Strategic Professional

– Options

Paper ATX Advanced Taxation (Malaysia)

ACADEMIC SESSION : JULY TO SEPTEMBER 2022

PROGRESS TEST FOR ACCA PAPER : ATX (M)

LECTURERS: MR KUMARAVEL, MS ROZI & MS ALLY

GROUPS : 1, 2 & 3

EXAM DATE : 22 August 2022

EXAM TIME : 9.00am – 12.15pm

Time allowed: 3 hours 15 minutes

INSTRUCTIONS TO CANDIDATES

ALL 4 questions are COMPULSORY and MUST be attempted

Do NOT open this paper until instructed by the supervisor.

All answers must be written in the answer booklet provided. At the end of the
examination, answer booklets and answer sheets must be fastened together.

This question paper must not be removed from the examination hall

Do Not Turn Over the Paper Until Instructed to Begin Writing

EXAM ATTACHMENT (YA 2021)

INCOME TAX RATES

Resident Individual
Chargeable Income Rate Cumulative Tax
RM RM (%) RM
First 5,000 (0 – 5,000) 0 0
Next 15,000 (5,001 – 20,000) 1 150
Next 15,000 (20,001 – 35,000) 3 600
Next 15,000 (35,001 – 50,000) 8 1,800
Next 20,000 (50,001 – 70,000) 13 4,400
Next 30,000 (70,001 – 100,000) 21 10,700
Next 150,000 (100,001 – 250,000) 24 46,700
Next 150,000 (250,001 – 400,000) 24.5 83,450
Next 200,000 (400,001 – 600,000) 25 133,450
Next 400,000 (600,001 – 1,000,000) 26 237,450
Next 1,000,000 (1,000,001 – 2,000,000) 28 517,450
Exceeding 2,000,000 30

Resident Company
Paid Up Ordinary Share Capital First RM 600,000 Excess Over RM 600,000

RM 2,500,000 or less 17% 24%

More than RM 2,500,000 24% 24%

Non-Resident
Company 24%
Individual 30%

Labuan Entity – Income from Labuan Trading Activity

All chargeable profits :
- if fulfil substance requirements 3%
- if do not fulfil substance requirements 24%

Trust Body – Resident or Non-resident

All Chargeable Income 24%
 PERSONAL RELIEFS
RM
Self 9,000
Disabled self – additional 6,000
Medical expenses expended on parents Maximum 8,000
Medical expenses expended on self, spouse or child with serious disease,
fertility treatment for self or spouse and vaccination for self, spouse or Maximum 8,000
child (up to RM 1,000), including up to RM 1,000 for medical examination
Basic supporting equipment for disabled self, spouse, child or parent Maximum 6,000
Study course fees for skills or qualifications Maximum 7,000
Lifestyle allowance Maximum 2,500
Payments for sports equipment or sports activity Maximum 500
Spouse relief 4,000
Disabled spouse, additional Each 5,000
Child – basic rate Each 2,000
Child – higher rate Each 8,000
Disabled child Each 6,000
Disabled child – additional Maximum 8,000
Child care (below six years old) Maximum 2,000
Breastfeeding equipment Maximum 1,000
Life insurance premiums Maximum 3,000
Contributions to approved funds Maximum 4,000
Life insurance (public service) Maximum 7,000
Private retirement scheme, deferred annuity premiums Maximum 3,000
Medical and/or educational insurance premiums for self, spouse or child Maximum 3,000
Deposit for a child into the National Education Savings Scheme Maximum 8,000
Contribution to Social Security Organization (SOCSO) Maximum 250

REBATES
Chargeable income not exceeding RM 35,000 RM
Individual - basic rate 400
Individual entitled to a deduction in respect of a spouse or a former wife 800

CAPITAL ALLOWANCE
Initial Rate Annual Rate
(%) (%)
Industrial buildings 10 3
Plant and machinery – general 20 14
Motor vehicles and heavy machinery 20 20
Office equipment, furniture and fittings 20 10
Computers 20 20

Agriculture allowance
Buildings for the welfare of or as living accommodation Nil 20
for farm employees
Other buildings used in the business Nil 10
All other qualifying agriculture expenditures Nil 50
 REAL PROPERTY GAINS TAX (RPGT)
Individuals & Executors
Companies who are non-citizens and
incorporated in non-permanent
Malaysia or residents & Companies All other
Category of disposal Trustee of a not incorporated in persons
Trust Malaysia (%)
(%) (%)
Disposal within 3 years 30 30 30
Disposal in the 4th year 20 30 20
Disposal in the 5th year 15 30 15
Disposal in the 6th year or 10 10 5
thereafter

