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Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 1
PUBLIC RULING
NO. 6/2006
DATE OF ISSUE: 6 JULY 2006
TAX TREATMENT OF LEGAL AND PROFESSIONAL EXPENSES MALAYSIA Date of Issue: 6 July 2006
4. General principle
4.1 Generally, legal or professional expenses are deductible where these are incurred in the
maintenance of trade rights or trade facilities, existing or alleged to exist and are not deductible,
as being of a capital nature, where incurred for the purpose of acquiring new rights or facilities.
The deductibility of expenses incurred to maintain alleged trade rights does not depend upon
whether the action is successful or not.
4.2 Legal and professional expenses which are not wholly and exclusively incurred in the
production of gross income or prohibited from deduction under subsection 39(1) of the ITA are
not deductible.
5. Deductible expenses
5.1 Debt collection
Legal and other expenses incurred by a person in the course of collecting trade debts from
customers.
5.2 Renewal of loans
Legal expense incurred by a finance company in renewing existing loans.
5.3 Preparation of accounts
(a) Ordinary expenses of keeping books and preparing financial records and accounts
including charges for accountancy work.
(b) Statutory audit fees expenditure [P.U.(A) 129 - Income Tax (Deduction For Audit
Expenditure) Rules 2006]
5.4 Defending title to property
Legal expenses incurred in connection with defending a person's title to the ownership of an
asset that is used in the business. The title to the ownership by the person remains the same and
had been maintained with nothing added or taken away.
5.5 Legal expenses incurred by a landlord
Legal expenses including litigation costs incurred on renewal of a lease.
5.6 Defending an action connected with a trade or breach of trading contracts
(a) Expenditure incurred by a person in resisting a claim that he has broken a trading
contract is allowable unless the breach was deliberate and dishonest.
Examples:
(b) Averting a threat to the goodwill of a business.
(c) Preservation and / or protection of a capital asset that does not result in the creation of a
new asset.
(d) Where litigation ensues after a customer withholds payments wholly or in part on the
grounds of inferior workmanship, sub-standard material, non-fulfilment of contract
requirements or for other reasons, the legal action is regarded as an ordinary incident of
trade.
(e) Defending legal action taken against a professional in respect of negligence in undertaking
work for a client.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 2
5.7 Legal cost incurred in disputes over trading contracts when incurred for -
(a) Enforcement of a contract for the supply to a litigant of goods which would be resold for
profit.
(b) Attempting to recover sums which would have been taxable if received.
(c) Claims for compensation for trading goods lost in transit.
6. Non-deductible legal and professional expenses
The following are examples of legal and professional expenses which will not qualify for
deduction:
6.1 Debt collection
Legal and other expenses incurred by a person in the collection of non-trade debts and loans of
a capital nature.
6.2 Renewal of loan
(a) Legal expenses incurred by a trading or commercial company.
(b) Legal expenses on renewal of a mortgage on premises.
(c) Cost of raising additional capital whether by means of a loan or otherwise (this will also
apply to a person carrying on a business of banking or money-lending).
6.3 Annual corporate filings and meeting expenses
(a) Secretarial fees.
(b) Annual general meeting expenses.
6.4 Income tax returns
(a) Cost of filing of tax returns and tax computations.
(b) Cost of appeal against income tax assessment i.e. to the Special Commissioners of Income
Tax and the Courts.
6.5 Legal expense incurred by a landlord
When a property is let for the first time by the owner or lessor.
6.6 Cost of defence in a fraud case
The cost of defending criminal prosecution or in connection with unlawful acts in the operation
of a business.
6.7 Legal expenses incurred in connection with:
(a) The formation, renewal, variation or dissolution of a partnership.
(b) Obtaining a trading licence.
(c) Increasing or reducing share capital or altering the Memorandum and Articles of
Association of a company.
(d) Floatation, registration, winding up or liquidation of a company.
(e) Obtaining new leases, mortgages, loan or credit facilities.
(f) Legal fees relating to income already earned eg. income tax appeals.
(g) Costs of legal proceedings incurred in pursuing a claim for unlawful or unjust dismissal by
an employee.
7. Effective Date
This Ruling is effective for the year of assessment 2006 and subsequent years of assessment.
Director General of Inland Revenue
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 3
State whether the following is deductible:
1. Legal fee incurred on collection of trade debts
2. Legal fee incurred on collection of non-trade debt.
3. Legal expenses incurred by a trading or commercial company in renewing existing loans.
4. Cost of raising additional capital whether by means of a loan .
5. Cost of book keeping and preparing financial records and accounts including charges for
accountancy work.
7. Audit fee
8. Legal expenses incurred on renewal of a lease.
9. Cost of averting a threat to the goodwill of a business.
10. Cost of litigation incurred after a customer withholds payments wholly or in part on the grounds of
inferior workmanship, sub-standard material.
11. Defending legal action taken against a professional in respect of negligence in undertaking work for
a client.
12. Claims for compensation for trading goods lost in transit.
13. Renewal of leases and licenses.
14. Claim for compensation for trading goods destroyed, defective or lost in transit.
15. Legal fees and agency fees incurred in connection with employment agreements as well as in
connection with preparation of trading contracts or agreements.
16. Secretarial fees.
17. Annual general meeting expenses.
18. Cost of filing of tax returns and tax computations.
19. Cost of appeal against income tax assessment i.e. to the Special Commissioners of Income Tax and
the Courts.
20. Legal fee on first tenancy agreement for the owner or lessor.
21. Legal fee on:
(a) The formation, renewal, variation or dissolution of a partnership.
(b) The transfer of a mortgage on business premises.
(c) The acquisition of capital assets or the sale or transfer of capital assets.
(d) Obtaining a trading licence.
(e) Increasing or reducing share capital or altering the Memorandum and Articles of Association of
a company.
(f) Floatation, registration, winding up or liquidation of a company.
(g) Costs of legal proceedings incurred in pursuing a claim for unlawful or unjust dismissal by an
employee.
(h) Fees for revaluation of land.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 4
Public Ruling- tax treatment of leave passage
For employer
For employee
Key-man insurance
For employer
If for investment in nature ie endowment– not deductible for company
If for loss of profit- deductible for company if the company is the beneficiary.
For employee
Regardless of the type of insurance, the employee is only taxable if he or his family are the
beneficiaries.
If the employer is the beneficiary, he is not taxable at all.
Professional indemnity insurance
1. A professional indemnity insurance is a policy taken to protect the insured against liability for
the person’s negligence.to protect the insured against liability for the person’s negligence. The
insurance is to cover the liability that would otherwise be borne by the person such as the cost
of defending the suit and the cost of the award.
1. Normally it is to cover a personal laibility or risk. So to cover claim
made against the personal assets of the person and is not wholly and
exclusively incurred in the production of income
Normally not
deductible
2. But for
Lawyers registered with the Bar Council
Accountants registered with the Malaysia Institute of Accountants
Where purchase of professional indemnity insurance si compulsory
Premium paid is
dedutible
3. For profession who is not engaged in professional practice but carries
on some other business or is in employment
Premium paid is
not deductibel
Leav e passage
Air fare
Not deductible for company unless it is family day, a
yearly event, and leave passage in Msia
Food & accommodation Treated as entertainmnet
for staff So deductible
Leave passage for
immediate family
including spouse,
and children
If not for staff or
his immediate
family
Fully taxable
If for staff or his
immediate family
Local trip 3X exempted
including meals and
accommodation
1 overseas leave passage for
travel up to a maximum of
RM3000 is tax exempt
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 5
4. Other profession/it is purchased by purchased by a company
It is a statutory requirement to practise as a professional
Purchase of professional indemnity insurance is a requirement
regulated by statute or by-laws
Premium paid is
deductible
5. If the premium is allowable, any proceeds received in connection with a
professionla indemnity insurance is taxable.
Taxable on the
recovery
Deductibility of loss of cash – Public Ruling
1. Banking of cash takings is necessary for the operations of the business.
Loss of cash by robbery/theft while in transit to the bank
Deductible
2. Cash is embezzled by an agent who is assigned to collect the cash Deductible
3. Loss of cash not incidental to business
eg A money changer brought back cash from office to keep in his strong
room at his house. Thieves broke in and stole the cash.
Not deductible
4. Embezzlement by employee
Arises directly from the necessity of delegating certain duties of the
business to subordinates.
Deductible
5. Employee who is involved in the embezzlement is a relative to the
proprietor.
This is not a trade loss since the proprietor chooses to overlook the theft
especially if he continues to employ the offender
Not deductible
6. Embezzlement by sole proprietor, partner , director or administrator who
in control of the business operations
Not Deductible
7. if the loss of cash is allowable, recoveries of:
insurance
payment from the offender
legal action
should be taxable as income of the business when such recoveries are
received.
Taxable
8. Supporting documents are needed to claim deduction
police report
bank statement
letter of termination of employment
minutes of board of directors meeting
proof recovery action
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 6
S34
Approved
pension
scheme
Scientific
research
S34(6)
1. Equipment to assist disabled employee
2. Publication in national language on approved cultural,
literary, professional, scientific or technical books .
3. Contributions to public or school libraries (max
RM100,000)
4. Revenue expenditure on maintenance of child care centre
5. Managing approved musical or cultural group
6. Sponsor approved local or foreign arts
Max for foreign arts is RM200,000
Max for both RM500,000
7. Scholarship
full time students
no means of his own
parents’ total monthly income =< RM5,000.
