tax320

CONFIDENTIAL AC/NOV 2005/TAX320

UNIVERSITI TEKNOLOGI MARAFINAL EXAMINATION

COURSE

COURSE CODE

EXAMINATION

TIME

TAXATION 1

TAX320

NOVEMBER 2005

3 HOURS

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of five (5) questions.

Answer ALL questions. Start each answer on a new page.2.

3.

4.

Do not bring any material into the examination room unless permission is given by theinvigilator.

Please check to make sure that this examination pack consists of:

i) the Question Paperii) an Answer Booklet - provided by the Facultyiii) A one-page Appendix 1 (Income Tax rate table)iv) A two-page Appendix 2 (Benefit-in-kind scale rates per Inland Revenue Board

Guidelines)v) A one-page Appendix 3 (Capital Allowance rate for Plant & Machinery)

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SOThis examination paper consists of 10 printed pages

Hak Clpta Universiti Teknologl MARA CONFIDENTIAL

CONFIDENTIAL 2 AC/NOV 2005ATAX320

QUESTION 1

(A) Encik Poon first came to Malaysia on 1 April 2000. He left Malaysia permanently in2005. Details of his stay in Malaysia are as follows:

Year In Malaysia No of days

2000 1 April to 31 May 61 days15 November to 22 December 38 days

2001 27 March to 1 July 97 days24 September to 24 December 92 days

2002 6 June to 16 October* 133 days26 October to 28 December** 63 days

2003 3 January to 18 January 16 days

2004 2 April to 11 July 101 days

2005 3 March to 7 May 66 days

* Encik Poon was in Greece from 17 October to 25 October 2002 to attend abusiness conference.

** He was in Taiwan from 29 December 2002 to 2 January 2003 on social visits.

Required:

Determine the resident status of Encik Poon for the years of assessment 2000 to2005 inclusive. Provide explanation for each answer.

(12 marks)

(B) Encik Razi is the sole-proprietor of a business selling traditional herbs. The annualgross takings of his business are in the range of RM100.000 to RM120,000 since hestarted his business in the year 2003.

Required:

(i) State briefly Encik Razi's obligation with regard to tax compliance under theself-assessment system.

(3 marks)

(ii) Under the self-assessment system, the submission of the tax return isdeemed to be the making of an assessment (Form J). In this respect, what isthe taxpayer's right of appeal?

(2 marks)

(iii) State four key differences between the self-assessment system and thetraditional/official tax system?

(4 marks)

Hak Cipta Universiti Teknologi MARA CON FIDENTIAL

CONFIDENTIAL 3 AC/NOV 2005/TAX320

(C) Encik Ken is a fresh graduate from the Faculty of Information Technology of a localprivate university. He wonders if he should operate a sole proprietorship (an ITconsultancy business). He seeks your advice on certain tax matters.

Required:

Explain to Encik Ken with regard to:

(i) What is the basis period for a sole-proprietorship?(2 marks)

(ii) The use of a car for business purpose.(1 mark)

(iii) Tax treatment of adjusted business loss.(1 mark)

(Total: 25 marks)

QUESTION 2

Mr. Wong, aged 52, is the factory manager of Smart Electronics Sdn Bhd, whichmanufactures electronic components for export to its holding company based in the UnitedStates of America.

He has been working with Smart Electronics Sdn Bhd for the past 101/2 years. Due to theeconomic recession in the United States of America, Smart Electronics Sdn Bhd has beenasked to cut production by half and has offered Voluntarily Separation Scheme (VSS) tosome of its employees including Mr. Wong.

Mr. Wong opted for the VSS and officially ceased to work for the company on 31 October2005 and was paid a sum amounting to 101/2 months of his last drawn salary. Other details ofhis remuneration for the year 2005 are as follows:

Salary: RM9.790 (net after deducting EPF 11%) per month

Incentive bonus: 2 months gross salary (Smart Electronics Sdn Bhd ends its accounts on 31July each year)

Mobile phone: Smart Electronics Sdn Bhd paid for the phone rental and all business callswhich totaled RM1,500 for the period of employment. The phone was owned by Mr. Wong.