SALES AND SERVICE TAX

Sales tax rate 5% / 10%
Service tax rate 6%

STAMP DUTY
Rates of duty under the First Schedule
Conveyance, assignment, transfer or absolute bill of sale Rate
Sale of property
For every RM 100 or fractional part thereof :
− on the first RM 100,000 1%
− on the next RM 400,000 2%
− on the next RM 500,000 3%
− on the excess over RM 1,000,000 4%

Sale of company shares

On every RM 1,000 or fractional part thereof RM 3.00
Section A – BOTH questions are compulsory and MUST be attempted

Question 1

You are a tax associate of Tax Firm. The Sure Pass group of companies have been Tax
Firm’s clients for many years. It has a year end of 31 October. It has been involved in a
variety of business for many years. The following information regarding the Sure Pass group
has been gathered from the meeting with Ms Isobel Robin, the group finance director of Sure
Pass Sdn Bhd.

The following exhibits, available on the left-hand side of the screen, provide information
relevant to the question:

1. Exhibit 1 – Information from the meeting dated 20 August 2022

2. Exhibit 2 – E Mail extract from your director

The information should be used to answer the question requirements within your chosen
response option(s).

Exhibit 1 – Notes of meeting dated 20 August 2022

1. Sure Pass, who is 100% owned by the Tan family and involved in the furniture
business,
Exhibit 1 intends to start manufacturing chairs from financial year ended 31
October 2022. In the years ended 31 October 2023 to 2024, it expects to register
annual increase of 65% to 75% in the exports of chairs. The value of increased
exports is estimated to be about RM100 million each year.

2. In November 2023, the shareholders of Sure Pass plan to sell their entire
shareholding to a foreign company based in South Korea to concentrate on other
business ventures.

3. The Research and Development (R&D) department of Sure Pass has been working
to develop high quality material which can be used to manufacture furniture. This
is the first of its kind in this world. A total of RM900,000 (non-capital expenditure)
and RM4,000,000 (on special machineries) were spent on the R&D in the year
ended 31 October 2021.

4. As the R&D activity is an approved activity, Sure Pass will apply for the
investment tax allowance incentive.

5. Sure Pass has an option not to carry out the R&D activity by itself . Alternatively,
Sure Pass is able to outsource the R&D exercise to an approved R&D company,
Lecturer Sdn Bhd (Lecturer) , which is a 55% subsidiary of Sure Pass. For this
purpose, Sure Pass has to pay a fee of RM7 million to Lecturer, whilst Lecturer
has to specifically acquire some assets worth RM5 million to carry out the R&D.
Lecturer will be eligible to claim investment tax allowance as the R&D activity is
confirmed to be a promoted activity.

(6 marks)
 Exhibit 1 (Continued)

6. Student Sdn Bhd (Student) is part of the Sure Pass group and carries out
manufacturing of desks. As a result of poor maintenance of the environment,
excessive storm water flowed onto its factory, and flooded it. This flooding
caused extensive damage to the whole factory and the whole factory could not
be used for two weeks as the entire wiring system had to be replaced to a flood
resistant system. In August 2021, Student received RM600,000 in compensation
as follows:

RM
Loss of trading profits 200,000
Loss of desks 100,000
Insurance compensation on the factory building 300,000

7. Projector Sdn Bhd (Projector), which is 70% owned by Sure Pass, also closes its
accounts annually to 31 October. In October 2020, it had applied for a tax incentive.
Projector submitted its tax return for the year of assessment (YA) 2020 on 15 May
2021 and paid the self-assessed tax in full.

8. Projector received a letter dated 1 July 2021, which granted approval for the tax
incentive it had applied for and of its claim for RM100,000 for YA 2020. As a result
of this
Exhibit 2 approval. Projector expects its tax payable for YA2020 to be reduced.

\
Exhibit 2 – E-Mail Extract from Director

Please write a letter to Ms Isobel Robin advising the following:

(a) Allowance for significant increase in export (ASIE)

Explain whether Sure Pass is eligible for the ASIE of 30% in years of assessment 2023
and 2024. If Sure Pass is eligible, explain how the ASIE operates.