8. Revenue expenditure to obtain accreditation for a
laboratory or as a certification body certified by Dept
of Standards Malaysia
9. double deduction on revenue expenditure to obtain
certification for recognized quality systems and
standards and halal certification evidenced by JAKIM
9. Practical training expenditure on
Resident individual
and
Not employee
10. Expenditure on participating in international
standardization activities approved by the Dept of
Standards Malaysia
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 7
S39
1. payments such as
royalty or interest
contract payment
consultancy fee
installation fee
rent of moveable property
where withholding tax has not being paid
2. lease rental of motor vehicle
purchase cost >150,000, max deduction is RM50,000
purchase cost = < 150,000, max deduction is RM100,000
3. leave passage (but local leave passage on a yearly event is deductible)
4. entertainment\ (see next page)
Entertainment means:
Provision of food, drink, recreation or hospitality ; or
Provision of accommodation or travel;
Recreation or hospitality include:
Trip to a theme park
Stay at holiday resort
Tickets to a show or theatre; and
Gifts and give-aways
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 8
Tax treatment for entertainment Normally 50% deductible ie
Entertainment allowance
Entertained suppliers
Entertainment is 100% deductible if:
1. Entertainment on staff ie free meals & refreshment, annual dinners, outings, family day
For outing & family day –cost of travel- not deductible as
it is leave passage
– food & accommodation is
100% deductible
2. provision of entertainment in the ordinary course of business ie
free cultural shows by hotels to entertain their customers
meals provided by airlines
3. Provisional gifts at trade fairs outside Malaysia
Ie Small souvenirs, samples, bags and travel tickets
4. Samples ie
Complimentary drink provided by restaurant
Free samples of drinks to schools
Free sample of products
5. Entertainment of cultural or sporting events such as fees paid to artistes or sportsmen,
cost of passage, accommodation , food or recreation or t-shirt for sportsment
6. Promotional gifts within Malaysia
restricted to non-products of company
must have conspicuous logo
gifts must be available to the public at large not to selected persons only.
7. entertainment related wholly to sales
food & drinks for launching new products
redemption vouchers given for purchase made
discount vouchers
fee gifts for purchase exceeding a certain amount
redemption of gifts base on accumulated points
lucky draws to customers
trips as an incentive to dealers for achieving sales target
8. the provision of leave passage to facilitate a yearly event within Malaysia which
involves
The employer
The employee; and
The immediate family members of the employee
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 9
Tax adjustments-Company taxation
Cost of sales include:
Advertising costs amounting to RM1,000 for newspaper
announcements stating that a particular agent was no longer
authorised to represent the company
Sales includes a sum of RM200,000 received by the company as t e
first instalment under an agreement signed with a shoe company in
China. This was for a license to use Fashenshu’s patents, designs
and know how in consideration for a sum of RM1 million payable
in annual instalments over a period of five years. Fashenshu also
agreed not to grant any such licence to other parties in China or
Hong Kong. Fashenshu had never made such an agreement before.
Cost of sales includes a sum of RM3,200 written off in respect fo a
consignment of vegetables damaged in an accident in the course of
its transportation from the company’s farm to the restaurants.
It is incurred in the normal
course of business, so deductible.
The sum of RM1 million
constitutes a capital receipt. This
is because with regard to the
China and Hong Kong market ,
Fashenshu has parted with a
capital asset (patent, designs and
know-how) for a purchase
price(Evans Medical Supplies
Ltd v Moriarty)
The fact tha the consideration is
payable in instalments does not
after the character of the receipt,
therefore it is not taxable.
Damaged stock-in-trade written
off constitutes a trading loss
therefore deductible.
Stock withdrawn for own use
Cost of sales includes
i. an amount of RM6000 written off in respect of 100 units of
product which were destroyed as they were found to contain
materials harmful to health
ii. A provision of RM4000 for the foreign exchange loss which
the company expects to incur when paying for raw materials
purchased
iii. On a festive day the company gave away toys costing
RM10,000(market value RM12,000) as prizes to children at
a nearby orphanage
iv. A consignment of telecommunication(stock) equipment
imported by the company which was damaged.
v. A consignment of telecommunication equipment imported
by the company which was damaged. The company
received RM120,000 compensation from the insurer. Three
units of telecommunication equipment from the opening
stock were transferred to fixed asset. The cost price for the
three units was RM80,000 and the normal selling price is
RM96,000.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 10
vi. The company’s products which is furniture costing
RM24,700 was donated to an approved orphanage. The
selling price was RM26,000 .
A set of bedroom furniture costing RM6,400 sold to a
member of staff at 5% discount. The selling price was
RM7,000.
Trading stock disposed by way
of donation is not in the normal
course of business. It is deemd to
have been disposed at market
value, therefore added back
RM26,000
The sale of furniture to a staff
member at a discount is an
normal incidence of trade.
Therefore on adjustment.
Embezzlement
RM61,000 embezzled by the marketing director.
Capital loss from
misappropriation of capital of
the company. So it is not
deductible.
AGM expenses
Expenses incurred in resepct of the annual general meeting of
shareholders comprise the csot of food and refreshments provided
at the meeting.
Not incurred in the income-
producing process. Rather they
are incurred after the income has
been produced, therefore added
back.
Stocks
The company’s trading stocks stated after deducting a general
provision of 5% for obsolescence wereas follows;
30.11.2004 RM6.20 million
30.11.2005 RM5.63 million
A general provision is not
realised. So not deductible
Insurance compensation
Insurance moneys were paid by the insurance company in respect of
the death in an accident of the company’s chief operating officer.
The company is the beneficiary of a policy which compensates the
company for loss of profits resulting from death/disabledemnt by
accident of its key personnel.
Repairs to premises includes:
(i) A sum of RM37,000 reovered from an insurance company
for the cost of repair to the factory which was damaged by
fire; and
(ii) RM44,000 incurred on the said repairs
It is insured gainst loss of profits,
not capital investment in nature.
So deductible.
The full amount of the insurance
money is taxable as it is for
repair which is a deductible
expense in ascertaining adjusted
income.
The cost of repair is deductible
as business expense.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 11
Freight and insurance includes premiums amounting to RM20,000
paid under a policy on the lives of the senior executives of the
company. The objective of the policy is to provide the company
with sufficient funds to pay retirement gratuities.
Insurance premiums of RM21,000 on the lives of the key personnel.
The intention is to provide the company with funds which it may, at
its discretion, use to make payments to their dependents in the
eventof the premature death of the key personnel.
Insurance premiums include a sum of RM48,000 paid to Kargo
Insurance Bhd, a company incorporated in Malaysia, to undertake
risks on the importation fo raw materials.
Insurance premiums amount to RM452,000 insured with foreign
companies for the export of cargo.
An amount of RM24,000 was paid to an insurance company
incorporated in Chile as premium for insuring goods imported by
the company
Freight includes RM99,000 premium paid to Dowell Insurance
Bhd, a company incorporated in Malaysia, for goods imported
The freight charges are for shipping the furniture manufactured by
the company from Sarawak to Port Klang.
Company paid export credit insurance premiums of RM554,000 to
Malaysia Export Credit InsuranceBhd.
The insurance is investment in
nature as the objective is to creat
a asset in the form of fund for
retiremet gratuities . This fund is
of enduring benefit. So not
deductible.
Insurance premums in respect in
respect of imported raw
materials qualify for double
deduction as te risks are insured
with an insurance company
incorporated in Malaysia.
Insurance premiums do not
qualify for double deduction as
the risks are insured with a
company not incorporated in
Malaysia.
Freight charges incurred by
manufacturers for the shipment
of their manufactured goods for
Sabah/Sarawak to any port in
Peninsular Malaysia qualifies for
double deduction.
Export credit insurance
premiums qualify for double
deduction as they are paid to
Malaysia Export Credit
Insurance Berhad (MEISB) –
Income Tax (Deductions of
Premiums for Export Credit
Insurance) Rules 1985
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 12
salaries and wages
The EPF contributions made by the company at the rate of 21% in
respect of its key personnel amounting to RM273,000.
Remuneration of disbled employees amounting to RM77,000.
The EPF contributions made by
the employer are deductible
subject to the maximum rate of
19%, of remuneration .
Therefore the excess is added
back.
Remuneration of disbled
employees specifically qualifies
for double deduction under the
Income Tax (Deductions for the
Employment of Disabled
Persons) Rules 1982.
Leave passage
Cost of holiday package to Canada in September 2004 amounting
to RM25,000 for Encik Hooi, Head of the Human Resource
Department . The cost is made up of the cost of air fare of
RM15,000 and the cost of accommodation and food of RM10,000.
RM82,000 was incurred on leave passage provided to senior
management during their periods fo leave for purposes of spending
vacation tiem with their spouses and children . The sum comprises:
Overseas air fares 48.000
Local air fares 34,000
82,000
A family day staff trip to Sabah for which the company incurred
RM9,000 on the cost of travel, RM8,000 on food and drinks and
RM14,000 on accommodation.
Leave passage in respect of the
cost of airfare is disallowable
under the Act.
The cost of accommodation and
food is allowable as
entertainment expenses provided
to employees as per the Public
Ruling.
Leave passage in respect of the
air fares (overseas and local) is
specifically disallowed under
S39.
Leave passage of RM9,000 is
specifically allowed by the Act.
Food and accommodation is
allowed as entertainment for
staff.
Cost of equipment of RM18,500 purchased to enable the company’s
disabled employees to label its footwear which is its products.
Purchase of equipment to assist
disabled employees to perform
their work is specifically allowed
under the Act. Therefore
deductible.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 13
Extension to the childcare centre
Maintenance of the centre
Extension cost qualifies for
industrial building allowance
Revenue expenditure in respect
of a childcare centre provided for
employees is specially allowed
under the Act.
International trade fair held in Malaysia
RM329,000 was incurred on participation in an international trade
fair held in Kuala Lumpur. Both the trade fair and the company’s
participation were approved by the Miinistry of International Trade
and Industry. Thd aim of the trade fair was to promote exports.
Included in the expenditure is the cost of exhibits of RM8,000.
Advertising includes RM20,000 incurred in participating in
international trade fair held in Kuala Lumpu
r. The trade fair and the company's participation were approved by
the Minister of International Trade and Industry. Details of the
expenditure are as follows:
Cost of exhibits 12
Overtime pay to staff 3
Rental of exhibition space 5
20
Expenditure incurred on
participation in an approved
international trade fair excetp for
the cost of exhibits qualifies for
double deduction as the trade
fair was held in Kuala Lumpur,
the aim ws to promote exports
and the company’s participation
was approved by the relevant
authority.
