Professional Level Options Module

Advanced Taxation (Malaysia)

Friday 9 December 2011

Time allowed Reading and planning: Writing:

15 minutes 3 hours

This paper is divided into two sections: Section A BOTH questions are compulsory and MUST be attempted Section B TWO questions ONLY to be attempted Tax rates and allowances are on pages 24 Do NOT open this paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall.

The Association of Chartered Certified Accountants

Paper P6 (MYS)

SUPPLEMENTARY INSTRUCTIONS 1. 2. 3. 4. You should assume that the tax rates and allowances shown below will continue to apply for the foreseeable future. Calculations and workings should be made to the nearest RM. All apportionments should be made to the nearest whole month. All workings should be shown.

TAX RATES AND ALLOWANCES The following tax rates, allowances and values are to be used in answering the questions. Income tax rates Resident individual Chargeable income Band RM 2,500 2,500 15,000 15,000 15,000 20,000 30,000 Excess Cumulative RM 2,500 5,000 20,000 35,000 50,000 70,000 100,000 Tax payable Rate Cumulative % RM 10 0 11 25 13 475 17 1,525 12 3,325 19 7,125 24 14,325 26 Non-resident individual All chargeable income Resident company RM2,500,000 or less 20% 25% Non-resident company All chargeable income Labuan offshore company income from an offshore business activity All chargeable income Trust body resident or non-resident All chargeable income 25% 26%

Paid up ordinary share capital On the first RM500,000 On the remainder

More than RM2,500,000 25% 25%

3%

25%

Personal deductions Self Self additional if disabled Spouse Spouse additional if disabled Child basic rate Child higher rate Disabled child Disabled child additional Life insurance premiums, approved scheme contributions Deferred annuity premium Medical expenses for parents Medical expenses for serious disease of self, spouse or child, including up to RM500 for medical examination Basic supporting equipment for self, spouse, child or parent if disabled Educational and medical insurance for self, spouse or child Study course fees for skills or qualifications Broadband subscription Purchase of a personal computer Purchase of books, magazines etc for personal use Purchase of sports equipment Deposit for a child into the National Education Savings Scheme Rebates Chargeable income not exceeding RM35,000 Individual basic rate Individual entitled to a deduction for a spouse or a former wife Capital allowances Initial Rate % 10 20 20 20 Annual Rate % 3 14 20 10 RM 9,000 6,000 3,000 3,500 1,000 4,000 5,000 4,000 6,000 1,000 5,000 5,000 5,000 3,000 5,000 500 3,000 1,000 300 3,000

each each each each maximum maximum maximum maximum maximum maximum maximum maximum maximum maximum maximum maximum

RM 400 800

Industrial buildings Plant and machinery general Motor vehicles and heavy machinery Office equipment, furniture and fittings

Real property gains tax Disposal by all persons (except non citizen individuals) Date of disposal Disposal within two years after the date of acquisition Disposal in the third year after the date of acquisition Disposal in the fourth year after the date of acquisition Disposal in the fifth year after the date of acquisition or thereafter Rate % 30 20 15 5

Note: an exemption is granted which reduces the effective rate of tax to 5% where disposal takes place within five years of acquisition and to nil thereafter. Sales and service tax Sales tax Service tax Rate % 10 6

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Stamp duty Rates of duty under the First Schedule Conveyance, assignment, transfer or absolute bill of sale For every RM100 or fractional part thereof: On the first RM100,000 On the next RM400,000 On the excess over RM500,000 Rate % 1 2 3

This is a blank page. Question 1 begins on page 6.

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Section A BOTH questions are compulsory and MUST be answered 1 Golden Land Sdn Bhd (GLSB), an investment holding company, has a paid up ordinary share capital of RM6 million and holds several real properties in Malaysia and Singapore for investment purposes. On 8 August 2011, GLSB disposed of a commercial shop lot acquired in 2008 and incurred an allowable loss of RM87,000. On 2 March 2008, GLSB acquired a piece of vacant land in the city; details regarding this transaction are as follows: Purchase price of land, per sale and purchase agreement Legal fees and stamp duty on acquisition Construction cost (in 2009) of a building used as a car showroom RM 2,000,000 70,000 935,000

