Co Tax Kooair Without Answers

Sunway University College Course Notes

Paper F6 –Taxation

Kok Fong Hun FCCA 1

PUBLIC RULING

NO. 6/2006

DATE OF ISSUE: 6 JULY 2006

TAX TREATMENT OF LEGAL AND PROFESSIONAL EXPENSES MALAYSIA Date of Issue: 6 July 2006

4. General principle

4.1 Generally, legal or professional expenses are deductible where these are incurred in the

maintenance of trade rights or trade facilities, existing or alleged to exist and are not deductible,

as being of a capital nature, where incurred for the purpose of acquiring new rights or facilities.

The deductibility of expenses incurred to maintain alleged trade rights does not depend upon

whether the action is successful or not.

4.2 Legal and professional expenses which are not wholly and exclusively incurred in the

production of gross income or prohibited from deduction under subsection 39(1) of the ITA are

not deductible.

5. Deductible expenses

5.1 Debt collection

Legal and other expenses incurred by a person in the course of collecting trade debts from

customers.

5.2 Renewal of loans

Legal expense incurred by a finance company in renewing existing loans.

5.3 Preparation of accounts

(a) Ordinary expenses of keeping books and preparing financial records and accounts

including charges for accountancy work.

(b) Statutory audit fees expenditure [P.U.(A) 129 - Income Tax (Deduction For Audit

Expenditure) Rules 2006]

5.4 Defending title to property

Legal expenses incurred in connection with defending a person's title to the ownership of an

asset that is used in the business. The title to the ownership by the person remains the same and

had been maintained with nothing added or taken away.

5.5 Legal expenses incurred by a landlord

Legal expenses including litigation costs incurred on renewal of a lease.

5.6 Defending an action connected with a trade or breach of trading contracts

(a) Expenditure incurred by a person in resisting a claim that he has broken a trading

contract is allowable unless the breach was deliberate and dishonest.

Examples:

(b) Averting a threat to the goodwill of a business.

(c) Preservation and / or protection of a capital asset that does not result in the creation of a

new asset.

(d) Where litigation ensues after a customer withholds payments wholly or in part on the

grounds of inferior workmanship, sub-standard material, non-fulfilment of contract

requirements or for other reasons, the legal action is regarded as an ordinary incident of

trade.

(e) Defending legal action taken against a professional in respect of negligence in undertaking

work for a client.



Kok Fong Hun FCCA 2

5.7 Legal cost incurred in disputes over trading contracts when incurred for -

(a) Enforcement of a contract for the supply to a litigant of goods which would be resold for

profit.

(b) Attempting to recover sums which would have been taxable if received.

(c) Claims for compensation for trading goods lost in transit.

6. Non-deductible legal and professional expenses

The following are examples of legal and professional expenses which will not qualify for

deduction:

6.1 Debt collection

Legal and other expenses incurred by a person in the collection of non-trade debts and loans of

a capital nature.

6.2 Renewal of loan

(a) Legal expenses incurred by a trading or commercial company.

(b) Legal expenses on renewal of a mortgage on premises.

(c) Cost of raising additional capital whether by means of a loan or otherwise (this will also

apply to a person carrying on a business of banking or money-lending).

6.3 Annual corporate filings and meeting expenses

(a) Secretarial fees.

(b) Annual general meeting expenses.

6.4 Income tax returns

(a) Cost of filing of tax returns and tax computations.

(b) Cost of appeal against income tax assessment i.e. to the Special Commissioners of Income

Tax and the Courts.

6.5 Legal expense incurred by a landlord

When a property is let for the first time by the owner or lessor.

6.6 Cost of defence in a fraud case

The cost of defending criminal prosecution or in connection with unlawful acts in the operation

of a business.

6.7 Legal expenses incurred in connection with:

(a) The formation, renewal, variation or dissolution of a partnership.

(b) Obtaining a trading licence.

(c) Increasing or reducing share capital or altering the Memorandum and Articles of

Association of a company.

(d) Floatation, registration, winding up or liquidation of a company.

(e) Obtaining new leases, mortgages, loan or credit facilities.

(f) Legal fees relating to income already earned eg. income tax appeals.

(g) Costs of legal proceedings incurred in pursuing a claim for unlawful or unjust dismissal by

an employee.

7. Effective Date

This Ruling is effective for the year of assessment 2006 and subsequent years of assessment.

Director General of Inland Revenue



Kok Fong Hun FCCA 3

State whether the following is deductible:

1. Legal fee incurred on collection of trade debts

2. Legal fee incurred on collection of non-trade debt.

3. Legal expenses incurred by a trading or commercial company in renewing existing loans.

4. Cost of raising additional capital whether by means of a loan .

5. Cost of book keeping and preparing financial records and accounts including charges for

accountancy work.

7. Audit fee

8. Legal expenses incurred on renewal of a lease.

9. Cost of averting a threat to the goodwill of a business.

10. Cost of litigation incurred after a customer withholds payments wholly or in part on the grounds of

inferior workmanship, sub-standard material.

11. Defending legal action taken against a professional in respect of negligence in undertaking work for

a client.

12. Claims for compensation for trading goods lost in transit.

13. Renewal of leases and licenses.

14. Claim for compensation for trading goods destroyed, defective or lost in transit.

15. Legal fees and agency fees incurred in connection with employment agreements as well as in

connection with preparation of trading contracts or agreements.

16. Secretarial fees.

17. Annual general meeting expenses.

18. Cost of filing of tax returns and tax computations.

19. Cost of appeal against income tax assessment i.e. to the Special Commissioners of Income Tax and

the Courts.

20. Legal fee on first tenancy agreement for the owner or lessor.

21. Legal fee on:

(a) The formation, renewal, variation or dissolution of a partnership.

(b) The transfer of a mortgage on business premises.

(c) The acquisition of capital assets or the sale or transfer of capital assets.

(d) Obtaining a trading licence.

(e) Increasing or reducing share capital or altering the Memorandum and Articles of Association of

a company.

(f) Floatation, registration, winding up or liquidation of a company.

(g) Costs of legal proceedings incurred in pursuing a claim for unlawful or unjust dismissal by an

employee.

(h) Fees for revaluation of land.



Kok Fong Hun FCCA 4

Public Ruling- tax treatment of leave passage

For employer

For employee

Key-man insurance

For employer

If for investment in nature ie endowment– not deductible for company

If for loss of profit- deductible for company if the company is the beneficiary.

For employee

Regardless of the type of insurance, the employee is only taxable if he or his family are the

beneficiaries.

If the employer is the beneficiary, he is not taxable at all.

Professional indemnity insurance

1. A professional indemnity insurance is a policy taken to protect the insured against liability for

the person’s negligence.to protect the insured against liability for the person’s negligence. The

insurance is to cover the liability that would otherwise be borne by the person such as the cost

of defending the suit and the cost of the award.

1. Normally it is to cover a personal laibility or risk. So to cover claim

made against the personal assets of the person and is not wholly and

exclusively incurred in the production of income

Normally not

deductible

2. But for

Lawyers registered with the Bar Council

Accountants registered with the Malaysia Institute of Accountants

Where purchase of professional indemnity insurance si compulsory

Premium paid is

dedutible

3. For profession who is not engaged in professional practice but carries

on some other business or is in employment

Premium paid is

not deductibel

Leav e passage

Air fare

Not deductible for company unless it is family day, a

yearly event, and leave passage in Msia

Food & accommodation Treated as entertainmnet

for staff So deductible

Leave passage for

immediate family

including spouse,

and children

If not for staff or

his immediate

family

Fully taxable

If for staff or his

immediate family

Local trip 3X exempted

including meals and

accommodation

1 overseas leave passage for

travel up to a maximum of

RM3000 is tax exempt



Kok Fong Hun FCCA 5

4. Other profession/it is purchased by purchased by a company

It is a statutory requirement to practise as a professional

Purchase of professional indemnity insurance is a requirement

regulated by statute or by-laws

Premium paid is

deductible

5. If the premium is allowable, any proceeds received in connection with a

professionla indemnity insurance is taxable.

Taxable on the

recovery

Deductibility of loss of cash – Public Ruling

1. Banking of cash takings is necessary for the operations of the business.

Loss of cash by robbery/theft while in transit to the bank

Deductible

2. Cash is embezzled by an agent who is assigned to collect the cash Deductible

3. Loss of cash not incidental to business

eg A money changer brought back cash from office to keep in his strong

room at his house. Thieves broke in and stole the cash.

Not deductible

4. Embezzlement by employee

Arises directly from the necessity of delegating certain duties of the

business to subordinates.

Deductible

5. Employee who is involved in the embezzlement is a relative to the

proprietor.

This is not a trade loss since the proprietor chooses to overlook the theft

especially if he continues to employ the offender

Not deductible

6. Embezzlement by sole proprietor, partner , director or administrator who

in control of the business operations

Not Deductible

7. if the loss of cash is allowable, recoveries of:

insurance

payment from the offender

legal action

should be taxable as income of the business when such recoveries are

received.

Taxable

8. Supporting documents are needed to claim deduction

police report

bank statement

letter of termination of employment

minutes of board of directors meeting

proof recovery action



Kok Fong Hun FCCA 6

S34

Approved

pension

scheme

Scientific

research

S34(6)

1. Equipment to assist disabled employee

2. Publication in national language on approved cultural,

literary, professional, scientific or technical books .

3. Contributions to public or school libraries (max

RM100,000)

4. Revenue expenditure on maintenance of child care centre

5. Managing approved musical or cultural group

6. Sponsor approved local or foreign arts

Max for foreign arts is RM200,000

Max for both RM500,000

7. Scholarship

full time students

no means of his own

parents’ total monthly income =< RM5,000.