Training
The human resource departmetn of the company organised cooking
and food preparation classes for twenty unemployed youths who
were afterwards sent to the restaurants for practical training . The
training cost per person amounted to RM880. Two of the trainees
were non-residents of Malaysia.
Expenses incurred on the
practical training of non-
employees of the company are
specifically allowed under the
Act provided the trainees are
Malaysian tax residents. So the
cost incurred on 2 of the trainees
are disallowed as they are non
Malaysian tax residents.
Halal certification
The expenditure incurred on halal certification consists of:
Capital expenditure 1,000
Revenue expenditure 450
1,450
The certificate was issued to the company on 10 April 2003
Expenditure incurred on halal
certification is specifically
allowed a double deduction
under the Act but restricted to
revenue expenditure only,
therefore add back to RM1,000.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 14
Publication of cultural book
RM29,000 was incurred on the publication of a cultural book in the
national language approved by the Dewan Bahasa and Pustaka.
The cost of publication of a
cultural book in the national
language is specifically allowed
by S34(6)(f) of the Act. As all
the stipulated conditions are
fulfilled ie the book is of cultural
, literary, professional, scientific
or technical nature and te
publication has the approval of
the relevant authority.
Scholaships
Scholarship to undergraduates 48,000
The scholarships were awarded to Encik Ali (RM26,000) and Cik
Kalsom(RM22,000) who studied full tiem on a degree course at
Universiti Teknologi Mara. They did nto have any means fo their
own. Ali’s parents earned total monthly income of RM4,500
whereas Kalsom’s guardian earned a total monthly income of
RM6,000.
The expenditure incurred on the
provision of scholarship is an
allowable deduction under
S34(6)(l) of the Act provided the
following conditions are
satisfied:
– The student is studying full
time at a Malaysian
educational institution for a
diplomaor a degree;
– The student has no means of
his own
– His paents/guardians earn a
total monthly inome nto
exceeded RM5,000.
Removal expenses
Rental fo premises includes removal expenses amounting to
RM16,000 form the existing place of business of business to new
premises as the company expanded its business.
Rental of premises includes the payment of RM27,000 to a
company for the cancellation of a contract to install a high-tech
security system.
Included in rental is a sum of RM25,000 paid in respect of the early
termination of the lease of a building which the company vacated in
February 2004. The lease was to have run for another 10 year. The
building was no longer suitable as a showroom for the company’s
goods due ot the construction of a toll plaza.
Removal is due to the expansion
of the company’s business and
therefore represents an asset of
enduring benefit. So not
deductible.
The compensation paid for the
cancellation of the contract is in
connection with a fixed asset
therefore of a capital nature.
The payment is a capital
expenditure as it was paid to get
rid of a lease which has become
an onerous liabillity. It resulting
in an eduring benefit to the
company.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 15
Lease rental
The company entered inot a car lease agreement on 1 April 2004
and commenced the lease rental payemnt on 6 April 2004 at
RM5,750 per month. The new car cost is RM155,000. The year end
of the company is 30 November 2004.
Motor vehicles expenses includes lease rentals in respect of a
motor car of RM6,500 per month under an agreement for a period
of 24 months commencing on 1 January 2003. The purchase price
fo the car in January 2004 was RM145,000. The year end of the
company is 30 April 2004.
Year end of company is 31 May 2005
Motor vehicles expenses include lease rental s for 2 new cars as
follows:
i. A new Proton leased for a period of 24 months at RM6,720
per month commencing in February 2004. The car costing
RM144,000 when new.
ii. A new Toyota leased for a period of 24 months at RM8,400
per month commencing in August 2004. The car cost
RM190,000 when new.
Lease rentals are deductible up
to the maximum of RM50,000
where the cost of the motor
vehicle exceeds RM150,000. As
the total lease rentals incurred
amount to RM46,000 (RM5,750
x 8 months), so no adjustment is
necessary.
Deduction of lease rental is
computed as follows:
Jan to Apr 03
(6500x4) 26,000
May 03 to Apr 04
(6500x12) 78,000
104,000
restricted to (100,000)
4,000
Deduction of lease rentals in
respect of private motor vehicles
is restricted to RM100,000
where the cost of the car does
not exceed RM150,000.
Lease rentals for the Proton are
deductible up to RM100,000 as
the purchase cost does not
exceed 150,000.
Feb-May 02
6,720 x 4 26,880
June – May 2003
6,720 x 12 80,640
107,520
restricted to 100,000
Add back 7,520
Lease rental for Toyota are
deductible up to RM50,000 only
as the purchase cost exceeds
RM150,000.
Aug02-May03
8,400 x 10 84,000
restricted to 50,000
Add back 34,000
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 16
Raise finances for the company
Legal fee amounting to RM6,000 of securing bank loan for
expansion of the company’s business.
It is incurred to a bank loan for
the purpose of business
expansion , and thus not
deductible.
Entrance fee to a trade association
Cash contribution to sponsor foreign arts approved by the Ministry
of Culture, Arts and Tourism of RM211,000
Cash donation to a public library amounting to RM18,000
Brings enduring benefit to the
company. So not deductible.
Cash contributions to sponsor
approved foreign arts are
deductible subject to the
maximum of RM220,000
Cash donations to public library
quality for deduction under the
Act, up to the limit of
RM100,000.
Advertising
RM75,000 in respect of product licensing in Japan for purposes of
promoting the company products.
Expenses on product licensing
overseas for the purposes of
promoting exports by a resident
company is specifically allowed
by an exemption order-Income
Tax(Deduction for Promotion of
Exprots No 2) Rules 2002.
Trade mark
On 1 December 2004, the company purchased a trade mark for
RM217,000 incurring legal cost of 8,000 . The trade mark cost
comprise:
Amortisation of cost of purchase
of trade mark 225,000
Royalty paid for the use of trade
mark before the date of purchase 235,000
460,000
The cost of purchasin gthe trade
mark including the legal fees is
specifically allowable , therefore
no adjustment – Income Tax
(Deduction for Cost of
Acquisition of Proprietory
Rights) Rules, 2002
Royalty paid for the use of trade
mark is revenue in nature, so no
adjustment.
Withholding tax
Consultancy fees of RM800,000 paid to a non-resident company on
3 March 2006 for technical advice rendered in Malaysia. The
withholding tax of 10%(RM80,000) was remitted to the Inland
Revenue Board on 20 April 2006. The 10% tax increase (RM8,000)
due to late payment of the tax remains unpaid.
The consultancy fees are
specifically disallowed because
part of the increased tax
(RM8,000) remains unpaid.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 17
Repairs
Repairs includes a sum of RM16,000 in respect of tools whch
have a life span of 2 years. This comprises RM4,000 for tools
replaced and RM12,000 for additional tools.
The company incurred RM62,000 on the purchase of cutlery
and glassware: of which RM27,000 was in respect of the
replacement of old and broken items.
For assets with life span of 2 years
and below, the assets are deductible
on replacement basis. Instead of
capital allowance Initial cost is not
deductible.
As above
Entertainment
Entertainment allwoance of RM500,000 to its amanging
director and the marketing executives.
EPF contributions of RM60,000 made by the company in
respect of the above entertainment allowance.
Entertainment allowance amounting to RM600,000 which are
not directly related to sales
EPF contributions at the rate of 22% amounting to RM594,000
in respect of the directors’ salaries (RM2,100,000) and the
above entertainment allowances.
Cost of maintainiing a holiday bungalow in Penang used by
senior executives of the company, RM30,000.
Cost of maintaining a holiday bungalow in Langkawi used
exclusively by the company’s clients, RM42,000.
The rental of RM1,900 per month in respect of the restaurant
premises in Johor Bahru. About 40% of this is attributable to a
flat on the upper floor occupied rent free by a director.
It is specifically 50% disallowed by
the Act as it is not incurred wholly to
sales.
Following from the above the EPF is
also 50% disallowed.
50%x600,000x22%=66,000
50%x600,000x3% = 9,000
2,100,000 x 3% = 63,000
Maintenance of the holiday bangalow
falls within the definition of
entertainment.
This is entertainment for staff.
Therefore deductible.
This is entertainment of clients.
Therefore deductible
It is a staff cost. So deductible.
Foreign exchange loss (net)
Realised loss(trade) 105
Realised gain (purchase of equipment) (43)
Unrealised loss(trade0 188
250
A gain on foreign exchange amouting to RM28,000 was made
on a payment for the purchase of a machine from Japan. The
payment was made in September 2004. The year end of the
company is 30 November 2004.
Realised loss on foreign exchange in
respect of trade transaction is trading
loss, therefore deductible.
Unrealised loss is only a provision
therefore not deductible.
The foreign exchange gan though
realised is nto taxablle as it is of a
capital nature.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 18
Donations
Donations comprises:
Cash donated to approved institutions 449
Cash contributions to public libraries 119
568
Miscellaneous expense comprise:
Approved donation 20
Unapproved doantion 9
Foreign exchange gain realised from debts
arising from sales of footwear (18)
11
Donations are not allowable in
computing adjusted income but they
are allowable in computing total
income but in case of a company, the
deduction is limited to 5% fo its
aggregate income.
In the case fo the cash contributions
to public librariesm the company can
choose to claim deduction under one
of the two sections of the Act. Under
S34(6)(g) deduction is against the
gross income fo the business source
and restricted to RM100,000.
Deduction under S44(8), on the other
hand , is against the aggregate income
of all sources of income and the
maximum allowed is only RM20,000.