Entertainment allowance: RM2.400 per month

Utilities paid by the company: RM4.500

Dental expenses for Mr. Wong and his family paid by the company: RM2.000

Car (7 years old and costs RM158,000 when new). Fuel costs: RM4,800

Hak Cipta Unlversiti Teknologi MARA CONFIDENTIAL


Additional notes:

a. Smart Electronics Sdn Bhd also provided Mr. Wong with a driver (salary RM800 permonth), a servant (salary RM1,000 per month) and a gardener (salary RM700 permonth).

b. The company also paid for his life insurance premium amounting to RM5,000 andalso contributed RM3,000 towards the tuition fees of Mr. Wong's second child who isstudying in Australia.

c. In February 2005, the second child was hospitalized in London and had to undergosurgery to remove her appendix. The surgery and hospitalization costs amounted toRM15,000 were paid by the company.

d. Mr. Wong and his family went to New Zealand for their holiday and Smart ElectronicSdn Bhd paid RM6,500 for their air fare.

e. Mr. Wong was provided by the company with a fully furnished bungalow. The rentalof the unfurnished bungalow is RM2.500 per month. The value of furniture is RM500per month.

f. Upon resignation, Mr. Wong withdrew RM120,000 from an unapproved providentfund, of which 55% was contributed by the company. His EPF withdrawals amountedto RM560.000 of which RM200.000 were contributions from his past employers,RM160,000 were contributions by Mr. Wong himself and the balance wereaccumulated interests to-date.

g. Mr. Wong incurred the following expenses in 2005:

RM10,000 for entertainment of suppliers and customers on the employer'sbehalf;

RM5.000 on petrol and toll charges for traveling between his house andoffice.

RM500 per month was paid as rent to the company for the bungalowprovided.

Required:

Compute the adjusted income from employment of Mr. Wong for the year of assessment2005.

(18 marks)

Hak Cipta Universiti Teknologi MARA CONFIDENTIAL


QUESTION 3

(A) Encik Amir is the sole owner of Amir Enterprise which sells hardware in Jitra. Thefollowing is the forecasted Trading Profit and Loss account for the year ended 31December 2005.

Trading Profit and Loss account for the year ended 31 December 2005

Notes RM RM

Sales 2,250,000Less: Cost of goods sold (1,750,000)

500,000GROSS PROFIT

Add: Dividend 6,000Gain on disposal of fixed asset 1,950Rental loss (1.000)

506,950Less: ExpensesSalary 1 78,000Bonus 2 20,000Employee Provident Fund 3 22,540Entertainment 4 45,000Fines and penalties 5 3,200Donations 6 15,000Office rental 7 24,000Office expenses 8 18,000Postage and courier 3,500Printing and stationery 18,000Quit rent and assessment 9 650Registration fee 10 380Staff benefit 11 8,000Sundry expenses 6,000Accounting fees 3,520Maintenance 12 14,500Telephone 13 6,000Water and electricity 14 7,150Bank charges 1,080Legal expense 15 7,800Depreciation 35.000 (337,320)Net profit before tax 169,630

Hak Clpta Unlversiti Teknologl MARA CONFIDENTIAL

CONFIDENTIAL 6 AC/NOV 2005ATAX320

Notes to the account:

1. Salary comprise of RM

Encik Amir 30,000Normal Employees 36,000Disabled Employee 12,000

2. Bonus was paid to


3. Employee provident fund comprise of


4. Entertainment incurred was for the following:

Encik Amir's family gathering 25,000Annual dinner for staff 6,000Purchase of home theatre set for En Amir 14,000

5. Fines and penalties were paid for:

Parking ticket for van 900Penalty for late payment of income tax 2,300

6. During the year, Encik Amir donated clothing valued at RM5.000 to a DisasterFund and the balance is a cash donation to Kedah Public library, to beclaimed under section 34(6)(g).

7. Encik Amir rented a 3-storey shop lot. His family occupies the third floor whilethe second floor is rented out to an insurance agency. The business is carriedout on the first floor.

8. Office expenses represent cost incurred in installing new cabinets andshelves for the business.

9. The quit rent and assessment expenditure was for the whole building.

10. The registration fee was in respect of the annual membership fee paid to theKedah Traders' Association.

Hak Clpta Universltl Teknologi MARA CONFIDENTIAL


11. Staff benefit represent payment for an employee's leave passage to PhuketIsland.

12. Maintenance comprise of:RM

Repairs to the office equipments 5,000Upkeep of van 6,000Repairs to Encik Amir's new house. 3,500

13. Inland Revenue Board agreed that a quarter (1/4) of the telephone expenseswas for private purpose.

14. Inland Revenue Board agreed that one half (1/2) of the water and electricitywas for private purpose.

15. Legal expense was in respect of the purchase of Encik Amir's new house.

16. Capital allowance for the year amounted to RM50,000, while balancingcharge was RM500.

17. During the year, Amir gave away goods costing RM10,000 to his relatives.This was not recorded anywhere in the books. The mark-up for goods sold tocustomers is 20% on cost of sales.

Required:

Compute the statutory business income of Amir Enterprise for the year of assessment 2005.