8. Revenue expenditure to obtain accreditation for a

laboratory or as a certification body certified by Dept

of Standards Malaysia

9. double deduction on revenue expenditure to obtain

certification for recognized quality systems and

standards and halal certification evidenced by JAKIM

9. Practical training expenditure on

Resident individual

and

Not employee

10. Expenditure on participating in international

standardization activities approved by the Dept of

Standards Malaysia



Kok Fong Hun FCCA 7

S39

1. payments such as

royalty or interest

contract payment

consultancy fee

installation fee

rent of moveable property

where withholding tax has not being paid

2. lease rental of motor vehicle

purchase cost >150,000, max deduction is RM50,000

purchase cost = < 150,000, max deduction is RM100,000

3. leave passage (but local leave passage on a yearly event is deductible)

4. entertainment\ (see next page)

Entertainment means:

Provision of food, drink, recreation or hospitality ; or

Provision of accommodation or travel;

Recreation or hospitality include:

Trip to a theme park

Stay at holiday resort

Tickets to a show or theatre; and

Gifts and give-aways



Kok Fong Hun FCCA 8

Tax treatment for entertainment Normally 50% deductible ie

Entertainment allowance

Entertained suppliers

Entertainment is 100% deductible if:

1. Entertainment on staff ie free meals & refreshment, annual dinners, outings, family day

For outing & family day –cost of travel- not deductible as

it is leave passage

– food & accommodation is

100% deductible

2. provision of entertainment in the ordinary course of business ie

free cultural shows by hotels to entertain their customers

meals provided by airlines

3. Provisional gifts at trade fairs outside Malaysia

Ie Small souvenirs, samples, bags and travel tickets

4. Samples ie

Complimentary drink provided by restaurant

Free samples of drinks to schools

Free sample of products

5. Entertainment of cultural or sporting events such as fees paid to artistes or sportsmen,

cost of passage, accommodation , food or recreation or t-shirt for sportsment

6. Promotional gifts within Malaysia

restricted to non-products of company

must have conspicuous logo

gifts must be available to the public at large not to selected persons only.

7. entertainment related wholly to sales

food & drinks for launching new products

redemption vouchers given for purchase made

discount vouchers

fee gifts for purchase exceeding a certain amount

redemption of gifts base on accumulated points

lucky draws to customers

trips as an incentive to dealers for achieving sales target

8. the provision of leave passage to facilitate a yearly event within Malaysia which

involves

The employer

The employee; and

The immediate family members of the employee



Kok Fong Hun FCCA 9

Tax adjustments-Company taxation

Cost of sales include:

Advertising costs amounting to RM1,000 for newspaper

announcements stating that a particular agent was no longer

authorised to represent the company

Sales includes a sum of RM200,000 received by the company as t e

first instalment under an agreement signed with a shoe company in

China. This was for a license to use Fashenshu’s patents, designs

and know how in consideration for a sum of RM1 million payable

in annual instalments over a period of five years. Fashenshu also

agreed not to grant any such licence to other parties in China or

Hong Kong. Fashenshu had never made such an agreement before.

Cost of sales includes a sum of RM3,200 written off in respect fo a

consignment of vegetables damaged in an accident in the course of

its transportation from the company’s farm to the restaurants.

It is incurred in the normal

course of business, so deductible.

The sum of RM1 million

constitutes a capital receipt. This

is because with regard to the

China and Hong Kong market ,

Fashenshu has parted with a

capital asset (patent, designs and

know-how) for a purchase

price(Evans Medical Supplies

Ltd v Moriarty)

The fact tha the consideration is

payable in instalments does not

after the character of the receipt,

therefore it is not taxable.

Damaged stock-in-trade written

off constitutes a trading loss

therefore deductible.

Stock withdrawn for own use

Cost of sales includes

i. an amount of RM6000 written off in respect of 100 units of

product which were destroyed as they were found to contain

materials harmful to health

ii. A provision of RM4000 for the foreign exchange loss which

the company expects to incur when paying for raw materials

purchased

iii. On a festive day the company gave away toys costing

RM10,000(market value RM12,000) as prizes to children at

a nearby orphanage

iv. A consignment of telecommunication(stock) equipment

imported by the company which was damaged.

v. A consignment of telecommunication equipment imported

by the company which was damaged. The company

received RM120,000 compensation from the insurer. Three

units of telecommunication equipment from the opening

stock were transferred to fixed asset. The cost price for the

three units was RM80,000 and the normal selling price is

RM96,000.



Kok Fong Hun FCCA 10

vi. The company’s products which is furniture costing

RM24,700 was donated to an approved orphanage. The

selling price was RM26,000 .

A set of bedroom furniture costing RM6,400 sold to a

member of staff at 5% discount. The selling price was

RM7,000.

Trading stock disposed by way

of donation is not in the normal

course of business. It is deemd to

have been disposed at market

value, therefore added back

RM26,000

The sale of furniture to a staff

member at a discount is an

normal incidence of trade.

Therefore on adjustment.

Embezzlement

RM61,000 embezzled by the marketing director.

Capital loss from

misappropriation of capital of

the company. So it is not

deductible.

AGM expenses

Expenses incurred in resepct of the annual general meeting of

shareholders comprise the csot of food and refreshments provided

at the meeting.

Not incurred in the income-

producing process. Rather they

are incurred after the income has

been produced, therefore added

back.

Stocks

The company’s trading stocks stated after deducting a general

provision of 5% for obsolescence wereas follows;

30.11.2004 RM6.20 million

30.11.2005 RM5.63 million

A general provision is not

realised. So not deductible

Insurance compensation

Insurance moneys were paid by the insurance company in respect of

the death in an accident of the company’s chief operating officer.

The company is the beneficiary of a policy which compensates the

company for loss of profits resulting from death/disabledemnt by

accident of its key personnel.

Repairs to premises includes:

(i) A sum of RM37,000 reovered from an insurance company

for the cost of repair to the factory which was damaged by

fire; and

(ii) RM44,000 incurred on the said repairs

It is insured gainst loss of profits,

not capital investment in nature.

So deductible.

The full amount of the insurance

money is taxable as it is for

repair which is a deductible

expense in ascertaining adjusted

income.

The cost of repair is deductible

as business expense.




Freight and insurance includes premiums amounting to RM20,000

paid under a policy on the lives of the senior executives of the

company. The objective of the policy is to provide the company

with sufficient funds to pay retirement gratuities.

Insurance premiums of RM21,000 on the lives of the key personnel.

The intention is to provide the company with funds which it may, at

its discretion, use to make payments to their dependents in the

eventof the premature death of the key personnel.

Insurance premiums include a sum of RM48,000 paid to Kargo

Insurance Bhd, a company incorporated in Malaysia, to undertake

risks on the importation fo raw materials.

Insurance premiums amount to RM452,000 insured with foreign

companies for the export of cargo.

An amount of RM24,000 was paid to an insurance company

incorporated in Chile as premium for insuring goods imported by

the company

Freight includes RM99,000 premium paid to Dowell Insurance

Bhd, a company incorporated in Malaysia, for goods imported

The freight charges are for shipping the furniture manufactured by

the company from Sarawak to Port Klang.

Company paid export credit insurance premiums of RM554,000 to

Malaysia Export Credit InsuranceBhd.

The insurance is investment in

nature as the objective is to creat

a asset in the form of fund for

retiremet gratuities . This fund is

of enduring benefit. So not

deductible.

Insurance premums in respect in

respect of imported raw

materials qualify for double

deduction as te risks are insured

with an insurance company

incorporated in Malaysia.

Insurance premiums do not

qualify for double deduction as

the risks are insured with a

company not incorporated in

Malaysia.

Freight charges incurred by

manufacturers for the shipment

of their manufactured goods for

Sabah/Sarawak to any port in

Peninsular Malaysia qualifies for

double deduction.

Export credit insurance

premiums qualify for double

deduction as they are paid to

Malaysia Export Credit

Insurance Berhad (MEISB) –

Income Tax (Deductions of

Premiums for Export Credit

Insurance) Rules 1985




salaries and wages

The EPF contributions made by the company at the rate of 21% in

respect of its key personnel amounting to RM273,000.

Remuneration of disbled employees amounting to RM77,000.

The EPF contributions made by

the employer are deductible

subject to the maximum rate of

19%, of remuneration .

Therefore the excess is added

back.

Remuneration of disbled

employees specifically qualifies

for double deduction under the

Income Tax (Deductions for the

Employment of Disabled

Persons) Rules 1982.

Leave passage

Cost of holiday package to Canada in September 2004 amounting

to RM25,000 for Encik Hooi, Head of the Human Resource

Department . The cost is made up of the cost of air fare of

RM15,000 and the cost of accommodation and food of RM10,000.

RM82,000 was incurred on leave passage provided to senior

management during their periods fo leave for purposes of spending

vacation tiem with their spouses and children . The sum comprises:

Overseas air fares 48.000

Local air fares 34,000

82,000

A family day staff trip to Sabah for which the company incurred

RM9,000 on the cost of travel, RM8,000 on food and drinks and

RM14,000 on accommodation.

Leave passage in respect of the

cost of airfare is disallowable

under the Act.

The cost of accommodation and

food is allowable as

entertainment expenses provided

to employees as per the Public

Ruling.

Leave passage in respect of the

air fares (overseas and local) is

specifically disallowed under

S39.

Leave passage of RM9,000 is

specifically allowed by the Act.

Food and accommodation is

allowed as entertainment for

staff.

Cost of equipment of RM18,500 purchased to enable the company’s

disabled employees to label its footwear which is its products.

Purchase of equipment to assist

disabled employees to perform

their work is specifically allowed

under the Act. Therefore

deductible.




Extension to the childcare centre

Maintenance of the centre

Extension cost qualifies for

industrial building allowance

Revenue expenditure in respect

of a childcare centre provided for

employees is specially allowed

under the Act.

International trade fair held in Malaysia

RM329,000 was incurred on participation in an international trade

fair held in Kuala Lumpur. Both the trade fair and the company’s

participation were approved by the Miinistry of International Trade

and Industry. Thd aim of the trade fair was to promote exports.