Therefore, the company should make
a claim under S34(6)(g) because the
company gets additional deduction of
RM75,000 ie (RM100,000 – 20,000 –
(5% x 100,000)
Double deduction for salary of disabled staff
Included in salaries and wages was a monthly salary of
RM1,600 to a physically disabled person who was employed
as a telephone operator for 10 months
Provision for bad debts
Bad debt written off * 252,000
Increase in specific provision(trade) 43,000
Decrease in general provision(trade) (87,000)
208,000
*On 7 March 2004 the directors of Ming Sdn Bhd passed a
resolution to forgive a debt amounting to RM252,000 owed by
the subsidiary company of a listed company for goods
supplied. The resolution was passed to facilitate Ming’s
acquisition fo the subsidiary company.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 19
Bad debts written off(trade) 79,000
Increase in general provision from
RM100,000 to RM199,999 99,000
Foreign exchange gain realised from debts
Arising from sales of footwear (122,000)
56,000
Bad debts written off 83
Net increase in specific provision 271
Net increase in general provision 350
Bad debts recovered (60)
644
RM10,000 of the bad debts written off is in respect of a car
loan to an ex-employee;
RM33,000 of the specific provision relates to non-trade debts;
RM20,000 of the bad debts recovered relates to non-trade
debts
Bad and doubtful debts comprise:
1. The company is in the business of oerating restaurants food
catering.
i. Bad debt written off in respect of advances amounting
to RM6,800 made to a farmer against farm produce
which ws not delivered due to the family’s untimely
death.
ii. A provision fo RM1,200 made in respect of food
supplied to a hostel.
2. Bad and doubtful debts
Bad debts written off during the year 183
Net increase in specific provision 33
Net increase in general provision 193
409
Bad debts recovered during the year (28)
Profit and loss account 381
All the debts are trade debts except for a sum of
RM23,000 written off which is in respect of a loan made to
an ex-employee.
Advances unrecoverable from
thefarmer, though made against farm
produce to be delivered, constitute an
investment of capital as the main
ohjective was to obtain the source of
raw materials. Therefore to be added
back.
Trade and specific provision. So
deductible.
Onlu trade debts written off/recovered
are deductible/taxable, hence the loan
written off is added back.
For a provision to qualify for
deduction it must be sepcific and in
respect of trade debts, therefore the
general provision is added back.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 20
3. Bad debt recovered (119)
Specific provision b/f (951)
General provision b/f (1,205)
Bad debts written off 120
Specific provision c/f 1,375
General provision c/f 1,799
1,019
The specific provision carried forward includes a sum of
RM13,000, being the balance of a personal loan granted to
a director who has now resigned from the Board.
Bad & doubtful debts compries:
Bad debt written off of which RM9000 is
in respect of debts taken over from vendor
when the business was acquired years ago 600
Recovery of debts written off by vendor (13)
Increase in specific provision of which
RM60,000 is non-trade 1,420
Decrease in general provision of which
RM24,000 is non-trade (174)
1,833
Other income
Year end of company is 30 April 2004
Other income comprises dividend income as follows:
Date received RM
10.8.03 100,000 (exempt)
14.2.04 103,000 (gross
before deduction of tax)
Other income is in respect of the gross rents of RM185 derived
from a property in Africa and recived in Malaysia.
Year end of company is 31 May 2004.
Interest income comprises:
– interest arising on a saving account
with Southern Finance Bhd credited
monthly from Aug 2003 to April 2004 430
– interest accrued on a fixed deposit of
RM90,000 with Hong Leong Finance
Bhd for 6 months which matured on
4 June 2004 1,570
2,000
Rental income is a separate source,
therefore to be deducted from the
computation.
However, foreign income remitted by
a resiident company is tax exempt by
Para 28 Schedule 6.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 21
Accelated capital allowances
1. Capital expenditure incurred on plant and machinery for the purpose of the business of
manfacturing company which are used exclusively for recycling of wastes or for the further
processing of the wastes into a finished product will qualify for accelerated capital allowance as
follows;
IA 40%
AA 20%
2. Qualifying plant expenditure incurred on computers and information technology equipment for
the purpose of business will qualify for accelerated capital allowance as follows:
IA - 20%
AA – 40%
Capital allowances
Year end of company is 30 September 2003
– On 5 April 2003 the company pruchased new
equipment for RM70,000. The Ministry of Energy,
Communications and Multimedia certified that the
equipment is used by the company exclusively for
conserving energy.
– The residual expenditure as at 30 September 2002 in
respect of the lorry was RM49,000. The lorry was sold
for RM51,000 on 11 November 2002.
Staff welfare is in respect of the construction cost of a child
care centre amounting to RM50,000.
Capital expenditure incurred on
plant and machinery as certified
by the Ministry fo Energy,
Communications and Multimedia
as plant or machinery used
exclusively for conservation of
energy will qualify for
accelerated capital allowance as
follows;
Equipment 70,000
IA 40% 28,000
AA 20% 14,000
28,000
Lorry
RE 49,000
Sales proceeds 51,000
Balancing charge 2,000
Enduring benefit. So not
deductible Instead qualify for
industrial building allowance at
rate of:
IA nil
AA 10%
IBA = 10% x 50,000
= 5,000.
Note: The same would applies
to an old folks home which is
approved by the Social Welfare
Department.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 22
Hire purchase assets
Year end of company 30 November 2002
The hire purchase interest is in respect of a new motor car
costing RM132,000. The car was purchased on 2 January
2002 whereupon a deposit of RM60,000 was paid. The
monthly instalment of RM3,500 which includes interest of
RM500 commenced on 2 February 2002
Year end of company 31 May 2001
i. Maintenance of plant and machinery includes the
installation cost of a machine amounting to RM17,000.
ii. On 14 January 2001, the company purchased a machine
at a cost of RM183,000. The sum of RM17,000
mentioned above was incurred on preparing the site for
installation fo this machine. The machine commenced
to be used for the business two weeks after acquisition.
Q/E
(60,000 +
3,000x10) 90,000
YA 2002
IA 20% 18,000
AA20% 18,000
54,000
enduring benefit , so not
deductible.
Para 2 Schedule 3
Site preparation cost
Total cost
= < 10%
17/183+17 = 8.5% < 10%
So the site preparation cost of
17,000 also qualify for CA.
Q/E
183 + 17 200,000
IA 20% 40,000
AA14% 28,000
132,000
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 23
Expenses
Deductible Not deductible
+ve column
xx + ve column
nil
Expenses
Double deduction?
Yes No
-ve column
xx
-ve column
nil
Expenses approved by the Minister
Not for the purpose of business For the purpose of business
Double deduction Single deduction
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 24
QUESTION 1
Section A – BOTH questions are compulsory and MUST be attempted
Kooair Sdn Bhd (Kooair) is a manufacturer of air-conditioners under the brand name ‘Cool’. The
air-conditioners are of export quality. ‘Cool’ is a Malaysian brand name registered by Kooair. 80%
of the issued share capital of Kooair is Malaysian owned. The profit and loss account of the
company for the year ended 30 April 2006 is as follows:
Note RM000’s RM000’s
Sales 78,690
Rental income 1 170
78,860
Less:
Cost of sales 48,532
30,328
Less:
Repairs and maintenance 2 1,045
Professional fees 3 1,909
Marketing and advertising 4 1,334
Training 5 167
Provision for bad debts 6 (13)
Employees Provident Fund contributions 7 1,920
Provision for warranty 8 449
Motor vehicle expenses 9 2,802
Entertainment 10 66
Salaries and allowances 9,600
Finance charges 2,749
22,028
Profit before taxation 8,300
Notes:
(1) The rental income is derived from overseas and was remitted to Malaysia in January 2006.
(2) Repairs and maintenance includes the installation of an additional air-conditioner manufactured
by the company in the managing director’s office costing RM1,800. The selling price of the air-
conditioner was RM2,000.
(3) Professional fees includes:
(i) Consultancy fees of RM800,000 paid to a non-resident company on 3 March 2006 for
technical advice rendered in Malaysia. The withholding tax of 10% (RM80,000) was
remitted to the Inland Revenue Board on 20 April 2006. The 10% tax increase (RM8,000)
due to late payment of the tax remains unpaid.
(ii) The sum of RM199,000 in respect of professional fees paid to a company resident in
Malaysia for advertising ‘Cool’ air-conditioners on behalf of Kooair on television Malaysia.
(4) Marketing and advertising includes:
(i) Expenditure of RM126,000 for participating in international standardisation activities
approved by the Department of Standards Malaysia.
(ii) The sum of RM289,000 was incurred in sponsoring foreign cultural activity approved by the
Ministry of Culture, Arts and Tourism.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 25
(5) Training includes practical training programmes conducted by Kooair at a cost of RM33,000 in
respect of three resident individuals who are employed by a component manufacturer, and not
by Kooair.
(6) Provision for bad debts comprises:
RM
Bad debts written off (i) 535,000
General provision brought forward (411,000)
General provision carried forward 270,000
Specific provision brought forward (ii) (188,000)
Specific provision carried forward 303,000
Bad debts recovered (iii) (522,000)
(13,000)
(i) Included in the bad debts written off was a sum of RM14,000 due from the financial director
who passed away. The financial director was found to have passed through the company’s
books several private transactions of his own.
(ii) Included in the specific provision brought forward was a sum of RM35,000 in respect of a
non-trade debt.
(ii) Included in the bad debts recovered was a sum of RM7,000 in respect of a personal loan
recovered from an ex-employee.
(7) The rate of EPF contributions is 20% of salaries and allowances.
(8) The provision for warranty includes a sum of RM110,000 incurred on repairs of faulty air-
conditioners under the warranty periods.
(9) Motor vehicle expenses include depreciation of RM775,000 and a loss of RM3,000 incurred on
the sale of a van.
(10) Entertainment comprises:
RM
A family day staff trip to Sabah for which the company
incurred RM9,000 on the cost of travel; RM8,000 on food
and drinks and RM14,000 on accommodation 31,000
Food and drinks for the launching of a new model of air-conditioner 25,000
Cost of a dinner for the company’s suppliers 10,000
66,000
(11) The industrial building allowances for the year of assessment 2006 amount to RM199,000.
(12) The other capital allowances for the year of assessment 2006 amount to RM759,000.
(13) As at 30 April 2005 the balance of the company’s s.108 account was RM355,000. The
instalment payments made by the company are RM130,000 per month for the year of
assessment 2005 and RM160,000 per month for the year of assessment 2006. All instalments
were paid on time. In November 2005 the company paid the final tax of RM549,000
(inclusive of the penalty of RM9,000 for the under estimation of tax) for the year of
assessment 2005.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 26
(14) The company paid a dividend of RM2·5 million (gross) on 15 January 2006.