(17 marks)

(B) Badges of trade are used to determine whether a person is engaged in trading. Stateand explain any three (3) badges of trade.

(3 marks)(Total: 20 marks)

Hak Cipta Universltl Teknologi MARA CONFIDENTIAL


QUESTION 4

Tech Creative Sdn Bhd which prepares its accounts to 31 October annually, carries on amanufacturing business. Its head office is based in Seberang Perai, Pulau Pinang and italso has a branch in Singapore. Details of its expenditures on plant and machinery are asfollows:

(a) On 1 January 2000 a machine was acquired at a cost of RM275.000, which was tobe used in the business in Singapore. However, in August 2002, it was brought intoMalaysia to be used in the business in Seberang Perai. The market value and netbook value on 1 August 2002 were RM210,000 and RM195,000 respectively.Before it could be used, necessary repairs at a cost of RM25.000 was incurred. Thecompany also incured RM30.000 for installation and RM36.000 for the sitepreparation. On 15 October 2004, the machine was sent for major repairs and wasnot used until 21 February 2005. On 30 June 2005, the machine was sold forRM150,000. The annual allowance rate is 14%.

(b) On 1 August 2002, a Honda CRV (not for commercial use) was bought on hirepurchase. The cash price of the car was RM110,000 and a deposit of RM25,000was paid on 1 August 2002. Installment payment is RM2.100 per month for 48months commencing from 1 September 2002. It was agreed with the IRB that 1/3 ofthe car was used for private purposes. On 1 January 2005, the motor vehicle wassold for RM85.000. The rate of annual allowance is 20%.

Required:

Calculate the capital allowances, balancing allowances and charges (if any) for TechCreative Sdn Bhd for all the relevant years of assessment up to year of assessment 2005.

(12 marks)



QUESTION 5

Encik Jeffrey, is a Marketing Manager with a manufacturing company in Kuala Lumpur.During the year 2005 he received the following incomes:

a) Employment income: RM48.000 (gross, before EPF contributions at 11 %)

b) Dividend income:

Gross Tax deducted at sourceFrom Malaysia RM25.000 RM7.000From Singapore (not remitted) S$15,000 S$3,600

(The Malaysian-Singapore exchange rate at 31 December 2005 is RM2.30: S$1.00)

c) Interest income of RM5.700 from a 15-month fixed deposit (RM120,000) in MaybankBerhad

d) Interest income of RM19,000 from a 6-month fixed deposit (RM350.000) in PublicBank Bhd.

e) Interest income of RM2.500 from bonds issued by the Malaysian government.

f) Royalties of RM26.000 from the publisher of a book on marketing authored by EncikJeffrey.

g) Rental income of RM1.800 per month. He paid RM1.200 each month (inclusive ofinterest RM450) to service the loan taken to purchase the property. He also paidRM1.350 per annum for assessment and quit rent. Repairs and extension of thekitchen were RM4.500 and RM10,000 respectively.

Encik Jeffrey's wife, Puan Juriah sells cakes from the house to supplement her husband'sincome. She earned RM8.000 for the year 2005.

Encik Jeffrey furnished the following additional particulars for the preparation of the taxreturn for the year of assessment 2005:

a. He has four (4) children from his marriage with Puan Juriah: Anis, 21 years old, who is studying in the University of Glasgow, Scotland.

She works part time and earned RM4.000 in 2005. Agos, 19 years old, who is studying in Universiti Putra Malaysia. Arman, 15 years old, schooling. Arsyad, 8 years old, suffers from bone cancer. He has been paralysed since

birth. Encik Jeffrey spent RM8.000 for his treatment and an additionalRM1,500 to purchase a wheelchair for him.

b. Encik Jeffrey also has a daughter, Erina, from his previous marriage. Erina, 23 yearsold, is studying in Universiti Malaya. He incurred RM6.000 while his ex-wife incurredRM4.000 on the child's maintenance for the year 2005.

i Hak Cipta Universiti Teknologl MARA CONFIDENTIAL


c. Encik Jeffrey was directed by the court to pay RM500 per month as alimony to hisex-wife.

d. Encik Jeffrey incurred RM6.500 medical expenses for his mother who washospitalised.

e. A life policy (capital sum: RM70.000) was taken out on Puan Juriah's life for apremium of RM2.100 which was +paid by Encik Jeffrey.

f. Encik Jeffrey attended a course for 2 months to enhance his knowledge ininformation technology and incurred RM3.500 for the fees.

g. Encik Jeffrey paid a premium of RM3.700 on education insurance for the benefit ofhis children.

h. Puan Juriah incurred RM800 to purchase books and other reading materials.

i. Encik Jeffrey also made Zakat and Fitrah contributions amounting to RM5.500.However, he only has receipts for RM4.500.

j. Encik Jeffrey and Puan Juriah donated RM10,700 and RM850 respectively to anapproved institution.

k. Encik Jeffrey spent RM4,500 to purchase a personal computer for his children.

