Paper P6 (MYS)

Professional Level – Options Module

Advanced Taxation
(Malaysia)
Friday 15 June 2012

Time allowed
Reading and planning: 15 minutes
Writing: 3 hours

This paper is divided into two sections:

Section A – BOTH questions are compulsory and MUST be attempted
Section B – TWO questions ONLY to be attempted
Tax rates and allowances are on pages 2–4

Do NOT open this paper until instructed by the supervisor.

During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.

The Association of Chartered Certified Accountants

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

TAX RATES AND ALLOWANCES

The following tax rates, allowances and values are to be used in answering the questions.

Income tax rates

Resident individual
Chargeable income
Tax payable
Band Cumulative Rate Cumulative
RM RM % RM
2,500 2,500 10 0
2,500 5,000 11 25
15,000 20,000 13 475
15,000 35,000 17 1,525
15,000 50,000 12 3,325
20,000 70,000 19 7,125
30,000 100,000 24 14,325
Excess 26

Non-resident individual
All chargeable income 26%

Resident company
Paid up ordinary share capital RM2,500,000 More than
or less RM2,500,000
On the first RM500,000 20% 25%
On the remainder 25% 25%

Non-resident company
All chargeable income 25%

Labuan entity
income from a Labuan business activity
All chargeable income 3%

Trust body – resident or non-resident

All chargeable income 25%

2
 Personal deductions
RM
Self 9,000
Self – additional if disabled 6,000
Spouse 3,000
Spouse – additional if disabled 3,500
Child – basic rate each 1,000
Child – higher rate each 4,000
Disabled child each 5,000
Disabled child – additional each 4,000
Life insurance premiums, approved scheme contributions maximum 6,000
Deferred annuity premium maximum 1,000
Medical expenses for parents maximum 5,000
Medical expenses for serious disease of self, spouse or child, including
up to RM500 for medical examination maximum 5,000
Basic supporting equipment for self, spouse, child or parent if disabled maximum 5,000
Educational and medical insurance for self, spouse or child maximum 3,000
Study course fees for skills or qualifications maximum 5,000
Broadband subscription maximum 500
Purchase of a personal computer maximum 3,000
Purchase of books, magazines etc for personal use maximum 1,000
Purchase of sports equipment maximum 300
Deposit for a child into the National Education Savings Scheme maximum 3,000

Rebates
Chargeable income not exceeding RM35,000 RM
Individual – basic rate 400
Individual entitled to a deduction for a spouse or a former wife 800

Capital allowances
Initial Annual
rate % 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

Real property gains tax

Disposal by all persons (except non-citizen individuals)
Date of disposal Rate %
Disposal within two years after the date of acquisition 30
Disposal in the third year after the date of acquisition 20
Disposal in the fourth year after the date of acquisition 15
Disposal in the fifth year after the date of acquisition or thereafter 5
Note: an exemption is granted which reduces the effective rate of tax to 5% where disposal takes place within five
years of acquisition and to nil thereafter.

Sales and service tax

Rate %
Sales tax 10
Service tax 6

3 [P.T.O.
 Stamp duty
Rates of duty under the First Schedule

Conveyance, assignment, transfer or absolute bill of sale Rate %

For every RM100 or fractional part thereof:
On the first RM100,000 1
On the next RM400,000 2
On the excess over RM500,000 3

4
Section A – BOTH questions are compulsory and MUST be attempted

1 Moodes Sdn Bhd (MSB), a producer of casual wear made with imported textile, closes its accounts annually to
31 December.
MSB’s business is constantly evolving: new product lines are acquired or developed and existing lines are disposed
of. A product line comprises the registered trademark, patented designs and brand name.
As at 1 January 2012, MSB owned a total of 18 product lines, one of which, swimwear, was sold for RM12·8 million
in May 2012. Under the sale and purchase agreement, this amount is payable to MSB in eight equal quarterly
payments as follows:
RM’000
2012: June, September and December 4,800
2013: March, June, September and December 6,400
2014: March 1,600
MSB does not expect the disposal of the swimwear product line to reduce the company’s turnover as sales of its other
casual wear product lines are expected to rise significantly. In fact, MSB will recruit more staff to cope with the
increase.
In July 2011, MSB obtained the requisite Government approval for its research project to develop world pioneering
technology for producing synthetic gold. MSB is therefore eligible for the tax incentive for approved research and
development (R&D).
In connection with this, MSB incurred expenditure as follows during the period 1 July to 31 December 2011:
RM’000
Remuneration for research personnel 1,500
Costs of laboratory testing, analysis and evaluation 800
Royalty paid to a Malaysian resident for secret processes 700
Research equipment and assets 2,000
––––––
Total R&D expenditure on the approved R&D project 5,000
––––––
The RM5 million is reflected as R&D expenditure in MSB’s balance sheet as at 31 December 2011.
The adjusted income of MSB for the year of assessment 2011 before taking into account the incentive for approved
R&D is RM10 million, and the capital allowance for assets other than the R&D assets is RM1 million.