(b) R&D expenditure

Explain whether the R&D is a qualifying activity for claiming incentives and explain
the relevant tax incentive(s) (including the tax mechanism) available where the R&D is

(i) carried out by Sure Pass itself

(ii) outsourced to Lecturer

Advise on the best option by computing the total potential total tax savings from the
deductions or allowances including capital allowances claimable by both Sure Pass and
Lecturer.

You should assume that both Sure Pass and Lecturer pay tax at a rate of 24%.

(c) Compensation
Explain the income tax treatment and real property gains tax treatment, if relevant,
of each component item of the compensation received by Student.
(d) Approval of tax incentive
Explain the relief (other than for error and mistake) available to Projector following
approval of the tax incentive and the action which must be taken by the company in
order to claim the tax incentive granted for the year of assessment (YA) 2020.
(6 marks)

Requirements:

Prepare the letter to Ms Isobel Robin of Sure Pass Sdn Bhd.

The following marks are available:

(a) Eligibility of allowance for significant increase of exports in YA’s 2023 and 2024
respectively (8 marks)

(b) Incentives available on the research and development activities. (13 marks)

(c) Treatment of compensation (6 marks)

(d) Approval of tax incentive (4 marks)

Professional marks will be awarded in question 1 for the appropriateness of the format and
presentation of the letter and the effectiveness with which the information is communicated.
(4 marks)
(35 marks)
Question 2
Your tax director met with the financial controller of Untung Sdn Bhd (USB) recently. USB
is a locally incorporated and tax resident company that is involved in the plantation and
manufacturing activities. Its paid-up ordinary share capital of RM 2.5 million is 70% owned
by five Malaysian citizen individuals and the balance by Kaya Bhd (KB), a listed investment
holding company. With its 30% shareholding, KB has the right to appoint a director to
represent itself in the board of USB. USB closes its accounts to 31 December annually.

The financial controller has asked for advice regarding tax incentives and some other tax
matters concerning the company. Extracts from the notes of the meeting and from an email
from your tax director detailing the work you are required to do are included in the following
exhibits :
1. Notes of meeting – dated 20 August 2022
2. Email extract from your tax director – dated 21 August 2022.

This information should be used to answer the question requirements within your chosen
response option(s).

Exhibit 1 – Notes of meeting dated 20 August 2022

USB has been involved in the plantation of fruits and vegetables for the past five years. Upon
being harvested, these fresh produce will be transported from USB’s plantation in Cameron
Highlands to its factory in Selangor to be processed into puree, fruit cocktail or to be pickled
and canned to be sold in the local market.

So far, USB has only produced its own agriculture produce and it has been enjoying the
reinvestment allowance (RA) incentive since the year of assessment (YA) 2020. There is no
unutilized RA balance as at 31 December 2020.

Capital investments
During the year ending 31 December 2021, USB intends to make the following investments :
For plantation activity
As part of its expansion plan, USB will incur RM 80,000 to construct better access roads to
the plantation and to improve on its irrigation system as well as RM 120,000 to construct
living accommodation for its plantation workers.

For manufacturing activity

USB is in the process of modernizing and automating its manufacturing activity and for this
purpose, it will be acquiring three additional machineries that adopt a more advanced
technology than the current technology at a total cost of RM 1.8 million.

Financing arrangement
The above investments will be financed by a loan of RM 2.0 million to be provided by KB at
an annual interest rate of 2%. The market interest rate for a similar loan is 5%. The loan will
be for a period of two years effective from 1 January 2021 and the annual interest will be due
on 31 December 2021 and 31 December 2022 respectively.
Exhibit 2 – Email extract from your tax director dated 21 August 2022.

In preparation for my next meeting with Untung Sdn Bhd’s (USB) financial controller,
please prepare a note that addresses the following :
a) Tax incentives available
Identify the incentives that will be available to USB in respect of its capital
investments to be made during the year ended 31 December 2021. For each
incentive, explain the reasons for USB’s eligibility and the mechanism of the
incentive.

b) Choice of incentive
Comment on whether the incentives discussed in part (a) above are mutually
exclusive to each other. If so, provide a comparative computation of the tax savings
that can be enjoyed by USB in the year of assessment (YA) 2021 in terms of the tax
exemption and deductions available for each incentive, on the assumption that the
available exemption and deductions are fully absorbed in YA 2021. Make a
recommendation on which incentive should be opted for by USB.

c) Treatment of loan interest

Explain with reasons, whether the interest cost to be incurred by USB on the loan
will qualify for tax deduction and if so, when can the deduction be claimed.
Consider any other issues that USB should be aware of and the potential
consequences of non-compliance.

