SUGGESTED ANSWERSTAX667 – DEC 2016

SUGGESTED SOLUTION
TAX 667

SOLUTION 1
A.
TI (RM) DI (RM)
Business income: M’sia
Gross income 247,000 247,000
Revenue expenses – trustee fee for managing business (17,500) √ (17,500) √
Capital expenses -√ (25,500) √
Adjusted income 229,500 204,000
Add: BC 10,000√
Less: CA (20,000) √ -
Statutory income 219,500 204,000

Business income: S’pore

Statutory income - Exempt Nil√ 75,000√
Add: other sources of income
Interest income 27,000 √ 27,000 √
AGGREGATE INCOME 246,500 306,000
-approved donation, restricted to 7% AI √ (17,000) √ (17,000) √
-trustee fee nil√ (10,000) √
TI / DI before accumulation 229,500 279,000
-trust for accumulation - (12,000) √
DI after accumulation 267,000
(16 √X ½ = 8 marks)
Deemed Total Income distributed:

Total income x DI after accumulation/DI before accumulation √

= 229,500 x 267,000 / 279,000 = RM219,629

Non-Discretionary (3/4) √ Discretionary (1/4) √

RM164,722 RM54,907

RM
Statutory Statutory Nadia
Income Income

Hafiz (1/2) Umar(1/2) Share of Amount

= 82,361√ =82,361 total income received =
=54,907 RM50,000
whichever is lower, therefore Ordinary source = RM50,000√
(5√ X 1 = 5 marks)

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SUGGESTED ANSWERSTAX667 – DEC 2016

B Taxability of income and its benefit:

Beneficiaries

The income from trust for the resident beneficiaries (Richie and Nancy) will be taxed
under section 4(e) √. The income of the non-resident beneficiaries will be taxed under
Trust body √. The non-resident beneficiary (Patrick) may apply for tax credit under
section 110 (8) in the calculation of net tax payable √.

Benefit to the resident beneficiaries: will improve the cash inflow of the beneficiaries. √

(4√ x ½ marks = 2 marks)

(Total: 15 marks)

SOLUTION 2

(a)
RM
Section 4c: Dividend Exempt
Section 4c: Interest 60,000
Rent (shop) 50,000
(-) interest 40,000 x 500,000/ 3,500,000 (5,714)

(-) quit rent (2,000)
Adjusted income from rent 42,286
Aggregate income 102,286
(-) fraction of Permitted Expenses [Note 1] (5,500)
Chargeable income  96,786

Note 1:

Permitted Expenses RM
Directors’ remuneration 50,000
Employees’ salaries 30,000
Accounting and secretarial fees 10,000
Audit fee 20,000
Printing and stationery 2,000
Management expenses 28,000
Rent for office 50,000 – sublet 20,000 30,000
A 170,000

Gross income chargeable to tax RM

Interest 60,000
Rent 50,000
B 110,000

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SUGGESTED ANSWERSTAX667 – DEC 2016

Aggregate of gross income (exempt or taxable) RM

Interest 60,000
Rent 50,000
Dividend (exempt) 225,000
Gain from realization of investments 86,000
C 421,000

A x B /4C  = 170,000 x 110,000

4 x 421,000

= 11,105

or

5% of B (5% x 110,000 = 5,500), 

whichever is lower, therefore the lower amount is RM5,500.

(22x ½ mark = 11 marks)

(b) 2 criteria :
a. Its main activity is the holding of investments;  and
b. Not less than 80% of the company’s gross income other than gross income
from a source consisting of a business of holding of an investment  (whether
exempt or not)is derived from the holding of those investment

(4x 1 mark = 4 marks)

(Total: 15 marks)

SOLUTION 3 (A)

(a) If the mill is treated as an extension of oil palm plantation, it is treated as a single
business source.  The adjusted loss will be treated as part of gross income from oil
palm plantation. Likewise, the capital allowance of the mill, and plant and machinery
will be set off against the adjusted income of oil palm plantation.
If the mill operation is treated as a separate business source; then the unabsorbed
capital allowance from the mill operation would be carried forward to be set off in the
next year of assessment against the mill operation.
The revenue loss recorded for the mills, however is a current year loss and is to be
deducted from aggregate income of the company (oil palm business + investment
income).
(6 x 1 = 6 marks)

(b) The plantation and mill activity is an integral part of the business, a same business
producing palm oil. Thus it is a single business source. 
(2 x 1 = 2 marks)

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SUGGESTED ANSWERSTAX667 – DEC 2016

SOLUTION 3 (B)

(a) Income tax implications to WAJA Sdn Bhd on the disposal of the heavy plant and
machineries on 2 Jul 2016.

The plant and machineries were disposed off within 2 years of acquisition.
Therefore, the IRBM would clawback all the capital allowances given by way of
balancing chargein the year of disposal. As such, the statutory income from
business would increase because the balancing charge is added to the adjusted
income of the business. 
(4 x 1 mark = 4 marks)

(b)
The disposal of the industrial building from WAJA to DBSB is subject to the controlled
sale provisions of the Income Tax Act 1967. The controlled sale provisions would apply
because the acquirer( DBSB) is a person over whom the disposer (WAJA Sdn Bhd)
has control [para 38(1), Sch 3]. Under this provision, the disposal value is
ignored in the computation of the balancing adjustments. The assets would be
deemed to be disposed at the residual expenditure of the disposer and therefore no
balancing charge or balancing allowance arise on the disposal. In this case, the
disposal will benefit the disposer, WAJA Sdn Bhd.
(4 x 1 mark =4 marks)