Included in the expenditure is the cost of exhibits of RM8,000.

Advertising includes RM20,000 incurred in participating in

international trade fair held in Kuala Lumpu

r. The trade fair and the company's participation were approved by

the Minister of International Trade and Industry. Details of the

expenditure are as follows:

Cost of exhibits 12

Overtime pay to staff 3

Rental of exhibition space 5

20

Expenditure incurred on

participation in an approved

international trade fair excetp for

the cost of exhibits qualifies for

double deduction as the trade

fair was held in Kuala Lumpur,

the aim ws to promote exports

and the company’s participation

was approved by the relevant

authority.

Training

The human resource departmetn of the company organised cooking

and food preparation classes for twenty unemployed youths who

were afterwards sent to the restaurants for practical training . The

training cost per person amounted to RM880. Two of the trainees

were non-residents of Malaysia.

Expenses incurred on the

practical training of non-

employees of the company are

specifically allowed under the

Act provided the trainees are

Malaysian tax residents. So the

cost incurred on 2 of the trainees

are disallowed as they are non

Malaysian tax residents.

Halal certification

The expenditure incurred on halal certification consists of:

Capital expenditure 1,000

Revenue expenditure 450

1,450

The certificate was issued to the company on 10 April 2003

Expenditure incurred on halal

certification is specifically

allowed a double deduction

under the Act but restricted to

revenue expenditure only,

therefore add back to RM1,000.




Publication of cultural book

RM29,000 was incurred on the publication of a cultural book in the

national language approved by the Dewan Bahasa and Pustaka.

The cost of publication of a

cultural book in the national

language is specifically allowed

by S34(6)(f) of the Act. As all

the stipulated conditions are

fulfilled ie the book is of cultural

, literary, professional, scientific

or technical nature and te

publication has the approval of

the relevant authority.

Scholaships

Scholarship to undergraduates 48,000

The scholarships were awarded to Encik Ali (RM26,000) and Cik

Kalsom(RM22,000) who studied full tiem on a degree course at

Universiti Teknologi Mara. They did nto have any means fo their

own. Ali’s parents earned total monthly income of RM4,500

whereas Kalsom’s guardian earned a total monthly income of

RM6,000.

The expenditure incurred on the

provision of scholarship is an

allowable deduction under

S34(6)(l) of the Act provided the

following conditions are

satisfied:

– The student is studying full

time at a Malaysian

educational institution for a

diplomaor a degree;

– The student has no means of

his own

– His paents/guardians earn a

total monthly inome nto

exceeded RM5,000.

Removal expenses

Rental fo premises includes removal expenses amounting to

RM16,000 form the existing place of business of business to new

premises as the company expanded its business.

Rental of premises includes the payment of RM27,000 to a

company for the cancellation of a contract to install a high-tech

security system.

Included in rental is a sum of RM25,000 paid in respect of the early

termination of the lease of a building which the company vacated in

February 2004. The lease was to have run for another 10 year. The

building was no longer suitable as a showroom for the company’s

goods due ot the construction of a toll plaza.

Removal is due to the expansion

of the company’s business and

therefore represents an asset of

enduring benefit. So not

deductible.

The compensation paid for the

cancellation of the contract is in

connection with a fixed asset

therefore of a capital nature.

The payment is a capital

expenditure as it was paid to get

rid of a lease which has become

an onerous liabillity. It resulting

in an eduring benefit to the

company.




Lease rental

The company entered inot a car lease agreement on 1 April 2004

and commenced the lease rental payemnt on 6 April 2004 at

RM5,750 per month. The new car cost is RM155,000. The year end

of the company is 30 November 2004.

Motor vehicles expenses includes lease rentals in respect of a

motor car of RM6,500 per month under an agreement for a period

of 24 months commencing on 1 January 2003. The purchase price

fo the car in January 2004 was RM145,000. The year end of the

company is 30 April 2004.

Year end of company is 31 May 2005

Motor vehicles expenses include lease rental s for 2 new cars as

follows:

i. A new Proton leased for a period of 24 months at RM6,720

per month commencing in February 2004. The car costing

RM144,000 when new.

ii. A new Toyota leased for a period of 24 months at RM8,400

per month commencing in August 2004. The car cost

RM190,000 when new.

Lease rentals are deductible up

to the maximum of RM50,000

where the cost of the motor

vehicle exceeds RM150,000. As

the total lease rentals incurred

amount to RM46,000 (RM5,750

x 8 months), so no adjustment is

necessary.

Deduction of lease rental is

computed as follows:

Jan to Apr 03

(6500x4) 26,000

May 03 to Apr 04

(6500x12) 78,000

104,000

restricted to (100,000)

4,000

Deduction of lease rentals in

respect of private motor vehicles

is restricted to RM100,000

where the cost of the car does

not exceed RM150,000.

Lease rentals for the Proton are

deductible up to RM100,000 as

the purchase cost does not

exceed 150,000.

Feb-May 02

6,720 x 4 26,880

June – May 2003

6,720 x 12 80,640

107,520

restricted to 100,000

Add back 7,520

Lease rental for Toyota are

deductible up to RM50,000 only

as the purchase cost exceeds

RM150,000.

Aug02-May03

8,400 x 10 84,000

restricted to 50,000

Add back 34,000




Raise finances for the company

Legal fee amounting to RM6,000 of securing bank loan for

expansion of the company’s business.

It is incurred to a bank loan for

the purpose of business

expansion , and thus not

deductible.

Entrance fee to a trade association

Cash contribution to sponsor foreign arts approved by the Ministry

of Culture, Arts and Tourism of RM211,000

Cash donation to a public library amounting to RM18,000

Brings enduring benefit to the

company. So not deductible.

Cash contributions to sponsor

approved foreign arts are

deductible subject to the

maximum of RM220,000

Cash donations to public library

quality for deduction under the

Act, up to the limit of

RM100,000.

Advertising

RM75,000 in respect of product licensing in Japan for purposes of

promoting the company products.

Expenses on product licensing

overseas for the purposes of

promoting exports by a resident

company is specifically allowed

by an exemption order-Income

Tax(Deduction for Promotion of

Exprots No 2) Rules 2002.

Trade mark

On 1 December 2004, the company purchased a trade mark for

RM217,000 incurring legal cost of 8,000 . The trade mark cost

comprise:

Amortisation of cost of purchase

of trade mark 225,000

Royalty paid for the use of trade

mark before the date of purchase 235,000

460,000

The cost of purchasin gthe trade

mark including the legal fees is

specifically allowable , therefore

no adjustment – Income Tax

(Deduction for Cost of

Acquisition of Proprietory

Rights) Rules, 2002

Royalty paid for the use of trade

mark is revenue in nature, so no

adjustment.

Withholding tax

Consultancy fees of RM800,000 paid to a non-resident company on

3 March 2006 for technical advice rendered in Malaysia. The

withholding tax of 10%(RM80,000) was remitted to the Inland

Revenue Board on 20 April 2006. The 10% tax increase (RM8,000)

due to late payment of the tax remains unpaid.

The consultancy fees are

specifically disallowed because

part of the increased tax

(RM8,000) remains unpaid.




Repairs

Repairs includes a sum of RM16,000 in respect of tools whch

have a life span of 2 years. This comprises RM4,000 for tools

replaced and RM12,000 for additional tools.

The company incurred RM62,000 on the purchase of cutlery

and glassware: of which RM27,000 was in respect of the

replacement of old and broken items.

For assets with life span of 2 years

and below, the assets are deductible

on replacement basis. Instead of

capital allowance Initial cost is not

deductible.

As above

Entertainment

Entertainment allwoance of RM500,000 to its amanging

director and the marketing executives.

EPF contributions of RM60,000 made by the company in

respect of the above entertainment allowance.

Entertainment allowance amounting to RM600,000 which are

not directly related to sales

EPF contributions at the rate of 22% amounting to RM594,000

in respect of the directors’ salaries (RM2,100,000) and the

above entertainment allowances.

Cost of maintainiing a holiday bungalow in Penang used by

senior executives of the company, RM30,000.

Cost of maintaining a holiday bungalow in Langkawi used

exclusively by the company’s clients, RM42,000.

The rental of RM1,900 per month in respect of the restaurant

premises in Johor Bahru. About 40% of this is attributable to a

flat on the upper floor occupied rent free by a director.

It is specifically 50% disallowed by

the Act as it is not incurred wholly to

sales.

Following from the above the EPF is

also 50% disallowed.

50%x600,000x22%=66,000

50%x600,000x3% = 9,000

2,100,000 x 3% = 63,000

Maintenance of the holiday bangalow

falls within the definition of

entertainment.

This is entertainment for staff.

Therefore deductible.

This is entertainment of clients.

Therefore deductible

It is a staff cost. So deductible.

Foreign exchange loss (net)

Realised loss(trade) 105

Realised gain (purchase of equipment) (43)

Unrealised loss(trade0 188

250

A gain on foreign exchange amouting to RM28,000 was made

on a payment for the purchase of a machine from Japan. The

payment was made in September 2004. The year end of the

company is 30 November 2004.

Realised loss on foreign exchange in

respect of trade transaction is trading

loss, therefore deductible.

Unrealised loss is only a provision

therefore not deductible.

The foreign exchange gan though

realised is nto taxablle as it is of a

capital nature.




Donations

Donations comprises:

Cash donated to approved institutions 449

Cash contributions to public libraries 119

568

Miscellaneous expense comprise:

Approved donation 20

Unapproved doantion 9

Foreign exchange gain realised from debts

arising from sales of footwear (18)

11

Donations are not allowable in

computing adjusted income but they

are allowable in computing total

income but in case of a company, the

deduction is limited to 5% fo its

aggregate income.

