CLOSED END FUND COMPANY
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CLOSED END FUND
COMPANY
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Definition
Closed end fund company
s 60H(5) -a public limited company
incorporated in Malaysia and approved by theSecurities Commission to engaged wholly in
the investment of fund in securities.
Amount invest by the company restricted bypaid up capital. The increase of the capital
may not be as flexible as unit trust.
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CONT…
Securities -debentures, stocks and shares inpublic company or corporation, or bonds of any government, corporate, unincorporatedand also include any right or options inrespect there of and any interest in unit trustschemes.
Examples -Amansfb are listed in Bursa
Malaysia.-Adams Express Company is listed in
New York Stock Exchange.
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INCOME RECOGNITION
Closed end fund is allowed to carry out investment in securities only
It can acquire shared and bond as listed in:Bursa MalaysiaMalaysian Government securitiesPrivate limited company or;Invest in unit trust
The income comprise: dividend incomeInterest income
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EXAMPTION ON FOREIGN INCOME
Closed end fund company:Is a resident company
Enjoy the benefit (para 28 of sch 6)
w.e.f YA 2004- The closed end fund company invest in overseasshares and bonds, such foreign dividend income or interest incomereceived in Malaysia will be exempted from income tax.
The amount of income exempted is allowed to credit into an exempt
income amount from which exempt dividend can be paid out on a two-tier basis.
Prior to YA 2004 (YAs 1998-2003)Foreign source income received in Malaysia will be tax exempt byvirtue of Income Tax(Exemption)
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INTEREST OR DISCOUNT INCOME
Interest or discount paid or credited will be tax exempt:
a)Securities or bond issued or guaranteed by the Governmentb)Debentures, other than convertible loan stock, approved by SecuritiesCommissionc)Bon Simpanan Malaysia issued by Bank Negara Malaysia
INCOME TAX (EXEMPTION)
w.e.f YA 1997 (06 October 1997)
Individual, unit trust or closed end fund deriving interest income from nonconvertible loan stock issued by companies listed in Malaysia Exchange ofSecurities Dealing and Automated Quotation Berhad (MESDAQ) will be
exempt.
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Expenses Deduction
1.Wholly and exclusively (Sec33)
2.Special provision (Sec 34)
•Not applicable to closed end fundcompanies.
• Will result in the gross income being
subject to tax with no deduction of
revenue expenses.
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Scope of s33• Revenue expenses that are incurred directly
in the production of dividend income or
interest income is not allowed.
• Fund manager’s remuneration employed
directly in the investment of protfolio is not
deductible in arriving at the adjusted income
of the investment source.
Remuneration is included in permitted
expenses as defined in Sec 60H(6)
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Interest Expenses
• Closed end fund is allowed to borrow as long
as the borrowing do not exceed 30% of it net
asset value at any time.• No tax relief for the interest expenses
incurred in production of interest income.
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Permitted Expenses
Permitted expenses are allowed to extend of the
permitted fraction as determined by Sec60(4).
• “Permitted expenses” means expenses incurred byclosed-end fund company in respect of:
a. Manager’s remuneration
b. Maintenance of register of shareholders
c. Share registration expenses
d. Secretarial, audit and accounting fee, telephone
charges, printing and stationery costs and postage.
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Example 1Success Guarantee Bhd is a public listed company incorporated in
Malaysia on 1.1.2009 and approved by SC to invest in shares and
bonds.
The income as follow: RM’000
Gross dividend - Bursa companies 360
Gross dividend - private limited companies 70
Malaysia Government bonds 45
Interest from listed bonds (Bursa)
-Convertible 120-Unconvertible 105
Profit from sales of shares 400
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Expenses incurred in year ended 31.12.2009: RM’000
Salaries & wages 58
Fund manager’s remuneration 80
Travelling 12
Accounting & auditing 27
Subscription to business magazines 4
Rental expenses 116
Share registration expenses 2Stationary & postage 5
Utility expenses (electricity & water) 13
Maintenance of shareholders’ register 9
Secretarial charges 6
Loss on disposal of shares 18
Telephone & fax 7
Cash donation to government 13
Depreciation 16
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Required:
1.Compute the gross income chargeable to tax.
