Tutorial 9 Advanced Taxation / BAC 4644 Question and Answer Group relief Question 1 What are the issues

you need to understand in relation to group relief? Answer In dealing with losses and group relief you need to understand the following: The meaning of related company for the purposes of group relief The operation of group relief rules, conditions and restrictions etc Penalties on the surrendering company which gi es incorrect information a!out its ad"usted loss#

Question 2 What do you understand !y a surrendering company, a claimant company and a related company? Answer $urrendering company % company ha ing an ad"usted loss in the !asis period for a year of assessment that passes o er its losses to another company# &laimant company % company which is related to the surrendering company that claims the losses against its own income 'elated company &ompanies are related in the conte(t of $ection ))%, if at least: *+, of the paid-up ordinary capital of the surrendering company is directly or indirectly owned !y the claimant company, or *+, of the paid-up ordinary capital of the claimant company is directly or indirectly owned !y the surrendering company, or *+, of the paid-up ordinary capital of !oth the surrendering company and the claimant company are directly or indirectly owned !y another company resident and incorporated in .alaysia#

In the a!o e conte(t, Indirectly owned means through the medium of other companies resident and incorporated in .alaysia#0 and 1rdinary share means any share other than one carrying the right to a fi(ed percentage of the nominal alue of the share or of the profits of the company# Question 3 When can a company claim loss relief Answer 2ntitlement to group relief is ery restricted on account of the arious conditions and limitations# % alid claim can !e only made when all of the pre-conditions ha e !een met# Question 4 In relation to 3uestion 4, what are the pre-conditions to claim loss relief? Answer The following si( re3uirements apply to !oth the surrendering company and the claimant company: /# They must !e related companies throughout the !asis period for the year of assessment 5of claim6 and the /7 months preceding# 7# 8oth must ha e a paid-up share capital of more than '.7#9m at the !eginning of the !asis period for the year of assessment 5of claim6# 4# 8oth must !e resident in .alaysia for the !asis period for the year of assessment 5of claim6# )# 8oth must !e incorporated in .alaysia# 9# 8oth must ha e a /7-month !asis period ending on the same day# :# 8oth must !e su!"ect to ta( at the full company rate applica!le 5and not the reduced rate of 7+,6#

Question When would a company !e excluded from ma;ing a claim for group loss? Answer If any of the following apply in the !asis period for the year of assessment concerned, a company will !e e(cluded from surrendering or claiming the losses: The company is a pioneer company, or has !een granted appro al for in estment ta( allowance# The company en"oys either a ta( e(emption in respect of a shipping operation, or a ministerial e(emption# The company has made a claim for rein estment allowance# The company has claimed a deduction for an appro ed food production pro"ect# The company has claimed a deduction for the cost of ac3uisition of proprietary rights# The company has !een granted a deduction for the cost of ac3uiring a foreignowned company# The company has claimed a deduction under any rules made under s#/9) 5a P< 1rder6 which prohi!it the application of group relief#

The following re3uirements also apply: The surrendering company must ha e an ad"usted loss in the !asis period for the year of assessment 5i#e# in the year in which the loss is to !e claimed6# The claimant company must ha e a defined aggregate income for the year of assessment 5of claim6# The residual assets and residual profits test must !e satisfied# 8oth companies must ma;e an irre oca!le election to surrender or claim an amount of ad"usted loss in the return 5=orm &6 furnished for the year of assessment 5of claim6#

Question 6 What are the factors and steps you would consider in arri ing at the losses in a group relief? Answer %ny eligi!le company ha ing an ad"usted loss may !e a surrendering company# &urrent year loss relief must !e applied first# The amount of loss eligi!le for surrender is 9+, of the ad"usted loss for the !asis period for the year of assessment, after it is reduced !y any aggregate income of the company for that year of assessment#