In the case fo the cash contributions

to public librariesm the company can

choose to claim deduction under one

of the two sections of the Act. Under

S34(6)(g) deduction is against the

gross income fo the business source

and restricted to RM100,000.

Deduction under S44(8), on the other

hand , is against the aggregate income

of all sources of income and the

maximum allowed is only RM20,000.

Therefore, the company should make

a claim under S34(6)(g) because the

company gets additional deduction of

RM75,000 ie (RM100,000 – 20,000 –

(5% x 100,000)

Double deduction for salary of disabled staff

Included in salaries and wages was a monthly salary of

RM1,600 to a physically disabled person who was employed

as a telephone operator for 10 months

Provision for bad debts

Bad debt written off * 252,000

Increase in specific provision(trade) 43,000

Decrease in general provision(trade) (87,000)

208,000

*On 7 March 2004 the directors of Ming Sdn Bhd passed a

resolution to forgive a debt amounting to RM252,000 owed by

the subsidiary company of a listed company for goods

supplied. The resolution was passed to facilitate Ming’s

acquisition fo the subsidiary company.




Bad debts written off(trade) 79,000

Increase in general provision from

RM100,000 to RM199,999 99,000

Foreign exchange gain realised from debts

Arising from sales of footwear (122,000)

56,000

Bad debts written off 83

Net increase in specific provision 271

Net increase in general provision 350

Bad debts recovered (60)

644

RM10,000 of the bad debts written off is in respect of a car

loan to an ex-employee;

RM33,000 of the specific provision relates to non-trade debts;

RM20,000 of the bad debts recovered relates to non-trade

debts

Bad and doubtful debts comprise:

1. The company is in the business of oerating restaurants food

catering.

i. Bad debt written off in respect of advances amounting

to RM6,800 made to a farmer against farm produce

which ws not delivered due to the family’s untimely

death.

ii. A provision fo RM1,200 made in respect of food

supplied to a hostel.

2. Bad and doubtful debts

Bad debts written off during the year 183



409

Bad debts recovered during the year (28)

Profit and loss account 381

All the debts are trade debts except for a sum of

RM23,000 written off which is in respect of a loan made to

an ex-employee.

Advances unrecoverable from

thefarmer, though made against farm

produce to be delivered, constitute an

investment of capital as the main

ohjective was to obtain the source of

raw materials. Therefore to be added

back.

Trade and specific provision. So

deductible.

Onlu trade debts written off/recovered

are deductible/taxable, hence the loan

written off is added back.

For a provision to qualify for

deduction it must be sepcific and in

respect of trade debts, therefore the

general provision is added back.




3. Bad debt recovered (119)

Specific provision b/f (951)

General provision b/f (1,205)

Bad debts written off 120

Specific provision c/f 1,375

General provision c/f 1,799

1,019

The specific provision carried forward includes a sum of

RM13,000, being the balance of a personal loan granted to

a director who has now resigned from the Board.

Bad & doubtful debts compries:

Bad debt written off of which RM9000 is

in respect of debts taken over from vendor

when the business was acquired years ago 600

Recovery of debts written off by vendor (13)

Increase in specific provision of which

RM60,000 is non-trade 1,420

Decrease in general provision of which

RM24,000 is non-trade (174)

1,833

Other income

Year end of company is 30 April 2004

Other income comprises dividend income as follows:

Date received RM

10.8.03 100,000 (exempt)

14.2.04 103,000 (gross

before deduction of tax)

Other income is in respect of the gross rents of RM185 derived

from a property in Africa and recived in Malaysia.

Year end of company is 31 May 2004.

Interest income comprises:

– interest arising on a saving account

with Southern Finance Bhd credited

monthly from Aug 2003 to April 2004 430

– interest accrued on a fixed deposit of

RM90,000 with Hong Leong Finance

Bhd for 6 months which matured on

4 June 2004 1,570

2,000

Rental income is a separate source,

therefore to be deducted from the

computation.

However, foreign income remitted by

a resiident company is tax exempt by

Para 28 Schedule 6.




Accelated capital allowances

1. Capital expenditure incurred on plant and machinery for the purpose of the business of

manfacturing company which are used exclusively for recycling of wastes or for the further

processing of the wastes into a finished product will qualify for accelerated capital allowance as

follows;

IA 40%

AA 20%

2. Qualifying plant expenditure incurred on computers and information technology equipment for

the purpose of business will qualify for accelerated capital allowance as follows:

IA - 20%

AA – 40%

Capital allowances

Year end of company is 30 September 2003

– On 5 April 2003 the company pruchased new

equipment for RM70,000. The Ministry of Energy,

Communications and Multimedia certified that the

equipment is used by the company exclusively for

conserving energy.

– The residual expenditure as at 30 September 2002 in

respect of the lorry was RM49,000. The lorry was sold

for RM51,000 on 11 November 2002.

Staff welfare is in respect of the construction cost of a child

care centre amounting to RM50,000.

Capital expenditure incurred on

plant and machinery as certified

by the Ministry fo Energy,

Communications and Multimedia

as plant or machinery used

exclusively for conservation of

energy will qualify for

accelerated capital allowance as

follows;

Equipment 70,000

IA 40% 28,000

AA 20% 14,000

28,000

Lorry

RE 49,000

Sales proceeds 51,000

Balancing charge 2,000

Enduring benefit. So not

deductible Instead qualify for

industrial building allowance at

rate of:

IA nil

AA 10%

IBA = 10% x 50,000

= 5,000.

Note: The same would applies

to an old folks home which is

approved by the Social Welfare

Department.




Hire purchase assets

Year end of company 30 November 2002

The hire purchase interest is in respect of a new motor car

costing RM132,000. The car was purchased on 2 January

2002 whereupon a deposit of RM60,000 was paid. The

monthly instalment of RM3,500 which includes interest of

RM500 commenced on 2 February 2002

Year end of company 31 May 2001

i. Maintenance of plant and machinery includes the

installation cost of a machine amounting to RM17,000.

ii. On 14 January 2001, the company purchased a machine

at a cost of RM183,000. The sum of RM17,000

mentioned above was incurred on preparing the site for

installation fo this machine. The machine commenced

to be used for the business two weeks after acquisition.

Q/E

(60,000 +

3,000x10) 90,000

YA 2002

IA 20% 18,000

AA20% 18,000

54,000

enduring benefit , so not

deductible.

Para 2 Schedule 3

Site preparation cost

Total cost

= < 10%

17/183+17 = 8.5% < 10%

So the site preparation cost of

17,000 also qualify for CA.

Q/E

183 + 17 200,000

IA 20% 40,000

AA14% 28,000

132,000




Expenses

Deductible Not deductible

+ve column

xx + ve column

nil

Expenses

Double deduction?

Yes No

-ve column

xx

-ve column

nil

Expenses approved by the Minister

Not for the purpose of business For the purpose of business

Double deduction Single deduction




QUESTION 1

Section A – BOTH questions are compulsory and MUST be attempted

Kooair Sdn Bhd (Kooair) is a manufacturer of air-conditioners under the brand name ‘Cool’. The

air-conditioners are of export quality. ‘Cool’ is a Malaysian brand name registered by Kooair. 80%

of the issued share capital of Kooair is Malaysian owned. The profit and loss account of the

company for the year ended 30 April 2006 is as follows:

Note RM000’s RM000’s

Sales 78,690

Rental income 1 170

78,860

Less:

Cost of sales 48,532

30,328

Less:

Repairs and maintenance 2 1,045

Professional fees 3 1,909

Marketing and advertising 4 1,334

Training 5 167

Provision for bad debts 6 (13)

Employees Provident Fund contributions 7 1,920

Provision for warranty 8 449

Motor vehicle expenses 9 2,802

Entertainment 10 66

Salaries and allowances 9,600

Finance charges 2,749

22,028

Profit before taxation 8,300

Notes:

(1) The rental income is derived from overseas and was remitted to Malaysia in January 2006.

(2) Repairs and maintenance includes the installation of an additional air-conditioner manufactured

by the company in the managing director’s office costing RM1,800. The selling price of the air-

conditioner was RM2,000.

(3) Professional fees includes:

(i) Consultancy fees of RM800,000 paid to a non-resident company on 3 March 2006 for

technical advice rendered in Malaysia. The withholding tax of 10% (RM80,000) was

remitted to the Inland Revenue Board on 20 April 2006. The 10% tax increase (RM8,000)

due to late payment of the tax remains unpaid.

(ii) The sum of RM199,000 in respect of professional fees paid to a company resident in

Malaysia for advertising ‘Cool’ air-conditioners on behalf of Kooair on television Malaysia.

(4) Marketing and advertising includes:

(i) Expenditure of RM126,000 for participating in international standardisation activities

approved by the Department of Standards Malaysia.

(ii) The sum of RM289,000 was incurred in sponsoring foreign cultural activity approved by the

Ministry of Culture, Arts and Tourism.




(5) Training includes practical training programmes conducted by Kooair at a cost of RM33,000 in

respect of three resident individuals who are employed by a component manufacturer, and not

by Kooair.

(6) Provision for bad debts comprises:

RM

Bad debts written off (i) 535,000

General provision brought forward (411,000)

General provision carried forward 270,000

Specific provision brought forward (ii) (188,000)

Specific provision carried forward 303,000

Bad debts recovered (iii) (522,000)

(13,000)

(i) Included in the bad debts written off was a sum of RM14,000 due from the financial director

who passed away. The financial director was found to have passed through the company’s

books several private transactions of his own.

(ii) Included in the specific provision brought forward was a sum of RM35,000 in respect of a

non-trade debt.

(ii) Included in the bad debts recovered was a sum of RM7,000 in respect of a personal loan

recovered from an ex-employee.

(7) The rate of EPF contributions is 20% of salaries and allowances.

(8) The provision for warranty includes a sum of RM110,000 incurred on repairs of faulty air-

conditioners under the warranty periods.