SOLUTION 3 (C)

a) The interest restriction is computed using the formula in paragraph 6.2 of this Ruling as
follows:
Interest restricted = RM300,000 x RM40,000 = RM 30,000
RM400,000

RM30,000 has to be added back in the company's tax computation (which means only
RM10,000 is deductible as a business expense). 

b) The company can claim interest expense against its investment income since the
investments are deemed to have been financed by the overdraft.  The computation of
interest expense for each investment source is computed as follows:

Dividend income (RM) Rental income (RM)

Gross income Exempted 260 000 x 30,000 = 26,000
Less: Interest allowable Nil 300,000
Statutory income NIL
Gross income 36,000
OR Less: Interest allowable 26,000
Other expenses 3,500
Dividend is exempted at gross income level Statutory income  6,500
thus, there is no issue of deductibility of
interest expense from dividend income. 
16x ½ mark = 8 marks

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SUGGESTED ANSWERSTAX667 – DEC 2016

SOLUTION 3( D)

a. The three traditional methods are:

i) The Comparable Uncontrolled Price Method 
The method focuses directly on the price of the goods or services transferred in a
controlled transaction to the price charged for the goods or services in a comparable
independent transaction. 

ii) The Resale Price Method 

The resale price method focuses on the gross margin obtained by the distributor.
This method is suitable where the final transaction is with an independent distributor.


iii) The Cost Plus Method 

The cost plus method focuses on costs incurred by the supplier of goods in a
controlled transaction for goods transferred to a related party. This method is
suitable where semi-finished goods are sold between related parties as the parties
could have concluded joint facility agreements or long-term buy and supply
arrangements. 
(8  x ½ mark = 4 marks)

b. TONE Distribution Sdn Bhd could adopt the `Resale Price’ method when determining
the purchase price of the cartridges bought from SUMMIT Multinational. This method is
appropriate because the final transaction made by TONE Distribution Sdn Bhd is with an
independent distributor. The focus is on the gross profit margin and both independent
retailers carry out similar functions as distributor of the product. 
(2 x 1 mark = 2 marks)
(Total: 30 marks)

SOLUTION 4

Pavilion REIT

(a) Tax computation for the year of assessment 2016

Net profit before tax 5,580
Less: interest income (separate source) 50
5,530
Add:
Interest on mortgage loan nil
Trustee’s fee 70
Manager’s remuneration nil
Mall operations expenses nil
Depreciation 450
Adjusted income 6,050
Less: capital allowance (600) 
Statutory income from business 5,450
Statutory income from interest (exempted) nil
Aggregate income/total income 5,450

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SUGGESTED ANSWERSTAX667 – DEC 2016

90% of total income = RM4,905

Distribution of RM5,000 exceeds 90%
Distribution occurred on 18 February 2017 i.e. within two months after
the close of the financial year on 31 December 2016.

Therefore, entire total income is eligible for exemption (5,450)

Chargeable income/ tax charged/ tax payable nil

(16x ½ mark = 8 marks)
(b)
Interest on mortgage loan (related to assets laid out for the business) 
Trustee’s fee (not incurred in the production of business income)
Manager’s remuneration (incurred in the production of business income)
Mall operations expenses (incurred in the production of business income)
Depreciation (a provision, not incurred) 
(6x 1mark = 6 marks)

(c) Tax treatment of the distribution in the hands of resident unit holders

Resident individuals
Pavilion REIT would have to withhold tax at 10% from the distribution made to all
individuals. This tax is the final tax payable to the Inland Revenue Board.  The resident
individual will not be required to report this income in his annual tax return. 
Resident companies
No tax has to be withheld from distributions made to resident companies. The amount
distributed to a resident company must therefore be reported in the company’s annual
tax return and it will be taxed at the appropriate rate applicable to the recipient
company. 
(6x 1mark = 6 marks)
(Total: 20 marks)

Solution 5
Encik Zainal
Capital Statement as at 31 December
(A)
2012 2013 2014
Assets RM RM
Capital 500,000 500,000 500,000
Balance in Profit & Loss A/c 200,000 270,000 360,000
Bungalow 900,000 900,000
building 500,000 500,000 500,000
car 250,000 250,000 250,000
share 200,000 200,000 nil
Second car 150,000 150,000
Wife saving 10,000 40,000 110,000

Total assets 1,660,000 2,810,000 2,770,000

Liabilities
building 200,000 100,000 nil
car 150,000 50,000 nil

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SUGGESTED ANSWERSTAX667 – DEC 2016

Second car 96,000

Total liabilities 350,000 150,000 96,000
Net assets 1,310,000 2,660,000 2,674,000
Less: net assets brought forward (1,310,000) (2,660,000)
Increase in net assets 1,350,000 14,000

Add: non-business expenses and capital loss

Interest on loan 22,500 20,500
insurance 5,000 5,000
Income tax 3,500 5,000
Living expenses 50,000 50,000
Children education 10,000 30,000
loss – sale share 60,000
Expenses on sale of share 10,000
Interest on loan 4,800

Apparent income 1,441,000 199,300

Declared income
Profit 90,000 100,000
Rental 60,000 72,000
Undeclared income 1,291,000 27,300

(30x ½ mark = 15 marks)

(B) i. The purpose of the tax investigation framework is to inform taxpayer about
IRBM’s tax investigation procedures. 
(2 marks)
ii. 3 method that are usually used by IRBM

1. Risk analysis
2. Information from informer
3. Review of income tax return
4. Intelligence information; and
5. Information from other law enforcement agencies
(Any 3 answer = 3 marks)
(Total: 20 marks)

END OF SOLUTION