The capital allowances of the surrendering company are not ta;en into account# The aggregate income of a claimant company is defined as the aggregate income as reduced !y all of the items which 3ualify for deduction under $ection )) when calculating total income, e(cept for group relief itself# These items are: current year loss 3ualifying prospecting e(penditure 3ualifying pre-operational !usiness e(penditure 5appro ed o erseas e(penditure6 monetary and other gifts, such as appro ed donations# %ggregate income is computed as follows: aggregate of statutory !usiness income from all sources, reduced !y una!sor!ed losses !rought forward aggregate of statutory income from all other sources claw-!ac; of 3ualifying prospecting e(penditure#

2(ample of the steps in arri ing at the defined aggregate income: %ggregate income 5say6 >ess: sec ))5/6 deduction &urrent year loss Prospecting e(penditure Pre-operating !usiness e(penditure %ppro ed donations ?efined aggregate income '. /++,+++ /+,+++ /4,+++ /7,+++ 9,+++

)+,+++ :+,+++

Question ! What is the penalty of wrong information or claim in respect of loss relief? Answer % penalty can also !e imposed on the surrendering company where the company has gi en incorrect information, in its annual ta( return, a!out the amount of an ad"usted loss# The amount of penalty prescri!ed is e3ual to the amount of ta( that the claimant company has or would ha e underpaid as a result of the incorrect information#

Question " What is an essential feature of a ta( planning in respect of capital allowance and losses? Answer &ompanies that ha e losses which are not fully deducted or set off against other income, and capital allowances that is not a!sor!ed or not fully a!sor!ed, can carry forward these losses and capital allowances to !e set off against the income of the following year, or any su!se3uent year of assessment i#e# it could !e carried forward indefinitely# The losses can to !e set off against the statutory income from all !usiness sources0 The capital allowance can !e deducted from the same !usiness source#

This feature of the ta( law pro ided a simple and con enient ta( planning mechanism to shift ta(a!le income from a profit ma;ing entity to a company that is carrying an e(cess !aggage of losses and capital allowances# <sually this is done !y ac3uiring a loss ma;ing company and in"ecting the profita!le !usiness into this loss ma;ing company# The profits generated will !e a!sor!ed !y the e(isting losses, thus gi ing the ta( !enefit to the ac3uirer# Question 9 In relation to 3uestion @ a!o e, what was the missing feature in this rule? Answer In a ailing oneself of this attri!ute of the law, a change in the shareholders of the company was not a matter to !e ta;en into account

Question 1# What was the change in the law introduced to pre ent such ta( planning? Answer The amount of !usiness losses and capital allowance ascertained for a year of assessment shall not !e a aila!le for deduction in su!se3uent years of assessment if the shareholders of that company on the last day of the !asis period for that year of assessment were not su!stantially the same as the shareholders of the company on the first day of the !asis period for the year of assessment in which such amount would otherwise !e deducti!le or gi en to that company0 %nd the amount of the una!sor!ed !usiness loss and una!sor!ed capital allowances in respect of a company for any year of assessment prior to the year of assessment 7++: shall not !e allowed to !e carried forward to the su!se3uent years of assessment if the shareholders of the company on the last day of the !asis period for the year of assessment 7++9 were not su!stantially the same as the shareholders of the company on the first day of the !asis period for the year of assessment in which such amount would otherwise !e deducti!le or gi en to that company# The critical factor is the shareholders of the company - if the shareholders are not su!stantially the same, then the losses and capital allowances determined in a rele ant year will not !e a aila!le for a deduction in the su!se3uent period# Question 11 When are the shareholders considered to !e su!stantially the same? Answer The shareholders are considered to !e substantially the same as the shareholders of the company at any other date if on !oth of those dates: .ore than 9+, of the paid-up capital of the ordinary shares of the company is held !y or on !ehalf of the same persons0 and .ore than 9+, of the nominal alue of the allotted shares in respect of the ordinary shares in the company is held !y or on !ehalf of the same persons#