Required :
Prepare the note as instructed by your tax director. Marks are available as follows:

a) Tax incentives available. (11 marks)

b) Choice of incentive (6 marks)
c) Treatment of loan interest (8 marks)

(25 marks)
Question 3
Red Sdn Bhd, International Sdn Bhd and Door Sdn Bhd are three unrelated cases

The following exhibits, available on the left-hand side of the screen, provide information
relevant to the question:

1. Exhibit 1 – Information regarding Red Sdn Bhd. It relates to requirement (a) only
2. Exhibit 2 – Information regarding International Inc. It relates to requirement (b) only.
3. Exhibit 3 – Information regarding Door Sdn Bhd. It relates to requirement (c) only.

Exhibit 1

Red Sdn Bhd (Red) is a registered service provider who provides information technology
services. It’s year-end is on 31 December. Red was appointed by Orange Sdn Bhd (Orange)
to develop new software for the company. Red will then engage Purple Sdn Bhd (Purple),
another registered service provider to develop the software. Red will customize the software
based on Orange’s requirements.

Red also received legal services from Violet Pte Ltd (Violet), a company based in USA. On
15 October 2021, Red received an invoice amounting to RM10,000 from Violet. Payment of
the invoice was made on 15 November 2021.

Exhibit 2

International Inc, a company incorporated and operating in Country A with a paid up

share capital of RM2 million, intends to expand its sales network to Malaysia. Beginning
in July 2021, International Inc will station a marketing manager in Malaysia to establish
business contacts, collect local market information and exhibit International Co’s
products to businesses. On 1 December 2021, the marketing manager will report to
International Co as to the feasibility and viability of doing business in Malaysia.
If the report is favourable, in January 2022, the marketing manager will proceed to
establish a sales team, enter into contracts, maintain inventory and fulfil orders.
Exhibit 3

Door Sdn Bhd is a company which proposes to open restaurants at various states in Malaysia.
It plans to incorporate a company operating the restaurant in each state. It is currently
considering the following structure to manage the restaurants:

(a) A management company to manage finance, accounting and human resources

functions at a fee based on time cost charged to the respective companies;
(b) A holding company to hold all the companies and receive dividend from them.

Required:
(a)
(i) Explain whether there is a service tax relief on the information technology
services charged by Purple. If so, specifically elaborate on the conditions to
be fulfilled, which party will receive the exemption, the related documents to
be issued and the consequences of non-compliance with the conditions.
(5 marks)

(ii) Explain the service tax implication on the legal services received from Violet.
(5 marks)
(b) Assuming a positive feasibility report, explain whether International Co
will have a permanent establishment in Malaysia in 2021 and 2022.
(4 marks)

(c) Explain why a single company should be incorporated to all the other
companies in the group, as well as carry out the management functions,
rather than a management company and a separate holding company.

Assuming a single company is incorporated, explain how the two functions

should be arranged within the company to avoid it from being classified as
an investment holding company.

In addition, determine the suitability of the fee charged based on the time
cost to the respective companies. (6 marks)

(20 marks)
Question 4
The following exhibit, available on the left-hand side of the screen, provide information
relevant to the question:

1. Exhibit 1 – Information regarding Build Sdn Bhd.

Exhibit 1

Build Sdn Bhd (Build) was incorporated on 1 January 2019 with a paid-up ordinary share
capital of RM1 million.

RM
Arif 400,000
Siti 600,000

On 1 July 2019, Build commenced its business of the manufacturing furniture. It closes its
accounts to 30 June annually.

On 1 December 2019, Build acquired its first and only real property, a land that cost RM2
million. Build cash at bank as at 1 December 2019 stood at RM500,000.

On 20 December 2020, Arif sold his entire shareholding to Siti for RM1.5 million. On the
same day, Build sold part of the land to a property development company for RM1 million.

At that date, the remaining land had a market value of RM4 million while cash at bank
amounted to RM6 million.

On 15 June 2022, Siti disposed her entire shareholding for RM10 million.

Required :

(i) Explain whether the shares held by Siti were RPC shares at the following dates:
– when the company was incorporated on 1 January 2019 (600,000 shares);
– when the company acquired the land on 1 December 2019 (600,000 shares);
– when the 400,000 shares were acquired from Arif on 29 December 2009.
(10 marks)

(ii) Calculate and briefly explain Siti’s real property gains tax liability for the disposal
of her entire shareholding on 15 June 2022.
(10 marks)

(20 marks)

END OF QUESTION PAPER