I. With respect to the dividend income earned by Mr. Jeffrey, the investments (both inMalaysia and Singapore) were financed through a term loan. Interest incurred on theloan in 2005 amounted to RM9.600 of which one-third (1/3) pertained to the cost ofthe Malaysian investments and the balance pertained to the cost of the Singapore-based investments.

Required:

(i) Calculate the income tax payable for Encik Jeffrey and Puan Juriah for the year ofassessment 2005. Puan Juriah elected for combined assessment and both areresident for tax purposes.

(22 marks)

(ii) Based on the facts presented in the question, Puan Juriah should not have electedfor joint assessment. Explain why Puan Juriah should not have elected for jointassessment. (You are not required to calculate the amount of tax saved.)

(3 marks)(Total: 25 marks)

END OF QUESTION PAPER


CONFIDENTIAL APPENDIX 1 (1) AC/NOV 2005/TAX320

THE TAX RATES APPLICABLE WITH EFFECT FROM YA 2002

Chargeable Income (RM) Rate (%) Tax

On the firstOn the next









On the first

Above

2,5002,500

5,0005,000

10,00010,000

20,00015,000

35,00015,000

50,00020,000

70,00030,000

100,00050,000

150,000100,000

250,000

250,000

01

13

19

24

27

27

28

Payable(RM)

025

25150

175300

4751,050

1,5251,950

3,4753,800

7,2757,200

14,47513,500

27,97527,000

54,975

Selected Personal Deductions

SelfWife/husbandChild - basicLife insurance and approved schemes

RM8,0003,0001,000

6,000 maximum

Hak Clpta Universiti Teknologi MARA CONFIDENTIAL

CONFIDENTIAL APPENDIX 2(1) AC/NOV 2005/TAX320

TAXABLE VALUE OF MOTOR VEHICLES PROVIDED BY EMPLOYER

New VehiclesRM

50,000

50,001

75,001

100,001

150,001

200,001

250,001

350,001

500,001

Costing

and below

75,000

100,000

150,000

200,000

250,000

350,000

500,000

and above

Annual ValueRM

1,200

2,400

3,600

5,000

7,000

9,000

15,000

21,250

25,000

Fuel (per arRM

600

900

1,200

1,500

1,800

2,100

2,400

2,700

3,000

Others

Types of BIK

Mobile telephone (rental and charges)DriverGardenerDomestic servant

Annual value of BIKRM600

7,2003,6004,800

Hak Clpta Universiti Teknologi MARA CONFIDENTIAL

CONFIDENTIAL APPENDIX 2 (2) AC/NOV 2005/TAX320

PRESCRIBED AVERAGE LIFE SPAN

PrescribedAsset Average life span

(1) Motorcar 8 years

(2) Furniture and fittings:Curtains, carpets 5 yearsFurniture, sewing machine 15 yearsAir-conditioner 8 yearsRefrigerator 10 years

(3) Kitchen equipment (i.e. crockery, rice cooker, electrickettle, toaster, coffee-maker, gas cooker, dryer,food processor, etc) 6 years

(4) Entertainment and RecreationPiano 20 yearsOrgan 10 yearsColour television, video player, stereo set 7 yearsSwimming pool (detachable), sauna 15 years

(5) MiscellaneousMobile telephone 10 years

VALUE OF BENEFITS

(i) Semi-furnished with furniture in the lounge, ) RM70 per monthdinning room, or bedrooms ) (RM840 per annum)

(ii) Semi-furnished with furniture as in (i) above andone or more of the following:Air-conditioners ) RM140 per monthCurtains ) (RM1,680 per annum)Carpets )

(iii) Fully-furnished with benefits as in (i) and ) RM280 per month(ii) above plus one or more of kitchen ) (RM3,360 per annum)equipment, crockery, utensils and appliances


CONFIDENTIAL APPENDIX 3(1) AC/NOV 2005/TAX320

Capital Allowances - Plant and machinery

Assets Annual allowance ratesComputers, information technology equipmentand computer software 40%Motor vehicles, heavy machinery 20%Plant and machinery - general 14%Office equipment, furniture and fittings 10%


tax320

Documents

page appendix

tax compliance

tax return

years of assessment

business purpose

itconsultancy business

theselfassessment system

acnov 2005tax320c encik