2.Expenses available for deduction in relation tothe closed-end fund company.
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Answer:
Success Guarantee Bhd
Computation of gross income for YA 2009Sec 4 (c) RM’000
Gross dividends:
-Bursa companies 360
-Private limited companies 70
430
Interest income:
M’sia government’ bond exempted
-Unconvertible bonds exempted
-Convertible bonds 120 _120_
Gross income 550
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Expenses available for deduction:
RM’000
Fund manager’s remuneration 80 Accounting & auditing 27
Share registration expenses 2
Maintenance of shareholders’ registration 9 Secretarial charges 6
Telephone & fax 7
Stationary & postage 5_
136
*No tax relief for other revenue expenses incurred bySuccess Guarantee Bhd is allowed.
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Computation of total income
A : Total of the permitted expenses incurred for the basic
period
B : Gross income consisting of dividend and interest
chargeable to tax for that basic periodC : Aggregate of the gross income consisting of dividend
and interest (whether exempted or not) and gain made from the realization of
investments (whether chargeable or not) for that basic period.
** Unlike unit trust, exempted interest income is part of the “C” defination.
Whichever is higher.
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PermittedExpenses
Shareregistration
expenses
Maintenance ofregister expenses
ManagersRemuneration
Secretarial
Audit & accounting fees
Telephone Charges
Printing &stationary Cost
Postage
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“B” ( GROSS INCOME )
DIVIDEND CHARGEABLE TO TAX
EXEMPT DIDIDEND
DIVIDEND INCME PAID OUT FROMEXEMPT INCOME ACCOUNT AND
SINGLE TIER DIVIDEND SYSTEM
TAXABLEDIVIDEND
INTEREST CHARGEABLE TO TAX
DERIVED FROM:
LOAN TO SPOUSE,
RELATIVE OR FRIENDS,
SUCH INTEREST INCOME WOULD BEASSESSD TO TAX
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Example 2
Using example 1 information..
The company incurred RM 136,000 permitted expenses.
RM’000
Gross income chargeable to tax (example 1) 550
Exempted interest
-Malaysia Government bonds 45
-Unconvertible bonds 105
Profit from sales of shares 400Loss of sale of shares (not included) -___
“C” 1100__
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Required:
1. Calculate fraction of permitted expenses.
2. Income tax payable for Success Guarantee
Bhd.
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Higher of:
1. A * B/ 4C = 136 * 550/ 4(1100) = RM 17000
2. 10% * 136,000 = RM 13600
So, the higher RM 17000is fraction of permitted expenses.
Income Tax Payable for Success Guarantee Bhd for YA 2009
RM’000
Gross income 120
Less: Fraction of permitted expenses (17)
103
Less: Approved donation (13)
Total income 90
Dividend income (deemed total income) 430Chargeable income 520
Income tax payable (520k* 25%) 130
Less: S 110 set off (tax credit in dividends) (25%*430k) (107.5)
Net income tax payable 22.5
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Restriction on carrying forward of
unabsorbed expenses
Where, by reason of an absence/insufficiency of AI for that year
of assessment, effect can’t be given/can’t be given in full to any
deduction falling to be made to the closed – end fund company
under this section for that year, that deduction which has notbeen so made shall not be made to the closed-end fund company
for any subsequent year of assessment.
The amount of deduction to be made shall not be
<10% of the total permitted expenses incurred
for that basis period
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Example 3
Using information in example 2, assumed that gross incomechargeable to tax is RM 8000. So,
RM’000
Gross income 8
Less: Fraction of permitted expenses (17)
Permanent Loss (9)
•No tax relief is available.
•No tax relief is available for the approved donation.
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GAINS FROM REALISATION OF
INVESTMENTWhen closed-end fund company received anamount in respect of gains from realization of
investment in the basis period for a YA, suchamount shall be exempt from income tax forthat YA.
