MALAYSIAN INSTITUTE OF ACCOUNTANTS QUALIFYING EXAMINATION

EXAMINER’S REPORT (SEPTEMBER 2014)

SUBJECT: TAXATION

Question Comments Recommendations

1 Several students did not attempt the question. Students should read up on
Of those who attempted, they failed to correctly case laws for a better
identify the tax issues and the implications understanding of tax laws on
arising thereof. Several students applied the the deduction of an
badges of trade which is totally irrelevant. expenditure, or taxability of
Some ventured into the question of the duties income.
of a liquidator and other tax reporting and filing
requirements. Only one student analyzed the
scenario in its proper context and quoted the
relevant case laws.

2A This question on profit and loss adjustments A clear understanding of the

was attempted well. Nevertheless the following law and its application to
weaknesses were noted: income and expenditure in
arriving at the chargeable
1. Overseas trip for director: Students income is needed.
‘exempted’ RM3,000 and disallowed
the balance when the whole sum
should be disallowed.
2. EPF and PRF: Some confusion was
exhibited in computing the applicable
restriction.
3. Bad debts written off: Balance written
off in respect of staff commission, and
loan debts to supplier was not
considered in the legal context.
4. Repairs: Repairs on a motor vehicle
that exceeded its cost was wholly
disallowed, even though it was not an
initial expenditure.
5. Lease: Lease payment restriction was
not computed correctly.

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 6. Advertisment and publicity: This was
attempted badly, and in many cases,
double deduction was not given for
overseas trade fair and brand name
promotion. Restriction for expenditure
on the provision for library facilities was
either not done, or wrongly done, and in
many cases, being fully disallowed.
7. Professional fees: Double deduction
was not given by many students for
payments to an approved research
institute and for cost of tender
preparation for overseas market.
8. Foreign exchange gains or losses:
Students still do not distinguish
between capital and revenue
expenditure and as between realised
and unrealized losses or gains.
9. Donation: Foreign art activity was
wrongly restricted, or fully disallowed.
2B Most students did not attempt this question. Of A detailed reading and
those who attempted, it was clear that they understanding of the case
were either blur on the issue or were not able laws on the related
to articulate the distinction between repair, expenditure would be an
renewal, improvement, and alteration; and advantage.
were not able to support their discussion with
relevant case laws.

On the issue of repair at the end of the period

of tenancy, most students discussed in terms
of a deduction being available for the property
owner, when it should be whether such
expenditure should be allowed to the outgoing
tenant.

3A The question asks for the tax implications to be Students should read the
considered under the Income Tax Act 1967 (as question carefully and

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 amended) when a person plans to commence determine what is required of
a business. them before answering.

Instead, many students explained at length the

compliance issues of an on-going business
(e.g. time line for filing of estimated tax, tax
returns, payments of installments, record
keeping, and even preparing for a tax audit).

Others went into a full scale discussion of

deductions available under section 33
including double deduction under the various
rules and order, and those disallowable under
section 39.

3B Students were not clear on the concept of Special tax rules apply to co-
mutuality and the exemption from income tax operative societies –and one
on that account (e.g. entrance fees, needs to appreciate them –
membership subscription and interest income e.g. issue of mutuality and the
derived from loans to members). Many were section 65A deductions.
not sure about computing the deduction falling
under section 65A(a) and 65A(b) and some
failed to show the workings to arrive at the said
deduction thus losing valuable marks.

QUESTION Question 4A (11 marks)

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(16 marks) This question tested candidates’ understanding Candidates should have good
on the principle of a resident status of a knowledge on the followings:
company, the taxability of a foreign branch in
Malaysia, the taxability of a director feei) i) The resident status of a
received by non-resident director, the taxability foreign company’s branch
of employment income received by a non- in Malaysia.
resident on services rendered in Malaysia. Theii)
following were observed: ii) The taxability of director
fees received by non-
i) In determining the resident status of a resident directors.
company, candidates did not
explain the management and iii) The derivation of

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 control of a company which refers employment income on
to the place where the directors services rendered in
have their board meetings in Malaysia by non-resident
Malaysia S.8(1)(b). person.

