Dr Nakha Ratnam Somasundaram
MIAQE ANSWER SET 1
April 2014 examination
Question 1
Badges of trade – case scenario
(i)
Briefly the argument for the Inland Revenue Board to tax the sum received would be
under section 4(a) on the grounds that what was done was by way of a trade. And even it was
an isolated transaction, it was carried out by way of a trade. The fact that it was necessitated by
the need to repay the loan is irrelevant to the issue [DGIR v LCW (1975) 1 MLJ 250 ]
The badges of trade could be lined in favour of the Revenue and this could include the subject
matter of the transaction (Rutledge v CIR), modification and supplementary work before
disposal – in this case construction of a saleable building (Cape Brandy Syndicate v CIR v), the
sale over a short period of two years over which a substantial number of units were sold
(Pickford v Quirke; Gray and Gillette v Tilly).
(5 marks)
(ii)
For Mr Kumar it could be argued that that the original intention was that of an investment
and when the properties were sold, it was merely realizing an investment. It was further
accelerated by the high cost of the development resulting in him having to borrow from the
bank and the sale was necessitated by the need to repay the loans i.e. it would not have been
sold had it been otherwise.
Law: Section 24(2);
(5 marks)
[Total: 10 marks]
QUESTION 2(a)
Profit and loss adjustment
Jengka Sdn Bhd
Tax computation for the year of assessment 2013
Jengka Sdn Bhd
Tax computation for the year of assessment
2013
Note
Business income
Profit before taxation
Cost of sales
Less:
Dividends
Interest
Fixed deposit
Customer-late payment charges
Insurance recovery
Add/Less:
Salaries and
wages
Director's salary
EPF and PRF(rest: [(45+20) -(19% of 225)]
Overseas trip for director
Loan interest
Interest on loan for
investment
Interest on loan for working capital
Entertainment
Company annual dinner
Entertainment disbursement (Disallow 50% of
90)
Depreciation
Repairs and maintenance
Construction of covered car park
Replacing the perimeter
fence
Widening and deepening the drains
Others
Bad and doubtful debts
Bad debts written off
Add (+)
RM’000
Deduct(
-)
RM’000
RM’000
√116,673
√14
1
2
√11
√0
√0
3
4
√0
√22
√11
5
√14
√0
6
√0
√45
√54
7
√17
√50
√43
√0
8
√0
25
116,648
General bad debts provision
Specific debts provision
Bad debts (staff commission w/o)
Bad debts (advance to supplier w/off)
Motor vehicle expenses
Compound and fines
Other maintenance charges
Lease payments
Car [62-50 max]
√190
√0
√15
√29
9
√4
√0
10
√12
Advertisement
Newspaper, magazines and radio
Local advertising for branded goods (DD)
11
Professional fees
Termination of supply contract
Guarantee fee for loan
Lease arrangement for vehicles
Income tax
appeal
Integrated TP audit system
Insurance
Freight insurance on cargo import and export
(DD)
Insurance on other company assets
Foreign exchange loss
Unrealized loss on stock imports
Realized loss-purchase of machinery spare parts
Donation
Cash 'ang pow' to inmates
Provision of pubiic school library facilities [120 100(max)]
Scholarship to foreign university
Sponsoring foreign art activity [235-200(max)]
12
Add
Less
Adjusted income from business
Less: Deduction for proprietary rights (20% of
RM200,000)
Less: Capital allowance
√0
0
√340
√0
√12
√0
√8
√22
13
0
√0
√12
14
√4
√0
15
√12
√20
√34
√35
653
352
116,648
653
117,301
352
116,949
√40
116,909
Allowance as claimed
IBA on additional expenditure during the year
[W1]
Statutory business income
Add: Other
income
Dividends
Interest
Less: Donation
Cash to approved institution
Total income and chargeable income
W1
IBA on additional building expenditure incurred during
the year
Construction of covered car park
Replacing of perimeter fence
Widening and deepening of drains
Total
Less: Initial allowance
Annual allowance
Residual expenditure carried forward
√926
√96
√0
√11
RM'000
1,022
115,888
11
115,899
√12
115,887
RM'000
√17
√50
√43
110
√11
√3
14
96
51 √= 15 marks
Question 2(b)
Repair and maintenance
Repair and maintenance expenses as understood in the ordinary sense and incurred wholly and
exclusively in the production of gross income are generally allowable as a deduction in arriving
at the adjusted income from a source consisting of a business or rent.
