taxable in Malaysia. Give your
reason(s).
(6 marks)
SUGGESTED ANSWER:
The profit arising from the sales is taxable because it is classified as an adventure in
the nature of trade. Below are the list of badges of trade to support the answer that the
gains are income and not capital gains:
 Subject matter – 500 units of powerbanks were not meant for personal use.
 Frequency of the transactions – 500 units of powerbanks were sold
 Source of finance – external sources (loan from bank)
 Systematic disposal – advertisement through social media
 Period of ownership – very short (i.e. only 4 months)

(b) Jasmine is a chartered company secretary. In 2015, she was appointed by five
companies to do secretarial work for them. She received professional fees from each
of the companies but did not receive any benefits from the companies. She has four
paid assistants to help her out with her duties.

REQUIRED:

(i) Is Jasmine exercising a contract of service (employment) or a contract for service

(profession). Give your reason(s).

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(6 marks)
SUGGESTED ANSWER:
Jasmine is exercising contract for service (profession) based on the following
reasons:
 She was appointed by five companies to do the secretarial work so she could
not have attended personally to the duties required of a full time secretary.
 The companies paid her professional fees and not salaries.
 She did not receive any benefits from the companies.
 She was carrying on a business of her own by providing company secretarial
services to five different companies.
 She hires assistants to help her perform the duties.

(ii) Briefly explain the tax implications to Jasmine if she is considered as exercising
a contract of service (employment) or a contract for service (profession).
Determine which one is better from the perspective of a taxpayer.
(6 marks)
SUGGESTED ANSWER:
Differences in tax treatement between contract of service (employment) and contract
for service (profession) are listed below:
 Employment is taxable under s4(b) while profession is taxable under s4(a)
of the ITA 1967.
 Application of s33(1) of ITA 1967 on deductible expenditure is stricter to
employment compared to profession
 Profession can claim capital allowance
 Profesion is allowed to carry forward any losses but this is not applicable to
employment
 Person exercising employment must pay income tax instalment based on
schedular tax deduction scheme whereas profession needs to pay by
instalments
Based on the above statements, profession is a better option for the taxpayer.
[Total 18 marks]

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QUESTION 7

Sepakat Berhad was first registered as a co-operative society on 1 January 2009. Sepakat
operates a convenience store, which is wholly funded by its members and opened to the
public. The audited accounts for the year ending 31 December 2015 are as follows:

Statutory income: RM
Convenience Store 175,000
Dividend (gross) 65,000
240,000

The liability and equity in the balance sheet as at 1 January 2015 are as follows:
RM
Paid up capital 250,000
Subscribed capital -
Share premium account 60,000
Statutory reserve fund 42,000
Accumulated profit 220,000
Members’ savings account 120,000
Members’ loan account 145,000
Total 837,000

REQUIRED:

(a) Explain the income tax treatment for the co-operative.

(8 marks)
SUGGESTED ANSWER:
For the purpose of income tax, principle of mutuality does not apply except for
contribution made by members only because the essence of mutuality lies in the return
of what one has contributed to a common fund, and if profits are distributed as
shareholders, as in the case of cooperatives, the principle of mutuality is not satisfied.
Income derived from mutual and non-mutual activities are both subject to income tax.
Ascertainment of chargeable income for co-operative is defined in s5 of the ITA 1967.

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Deductions can be made if the expenditure fulfils the requirement of s33 (wholly and
exclusively incurred in the production of the income) and not capital or domestic in
nature.
In addition, special deductions is given under para 65A(a) and 65A(b) of the ITA.
Para 65A(a): Deduction equal to the following, whichever is lower
(i) the total amount transferred or paid to statutory reserve fund, any educational
institution, any co-operative organization established for furtherance of co-
operative principles, co-operative Education Trust Fund and Co-operative
Development trust fund, or
(ii) 25% of audited net profit for the basis period
Para 65A(b): Deduction equal to 8% of the members’ funds as at the first day of
the basis period for a year of assessment.

(b) Determine whether or not Sepakat Berhad is subject to income tax for the year of
assessment 2015. State the conditions required for a co-operative to be exempted from
income tax.
(10 marks)
SUGGESTED ANSWER:
Sepakat Sdn Bhd has been operating for more than 5 years. Hence, we need to
calculate the members’ funds on the first day of basis period (1.1.2015) to determine
if Sepakat can be exempted from income tax.
Paid up capital 250,000
Subscribed capital -
Share premium account 60,000
Statutory reserve fund 42,000
Accumulated profit 220,000
Members’ fund 572,000

Since the members’ funds as at the first day of basis period for a year of assessment is
less than RM750,000, Sepakat Bhd is exempted from income tax for the year of
assessment 2015.

A co-operative is exempted under schedule 6 of the ITA 1967 based on the following
conditions:

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 Taxation
___________________________________________________________________________
 A newly registered co-operative society is exempted from tax on any income for
a period of 5 years commencing from the date of registration.
 Further exemption after 5 years only if the members’ funds as at the first day of
the basis period for a year of assessment is less than RM750,000.

[Total 18 marks]

~ End of Suggested Answer ~

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