(9) Motor vehicle expenses include depreciation of RM775,000 and a loss of RM3,000 incurred on

the sale of a van.

(10) Entertainment comprises:

RM

A family day staff trip to Sabah for which the company

incurred RM9,000 on the cost of travel; RM8,000 on food

and drinks and RM14,000 on accommodation 31,000

Food and drinks for the launching of a new model of air-conditioner 25,000

Cost of a dinner for the company’s suppliers 10,000

66,000

(11) The industrial building allowances for the year of assessment 2006 amount to RM199,000.

(12) The other capital allowances for the year of assessment 2006 amount to RM759,000.

(13) As at 30 April 2005 the balance of the company’s s.108 account was RM355,000. The

instalment payments made by the company are RM130,000 per month for the year of

assessment 2005 and RM160,000 per month for the year of assessment 2006. All instalments

were paid on time. In November 2005 the company paid the final tax of RM549,000

(inclusive of the penalty of RM9,000 for the under estimation of tax) for the year of

assessment 2005.




(14) The company paid a dividend of RM2·5 million (gross) on 15 January 2006.

Required:

(a) Compute the chargeable income of Kooair Sdn Bhd for the year of assessment 2006.

Your computation should start with the 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. (16 marks)

(b) Explain your treatment of the items referred to in notes 1 to 5 inclusive. (7 marks)




Answer:

Kooair Sdn Bhd – Year of assessment 2006

(basis period 1 May 2005 to 30 April 2006)

Note + –

RM000’s RM000’s


Rental income 1 170 1/2

Air-conditioner taken from stock-in-trade 2 2 1

Consultancy fees 3 800 1

Professional fees 3 199 1

International standardisation activities 4 Nil 1/2

Sponsorship of cultural activity

(RM289,000 – RM200,000 maximum) 4 89 1

Training of non-employees 5 Nil 1

Bad debts written off 6 14 1/2

General provision b/f 6 411 1/2

General provision c/f 6 270 1/2

Specific provision b/f 6 35 1/2

Specific provision c/f 6 Nil 1/2

Bad debts recovered 6 7 1/2

Employees Provident Fund contributions

[(20% – 19% x RM9,600,000)] 7 96 1

Provision for warranty (RM449,000 – RM110,000) 8 339 1

Depreciation 9 775 1/2

Loss on sale of van 9 3 1/2

Family day trip 10 nil 1

Launching of new product 10 Nil 1

Dinner for suppliers (50% x RM10,000) 10 5 1

––––––– –––––

10,693 822

(822) –––––

–––––––

Adjusted income 9,871

Less: Industrial building/capital allowances (RM199 + RM759) (958) 1

–––––––

Statutory/aggregate/chargeable income 8,913

–––––––

(b) Notes

1 Rental is not a business source and so it is to be taxed separately as non business source. But

since it is derived from sources outside Malaysia and received in Malaysia, it is tax exempt.

1 [Paragraph 28(1), Schedule 6, Income Tax Act (ITA)]

2 The market value of stock in trade withdrawn for the company’s own use is treated as gross

income from its business. [s.24(2), ITA]

3 (i) The consultancy fees are specifically disallowed because part of the increased

tax(penalty) (RM8,000) remains unpaid. [s.39(1) proviso and s.109B(2), ITA]




(ii) The professional fees incurred for advertising Malaysian brand name goods of export

quality and the company is >70% Malaysian owned, so it qualifes for double 1

deduction as all the conditions stipulated under the Rules have been fulfilled.

[Income Tax (Deduction for Advertising Expenditure on Malaysian Brand Name Goods)

Rules 2002.

Among the stipulated conditions are: a company incorporated in Malaysia with at least

70% of its issued share capital Malaysian owned and Kooair being the registered

proprietor of the brand name and the goods are of export quality.]

4 (i) Expenses incurred for participation in international standardisation activities approved by

the Department of Standards, Malaysia are a specifically allowed deduction. [s.34(6)(o),

ITA]

(ii) Expenses incurred in sponsoring cultural activity approved by the Ministry of Culture,

Arts and 1Tourism are a specifically allowed deduction subject to a maximum of

RM200,000 in respect of foreign cultural activity. [proviso to s.34(6)(k), ITA]

5 Expenses incurred on practical training in relation to the business of the company of resident

individuals who are non-employees of the company are a specifically allowed deduction.

[s.34(6)(n), ITA]

(c) (i) s.108 account of Kooair – year of assessment 2006 RM

Balance as at 1 May 2005 355,000 1/2

Add:

Final monthly instalment payment for YA 2005 (paid in May 05) 130,000 1

Final tax paid for YA 2005 (RM549,000 – RM9,000 paid in November 05) 540,000 1

Monthly instalment payments for YA 2006 (RM160,000 x 11 months) 1,760,000 1

––––––––––

Compared aggregate 2,785,000

Compared total

RM2,500,000 x 28% (income tax deducted from dividends

distributed on 15 January 06) (700,000) 1

––––––––––

Balance as at 30 April 06 c/f to YA 2007 2,085,000 ½

The item stated below is not included in the s.108 account computation:

The payment of a penalty amounting to RM9,000 imposed under s.107C(10) for under-

estimation of tax does not appear in the above computation because it does not fall within

the meaning of ‘tax paid’ as defined under s.108(14).




Question 2

Kalsom Sdn Bhd carries on the business of food production. Its profit and loss account for the

financial year ended 30 June 2005 is as follows:


Turnover 27,042

Less: Cost of sales 1 11,990

–––––––

15,052

Add: Rental income 2 97

Gain from sale of property 3 330

Insurance proceeds 4 400

–––––––

15,879

Less: Directors’ remuneration 5 3,332

Staff welfare 6 245


Provision for bad debts 8 1,055

Foreign exchange gain 9 (91)

Repairs & maintenance 1,730

Staff remuneration 1,488

–––––––

9,335

–––––––


–––––––

Notes:

(1) Cost of sales includes:

(i) Marine insurance for the import of raw materials paid to an insurance company incorporated

in Malaysia amounting to RM130,000.

(ii) Compensation paid to a customer for late delivery of goods amounting to RM27,000.

(iii)Depreciation of plant and machinery amounting to RM186,000.

(2) The rental income was in respect of a shop lot leased to a trader.

(3) The gain from sale of property was in respect of a house which has been used as living

accommodation for staff.

(4) The insurance proceeds received from an insurance company were in respect of a whole life

policy on the life of the marketing director who died in an accident.

(5) Directors’ remuneration comprises:

(i) Entertainment allowances amounting to RM600,000 which are not directly related to sales.

(ii) Employees’ Provident Fund contributions at the rate of 22% amounting to RM594,000 in

respect of the directors’ salaries (RM2,100,000) and entertainment allowances.

(iii) Contributions to the Kalsom Provident Fund established by the company amounting to

RM38,000. The fund was not approved by the Inland Revenue Board.




(6) Staff welfare comprises: RM

Medical expenses 44,000

Cost of leave passage 99,000

Cost of food and accommodation 102,000

245,000

(7) Motor vehicle expenses include a gain from the sale of a motorcar amounting to RM3,000.

(8) Provision for bad debts comprises: RM

(i) Decrease in specific provision for trade debts (25,000)

(ii) Increase in general provision for trade debts 381,000

(iii) Bad debts written off* 920,000

(iv) Bad debts recovered* (221,000)

1,055,000

* These both relate to debts taken over by Kalsom Sdn Bhd two years ago when the company

bought over a retailer’s business.

(9) A foreign exchange gain amounting to RM91,000 was realised as a result of the purchase of

machinery from Japan.

(10)Capital allowances including industrial building allowances for the year of assessment 2005

amount to RM308,000. The balancing charge in respect of the sale of a motorcar amounts to

RM4,000.

Required:

(a) Compute the chargeable income of Kalsom Sdn Bhd for the year of assessment 2005.

Your computation should start with the 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. (19 marks)

(b) (i)Explain your treatment of the items mentioned in notes 3 to 6 inclusive. (8 marks)




Answer:

Kalsom Sdn Bhd

Year of assessment 2005

(Basis period 1 July 2004 to 30 June 2005)


+ –


Marine insurance 1 130 1

Compensation to customer 1 Nil 1/2


Rental income 2 97 1

Gain from sale of property 3 330 1

Insurance proceeds 4 400 1/2

Entertainment allowance (50%x600,000) 5 300 1

Employees Provident Fund contributions 5 75 2

(entertainment allowances)

(3% x RM300,000 = RM9,000 +

22% x RM300,000 = RM66,000)


(salary 3% x RM2,100,000)

Kalsom Provident Fund (unapproved) 5 38 1

Medical expenses 6 Nil 1/2

Cost of leave passage 6 99 1

Food and accommodation 6 Nil 1/2

Gain from sale of motorcar 7 3 1

Decrease in specific provision 8 nil 1

Increase in general provision 8 381 1

Bad debts written off (capital loss) 8 920 1

Bad debts recovered (capital gain) 8 221 1

Foreign exchange gain (machinery) 9 91 1

–––––– ––––––

8,606 1,272

––––––

(1,272)

––––––

Adjusted profit 7,334

Add: Balancing charge 4 1/2

Less: Capital allowances and industrial building allowances (308)

1/2

Statutory income 7,030

Rental income 97 1/2

Aggregate/total/chargeable income 7,127

––––––




(b) (i) Notes

(3) The gain from sale of the property being a capital gain is not subject to income tax,

therefore excluded from the tax computation.

(4) The insurance proceeds are not taxable as the premiums would not have been allowed in

respect of a whole life policy. (See Inland Revenue Board Public Ruling No.2/2003 on

‘Key-Man’ Insurance)

(5) Directors’ Remuneration:

Employees Provident Fund contributions in respect of directors’ salary and allowances

are deductible up to the maximum limit of 19%. The 3% in excess of this limit is added

back. [s.34(4)(a)), Income Tax Act (ITA)]

Deduction of 50% of the entertainment allowances paid to employees is specifically

prohibited under s.39(1)(l), ITA. 1

Following from this the 19% maximum amount of Employees Provident Fund (EPF)

contributions attributable to this amount are added back, being specifically prohibited

under s.34(4)(b) ITA.