However one needs to distinguish between ‘repairs’ and ‘improvements’ as improvements that
add substantial value to the repaired item maybe disallowable – for example changing a zinc
roof of a factory to a tiled roof.
A large repair expenditure on a newly acquired used asset for example may also not qualify as
it falls within the meaning of ‘initial repairs’ [Law Shipping Company which can be contrasted
with Odeon Associated Theatres Ltd v Jones where initial repairs were disallowed in the first
case but allowed in the second case – which illustrates that the particular facts of the case
have a great bearing on the outcome of the decision].
Other issues include the matter of replacement of an entirely or part of an entirety as in the
case of Bullcroft Main Collieries Ltd v O’Grady and Samuel Jones Ltd v Devondale; and
renewal which may be allowed if it is not of a capital nature.
2 ½ points
Bad and doubtful debts
One needs to distinguish between trade debts and non-trade debts; and for trade debts as
between specific bad debts and general bad debts and bad debts written off. The IRB had
issued a Public Ruling No. 1/2002 with deals with the law, practice and treatment for tax
purposes of bad debts in some detail.
Bad debts taken over would constitute a capital asset and so do advances to a supplier. Some
relevant case laws concerning decision on bad debts (including advances in the course of
trading) are Reynolds and Gibson v Crompton (bad debts taken over), Reid’s Brewery (loans to
customers) , English Crown Spelter and Charles Marsden and Sons (dealing with advances
extended to suppliers).
2 ½ points
(5 marks)
Question 3 A
JPK Private Hospital Sdn Bhd
Determination of qualifying building expenditure
Cost of land
Legal fee for transfer of land
Cutting and leveling land
Excavation and preparation of site for construction
Piling and foundation works
Construction of building
Construction of perimeter wall
Architect fee-hospital building design
Legal services for obtaining various building approval
Subcontract charges for installation of wiring and plumbing
Landscaping charges
Qualifying building expenditure
RM
√0
√0
√0
√30,347
√507,637
√3,844,375
√13,113
√52,451
√24,353
√27,724
√0
4,500,000
JPK Private Hospital Sdn Bhd
Computation of industrial building allowance
Constructed building
Year of assessment 2012
Qualifying building
expenditure
RM
√4,500,000
Initial allowance
Annual allowance
Residual
expenditure
Year of assessment 2013
Annual allowance
Residual
expenditure
10%
3%
√
√
450,000
135,000
3,915,000
√135,000
3%
3,780,000
Leased building
Renovation expenditure
Year of assessment 2012
Leased building - used as hospital
Qualifying expenditure (75% of 618,250)
Initial allowance
Annual allowance
Year of assessment 2013
Annual allowance
Residual expenditure c/f
585,000
RM
√618,250
Qualifying
RM
463,688
10%
3%
√46,369
√13,911
60,279
403,408
√13,911
389,498
3%
Leased building - used as administrative office
Nonqualifying
RM
√154,563
Year of assessment 2012
Non-qualifying expenditure (25% of 618,250)
Initial allowance
Notional allowance
Year of assessment 2013
Notional allowance
Residual expenditure c/f
10%
3%
3%
√0
√46,369
46,369
108,194
√46,369
61,825
23√ = 10 marks
QUESTION 3B
Real Property Gains Tax
Mr Ravi
Computation of disposal and acquisition price
Year of assessment 2013
Disposal
Consideration received
Less: Permitted expenses
Cost of improvement
Legal fees -defending title
Less: Incidental cost of disposal
Valuation fees
Legal fees for disposal
Brokerage
Advertisement
Disposal price
Acquisition
Consideration paid
Add:
Legal fees
Stamp duty on transfer
Less:
Compensation received
Insurance recoveries
Interest on mortgage loan
Deposit forfeited
Acquisition price
RM
RM
√582,196
√58,086
√4,763
√7,784
√11,623
√14,521
√1,511
RM
62,849
519,347
35,439
483,908
RM
√406,604
√6,912
√7,132
√35,549
√13,012
√0
√11,000
14,044
420,648
59,561
361,087
14 √= 10 marks
ANSWER 4(A)
(i)
A Labuan business activity refers to a Labuan trading or a Labuan non-trading
activity carried on in or from Labuan in currency other than the Malaysian
ringgit by an offshore company with persons not resident in Malaysia or with
another offshore company but excluding shipping operations.