Required:
(a) Compute the chargeable income of Kooair Sdn Bhd for the year of assessment 2006.
Your computation should start with the profit before taxation figure and follow the
descriptions used in the notes to the profit and loss account indicating ‘nil’ in the
appropriate column for every item that does not require adjustment. (16 marks)
(b) Explain your treatment of the items referred to in notes 1 to 5 inclusive. (7 marks)
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 27
Answer:
Kooair Sdn Bhd – Year of assessment 2006
(basis period 1 May 2005 to 30 April 2006)
Note + –
RM000’s RM000’s
Profit before taxation 8,300
Rental income 1 170 1/2
Air-conditioner taken from stock-in-trade 2 2 1
Consultancy fees 3 800 1
Professional fees 3 199 1
International standardisation activities 4 Nil 1/2
Sponsorship of cultural activity
(RM289,000 – RM200,000 maximum) 4 89 1
Training of non-employees 5 Nil 1
Bad debts written off 6 14 1/2
General provision b/f 6 411 1/2
General provision c/f 6 270 1/2
Specific provision b/f 6 35 1/2
Specific provision c/f 6 Nil 1/2
Bad debts recovered 6 7 1/2
Employees Provident Fund contributions
[(20% – 19% x RM9,600,000)] 7 96 1
Provision for warranty (RM449,000 – RM110,000) 8 339 1
Depreciation 9 775 1/2
Loss on sale of van 9 3 1/2
Family day trip 10 nil 1
Launching of new product 10 Nil 1
Dinner for suppliers (50% x RM10,000) 10 5 1
––––––– –––––
10,693 822
(822) –––––
–––––––
Adjusted income 9,871
Less: Industrial building/capital allowances (RM199 + RM759) (958) 1
–––––––
Statutory/aggregate/chargeable income 8,913
–––––––
(b) Notes
1 Rental is not a business source and so it is to be taxed separately as non business source. But
since it is derived from sources outside Malaysia and received in Malaysia, it is tax exempt.
1 [Paragraph 28(1), Schedule 6, Income Tax Act (ITA)]
2 The market value of stock in trade withdrawn for the company’s own use is treated as gross
income from its business. [s.24(2), ITA]
3 (i) The consultancy fees are specifically disallowed because part of the increased
tax(penalty) (RM8,000) remains unpaid. [s.39(1) proviso and s.109B(2), ITA]
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 28
(ii) The professional fees incurred for advertising Malaysian brand name goods of export
quality and the company is >70% Malaysian owned, so it qualifes for double 1
deduction as all the conditions stipulated under the Rules have been fulfilled.
[Income Tax (Deduction for Advertising Expenditure on Malaysian Brand Name Goods)
Rules 2002.
Among the stipulated conditions are: a company incorporated in Malaysia with at least
70% of its issued share capital Malaysian owned and Kooair being the registered
proprietor of the brand name and the goods are of export quality.]
4 (i) Expenses incurred for participation in international standardisation activities approved by
the Department of Standards, Malaysia are a specifically allowed deduction. [s.34(6)(o),
ITA]
(ii) Expenses incurred in sponsoring cultural activity approved by the Ministry of Culture,
Arts and 1Tourism are a specifically allowed deduction subject to a maximum of
RM200,000 in respect of foreign cultural activity. [proviso to s.34(6)(k), ITA]
5 Expenses incurred on practical training in relation to the business of the company of resident
individuals who are non-employees of the company are a specifically allowed deduction.
[s.34(6)(n), ITA]
(c) (i) s.108 account of Kooair – year of assessment 2006 RM
Balance as at 1 May 2005 355,000 1/2
Add:
Final monthly instalment payment for YA 2005 (paid in May 05) 130,000 1
Final tax paid for YA 2005 (RM549,000 – RM9,000 paid in November 05) 540,000 1
Monthly instalment payments for YA 2006 (RM160,000 x 11 months) 1,760,000 1
––––––––––
Compared aggregate 2,785,000
Compared total
RM2,500,000 x 28% (income tax deducted from dividends
distributed on 15 January 06) (700,000) 1
––––––––––
Balance as at 30 April 06 c/f to YA 2007 2,085,000 ½
The item stated below is not included in the s.108 account computation:
The payment of a penalty amounting to RM9,000 imposed under s.107C(10) for under-
estimation of tax does not appear in the above computation because it does not fall within
the meaning of ‘tax paid’ as defined under s.108(14).
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 29
Question 2
Kalsom Sdn Bhd carries on the business of food production. Its profit and loss account for the
financial year ended 30 June 2005 is as follows:
Note RM000’s RM000’s
Turnover 27,042
Less: Cost of sales 1 11,990
–––––––
15,052
Add: Rental income 2 97
Gain from sale of property 3 330
Insurance proceeds 4 400
–––––––
15,879
Less: Directors’ remuneration 5 3,332
Staff welfare 6 245
Motor vehicle expenses 7 1,576
Provision for bad debts 8 1,055
Foreign exchange gain 9 (91)
Repairs & maintenance 1,730
Staff remuneration 1,488
–––––––
9,335
–––––––
Profit before taxation 6,544
–––––––
Notes:
(1) Cost of sales includes:
(i) Marine insurance for the import of raw materials paid to an insurance company incorporated
in Malaysia amounting to RM130,000.
(ii) Compensation paid to a customer for late delivery of goods amounting to RM27,000.
(iii)Depreciation of plant and machinery amounting to RM186,000.
(2) The rental income was in respect of a shop lot leased to a trader.
(3) The gain from sale of property was in respect of a house which has been used as living
accommodation for staff.
(4) The insurance proceeds received from an insurance company were in respect of a whole life
policy on the life of the marketing director who died in an accident.
(5) Directors’ remuneration comprises:
(i) Entertainment allowances amounting to RM600,000 which are not directly related to sales.
(ii) Employees’ Provident Fund contributions at the rate of 22% amounting to RM594,000 in
respect of the directors’ salaries (RM2,100,000) and entertainment allowances.
(iii) Contributions to the Kalsom Provident Fund established by the company amounting to
RM38,000. The fund was not approved by the Inland Revenue Board.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 30
(6) Staff welfare comprises: RM
Medical expenses 44,000
Cost of leave passage 99,000
Cost of food and accommodation 102,000
245,000
(7) Motor vehicle expenses include a gain from the sale of a motorcar amounting to RM3,000.
(8) Provision for bad debts comprises: RM
(i) Decrease in specific provision for trade debts (25,000)
(ii) Increase in general provision for trade debts 381,000
(iii) Bad debts written off* 920,000
(iv) Bad debts recovered* (221,000)
1,055,000
* These both relate to debts taken over by Kalsom Sdn Bhd two years ago when the company
bought over a retailer’s business.
(9) A foreign exchange gain amounting to RM91,000 was realised as a result of the purchase of
machinery from Japan.
(10)Capital allowances including industrial building allowances for the year of assessment 2005
amount to RM308,000. The balancing charge in respect of the sale of a motorcar amounts to
RM4,000.
Required:
(a) Compute the chargeable income of Kalsom Sdn Bhd for the year of assessment 2005.
Your computation should start with the profit before taxation figure and follow the descriptions
used in the notes to the profit and loss account indicating ‘nil’ in the appropriate column for
every item that does not require adjustment. (19 marks)
(b) (i)Explain your treatment of the items mentioned in notes 3 to 6 inclusive. (8 marks)
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 31
Answer:
Kalsom Sdn Bhd
Year of assessment 2005
(Basis period 1 July 2004 to 30 June 2005)
Note RM000’s RM000’s
+ –
Profit before taxation 6,544
Marine insurance 1 130 1
Compensation to customer 1 Nil 1/2
Depreciation 1 186 1/2
Rental income 2 97 1
Gain from sale of property 3 330 1
Insurance proceeds 4 400 1/2
Entertainment allowance (50%x600,000) 5 300 1
Employees Provident Fund contributions 5 75 2
(entertainment allowances)
(3% x RM300,000 = RM9,000 +
22% x RM300,000 = RM66,000)
Employees Provident Fund contributions 5 63 1
(salary 3% x RM2,100,000)
Kalsom Provident Fund (unapproved) 5 38 1
Medical expenses 6 Nil 1/2
Cost of leave passage 6 99 1
Food and accommodation 6 Nil 1/2
Gain from sale of motorcar 7 3 1
Decrease in specific provision 8 nil 1
Increase in general provision 8 381 1
Bad debts written off (capital loss) 8 920 1
Bad debts recovered (capital gain) 8 221 1
Foreign exchange gain (machinery) 9 91 1
–––––– ––––––
8,606 1,272
––––––
(1,272)
––––––
Adjusted profit 7,334
Add: Balancing charge 4 1/2
Less: Capital allowances and industrial building allowances (308)
1/2
Statutory income 7,030
Rental income 97 1/2
Aggregate/total/chargeable income 7,127
––––––
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 32
(b) (i) Notes
(3) The gain from sale of the property being a capital gain is not subject to income tax,
therefore excluded from the tax computation.
(4) The insurance proceeds are not taxable as the premiums would not have been allowed in
respect of a whole life policy. (See Inland Revenue Board Public Ruling No.2/2003 on
‘Key-Man’ Insurance)
(5) Directors’ Remuneration:
Employees Provident Fund contributions in respect of directors’ salary and allowances
are deductible up to the maximum limit of 19%. The 3% in excess of this limit is added
back. [s.34(4)(a)), Income Tax Act (ITA)]
Deduction of 50% of the entertainment allowances paid to employees is specifically
prohibited under s.39(1)(l), ITA. 1
Following from this the 19% maximum amount of Employees Provident Fund (EPF)
contributions attributable to this amount are added back, being specifically prohibited
under s.34(4)(b) ITA.
The EPF on the portion of the unallowed entertainment allowance is fully not
deductible.
Contributions to Kalsom Provident Fund are non-deductible as the Fund is not an
approved fund. 1
(6) Staff Welfare:
Medical expenses are staff amenities, therefore no adjustment. 1/2
Cost of leave passage means cost of fares which is disallowed under s.39(1)(m) ITA
(and see 1 Inland Revenue Board Public Ruling No.1/2003).