The EPF on the portion of the unallowed entertainment allowance is fully not

deductible.

Contributions to Kalsom Provident Fund are non-deductible as the Fund is not an

approved fund. 1

(6) Staff Welfare:

Medical expenses are staff amenities, therefore no adjustment. 1/2

Cost of leave passage means cost of fares which is disallowed under s.39(1)(m) ITA

(and see 1 Inland Revenue Board Public Ruling No.1/2003).

Food and accommodation is entertainment of staff, therefore it is deductible.

Paper 2.3MYS




Question 3

Zim Sdn Bhd is engaged in the manufacture and distribution of wheat flour. The company’s profit

and loss account for the year ended 31 December 2004 is as follows:


Sales 59,800

Cost of sales 1 41,500

–––––––

18,300

Less:

Repairs to premises 2 504

Wages and salaries 3 3,970

Freight and insurance 4 1,208

Consultancy fees 5 150

Miscellaneous expenses 6 591

Donations 7 92

Lease rentals 8 72

Legal expenses 9 6


Depreciation 300

Lease amortisation 19

Tax penalty 15

––––––

10,362

Add:

Dividends received 11 538

––––––


––––––

Notes:

(1) Cost of sales includes:

(i) Entertainment expenses amounting to RM162,000 of which RM112,000 was related

wholly to sales.

(ii) Provision for loss of damaged stock amounting to RM82,000

(2) Repairs to premises includes:

(i) A sum of RM37,000 recovered from an insurance company for the cost of repair to the

factory which was damaged by fire; and

(ii) RM44,000 incurred on the said repairs.

(3) Wages and salaries include:

(i) Contributions to Employees Provident Fund at 15% in respect of the remuneration of

RM990,000 paid to its senior management staff.

(ii) A sum of RM250,000 paid to the head of the distribution business as compensation for

loss of employment resulting from the disposal of the company’s distribution business.

(4) Freight and insurance includes a premium of RM115,000 in respect of export credit insurance

with a company approved by the Minister.




(5) Consultancy fees were paid to a consultant in respect of the purchase of machinery.

(6) Miscellaneous expenses comprise:

(i) A sum of RM480,000 embezelled by the purchasing director;

(ii) entrance fees in respect of the corporate membership to a golf club, RM99,000; and

(iii) subscriptions to the golf club, RM12,000.

(7) The company donated wheat flour costing RM92,000 to various charitable institutions

approved by the Inland Revenue Board. The selling price of the flour was RM98,000.

(8) The lease rentals commenced on 9 February 2003 at RM6,000 per month in respect of a car

leased by the company from that date. The car cost the lessor RM148,000 and it had not been

used previously.

(9) Legal expenses were incurred in connection with the disposal of the company’s distribution

business.

(10) Motor vehicle expenses include a loss of RM2,000 on the sale of a van. The residual tax

expenditure of the van as at 31 December 2003 was RM9,000. The van was sold for

RM5,000(5000-9000=4000BA).

(11) Dividend income comprises gross dividends of RM250,000 and tax exempt dividends of

RM288,000.

(12) Other information

For the year of assessment 2004, the industrial building allowance amounts to M82,000.

Capital allowances on plant and machinery (excluding the purchase of new machinery and the

sale of the van) amount to RM366,000. New machinery (heavy machinery) was purchased for

RM1·3 million in August 2004 and commenced to be used in October 2004.

Required:

(a) Compute the tax payable by Zim Sdn Bhd (which is not a small company) for the year of

assessment 2004.

Your computation should start with the 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. (20 marks)

(b) Explain your treatment of the items mentioned in notes 1 to 8 inclusive. (10 marks)

(30 marks)




Zim Sdn Bhd


(basis period 1 January 2004 to 31 December 2004)

Note RM000’s RM000’s Marks

+ –

Profit before taxation 10,900 1/2

entertainment expenses 1

(RM162,000 – RM112,000) x 100%

50 1

Provision for damaged stock 82 1

Insurance moneys 2 Nil 1/2

Cost of repairs 2 Nil 1/2

Employees Provident Fund contributions 3 Nil 1/2

Compensation for loss of employment 3 250 1

Insurance premiums 4 115 1

Consultancy fees 5 150 1

Embezzlement by director 6 480 1

Entrance fees to golf club 6 99 1

Subscriptions to golf club 6 Nil 1/2

Stock withdrawn for donations 7 98 1

Lease rentals 8 38 1

Legal expenses 9 6 1

Loss on sale of van 10 2 1

Depreciation 300 1/2

Lease amortisation 19 1

Tax penalty 15 1

Dividend 538 1/2

––––––– ––––

12,489 653

Less: (653)

––––––


Less: Capital allowance

Less: (RM82 + 366 + 4 + 520) 972 11/2

––––––


Add: Dividend (RM538 – 288) 250 ½

––––––

Aggregate/total/chargeable income 11,114

––––––

RM

Tax at 25% 2,2,778,500 1/2

Less: s.110 (25% x RM250,000) 11,6676767 62,500

––––––––––

Tax payable 2,2,716,000

––––––––––




(b) Notes

1 Entertainment expenses which are related wholly to sales are fully deductible, therefore no

adjustment. [Proviso (vii) to s.39(1)(1), Income Tax Act (ITA)] 1

The rest of the entertainment expenses that are not related wholly to sales is specifically

prohibited. [s.39(1)(1), ITA] 1/2

Provision for damaged stock is an unrealised loss, therefore not deductible. ½

2 The full amount of the insurance moneys is regarded as taxable income as it is for repair

which is a deductible expense in ascertaining adjusted income. [s.22(2)(a)(i), ITA] 1/2

The cost of repairs is deductible as a business expense. ½

3 Employees Provident Fund contributions are deductible as they are below the maximum

allowable rate of 19%. [s.34(4)(a), ITA] ½

Compensation for loss of employment constitutes capital expenditure as the reason for the

payment was in connection with disposal of the company’s distribution business, therefore

added back. 1

4 The insurance premium qualifies for double deduction as it is for export credit insurance

and the insurance company is approved by the Minister. [Income tax (Deductions of

Premiums for Export Credit Insurance) Rules 1985] ½

5 The consultancy fees are of a capital nature as they are incurred in connection with the

acquisition of a fixed asset. ½

6 Embezzlement committed by a director constitutes a capital loss as a director is in the

position of directing the affairs of the company. 1

Entrance fees to a golf club is an expenditure that brings an enduring benefit to the

company, therefore of a capital nature and added back. ½

Subscriptions to a golf club are revenue expenses, therefore no adjustment necessary. ½

7 Stock withdrawn without any consideration is deemed to have been disposed of at market

value, therefore added back at market value. 1

In any case, donations in kind do not qualify for deduction. Only gifts of money to approved

institutions are eligible. [s.44(6), ITA] ½




8 Lease rentals are deductible up to a maximum of RM100,000 where the cost of purchase

does not exceed RM150,000, therefore the excess is added back as follows: 1

RM

9.2.2003 to 9.12.2003 RM6,000 x 11 = 166,000

9.1.2004 to 9.12.2004 RM6,000 x 12 = 172,000

––––––––

138,000

Less: maximum allowable s.39(1)(k) 100,000

––––––––

Add back 38,000

––––––––

Workings: (item 10 – van)

Capital allowance

RM

Residual expenditure as at 31.12.2003 9,000

Less: sale price 5,000

––––––

Balancing allowance 4,000

––––––

(Workings: (item 12 – heavy machinery) RM

Qualifying plant expenditure 1,300,000

Initial allowance 20% 260,000

Annual allowance 20% 260,000

––––––––

520,000

––––––––

Residual expenditure as at 31.12.2004 780,000

––––––––




Question 4

Marks Sdn Bhd, a dealer in car accessories, submits its profit and loss account for the year ended

30 November 2003 as follows:


Sales 23,507


Gross profit 13,907

Less:

Salaries and wages 2 2,770

Freight and insurance 3 2,067

Bad and doubtful debts 4 381

Consultancy fees 5 144

Motor vehicles expenses 6 185

Training expenses 7 24

Donations 8 568

Staff welfare 9 50

Hire purchase interest 10 5

Legal charges 11 1

Lease rentals 12 63

6,258

7,649

Add: Other income:

Interest 13 14


Notes:

(1) Cost of sales includes obsolete stock write-offs amounting to RM59,000.

(2) Salaries and wages include a sum of RM18,000 paid to an individual to persuade him to join

the company as a marketing executive.

(3) Freight and insurance includes:

(i) Export credit insurance premiums of RM554,000 paid to Malaysia Export Credit

Insurance Berhad (MECIB).

(ii) Insurance premiums of RM21,000 on the lives of the key personnel. The intention is to

provide the company with funds which it may, at its discretion, use to make payments

to their dependants in the event of the premature death of the key personnel.

(4) Bad and doubtful debts

RM000’s

Bad debts written off during the year 183



409

Bad debts recovered during the year (28)

Profit and loss account 381

All the debts are trade debts except for a sum of RM23,000 written off which is in respect of

a loan made to an ex-employee.




(5) Consultancy fees are in respect of a sum of RM144,000 paid to a local consultant engaged to

implement and oversee the usage of information technology for improving the management

and production processes of the company.

(6) Motor vehicles expenses include depreciation of RM31,000.

(7) Training expenses are in respect of the practical training for Malaysian resident employees

of suppliers in relation to the business of Marks Sdn Bhd.

(8) Donations comprise:

RM000’s

Cash donated to approved institutions 449

Cash contributions to public libraries 119

568

The above donations were made on 20 December 2001.

