CAPITAL
STATEMENT
TAX INVESTIGATION
What is Capital Statement
Is a procedure used by IRB in their tax investigation
(Form CP103) to ascertain an individual taxpayer’s
omitted (under declared) income.
Q: What is the purpose?
….. to ascertain the amount of omitted income.
Principle
Total Income = [Expenditure + Savings]
INFLOW = OUTFLOW
Principle
Total Income = Taxable + Non taxable income
Expenditure = Capital (Assets) + Private/Personal expenses
Savings = Cash in hand or in the Bank
Total Taxable Income (E) =
Assets(A) –Liabilities(B)
+ Private/ Personal expenses + Capital loss (C)
- Not taxable receipts including Capital gain (D)
Capital Statement: Format
(A) Assets
Less: (B) Liabilities
xxx
xxx
Increase in Net Assets
----xxx
xxx
Add: (C) Personal & Private Exp + Capital loss
Less: (D) Non-Taxable Income/ Capital Gains
Apparent (Taxable) Income (E)
xxx
----xxx
-----
(A), (B): Assets & Liabilities
Capital Statement is prepare for each calendar year (ended 31/12)
Assets (outflow) include :
1. Houses, properties, shares, bank deposits, fixed
renovations
2. Cars, investments, furniture, jewellery
3. Capital invested in business and unappropriated business
profits
4. Loans made
5. Beneficially owned assets (held in the name of wife,
children, relative or nominee).
Liabilities (inflow) : Borrowings (include from relatives/ friends)
Bank borrowings, Business or private overdraft, HP agreements,
Balance in credit cards
(C): Personal Expenses
Include expenses on:
1. Food, clothing, medical bills, gifts
2. House moving children education, holidays, loan
interest, insurance premiums, income tax paid,
etc.
Personal expenses for a year are added to the
increase in net assets for that year to arrive at the
total income for that year.
(C): Personal Expenses
Note:
1. CP102 – Form issued by IRB for taxpayer to
declare details of personal expenses
2. Critical analysis of a person’s drawings,
bank accounts and director’s accounts
may reveal his spending habits and
lifestyle.
(C): Personal Expenses
3. Looking out during/on inspection:
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Size of house, interior decoration, renovations
Furniture & equipment
number of cars, model and who drives them
travel – from passports
type of school; for children
club membership
other extravagant & expensive features
(D): Non Taxable Income/ Capital Gains
1. Lottery wins/ 4 digits wins
2. Gains from disposal of investments
3. Inheritance from father, legacies
4. Gifts received, children’s contribution etc
5. Other sources of funds/ receipts (not
taxable)
Supporting documents required for claims.
Examples:
1. Purchase of asset by cash
2. Purchase and sale of an asset in the
same year
3. Purchase of asset by loan
4. Repayment of loan
5. Business capital contribution
Purchase of land by cash of RM 50,000 in year 2017
Capital Statement
(A)
Land
Ye 31.12.2017
50,000
2. The land (in previous slide) was sold in the
year 2018 for RM 65,000.
Capital Statement
(A)
Land
(D) Less: Gains (NT)
31.12.17
31.12.18
50,000
-
Nil [-50K]
(15,000)
Note: Income (-)65,000 [land -50; CG -15]
. Purchase of car by hire purchase.
Cost of car RM 50,000. [asset]
Balance of loan at 31.12.2017 RM 24,000
[liability]
Balance of loan at 31.12.2018 is Nil.
Repayment in 2017 RM 29,000. [outflow]
Repayment in 2018 RM 26,500.
4
Note: Reduction in liability represent capital loan repayment
Q: CS for 2017 to 2019
1. Ramli bought a house in 2015 for RM300,000.
This was financed by a down-payment of
RM100,000 and a loan of RM200,000. The
outstanding loan balances as at the end of 2017,
2018 and 2019 were RM150,000, RM100,000
and RM50,000 respectively. The house was
renovated at a cost of RM200,000 and
RM300,000 in 2018 and 2019 respectively.
[Outflow till 31.12.2008 = 300,000 – 150,000]
Q: CS for 2017 to 2019
2. Ramli inherited a plot of land in Bentong, Pahang
from his father in 1991. The land were bought by his
father in the 1970s at a cost of RM10,000. Land was sold
in July, 2018 for RM50,000.
3. Two units of shop-houses in Gombak, were acquired
at a cost of RM200,000 each in 2007. One unit was sold
in 2019 for RM900,000.
Q: John
(Capital Statement for 2017 to 2019?)
(1)The paid-up capital of MJSB was as follows:
RM’000
December 31, 2017
1,000
December 31, 2018
1,500
December 31, 2019
4,500
Mr John owned 80% of the paid-up capital of MJSB throughout 2017 to
2019.
In 2019, the paid-up capital of MJSB was increased through an allotment
of one rights (RM1 per share) and one bonus share for each of the
ordinary shares held as at December 31, 2018.
4. Capital of the business
Lee started a business in 2017 with a capital of
RM100,000. In 2019, he injected an additional
capital of RM 60,000.
Expenditure : RM100,000 : [asset]
Expenditure : RM 60,000 : [asset]
Capital Statement At 31.12 2018
(A) Capital (Business)
100,000
2019
160,000
5. Continued
P+L Appropriation a/c for Lee’s sole proprietor business
in 2018 was RM 280,000. The Net Profit for 31.12.2019
was RM80,000 [with no drawings]
Bal of App P+L: “Profit invested into biz” [asset]
– to show the balance of app P+L.
As at 31.12
(A)Capital
(A) App P & L
2018
100,000
280,000
2019
160,000
360,000
Note:
Any “drawings” is an inflow (not taxable) and recorded as
Part A (-ve) instead of Part D.
ANY Current a/c (in the Co) of taxpayer need to be anaylsed
Q:Record in Capital Statement
for year 2017 to 2019
Ramli Food started with a capital of RM100,000 and
the balance of the app P+L a/c submitted to the IRB
was RM60,000, RM70,000 and RM80,000 for the
years ended Dec 31, 2017, 2018 and 2019
respectively. The drawings a/c balances were
RM45,000 in 2017, RM50,000 in 2018 and
RM60,000 in 2019.
5. Capital of the business
Lee’s capital contribution in a partnership in 2014 is
RM50,000. In 2019 the partnership, valued at RM500,000
was converted into a Sdn Bhd. He was issued 250,000
ordinary shares at RM 1.00 each.
Expenditure RM50,000 : [asset] - Partnership
No further inflow or outflow : Conversion
(A) Partnership
(A) Sdn Bhd (250,000 shares)
2018
50,000
--------------50,000
=========
2019
50,000
--------50,000
=======
PY September 2015/2016
Section B Q 1(a) (10)
Mr Gan gave an interest free loan to his sister of
RM200,000 in May 2012. She paid RM10,000 per
month to Mr Gan commencing January 2014.
Q:
Is the repayment of RM120,000 from his sister
recognized as non taxable income in part (D).
Why?