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Two-Tier Exemption
•
The gain from realization of investment and interest or discountincome exempted will be credited to an exempt incomeaccount.
• Exempt dividend can be subsequently declared to itsshareholders which is on a two-tier basic.
• Corporate shareholders receiving exempt dividend from theclosed-end fund company (First Trier) would be able to pay ,credit or distribute those exempt dividend to its shareholders astax exempt dividends (Second Trier).
• Further distribution by the shareholders will no longer be taxexempt.
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Real Property Gains Tax
Prior to 1.4.2007
• Since the Gain from the realization of shares are
specifically exempted from income tax by virtue of
s60H(2) such shares would not be subject to real
property gains tax even though they fall into the ambit
of Real Property Company Shares.
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Format of Tax Computation
Closed End Fund CompanyTax Computation for YA 2010
RM
Gross interest ( Malaysian) XX
Aggregate income XX
Less: -fraction of permitted expenses (s 60H special deduction) (XX)-approved donation ( restricted to 10% x aggregated income) (XX)
Total income XX
Section 4(c)
Gross dividend (Malaysian)(deemed total income) XX
Chargeable income XX
Income tax payable @ 25% XX
- s110 set off ( 25% x gross dividend) (XX)
Net income tax payable XX
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Comparison between:Unit Trust
Property Trust (Special Type of Unit Trust)
Investment Holding Company
Closed-end Fund Company
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Unit Trust Investment Holding
Company
Closed-end Fund Company
Section Sec 61 Sec 60F Sec 60 H
Definition Created by a trust deed
between managing
company & public
trustees of unit holders
(individual/companies)
a) Company
b) Resident in M’sia
c) Mainly in the holding
of investments
d) Deriving 80%
investment income
(exempt & taxable)
a) Public limited company
incorporated in M’sia
b) Approved by the SC
c) Wholly making of investment
in securities
Relief of capital
expenditures
•10% of the qualifyingcapital (p/m)
expenditure against
rental income.
•Unabsorbed
deduction cannot be
c/f
N/A N/A
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Unit Trust Investment Holding Company Closed-end Fund Company
Permitted
expenses
(A)
a) Manager’s remuneration
b) Maintenance of register
of unit holders
c) Share registration
expenses
d) Secretarial, audit &
accounting fees,
telephone charges,
printing & stationery costs
& postage
• Which are not deductible
under s33(1)
a) Director fees
b) Wages, salaries, allowances
c) Management fees
d) Secretarial, audit & accounting
fees, telephone charges,
printing & stationery costs &
postage
e) Rent & other expenses to the
maintenances of an office
• Which are not deductible
under Sec 33 (1)
a) Manager’s remuneration
b) Maintenance of register
of shareholders
c) Share registration
expenses
d) Secretarial , audit &
accounting fees,
telephone charges,
printing & stationery costs
& postage
• Sec 33 & 34 is not
applicable
Scope of B Gross income :
1.Dividend
2.Interest
3.Rental
Gross income:
1.Dividend
2.Interest
3.Rental
•Chargeable to tax for the basic
period
Gross income:
1.Dividend
2.Interest
•Chargeable to tax for the
basic period
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Unit Trust Investment Holding
Company
Closed-end Fund
Scope of C Aggregate of
•
gross income fromdividend (E+NE)
•Interest
• rent
•Gain made from
realization of
investment (C+NC)
Aggregate of
•
gross income fromdividend (E+NE)
•Interest
•Rent
•Gain made from
realization of investment
Aggregate of
•
Gross income from dividend•Interest (E+NE)
•Gain made from realization of
investment (C+NC)
The
Deduction
Higher of
A*B/4C
Or
10% * A
Lower of
A*B/4C
Or
5% * B
Higher of
A*B/4C
Or
10% *A
Unabsorbed
expenses c/f
No No No
Disposal of
investment
No income tax.
RPGT exempted
Prima facie capital gain Exempted from income tax.
No RGPT even if disposal of real
property company shares
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End of Discussions