ii) Many candidates were not able to

explain that the resident status of a
branch which is depended on its
headquarters. Thus, the taxability of
non-resident branch is determined
on the existence of a permanent
establishment of a foreign branch,
such as the existence of an office in
Malaysia.

iii) The derivation of director fees received

by a non-resident director is
deemed to be derived from
Malaysia if it is paid by a Malaysian
resident company. Thus, it should
be taxable in Malaysia.

iv) Misclassification on the taxability of an

employment income received by a
non-resident person. The derivation
of employment income is deemed
to be derived from Malaysia if the
services are rendered in Malaysia -
S.13(1)(2).

v) Candidates seem to have good

knowledge on the principle of
withholding for special classes of
income under S.4A and the penalty
that can be imposed to the payer for
non-compliance.

Question 4B (2 marks)

Most candidates did not explain that the

resubmission of a claim on a computer relief
can be made within 5 years from the date of
the transaction as provided under S. 131.

Question 4C (3 marks)

The candidates seem to have little knowledge

on the situations where an assessment is
considered final and conclusive.

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QUESTION Question 5A (13 marks) examined the principle Candidates should have good
5 related to personal taxation of a person who knowledge in the assessment
(20 marks) passed away during the year of assessment. of income of a deceased and
Candidates are expected to compute the executor of the estate. The
taxable income and income tax liability for both following should be
deceased and the executor. highlighted:

The following mistakes were observed: i) The principle on the

apportionment of
i) The apportionment of income such as income between
business income was not done at deceased and
the statutory income level. executor of the
estate.
ii) Renovation expense (which is ii) The taxability of foreign
disallowed) was not added back in income and
determining the adjusted rental interest income
income. derived from
Malaysia.
iii) The absorption of adjusted business iii) The treatment of
losses brought forward (S.43) and adjusted business
adjusted business losses for current losses under S.43
year (S.44) were not correctly and S.44
treated. iv) The deductibility of
annuity, executor
iv) Foreign income such as director fees fees and
and dividend which are exempted distributions to
but were treated as taxable income. beneficiaries made
by executor.
v) Interest income which is exempted but
was treated as a taxable income.

vi) Annuity payment was not deducted

from the aggregate income of the
executor.

vii) Distributions to children were wrongly

treated as deductible transaction
under the executor aggregate
income.

viii) Executor fees which is not allowed but

was treated as an allowable
deduction from the executor’s
aggregate income.

However, candidates seem have good

knowledge on the provision of personal

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 relief including the special relief provided to
the executor. Candidates also know how to
apply the income tax table.

Question 5B (7 marks) examined candidates

understanding on the tax computation for
partnership business. Overall, this question
was well attempted. Candidates seem to have
good knowledge on how to compute
partnership provisional adjusted income and
divisible income, as well as the apportionment
of divisible income among the partners.
However, there were few candidates have
misclassified on the treatment of the capital
allowance.

QUESTION Question 6A (8 marks)

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(14 marks) This question examined the concept of The followings should be
investment tax allowance tax incentive under emphasized to candidates on
the Promotion of Investment Act 1986. tax incentives:
Candidates were required to compute the
exempt income, the treatment of the i) The rate of tax
unabsorbed losses and unutilized investment incentives and the
tax allowance, and income tax payable on the basis to calculate the
taxable income. The following mistakes were tax incentives.
observed: ii) The computation of
statutory income of a
i) The statutory income, exemption, promoted business,
aggregate income, chargeable with particular
income were poorly presented. emphasis on the
ii) The capital allowance was wrongly treatment of capital
treated; and allowances, including
iii) The absorption of losses from Product unabsorbed capital
A business (which qualified for tax allowances.
incentives) and Product B business
were wrongly treated. The losses iii) The tax treatment of
from both businesses should be adjusted losses for
utilized according to S.43 (for promoted business as
brought losses) and S.44 (for well as non-promoted
current year losses). business.

Question 6B (6 marks)

This question tested candidates’ knowledge on

the principle of reinvestment tax allowance.
Candidates seem to have good knowledge on
this tax incentive and the exemption rate of

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60% from the qualifying capital expenditure.
However, many have no idea about the 15
consecutive years of tax exemption period
provided to companies from the basis period in
which the reinvestment allowance claim was
first made.