In 2010, the showroom building had completely burned down in a fire and insurance compensation of RM1,000,000 was received for the loss of the building. On 1 May 2011, one-tenth of the now vacant land was compulsorily acquired by the Government for the construction of a flyover. GLSB received compensation of RM450,000. On 21 November 2011, GLSB disposed of the remaining vacant land in the city for RM3,500,000. GLSBs real property in Singapore had been acquired in 2001 for RM1,000,000. Three months ago, GLSB accepted an offer of RM4,000,000 for this property. The sales transaction will be completed before the end of 2011 and the gain will be immediately remitted to Malaysia. By 31 December 2011, GLSB will have no liabilities, its assets of RM10 million will be predominantly in the form of cash, its retained earnings are expected to be RM6 million, while its imputation credit stands at RM10,000. The shareholders of GLSB, which are all resident companies, are pressing for a full distribution of the cash, even if it means winding up the company. The board of directors has sought expert tax advice regarding the property transactions and the distribution of its accumulated cash.

Required: Prepare a letter from the companys tax adviser to the chairman of the board of directors of Golden Land Sdn Bhd which: (a) Explains the income tax and related implications of the distribution of the RM10 million cash: (i) by payment of a dividend; (5 marks) (2 marks) (2 marks)

(ii) by undertaking a capital reduction; (iii) by winding up the company; and

(iv) considers the relative merits of each method leading to a recommendation of the best method to use in this case. (4 marks) (b) Explains the real property gains tax (RPGT) treatment of the following: (i) the allowable loss on the sale of the commercial shop lot; (3 marks)

(ii) the construction and destruction of the showroom building and the insurance compensation thus received; (6 marks) (iii) the proceeds from the compulsory disposal of one-tenth of the land to the Government; and (3 marks) (iv) the disposal of the property in Singapore and remittance of the proceeds to Malaysia. (4 marks)

(c) Advises, supported by a detailed computation using accurate technical terms, on Golden Land Sdn Bhds liability to RPGT for the year of assessment 2011. (5 marks) Professional marks will be awarded for the appropriateness of the format of the letter and the effectiveness with which the information is communicated. (3 marks) (37 marks)

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Learned Bhd (Learned), the holding company of the Learned Group of companies, is listed on the Bursa Kuala Lumpur. The Learned Group closes its accounts to 31 December annually. Learneds wholly-owned subsidiary, Reading Sdn Bhd (Reading), has been operating a chain of book shops since 2005. Reading registered statutory income of RM5 million and RM6 million respectively in 2010 and 2011 and expects this profit trend to continue in the coming years. Another wholly-owned subsidiary of Learned, Kopi-O Sdn Bhd (Kopi-O) has, in the past 30 months, been starting up a chain of garden cafes. Kopi-O incurred a loss in 2009 and 2010, and expects to incur losses of RM10 million in the year of assessment 2011 and a further loss of RM1 million in 2012. Thereafter Kopi-O expects to record profits exceeding RM15 million annually. Recently, the Learned Group decided to venture into art works. It has entered into negotiations with Artful Sdn Bhd (Artful), a newly-incorporated company yet to commence operations, whose main value lies in owning 500 pieces of contemporary art by promising artists. The Learned Groups management is considering two alternatives for this acquisition: 1. 2. Learned will acquire the entire shareholding of Artful; or Kopi-O will acquire the entire art collection as there is a perceived synergy between the garden caf business with the exhibition and dealing of art works, as the art works can be displayed in the garden caf premises and sales may be transacted therein.

Under both alternatives, the transaction cost will be about RM30 million and will be financed by a bank loan taken by the acquiring company. The art works business is expected to be profitable after 12 months. All three companies, Reading, Kopi-O and Artful, have a paid-up ordinary share capital of RM18 million, and none of them has, until now, enjoyed any tax incentives. None of the three companies derives income from any sources except the business sources identified above. Required: (a) With regard to the group relief provisions in the Income Tax Act: (i) State, with reasons, whether Reading Sdn Bhd and Kopi-O Sdn Bhd will be qualifying companies for group relief in the year of assessment 2011. (9 marks)