Food and accommodation is entertainment of staff, therefore it is deductible.
Paper 2.3MYS
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 33
Question 3
Zim Sdn Bhd is engaged in the manufacture and distribution of wheat flour. The company’s profit
and loss account for the year ended 31 December 2004 is as follows:
Note RM000’s RM000’s
Sales 59,800
Cost of sales 1 41,500
–––––––
18,300
Less:
Repairs to premises 2 504
Wages and salaries 3 3,970
Freight and insurance 4 1,208
Consultancy fees 5 150
Miscellaneous expenses 6 591
Donations 7 92
Lease rentals 8 72
Legal expenses 9 6
Motor vehicle expenses 10 1,011
Depreciation 300
Lease amortisation 19
Tax penalty 15
––––––
10,362
Add:
Dividends received 11 538
––––––
Profit before taxation 10,900
––––––
Notes:
(1) Cost of sales includes:
(i) Entertainment expenses amounting to RM162,000 of which RM112,000 was related
wholly to sales.
(ii) Provision for loss of damaged stock amounting to RM82,000
(2) Repairs to premises includes:
(i) A sum of RM37,000 recovered from an insurance company for the cost of repair to the
factory which was damaged by fire; and
(ii) RM44,000 incurred on the said repairs.
(3) Wages and salaries include:
(i) Contributions to Employees Provident Fund at 15% in respect of the remuneration of
RM990,000 paid to its senior management staff.
(ii) A sum of RM250,000 paid to the head of the distribution business as compensation for
loss of employment resulting from the disposal of the company’s distribution business.
(4) Freight and insurance includes a premium of RM115,000 in respect of export credit insurance
with a company approved by the Minister.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 34
(5) Consultancy fees were paid to a consultant in respect of the purchase of machinery.
(6) Miscellaneous expenses comprise:
(i) A sum of RM480,000 embezelled by the purchasing director;
(ii) entrance fees in respect of the corporate membership to a golf club, RM99,000; and
(iii) subscriptions to the golf club, RM12,000.
(7) The company donated wheat flour costing RM92,000 to various charitable institutions
approved by the Inland Revenue Board. The selling price of the flour was RM98,000.
(8) The lease rentals commenced on 9 February 2003 at RM6,000 per month in respect of a car
leased by the company from that date. The car cost the lessor RM148,000 and it had not been
used previously.
(9) Legal expenses were incurred in connection with the disposal of the company’s distribution
business.
(10) Motor vehicle expenses include a loss of RM2,000 on the sale of a van. The residual tax
expenditure of the van as at 31 December 2003 was RM9,000. The van was sold for
RM5,000(5000-9000=4000BA).
(11) Dividend income comprises gross dividends of RM250,000 and tax exempt dividends of
RM288,000.
(12) Other information
For the year of assessment 2004, the industrial building allowance amounts to M82,000.
Capital allowances on plant and machinery (excluding the purchase of new machinery and the
sale of the van) amount to RM366,000. New machinery (heavy machinery) was purchased for
RM1·3 million in August 2004 and commenced to be used in October 2004.
Required:
(a) Compute the tax payable by Zim Sdn Bhd (which is not a small company) for the year of
assessment 2004.
Your computation should start with the profit before taxation figure and follow the descriptions
used in the notes to the profit and loss account indicating ‘nil’ in the appropriate column for
every item that does not require adjustment. (20 marks)
(b) Explain your treatment of the items mentioned in notes 1 to 8 inclusive. (10 marks)
(30 marks)
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 35
Zim Sdn Bhd
Year of assessment 2004
(basis period 1 January 2004 to 31 December 2004)
Note RM000’s RM000’s Marks
+ –
Profit before taxation 10,900 1/2
entertainment expenses 1
(RM162,000 – RM112,000) x 100%
50 1
Provision for damaged stock 82 1
Insurance moneys 2 Nil 1/2
Cost of repairs 2 Nil 1/2
Employees Provident Fund contributions 3 Nil 1/2
Compensation for loss of employment 3 250 1
Insurance premiums 4 115 1
Consultancy fees 5 150 1
Embezzlement by director 6 480 1
Entrance fees to golf club 6 99 1
Subscriptions to golf club 6 Nil 1/2
Stock withdrawn for donations 7 98 1
Lease rentals 8 38 1
Legal expenses 9 6 1
Loss on sale of van 10 2 1
Depreciation 300 1/2
Lease amortisation 19 1
Tax penalty 15 1
Dividend 538 1/2
––––––– ––––
12,489 653
Less: (653)
––––––
Adjusted income 11,836
Less: Capital allowance
Less: (RM82 + 366 + 4 + 520) 972 11/2
––––––
Statutory income 10,864
Add: Dividend (RM538 – 288) 250 ½
––––––
Aggregate/total/chargeable income 11,114
––––––
RM
Tax at 25% 2,2,778,500 1/2
Less: s.110 (25% x RM250,000) 11,6676767 62,500
––––––––––
Tax payable 2,2,716,000
––––––––––
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 36
(b) Notes
1 Entertainment expenses which are related wholly to sales are fully deductible, therefore no
adjustment. [Proviso (vii) to s.39(1)(1), Income Tax Act (ITA)] 1
The rest of the entertainment expenses that are not related wholly to sales is specifically
prohibited. [s.39(1)(1), ITA] 1/2
Provision for damaged stock is an unrealised loss, therefore not deductible. ½
2 The full amount of the insurance moneys is regarded as taxable income as it is for repair
which is a deductible expense in ascertaining adjusted income. [s.22(2)(a)(i), ITA] 1/2
The cost of repairs is deductible as a business expense. ½
3 Employees Provident Fund contributions are deductible as they are below the maximum
allowable rate of 19%. [s.34(4)(a), ITA] ½
Compensation for loss of employment constitutes capital expenditure as the reason for the
payment was in connection with disposal of the company’s distribution business, therefore
added back. 1
4 The insurance premium qualifies for double deduction as it is for export credit insurance
and the insurance company is approved by the Minister. [Income tax (Deductions of
Premiums for Export Credit Insurance) Rules 1985] ½
5 The consultancy fees are of a capital nature as they are incurred in connection with the
acquisition of a fixed asset. ½
6 Embezzlement committed by a director constitutes a capital loss as a director is in the
position of directing the affairs of the company. 1
Entrance fees to a golf club is an expenditure that brings an enduring benefit to the
company, therefore of a capital nature and added back. ½
Subscriptions to a golf club are revenue expenses, therefore no adjustment necessary. ½
7 Stock withdrawn without any consideration is deemed to have been disposed of at market
value, therefore added back at market value. 1
In any case, donations in kind do not qualify for deduction. Only gifts of money to approved
institutions are eligible. [s.44(6), ITA] ½
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 37
8 Lease rentals are deductible up to a maximum of RM100,000 where the cost of purchase
does not exceed RM150,000, therefore the excess is added back as follows: 1
RM
9.2.2003 to 9.12.2003 RM6,000 x 11 = 166,000
9.1.2004 to 9.12.2004 RM6,000 x 12 = 172,000
––––––––
138,000
Less: maximum allowable s.39(1)(k) 100,000
––––––––
Add back 38,000
––––––––
Workings: (item 10 – van)
Capital allowance
RM
Residual expenditure as at 31.12.2003 9,000
Less: sale price 5,000
––––––
Balancing allowance 4,000
––––––
(Workings: (item 12 – heavy machinery) RM
Qualifying plant expenditure 1,300,000
Initial allowance 20% 260,000
Annual allowance 20% 260,000
––––––––
520,000
––––––––
Residual expenditure as at 31.12.2004 780,000
––––––––
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 38
Question 4
Marks Sdn Bhd, a dealer in car accessories, submits its profit and loss account for the year ended
30 November 2003 as follows:
Note RM000’s RM000’s
Sales 23,507
Cost of sales 1 9,600
Gross profit 13,907
Less:
Salaries and wages 2 2,770
Freight and insurance 3 2,067
Bad and doubtful debts 4 381
Consultancy fees 5 144
Motor vehicles expenses 6 185
Training expenses 7 24
Donations 8 568
Staff welfare 9 50
Hire purchase interest 10 5
Legal charges 11 1
Lease rentals 12 63
6,258
7,649
Add: Other income:
Interest 13 14
Profit before taxation 7,663
Notes:
(1) Cost of sales includes obsolete stock write-offs amounting to RM59,000.
(2) Salaries and wages include a sum of RM18,000 paid to an individual to persuade him to join
the company as a marketing executive.
(3) Freight and insurance includes:
(i) Export credit insurance premiums of RM554,000 paid to Malaysia Export Credit
Insurance Berhad (MECIB).
(ii) Insurance premiums of RM21,000 on the lives of the key personnel. The intention is to
provide the company with funds which it may, at its discretion, use to make payments
to their dependants in the event of the premature death of the key personnel.
(4) Bad and doubtful debts
RM000’s
Bad debts written off during the year 183
Net increase in specific provision 33
Net increase in general provision 193
409
Bad debts recovered during the year (28)
Profit and loss account 381
All the debts are trade debts except for a sum of RM23,000 written off which is in respect of
a loan made to an ex-employee.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 39
(5) Consultancy fees are in respect of a sum of RM144,000 paid to a local consultant engaged to
implement and oversee the usage of information technology for improving the management
and production processes of the company.
(6) Motor vehicles expenses include depreciation of RM31,000.
(7) Training expenses are in respect of the practical training for Malaysian resident employees
of suppliers in relation to the business of Marks Sdn Bhd.
(8) Donations comprise:
RM000’s
Cash donated to approved institutions 449
Cash contributions to public libraries 119
568
The above donations were made on 20 December 2001.
(9) Staff welfare is in respect of the construction cost of a childcare centre amounting to
RM50,000.
(10) The hire purchase interest is in respect of a new motorcar costing RM132,000. The car was
purchased on 2 January 2003 whereupon a deposit of RM60,000 was paid. The monthly
instalment of RM3,500(cap 3500-500=3000) which includes interest of RM500 commenced
on 2 February 2003.