(9) Staff welfare is in respect of the construction cost of a childcare centre amounting to

RM50,000.

(10) The hire purchase interest is in respect of a new motorcar costing RM132,000. The car was

purchased on 2 January 2003 whereupon a deposit of RM60,000 was paid. The monthly

instalment of RM3,500(cap 3500-500=3000) which includes interest of RM500 commenced

on 2 February 2003.

(11) The legal charges were incurred in connection with the recovery of a loan from an ex-

employee.

(12) The lease rentals related to a motorcar, they commenced on 5 December 2002 at RM5,250

per month for a period of 24 months. The selling price of the vehicle was RM156,000.

5/12/02-30/11/03 5250x12=63000-50000=+13000

(13) Interest on fixed deposits:

RM10,000 matured on 15 December 2002

RM 4,000 matured on 10 June 2003

Required:

(a) Starting with the net profit before taxation compute the chargeable income of Marks

Sdn Bhd for the year of assessment 2003 if the paid up ordinary share capital of the

company is RM30 million as at the beginning of the basis period.

N.B. Your computation must follow the descriptions used in the notes to the profit and

loss account indicating ‘nil’ for every item that does not require adjustment.

(20 marks)

(b) Explain your treatment of each of the items mentioned in notes 2 to 8 inclusive.

(10 marks)

(30 marks)




Answer:

(a) Marks Sdn Bhd


(Basis period 1 December 2002 to 30 November 2003)

Marks


+ -

Net profit before taxation 7,663 1/2

Obsolete stock write-offs Nil 1

Payment to individual 1 18 1

Export credit insurance premiums 2 554 1

Life insurance premiums 2 21 1

Bad debts written off 3 23 1

Net increase in specific provision 3 Nil 1/2

Net increase in general provision 3 193 1

Bad debts recovered 3 Nil 1/2

Consultancy fees for IT 4 Nil 1


Training expenses 6 Nil 1

Cash donated to approved institutions 7 449 1

Cash contributions to public libraries

(119-100)

7 19 1

Construction of child care centre 50 1

Hire purchase interest Nil 1/2

Legal charges (loan recovery) 1 1

Lease rentals (restricted to RM50,000) 13 1

Interest on fixed deposit(10+4) 14

8,481 568

(568)


Less: Capital allowances

(RM36,000 + 5,000) (41) 2 1/2

Statutory income from business 7,872

Add: Other income:

Interest income (RM10,000 +

4,000)

14 1

Aggregate income 7,886

Less: Cash donations to approved

institutions

(restricted to 10% of aggregate

income))

449 1

Total/chargeable income 7,437

(b) Notes:

1 Payment to the individual constitutes an inducement payment which encourages

him to commence employment with the company, therefore capital in nature

and added back.

1




2 Export credit insurance premiums qualify for double deduction as they are paid

to Malaysia Export Credit Insurance Berhad (MECIB) – Income Tax

(Deductions of Premiums for Export Credit Insurance)

1/2

Marks

Rule 1985: Life insurance premiums are not deductible because they constitute

capital expenditure in that the company has acquired an asset with those

premiums(the co created a fund(asset) as compensation for the family).

1

3 Bad and doubtful debts

Only trade debts written off/recovered are deductible/taxable, hence the loan

written off is added back.

1

For a provision to qualify for deduction it must be specific and in respect of

trade debts, therefore the general provision is added back.

1

4 Operating expenses incurred for the usage of information technology to improve

management and production processes are specifically allowed. The deduction

includes consultancy fees, therefore no adjustment is necessary. (Income Tax

(Deductions for Information Technology Related Expenses) Rules, 2000).

1

5 Depreciation is specifically disallowable under s.39(1). 1/2

6 Expenses incurred on the practical training in relation to the business of Marks

Sdn Bhd of non-employees are specifically allowed under s.34(6)(n) of the

Income Tax Act as long as the non-employees are Malaysian tax residents.

1

7 Donations are not allowable in computing adjusted income but they are

allowable in computing total income but in the case of a company, the

deduction is limited to 10% of its aggregate income.

1

In the case of the cash contributions to public libraries, the company can choose

to claim deduction under one of the two sections of the Income Tax Act: Under

s.34(6)(g) deduction is against the gross income of the business source and

restricted to RM100,000. Deduction under s.44(8), on the other hand, is against

the aggregate income of all sources of income and the maximum allowed is only

RM20,000. Therefore, Marks Sdn Bhd should make a claim under s.34(6)(g)

because the company gets additional deduction of RM95,000 i.e. RM495,000

instead of RM400,000.

1

1

Workings: Capital allowances

Construction of child care centre

No IA

AA 10% of RM50,000 = 5,000.

Motor car purchased on 2.1.2002 for RM132,000 with hire purchase

Qualifying plant expenditure

(RM60,000 + 3,000 x 10 months) 90,000

YA 2002 IA 20% 18,000




AA 20% 18,000

36,000

RE 54,000




Question 5

Winner Berhad, a company incorporated and resident in Malaysia, is 70% Malaysian owned and is

a manufacturer of refrigerators, freezers and air-conditioners under the brand name Wincon which

is registered as a trade mark in Malaysia. The company is the owner of the brand. The profit and

loss account for the year ended 31 May 2003 is as follows:

Note RM000 RM000

Turnover 80,798

Add: Interest income 1 154

80,952

Less: Cost of sales 2 57,708

23,244

Less: Salaries, wages, and bonuses 3 3,520

Employees Provident Fund 4 768

Donation 5 10

Advertising 6 3,688

Rental of premises 7 929

Travelling 8 750

Foreign exchange loss 9 140

Maintenance of plant and machinery 10 116

Bad and doubtful debts 11 1,019

Freight and insurance 1,522

Depreciation 940

Motor vehicles expenses 291

13,693

Net profit before taxation 9,551

Notes:

(1) Interest income is from a fixed deposit placed with a bank in Europe. The interest was

remitted to Malaysia on 12 April 2003.

(2) Cost of sales is arrived at after crediting RM40,000 in respect of the cost of goods

manufactured by the company, which were withdrawn from stock for use as fixed assets by the

company. The normal selling price was RM60,000.

(3) Salaries, wages, and bonuses

(i) Staff were paid two months bonus based on their wages of RM960,000 whereas

executives and directors were paid four months bonus(1800000x4/12=600,000) based on

their salaries of RM1,800,000.

(ii) Salaries, wages, and bonuses includes wages of RM36,000 and bonus of RM6,000 paid to

disabled staff.

(4) The Employees Provident Fund contribution is at the rate of 15% for staff and 25% for

executives and directors.

(5) Donation is in respect of contributions made to a fund-raising campaign organised by a

distributor of the Wincon brand of goods.




(6) Advertising

Included is a sum of RM27,000 incurred on advertising the Wincon brand of goods on the

Internet via a host website located in Kuala Lumpur. The goods are of export quality standard.

(7) Rental of premises

Included in the rental is a sum of RM25,000 paid in respect of the early termination of the

lease of a building which the company vacated in February 2003. The lease was to have run

for another 10 years. The building was no longer suitable as a showroom for the company's

goods due to the construction of a toll plaza.

(8) Travelling includes:

(i) Vacation airfare and hotel accommodation costing RM18,000 for important overseas

customers.

(ii) Reimbursement to the directors of the company of salaries of RM100,000 and Employees

Provident Fund contributions of RM 12,000 in respect of drivers employed by them.

(9) The foreign exchange loss is in respect of the purchase of component parts for manufacture.

The realised loss amounts to RM7,000 only.

(10) Maintenance of plant and machinery includes the installation cost of a machine amounting to

RM17,000.

(11) The specific provision carried forward includes a sum of RM 13,000, being the balance of a

personal loan granted to a director who has now resigned from the Board.

(12) Capital allowances have been computed at RM822,000 for the year of assessment 2001, but

without taking into account the following acquisitions:

Machine

On 14 January 2003 the company purchased a machine at a cost of RM183,000. The sum of

RM17,000(8.5%) mentioned in note 10 was incurred on preparing the site for installation of

this machine. The machine commenced to be used for the business two weeks after

acquisition.

Motor car

A new car costing RM220,000 was purchased on 9 December 2002 for the general manager.

Bad and doubtful debts comprise:

RM

Bad debts recovered (119,000)

Specific provision brought forward (951,000)

General provision brought forward (1,205,000)

Bad debts written off 120,000

Specific provision carried forward 1,375,000

General provision carried forward 1,799,000

1,019,000




Required:

(a) Starting with the net profit before taxation, compute the chargeable income of Winner

Berhad for the year of assessment 2003 if the paid up ordinary share capital of the

company is RM3 million at the beginning of the basis period .