(4 x 1/2 marks= 2 marks)
(ii)
2 examples of Labuan trading activity
-
Banking, insurance, trading, management, licensing or any other activity
which is not offshore non-trading activity.
2 examples of Labuan non-trading activity
-
Holding of investments in securities, stock, shares, loans, deposits and
immovable properties by an offshore companies on its behalf.
(4x ½ mark = 2 marks)
(iii)
The income derived from Labuan non-trading activities is exempted from tax.
Meanwhile income derived from Labuan trading activities Ltd will be taxed at a
preferential rate of 3% of net profits as per the company’s audited accounts or at
a fixed sum of RM20,000 upon election as follows:
Audited net profit
3% preferential rate
Zakat payment
Income tax payable
(iv)
3 % Preferential rate
RM’million
50
15
[1.25]
13.75
Election
RM
20,000
[1,250,000]
nil
(6 x ½ mark = 3 marks)
Dividends paid by Barakah (L) Ltd in July 2013 would be deemed to be derived
from Malaysia. However the dividends are exempted from tax in the hands of
the shareholders. 
(2x 1/2 mark = 1 mark)
(v)
Interest on loan given to Makmur Sdn Bhd is exempted from tax. Therefore, Makmur
Sdn Bhd is not required to withhold taxfrom interest payments made to Barakah (L)
Ltd.
(2 x 1/2 mark = 1 mark)
(vi)
The directors’ fees received by non-resident directors are deemed to be derived
from Malaysia and should be assessed at a flat rate of 26%.
(2x ½ mark = 1 mark)
ANSWER 4(B)
(i)
Tanjung Pagar Pte Ltd (TPPL) is foreign company i.e. Singapore resident company.
There is no evidence to establish that TPPL has a permanent establishment in Malaysia
since TPPL does not has a branch in Malaysia. Furthermore, TPPL just provides
special equipment to Sari Setia Malaysia (SSM) and the maintenance of the equipment
is done in Singapore. Therefore, business income of TPPL is not subject to Malaysian
tax at 25%. 
TPPL has an arrangement with SSM for the renting of moveable property i.e. special
equipment which is used by SSM to provide service of water treatment for his clients in
Malaysia. Hence, the rental income is deemed to be derived from Malaysia. Thus,
RM100,000 paid to TPPL would be subject to withholding tax. It is special classes of
income falling under Section 4A.
(8x ½ mark = 4 marks)
(ii)
Sari Setia Malaysia (SSM) is required to withhold 10% from RM100,000 i.e. RM10,000
on rental payable to TPPL, that is only RM90,000 should be payable to TPPL (S.
109B). The withholding tax RM10,000 withheld should be remitted to the IRBM within
one month from the date of payment to TPPL. Failure to do, SSM can be charged: 1) A
penalty of 10% of the unpaid amount; and 2) RM100,000 is not allowed as deduction
(S.39) in arriving at the adjusted business income of SSM.