(11) The legal charges were incurred in connection with the recovery of a loan from an ex-
employee.
(12) The lease rentals related to a motorcar, they commenced on 5 December 2002 at RM5,250
per month for a period of 24 months. The selling price of the vehicle was RM156,000.
5/12/02-30/11/03 5250x12=63000-50000=+13000
(13) Interest on fixed deposits:
RM10,000 matured on 15 December 2002
RM 4,000 matured on 10 June 2003
Required:
(a) Starting with the net profit before taxation compute the chargeable income of Marks
Sdn Bhd for the year of assessment 2003 if the paid up ordinary share capital of the
company is RM30 million as at the beginning of the basis period.
N.B. Your computation must follow the descriptions used in the notes to the profit and
loss account indicating ‘nil’ for every item that does not require adjustment.
(20 marks)
(b) Explain your treatment of each of the items mentioned in notes 2 to 8 inclusive.
(10 marks)
(30 marks)
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 40
Answer:
(a) Marks Sdn Bhd
Year of assessment 2003
(Basis period 1 December 2002 to 30 November 2003)
Marks
Note RM000’s RM000’s
+ -
Net profit before taxation 7,663 1/2
Obsolete stock write-offs Nil 1
Payment to individual 1 18 1
Export credit insurance premiums 2 554 1
Life insurance premiums 2 21 1
Bad debts written off 3 23 1
Net increase in specific provision 3 Nil 1/2
Net increase in general provision 3 193 1
Bad debts recovered 3 Nil 1/2
Consultancy fees for IT 4 Nil 1
Depreciation 5 31 1/2
Training expenses 6 Nil 1
Cash donated to approved institutions 7 449 1
Cash contributions to public libraries
(119-100)
7 19 1
Construction of child care centre 50 1
Hire purchase interest Nil 1/2
Legal charges (loan recovery) 1 1
Lease rentals (restricted to RM50,000) 13 1
Interest on fixed deposit(10+4) 14
8,481 568
(568)
Adjusted income 7,913
Less: Capital allowances
(RM36,000 + 5,000) (41) 2 1/2
Statutory income from business 7,872
Add: Other income:
Interest income (RM10,000 +
4,000)
14 1
Aggregate income 7,886
Less: Cash donations to approved
institutions
(restricted to 10% of aggregate
income))
449 1
Total/chargeable income 7,437
(b) Notes:
1 Payment to the individual constitutes an inducement payment which encourages
him to commence employment with the company, therefore capital in nature
and added back.
1
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 41
2 Export credit insurance premiums qualify for double deduction as they are paid
to Malaysia Export Credit Insurance Berhad (MECIB) – Income Tax
(Deductions of Premiums for Export Credit Insurance)
1/2
Marks
Rule 1985: Life insurance premiums are not deductible because they constitute
capital expenditure in that the company has acquired an asset with those
premiums(the co created a fund(asset) as compensation for the family).
1
3 Bad and doubtful debts
Only trade debts written off/recovered are deductible/taxable, hence the loan
written off is added back.
1
For a provision to qualify for deduction it must be specific and in respect of
trade debts, therefore the general provision is added back.
1
4 Operating expenses incurred for the usage of information technology to improve
management and production processes are specifically allowed. The deduction
includes consultancy fees, therefore no adjustment is necessary. (Income Tax
(Deductions for Information Technology Related Expenses) Rules, 2000).
1
5 Depreciation is specifically disallowable under s.39(1). 1/2
6 Expenses incurred on the practical training in relation to the business of Marks
Sdn Bhd of non-employees are specifically allowed under s.34(6)(n) of the
Income Tax Act as long as the non-employees are Malaysian tax residents.
1
7 Donations are not allowable in computing adjusted income but they are
allowable in computing total income but in the case of a company, the
deduction is limited to 10% of its aggregate income.
1
In the case of the cash contributions to public libraries, the company can choose
to claim deduction under one of the two sections of the Income Tax Act: Under
s.34(6)(g) deduction is against the gross income of the business source and
restricted to RM100,000. Deduction under s.44(8), on the other hand, is against
the aggregate income of all sources of income and the maximum allowed is only
RM20,000. Therefore, Marks Sdn Bhd should make a claim under s.34(6)(g)
because the company gets additional deduction of RM95,000 i.e. RM495,000
instead of RM400,000.
1
1
Workings: Capital allowances
Construction of child care centre
No IA
AA 10% of RM50,000 = 5,000.
Motor car purchased on 2.1.2002 for RM132,000 with hire purchase
Qualifying plant expenditure
(RM60,000 + 3,000 x 10 months) 90,000
YA 2002 IA 20% 18,000
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 42
AA 20% 18,000
36,000
RE 54,000
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 43
Question 5
Winner Berhad, a company incorporated and resident in Malaysia, is 70% Malaysian owned and is
a manufacturer of refrigerators, freezers and air-conditioners under the brand name Wincon which
is registered as a trade mark in Malaysia. The company is the owner of the brand. The profit and
loss account for the year ended 31 May 2003 is as follows:
Note RM000 RM000
Turnover 80,798
Add: Interest income 1 154
80,952
Less: Cost of sales 2 57,708
23,244
Less: Salaries, wages, and bonuses 3 3,520
Employees Provident Fund 4 768
Donation 5 10
Advertising 6 3,688
Rental of premises 7 929
Travelling 8 750
Foreign exchange loss 9 140
Maintenance of plant and machinery 10 116
Bad and doubtful debts 11 1,019
Freight and insurance 1,522
Depreciation 940
Motor vehicles expenses 291
13,693
Net profit before taxation 9,551
Notes:
(1) Interest income is from a fixed deposit placed with a bank in Europe. The interest was
remitted to Malaysia on 12 April 2003.
(2) Cost of sales is arrived at after crediting RM40,000 in respect of the cost of goods
manufactured by the company, which were withdrawn from stock for use as fixed assets by the
company. The normal selling price was RM60,000.
(3) Salaries, wages, and bonuses
(i) Staff were paid two months bonus based on their wages of RM960,000 whereas
executives and directors were paid four months bonus(1800000x4/12=600,000) based on
their salaries of RM1,800,000.
(ii) Salaries, wages, and bonuses includes wages of RM36,000 and bonus of RM6,000 paid to
disabled staff.
(4) The Employees Provident Fund contribution is at the rate of 15% for staff and 25% for
executives and directors.
(5) Donation is in respect of contributions made to a fund-raising campaign organised by a
distributor of the Wincon brand of goods.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 44
(6) Advertising
Included is a sum of RM27,000 incurred on advertising the Wincon brand of goods on the
Internet via a host website located in Kuala Lumpur. The goods are of export quality standard.
(7) Rental of premises
Included in the rental is a sum of RM25,000 paid in respect of the early termination of the
lease of a building which the company vacated in February 2003. The lease was to have run
for another 10 years. The building was no longer suitable as a showroom for the company's
goods due to the construction of a toll plaza.
(8) Travelling includes:
(i) Vacation airfare and hotel accommodation costing RM18,000 for important overseas
customers.
(ii) Reimbursement to the directors of the company of salaries of RM100,000 and Employees
Provident Fund contributions of RM 12,000 in respect of drivers employed by them.
(9) The foreign exchange loss is in respect of the purchase of component parts for manufacture.
The realised loss amounts to RM7,000 only.
(10) Maintenance of plant and machinery includes the installation cost of a machine amounting to
RM17,000.
(11) The specific provision carried forward includes a sum of RM 13,000, being the balance of a
personal loan granted to a director who has now resigned from the Board.
(12) Capital allowances have been computed at RM822,000 for the year of assessment 2001, but
without taking into account the following acquisitions:
Machine
On 14 January 2003 the company purchased a machine at a cost of RM183,000. The sum of
RM17,000(8.5%) mentioned in note 10 was incurred on preparing the site for installation of
this machine. The machine commenced to be used for the business two weeks after
acquisition.
Motor car
A new car costing RM220,000 was purchased on 9 December 2002 for the general manager.
Bad and doubtful debts comprise:
RM
Bad debts recovered (119,000)
Specific provision brought forward (951,000)
General provision brought forward (1,205,000)
Bad debts written off 120,000
Specific provision carried forward 1,375,000
General provision carried forward 1,799,000
1,019,000
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 45
Required:
(a) Starting with the net profit before taxation, compute the chargeable income of Winner
Berhad for the year of assessment 2003 if the paid up ordinary share capital of the
company is RM3 million at the beginning of the basis period .
N.B. Every item mentioned in the notes to the accounts (except for notes 11 and 12) must
appear in your computation, whether or not it is deductible, taxable or no adjustment is
necessary. Where no adjustment is required indicate "nil" under the appropriate
column. (18 marks)
(b) Explain your treatment of each of the items mentioned in notes 1 to 9 inclusive. (12 marks)
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 46
Answer:
(a) Winner Berhad
Year of assessment 2003
(Basis period 1 June 2002 to 31 May 2003)
Note RM000 RM000
+ -
Net profit before taxation 9,551
Interest income 1 154 1
Unrealised profit on goods withdrawn from stock 2 60 1
Bonus 3 Nil 1
Remuneration of disabled staff (RM36,000 + RM6,000) 3 42 1
Employees Provident Fund contributions 4 144 1
Donation 5 10 1
Advertising on the Internet 6 27 1
Lease termination 7 25 1
Entertainment of overseas customers 8 18 1
Reimbursement of drivers' salaries etc 8 Nil 1
Foreign exchange loss (unrealised)140-7 9 133 1
Installation of machine
Bad debt recovered
17
nil 1
Specific prov b/f
Specific provision carried forward
13
nil
1
General provision carried forward 1,799 1
General provision brought forward 1,205 1
Depreciation 940 1
12,710 1,428
(1,428)
Adjusted income 11,282
Less: capital allowance (822 + 68 + 20) 10 910 2
Statutory/aggregate/chargeable income 10,372
(b) Notes:
1 Foreign income remitted to Malaysia by a resident company is tax exempt under the
Paragraph 28 Schedule 6.. 1
2 Where stock is withdrawn for the company's own use the market value of the stock
at the time of withdrawal is treated as gross income. Therefore the unrealised profit
of RM60,000 is added back. 1
3 Remuneration paid to disabled staff qualifies for double deduction under the
Income Tax (Deductions for the Employment of Disabled Persons) Rules, 1982. 1
Bonus is staff cost and therefore deductible. 1
4 Deduction for the Employees Provident Fund contributions is restricted to 19% of
the employees' remuneration. EPF contributions in respect of restricted bonus is
also disallowed. The adjustment is arrived at as follows: 2
RM
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 47
(25%-19% )x (RMI,800,000 + 600,000) 144,000
5 Donation is deductible at the aggregate income stage, therefore add back RM
10,000 in arriving at adjusted income. However, in this case it is not an approved
donation therefore it does not qualify for deduction. 1
6 Advertising on the Internet host web site located in Malaysia qualifies for double
deduction under the Income Tax (Deduction for Advertising Expenditure on
Malaysian Brand Name Goods) Rules, 1999 as the company satisfies the conditions
specified in the Rules including being 70% Malaysian controlled.