N.B. Every item mentioned in the notes to the accounts (except for notes 11 and 12) must

appear in your computation, whether or not it is deductible, taxable or no adjustment is

necessary. Where no adjustment is required indicate "nil" under the appropriate

column. (18 marks)

(b) Explain your treatment of each of the items mentioned in notes 1 to 9 inclusive. (12 marks)




Answer:

(a) Winner Berhad


(Basis period 1 June 2002 to 31 May 2003)

Note RM000 RM000

+ -


Interest income 1 154 1

Unrealised profit on goods withdrawn from stock 2 60 1

Bonus 3 Nil 1

Remuneration of disabled staff (RM36,000 + RM6,000) 3 42 1


Donation 5 10 1

Advertising on the Internet 6 27 1

Lease termination 7 25 1

Entertainment of overseas customers 8 18 1

Reimbursement of drivers' salaries etc 8 Nil 1

Foreign exchange loss (unrealised)140-7 9 133 1

Installation of machine

Bad debt recovered

17

nil 1

Specific prov b/f

Specific provision carried forward

13

nil

1

General provision carried forward 1,799 1

General provision brought forward 1,205 1

Depreciation 940 1

12,710 1,428

(1,428)


Less: capital allowance (822 + 68 + 20) 10 910 2

Statutory/aggregate/chargeable income 10,372

(b) Notes:

1 Foreign income remitted to Malaysia by a resident company is tax exempt under the

Paragraph 28 Schedule 6.. 1

2 Where stock is withdrawn for the company's own use the market value of the stock

at the time of withdrawal is treated as gross income. Therefore the unrealised profit

of RM60,000 is added back. 1

3 Remuneration paid to disabled staff qualifies for double deduction under the

Income Tax (Deductions for the Employment of Disabled Persons) Rules, 1982. 1

Bonus is staff cost and therefore deductible. 1

4 Deduction for the Employees Provident Fund contributions is restricted to 19% of

the employees' remuneration. EPF contributions in respect of restricted bonus is

also disallowed. The adjustment is arrived at as follows: 2

RM




(25%-19% )x (RMI,800,000 + 600,000) 144,000

5 Donation is deductible at the aggregate income stage, therefore add back RM

10,000 in arriving at adjusted income. However, in this case it is not an approved

donation therefore it does not qualify for deduction. 1

6 Advertising on the Internet host web site located in Malaysia qualifies for double

deduction under the Income Tax (Deduction for Advertising Expenditure on

Malaysian Brand Name Goods) Rules, 1999 as the company satisfies the conditions

specified in the Rules including being 70% Malaysian controlled.

2

7 The payment of RM25,000 is capital expenditure as it was paid to get rid of a lease

which had become an onerous liability. It resulted in an enduring benefit to the

company. 1

8 The cost of airfare and accommodation is regarded as hospitality and constitutes

entertainment specifically disallowed under s.39(1)(l) of the Income Tax Act. ½

No adjustment is necessary for reimbursement of drivers' salaries and Employees

Provident Fund contributions as the expenditure is on staff amenities ½

9 Foreign exchange loss of a revenue nature is deductible to the extent that the loss is

realised, therefore the unrealised loss of RM133,000 is added back. 1

10 Capital allowance computation:

Machine RM

Qualifying expenditure (RM183,000 + 17,000) 200,000



68,000

Residual expenditure 132,000

Motor car

Qualifying expenditure restricted to 50,000



20,000

Residual expenditure 30,000




Question 7

Fashenshu Sdn. Bhd. (Fashenshu), a resident and wholly Malaysian-owned company is engaged in

the business of manufacturing footwear for export. Its profit and loss account for the year ended 30

April 2004 is as follows:

Note RM 000’s RM 000’s

Sales 1 68,230


23,370

Less:

Wages and salaries 3 4,612

Insurance premiums 4 181

Rental of premises 5 96

Marketing expenses 6 799

Annual general meeting expenses 7 5

Trade mark costs 8 460

Motor vehicles expenses 9 350

Repairs and maintenance 10 293

Provisions for bad debts 11 56

Miscellaneous expenses 12 11

6,863

16,507

Add : Dividends 203


Tax 4,610

Profit after taxation 12,100

Notes:

(1) Sales include a sum of RM200,000 received by the company as the first installment under an

agreement signed with a shoe company in China. This was for a license to use Fashenshu’s

patents, designs and know-how in consideration for a sum of RM 1 million payable in annual

installments over a period of five years. Fashenshu also agreed not to grant any such license to

other parties in China or Hong Kong. Fashenshu had never made such an agreement before.

(2) Cost of sales includes the cost of equipment amounting to RM18,500 purchased to enable the

company’s disabled employees to label its footwear.

(3) Wages and salaries include a sum of RM82,000 incurred on leave passage provided to senior

management staff during their periods of leave for purposes of spending vacation time with

their spouses and children. The sum comprises:

RM

Overseas air fares 48,000

Local air fares 34,000

82,000

(4) Insurance premiums include a sum of RM48,000 paid to Kargo Insurance Berhad, a company

incorporated in Malaysia, to undertake risks on the importation of raw materials.




(5) Rental of premises includes rental paid in advance for six months period 1 December 2003 to

31 May 2004 amounting to RM48,000.

(6) Marketing expenses include:

(i) A sum of RM61,000 embezzled by the marketing director.

(ii) A sum of RM75,000 in respect of products licensing in Japan for purposes of promoting the

company’s footwear.

(7) Expenses incurred in respect or the annual general meeting of shareholders comprise the cost of

food and refreshments provided at the meeting.

(8) On 1 December 2003 the company purchased a trade mark for RM217,000 incurring legal cost

of RM8,000. The trade mark casts comprise:

RM

Amortization of cost of purchase of trade mark 225,000

Royalty paid for the use of trade mark before the date of purchase 235,000

460,000

(9) Motor vehicles expenses includes lease rentals in respect of a motor car of RM6,500 per month

under an agreement for a period of 24 months commencing on 1 January 2003. The purchase

price of the car in January 2003 was RM145,000.

(10)Repairs and maintenance includes a sum of RM16,000 in respect of tools which have a life

span of two years. This comprises RM4,000 for tools replaced and RM12,000 for additional

tools.

(11)Provision for bad debts comprise:

RM

Bad debts written off (trade) 79,000

Increase in general provision from RM100,000 to RM199,000 99,000

Recovery of debts which were taken over from the vendor of the

business which Fashenshu acquired several years ago (122,000)

56,000

(12)Miscellaneous expenses comprise:

RM

Approved donations 20,000

Unapproved donations 9,000

Foreign exchange gain realized from debts arising from sales of footwea (18,000)

11,000

(13)Dividends comprise:

Date received RM

10 August 2003 100,000 (exempt)

14 February 2004 103,000(gross before deduction of tax)

(14)A new factory which had not previously been used as an industrial building was purchased on

19 July 2003 for RM350,000 which includes RM50,000 for the cost of the land. The factory

commenced to be used by Fashenshu’s trade in August 2003.




Required:

(a) Compute the tax payable by Fashenshu Sdn. Bhd. for the year of assessment 2004.

N.B. Your computation should start with 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. (20 marks)

(b) Explain your treatment of the items mentioned in notes 1 to 8 inclusive, using the same

descriptions as in (a). (10 marks)

(30 marks)




(a) Fashenshu Sdn Bhd


(Basis Period 1 May 2003 to 30 April 2004)


+ -


Installment payment 1 200 1

Equipment for disabled employees 2 Nil ½

Air fares 3 82

Insurance premiums 4 48 1

Rental paid in advance(RM48,000/6) 5 8 1

Embezzlement by director 6 61 1

Product licensing 6 Nil 75 ½

Annual general meeting expenses 7 5 1

Trade mark (4/5 x RM225,000) 8 180 1

Royalty 8 Nil 1

Lease rental 9 4 1

Additional tools 12 1

Increase in general provision 99 1

Recovery of debts 122 1

Donations (RM20,000 + 9,000) 29 ½

Foreign exchange gain Nil ½

Dividends 203 1

17,190 648

(648)


Less: industrial building allowance

(RM30,000 + 9,000) 10 (39)

1

½


Less donation (20) 1

Aggregate statutory income 16,606

Add dividend 103 1

Total/chargeable income 16,586

RM

Tax at 25% 4,146,500 ½

Less: s.110 set-off (RM103,000 x 25%) (25,750) 1

Tax payable 4,120,750

(b) Notes 1 to 8: Marks

1 The sum of RM1 million constitutes a capital receipt. This is because with regard

to the China and Hong Kong market Fashenshu has parted with a capital asset

(patent, designs and know-how) for a purchase price (Evan Medical Supplies Ltd v

Moriarty). 1

The fact that the consideration is payable in installment does not alter the character

of the receipt, therefore it is not taxable. 1

2 The cost of purchase of equipment to assist the company’s disabled employees to

perform their work is specifically allowed under s.34(6)(e) of the Income Tax Act,

therefore no adjustment.

1




Marks

3 Leave passage in respect of the air fares (oversea and local) is specifically

disallowed under paragraph 39(1)(m) of the Income Tax Act, therefore added back

RM82,000.

4 Insurance premiums in respect of imported raw materials qualify for double

deduction as the risks are insured with an insurance company incorporated in

Malaysia – Income Tax (Deduction of Insurance Premiums for Importers) Rules

1982. 1

5 The one month rental paid in advance was not incurred during the basis period for

the year of assessment 2004, therefore added back RM8,000. This amount would

be deductible for the year of assessment 2005. 1

6 Embezzlement by director of a company is regarded as a capital loss resulting from

misappropriation of the capital of the company, therefore added back. 1

Expenses incurred on products licensing overseas for the purposes of promoting

exports by a resident company is eligible for double deduction under Income Tax

(Deduction for Promotion of Exports) 2002 & 2007. 1

7 Expenses incurred on the annual general meeting of shareholders are not incurred

in the income-producing process. Rather they are incurred after the income has

been produced, therefore added back. 1

8 The cost of purchasing the trade mark including the legal fees is specifically

allowable, but restricted to 1/5 of the expenditure for each of the five years of

assessment – Income Tax (Deductions of Cost of Acquisition of Proprietary

Rights) Rules, 2002. 1

Royalty paid for the use of a trade mark is a revenue expense, therefore no

adjustment. 1

Workings:

Deduction of lease rentals (item 9) is computed as follows:

RM

January to April 2003 (RM6,500 x 4) 26,000

May 2003 to April 2004 (RM6,500 x 12) 78,000

104,000

Restricted to 100,000

Add back 4,000

Deduction of lease rentals in respect of private motor vehicles is restricted to RM100,000 where

the cost of the car does not exceed RM150,000.

Industrial building allowance (item 10) is computed as follows:

RM

Qualifying building expenditure (RM350,000 –

50,000)

300,000

Less: initial allowance 10% 30,000

annual allowance 3% 9,000

39,000

261,000

Co Tax Kooair Without Answers

Documents

sunway university

technical

kalsom sdn

reducing share

computing

private motor

accelerated

miscellaneous