(4x 1/2 mark= 2 marks)
(iii)
Factory price
Inland transport from factory to Korean port
Freight from Korea to TanjungPelepas
Ocean Insurance
CIV value
Import duty rate
Import duty payable
CIV value
Import duty payable
Sales tax rate
Sales tax payable
RM
1,000,000
10,000
46,000
4,000
1,060,000
5%
53,000





1,060,000 
53,000 
1,113,000
10%
111,300 
(8x ½ mark = 4 marks)
[Total: 20 marks]
ANSWER 5(A)
(i)
Computation of income tax payable for the Year of Assessment 2013 for Sohimin
and Rose
RM
RM
RM
Section 13 (1) (a)
Sohimin
Rose
Salary
Interest on loan (6,000 – 3,000)
Prize – i-pad (exempt)
Hamper
Refund of Professional fees
90,000
3,000
Nil
300
500
√
√
√
√
√
93,800
Section 13 (1) (b)
Furniture (prescribed value)
Car (prescribed value)
Fuel (exempt)
Utilities
Leave passage:
- Air fares (RM5,000
Exemption)
–
RM3,000
3,360
5,000
Nil
3,600
√
√
√
√
2,000
√
13,960
Section 13 (1) (c)
House: DV [(RM21,600 – RM3,600) =
30% x 93,800 =
18,00
0
28,14
0
√
√
WIL
GROSS EMPLOYMENT INCOME
Professional fee
STATUTORY EMPLOYMENT INCOME
Rent
Aggregate income√
Donations: cash
Total income√
Personal reliefs
self
Special relief
Purchased of books
Study course fees
EPF (max)
Medical insurance premium
Chargeable income√
18,000√
125,760
(500)
125,260
125,260
(500) √
124,760
9,000
2,000
1,000
5,000
6,000
3,000
√
√
√
√
√
√
(26,000)
98,760
exempt√
38,000√
38,000
38,000
38,00
Tax chargeable at special rate 15% √ / 26%√
Less: zakat
14,814
(1,500)
√
13,314√
Net tax payable
0
9,880
9,880√
(30√ x 1/3 = 10 marks)
(i)
RM2,000 allowance to be received by Sohimin from Singapore’s clients will be subjected
to tax under S.4(b)√. This is due to that the service rendered in Singapore is incidental to
his employment in Malaysia √.
(2x 1 mark = 2 marks)
ANSWER 5(B)
Business income
Adjusted loss b/f
Statutory income
Rent
Dividend
Foreign income
Aggregate income
Annuity
Trust fees
Total Income
Tax rate
Tax payable
Total Income (RM)
220,000
(20,000)
200,000
80,000
Exempt
Exempt
280,000
(10,000)
NA
270,000
25%
67,500
√
√
√
√
√
√
√
√
√
Adjusted Trust Total Income = 270,000 x [245,000 / 250,000] = 264,600
Alif RM
Bahrin
RM
Citra RM
Dora RM
198,450√
198,450
66,150√
66,150
Annuity
Accumulation
Share of trust income
Total income
10,000√
Self relief
Chargeable Income
Tax chargeable at scale
rate
Tax rebate
Tax credit S.110(8)
[9,000] √
1,000
0
[9,000] √
189,450
37,107√
[9,000] √
57,150
4,208.50√
[400] √
NA
[49,612.50] √
0
12,505.50√
[16,537.50]
√
[12,329] √
Tax refundable
5,000√
10,000
Not
taxable√
(24x 1/3 mark = 8 marks)
[Total: 20 marks]
QUESTION 6
(i)
Income derived from business source of real estate S.4 (a) will be assessed separately
from director fees S.4 (b) √. The business income will be taxed at a flat rate of 25%
under the company √. Meanwhile, the director fees will be assessed under the personal
tax of Encik Subhan √. If En Subhan is a tax resident, he may claim personal relief and
will be taxed at a scale rate √.
(4x 1 mark = 4 marks)
(ii)
As a director of the company, Encik Subhan is responsible for the tax affairs of the
company √. He is responsible to settle the tax liability of the company besides his own
personal tax. (S.75A) √
If Encik Subhan fails to pay the tax due either tax for the company as well as his own
personal tax √, he may be stopped from leaving Malaysia √. (S104).
En Subhan also must make sure the company keeps proper records and book of
account √. All business transactions must be recorded within 60 days from the date of
the transaction √. Official receipts must be issued by the company if the total sales is
more than RM150,000 or the provision of services exceeds RM100,000√√.
(8x ½ mark = 4 marks)
(iii)
If the company fails to furnish a return in accordance with S.77(1) or S.77A(1); or give
notice of chargeability pursuant to S.77(3) √, a penalty of between RM200 to RM2,000 or
6 months imprisonment or both can be imposed on the company √.
(2x 1 mark = 2 marks)
[Total: 10 marks]
END OF ANSWER PAPER