2
7 The payment of RM25,000 is capital expenditure as it was paid to get rid of a lease
which had become an onerous liability. It resulted in an enduring benefit to the
company. 1
8 The cost of airfare and accommodation is regarded as hospitality and constitutes
entertainment specifically disallowed under s.39(1)(l) of the Income Tax Act. ½
No adjustment is necessary for reimbursement of drivers' salaries and Employees
Provident Fund contributions as the expenditure is on staff amenities ½
9 Foreign exchange loss of a revenue nature is deductible to the extent that the loss is
realised, therefore the unrealised loss of RM133,000 is added back. 1
10 Capital allowance computation:
Machine RM
Qualifying expenditure (RM183,000 + 17,000) 200,000
Initial allowance 20% 40,000
Annual allowance 14% 28,000
68,000
Residual expenditure 132,000
Motor car
Qualifying expenditure restricted to 50,000
Initial allowance 20% 10,000
Annual allowance 20% 10,000
20,000
Residual expenditure 30,000
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 48
Question 7
Fashenshu Sdn. Bhd. (Fashenshu), a resident and wholly Malaysian-owned company is engaged in
the business of manufacturing footwear for export. Its profit and loss account for the year ended 30
April 2004 is as follows:
Note RM 000’s RM 000’s
Sales 1 68,230
Cost of sales 2 44,860
23,370
Less:
Wages and salaries 3 4,612
Insurance premiums 4 181
Rental of premises 5 96
Marketing expenses 6 799
Annual general meeting expenses 7 5
Trade mark costs 8 460
Motor vehicles expenses 9 350
Repairs and maintenance 10 293
Provisions for bad debts 11 56
Miscellaneous expenses 12 11
6,863
16,507
Add : Dividends 203
Profit before taxation 16,710
Tax 4,610
Profit after taxation 12,100
Notes:
(1) Sales include a sum of RM200,000 received by the company as the first installment under an
agreement signed with a shoe company in China. This was for a license to use Fashenshu’s
patents, designs and know-how in consideration for a sum of RM 1 million payable in annual
installments over a period of five years. Fashenshu also agreed not to grant any such license to
other parties in China or Hong Kong. Fashenshu had never made such an agreement before.
(2) Cost of sales includes the cost of equipment amounting to RM18,500 purchased to enable the
company’s disabled employees to label its footwear.
(3) Wages and salaries include a sum of RM82,000 incurred on leave passage provided to senior
management staff during their periods of leave for purposes of spending vacation time with
their spouses and children. The sum comprises:
RM
Overseas air fares 48,000
Local air fares 34,000
82,000
(4) Insurance premiums include a sum of RM48,000 paid to Kargo Insurance Berhad, a company
incorporated in Malaysia, to undertake risks on the importation of raw materials.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 49
(5) Rental of premises includes rental paid in advance for six months period 1 December 2003 to
31 May 2004 amounting to RM48,000.
(6) Marketing expenses include:
(i) A sum of RM61,000 embezzled by the marketing director.
(ii) A sum of RM75,000 in respect of products licensing in Japan for purposes of promoting the
company’s footwear.
(7) Expenses incurred in respect or the annual general meeting of shareholders comprise the cost of
food and refreshments provided at the meeting.
(8) On 1 December 2003 the company purchased a trade mark for RM217,000 incurring legal cost
of RM8,000. The trade mark casts comprise:
RM
Amortization of cost of purchase of trade mark 225,000
Royalty paid for the use of trade mark before the date of purchase 235,000
460,000
(9) Motor vehicles expenses includes lease rentals in respect of a motor car of RM6,500 per month
under an agreement for a period of 24 months commencing on 1 January 2003. The purchase
price of the car in January 2003 was RM145,000.
(10)Repairs and maintenance includes a sum of RM16,000 in respect of tools which have a life
span of two years. This comprises RM4,000 for tools replaced and RM12,000 for additional
tools.
(11)Provision for bad debts comprise:
RM
Bad debts written off (trade) 79,000
Increase in general provision from RM100,000 to RM199,000 99,000
Recovery of debts which were taken over from the vendor of the
business which Fashenshu acquired several years ago (122,000)
56,000
(12)Miscellaneous expenses comprise:
RM
Approved donations 20,000
Unapproved donations 9,000
Foreign exchange gain realized from debts arising from sales of footwea (18,000)
11,000
(13)Dividends comprise:
Date received RM
10 August 2003 100,000 (exempt)
14 February 2004 103,000(gross before deduction of tax)
(14)A new factory which had not previously been used as an industrial building was purchased on
19 July 2003 for RM350,000 which includes RM50,000 for the cost of the land. The factory
commenced to be used by Fashenshu’s trade in August 2003.
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 50
Required:
(a) Compute the tax payable by Fashenshu Sdn. Bhd. for the year of assessment 2004.
N.B. Your computation should start with net profit before taxation figure and follow the
descriptions used in the notes to the profit and loss account indicating ‘nil’ in the
appropriate column for every item that does not require adjustment. (20 marks)
(b) Explain your treatment of the items mentioned in notes 1 to 8 inclusive, using the same
descriptions as in (a). (10 marks)
(30 marks)
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 51
(a) Fashenshu Sdn Bhd
Year of assessment 2004
(Basis Period 1 May 2003 to 30 April 2004)
Note RM000’s RM000’s
+ -
Net profit before taxation 16,710
Installment payment 1 200 1
Equipment for disabled employees 2 Nil ½
Air fares 3 82
Insurance premiums 4 48 1
Rental paid in advance(RM48,000/6) 5 8 1
Embezzlement by director 6 61 1
Product licensing 6 Nil 75 ½
Annual general meeting expenses 7 5 1
Trade mark (4/5 x RM225,000) 8 180 1
Royalty 8 Nil 1
Lease rental 9 4 1
Additional tools 12 1
Increase in general provision 99 1
Recovery of debts 122 1
Donations (RM20,000 + 9,000) 29 ½
Foreign exchange gain Nil ½
Dividends 203 1
17,190 648
(648)
Adjusted income 16,542
Less: industrial building allowance
(RM30,000 + 9,000) 10 (39)
1
½
Statutory income 16,503
Less donation (20) 1
Aggregate statutory income 16,606
Add dividend 103 1
Total/chargeable income 16,586
RM
Tax at 25% 4,146,500 ½
Less: s.110 set-off (RM103,000 x 25%) (25,750) 1
Tax payable 4,120,750
(b) Notes 1 to 8: Marks
1 The sum of RM1 million constitutes a capital receipt. This is because with regard
to the China and Hong Kong market Fashenshu has parted with a capital asset
(patent, designs and know-how) for a purchase price (Evan Medical Supplies Ltd v
Moriarty). 1
The fact that the consideration is payable in installment does not alter the character
of the receipt, therefore it is not taxable. 1
2 The cost of purchase of equipment to assist the company’s disabled employees to
perform their work is specifically allowed under s.34(6)(e) of the Income Tax Act,
therefore no adjustment.
1
Sunway University College Course Notes
Paper F6 –Taxation
Kok Fong Hun FCCA 52
Marks
3 Leave passage in respect of the air fares (oversea and local) is specifically
disallowed under paragraph 39(1)(m) of the Income Tax Act, therefore added back
RM82,000.
4 Insurance premiums in respect of imported raw materials qualify for double
deduction as the risks are insured with an insurance company incorporated in
Malaysia – Income Tax (Deduction of Insurance Premiums for Importers) Rules
1982. 1
5 The one month rental paid in advance was not incurred during the basis period for
the year of assessment 2004, therefore added back RM8,000. This amount would
be deductible for the year of assessment 2005. 1
6 Embezzlement by director of a company is regarded as a capital loss resulting from
misappropriation of the capital of the company, therefore added back. 1
Expenses incurred on products licensing overseas for the purposes of promoting
exports by a resident company is eligible for double deduction under Income Tax
(Deduction for Promotion of Exports) 2002 & 2007. 1
7 Expenses incurred on the annual general meeting of shareholders are not incurred
in the income-producing process. Rather they are incurred after the income has
been produced, therefore added back. 1
8 The cost of purchasing the trade mark including the legal fees is specifically
allowable, but restricted to 1/5 of the expenditure for each of the five years of
assessment – Income Tax (Deductions of Cost of Acquisition of Proprietary
Rights) Rules, 2002. 1
Royalty paid for the use of a trade mark is a revenue expense, therefore no
adjustment. 1
Workings:
Deduction of lease rentals (item 9) is computed as follows:
RM
January to April 2003 (RM6,500 x 4) 26,000
May 2003 to April 2004 (RM6,500 x 12) 78,000
104,000
Restricted to 100,000
Add back 4,000
Deduction of lease rentals in respect of private motor vehicles is restricted to RM100,000 where
the cost of the car does not exceed RM150,000.
Industrial building allowance (item 10) is computed as follows:
RM
Qualifying building expenditure (RM350,000 –
50,000)
300,000
Less: initial allowance 10% 30,000
annual allowance 3% 9,000
39,000
261,000