(ii) Assuming that Reading Sdn Bhd and Kopi-O Sdn Bhd are qualifying companies for group relief in the year of assessment 2011: (1) identify which company will be the claimant company and explain how much of the surrendered loss can be utilised; and (2) identify which company is the surrendering company and determine the amount of loss that may be surrendered. (4 marks) (b) As the tax adviser to the Learned Group of companies, draft a report addressed to the group managing director explaining the relative merits and tax efficiency of each of the two acquisition alternatives identified above, with reference to the following aspects: (i) the tax deductibility of the loan interest; (5 marks)

(ii) the tax treatment of the initial cost of the 500 art pieces and the basis of inventory valuation at the end of the basis period; (6 marks) (iii) the treatment of the initial losses incurred in respect of the art works business; and (iv) the eligibility of the initial losses in respect of the art works business for group relief. (4 marks) (3 marks)

Professional marks will be awarded in part (b) for the appropriateness of the format and presentation of the report. (2 marks) (33 marks)

Section B TWO questions ONLY to be attempted 3 Buku Sdn Bhd (Buku) closes its accounts to 30 June annually. On 1 December 2010, Buku launched an employees share option scheme. Under this scheme, an employee who has served ten years or more will be granted an option to acquire a designated number of shares in Bukus holding company, Holdings Bhd, at RM1 per share. Each employee is given 12 months (from the date he first becomes eligible) to exercise his option. In preparation for the share option scheme, in November 2010, Buku acquired, at RM3 per share in the open market, 100,000 shares of Holdings Bhd. The chief accountant of Buku advised that the cost of the shares taken up by employees will be charged to the income statement as and when shares are transferred to the employees when they exercise their share options. During the calendar year to 31 December 2011, three employees duly exercised their share options. The relevant details are as follows: Employee Number of shares transferred to employees under option scheme 1,000 6,000 10,000 Date option was exercised Market value per share on the day the option was exercised (RM) 550 600 450 Market value on the first day of the option period (RM) 460 680 450 Number of shares subsequently sold by the employee and sale price

A B C Required:

8 March 2011 2 July 2011 20 July 2011

1,000 shares at RM550 4,000 shares at RM450 Not sold at 31 December 2011

(a) With regard to the share option scheme: (i) Explain the income tax treatment of the RM300,000 expended by Buku Sdn Bhd in acquiring the shares of Holdings Bhd; (3 marks)

(ii) Explain the tax deductibility of the cost of the shares transferred under the share option scheme in 2011, stating the year of assessment and the amount deductible, if any. (5 marks) (b) For each of the three employees, compute, with supporting explanations, the value of the share benefit received, stating the year of assessment in which the share benefit will be assessable. (5 marks) (c) Explain the tax treatment of any gain arising on the disposal of the option shares by the employees. (2 marks) (15 marks)

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A foreign investor is interested in setting up a manufacturing facility in Perak, Malaysia. The forecast financial information for this venture is as follows: Year of assessment Capital allowances available RM000 400 1,400 800 800 Qualifying capital expenditure RM000 1,000 3,000 nil nil Adjusted income/(loss) RM000 (700) 5,000 10,300 15,100

1 2 3 4 Required:

(a) Prepare comparative tax computations of exempt income and total income under the pioneer status and investment tax allowance incentives. (12 marks) (b) Explain and quantify your conclusion as to which incentive yields the greater tax benefits to the investor, clearly identifying which is the preferred incentive in this case. (3 marks) Note: you should disregard the income tax impact of the provisions of any double tax agreements. (15 marks)

White Knight Sdn Bhd (White Knight) acquired the entire share capital of Distress Sdn Bhd (Distress), a distribution company with unabsorbed losses and capital allowances brought forward of RM15 million. Following the acquisition, White Knight injected a highly profitable distribution business and effective business model, together with a strong management team into Distress, and continued running the merged business, making full use of Distresss excellent distribution network and established brand name. The tax authorities carried out an audit of Distress and denied the utilisation of the unabsorbed losses and capital allowance brought forward by invoking the general anti-avoidance provisions in s.140 of the Income Tax Act. Required: (a) State the main features and powers of the Director General of Inland Revenue under the general anti-avoidance provisions contained in s.140. (5 marks) (b) Set out the arguments that might assist Distress Sdn Bhd in its appeal against the tax authorities invocation of the anti-avoidance provisions. For this purpose, you may disregard the provisions in the Income Tax Act relating to substantial changes of shareholders. (10 marks) (15 marks)

End of Question Paper

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