Required:
Prepare a report from the company’s tax adviser to Moodes Sdn Bhd’s financial controller, which addresses the
following:
(i) With reference to the sale of the swimwear product line:
(1) The arguments for both the capital and revenue nature of the RM12·8 million received and your
conclusion, supported with reasons, on this issue. (8 marks)
(2) Assuming that the RM12·8 million receipt is income in nature, the possible bases of recognition for
income tax purposes and your conclusion as to which basis is applicable. (8 marks)

(ii) The nature of the approved research and development (R&D) incentive and the eligibility (or otherwise) of
every item of the expenditure incurred by Moodes Sdn Bhd (MSB) in relation to the research project in the
period ended 31 December 2011, together with any other relevant aspects of their tax treatment;
Support your explanations with a computation of MSB’s statutory income for the year of assessment 2011,
indicating by the use of the word ‘nil’ any item referred to in the scenario for which no adjusting entry needs
to be made in the tax computation. (16 marks)
Professional marks will be awarded in question 1 for the appropriateness of the format of the report and the
effectiveness with which the information is communicated. (4 marks)

(36 marks)

5 [P.T.O.
2 Pursuant to a merger agreement between Big Sdn Bhd (Big) and Small Sdn Bhd (Small), Big will acquire the entire
shareholding of Small on 15 July 2012. Thereafter, on 1 August 2012 Small will transfer all the assets (some of
which were acquired on 5 June 2012), liabilities and activities of its trading business to Big to be merged with Big’s
trading business from 1 August 2012.
Both companies trade in home appliances. Big closes its accounts annually to 31 July while Small closes its accounts
annually to 31 May.
Extracts of information from Small’s financial statements as at 31 May 2012 are as follows:
RM’000
Unabsorbed business loss carried forward 10
Unabsorbed capital allowance carried forward 50
Trade receivables 900
Inventory at net realisable value 280
S.108 balance 75
Exempt account balance 130
Retained earnings 590

Required:
Explain the following issues arising from the impending takeover and merger:
(a) Bearing in mind the basis of inventory valuation for an on-going business and that for a business going into
cessation, the strategy that should be adopted by Small Sdn Bhd for inventory valuation at the time of
transfer of the company’s business to Big Sdn Bhd. (9 marks)

(b) The dividend distribution policy that should be adopted by Small Sdn Bhd, together with a computation of
the component dividends that may be distributed. (5 marks)

(c) The course of action that should be taken by Small Sdn Bhd regarding the trade receivables. (4 marks)

(d) Why the controlled sale provisions will apply to the transfer, and the entitlement to capital allowances (initial,
annual, balancing allowance and balancing charge) available to Big Sdn Bhd and Small Sdn Bhd
respectively, in relation to the transferred assets for the years of assessment 2012 and 2013. (10 marks)

(28 marks)

6
Section B – TWO questions ONLY to be attempted

3 On 1 February 2011, Mr Grandpa signed a written agreement to transfer a shop house as a birthday gift to his
granddaughter, Niki, who turned 21 years of age on that day. Niki is single and a student at a local university.
The shop house had a market value of RM590,000 on 1 February 2011 and produces a rental income of RM5,000
per month. Mr Grandpa had acquired the shop house on 13 March 2007 at a cost of RM380,000.

Required:
(a) Explain why the transfer of the shop house by Mr Grandpa to Niki constitutes a settlement under s.65 of the
Income Tax Act for the year of assessment 2011, and state the significance of such a settlement for income
tax purposes. (7 marks)

(b) Explain the income tax treatment of the rental income from the shop house for both Mr Grandpa and Niki
for the years of assessment 2011 and 2012, clearly identifying when (when not) the deeming provisions
apply. (6 marks)

(c) Explain the real property gains tax treatment of the transfer of the shop house with respect to Mr Grandpa
and Niki, stating clearly Niki’s acquisition date and acquisition price. (5 marks)

(18 marks)

4 A foreign publishing company (FPC) carries out its main publishing functions such as liaison with writers, editorial
work and global marketing in the foreign country of Halvana, where it is resident. FPC does not have an office, a
branch or any appreciable presence in Malaysia.
FPC has appointed Mr A as its representative in Malaysia. Mr A works exclusively for FPC, he works from his home
in Malaysia, taking instructions and communicating with the distribution department of FPC through the telephone
and email. Mr A is not vested with authority to enter into contracts on behalf of FPC. He is paid a fixed monthly
remuneration by FPC into his bank account in Halvana.
Mr A’s duties include:
– liaising with the Malaysian contractors appointed by FPC to carry out the printing of its many publications;
– ensuring that the printed publications are transported or shipped to buyers in Malaysia and the Asia-Pacific
region; and
– submitting reports regularly to FPC’s distribution department to facilitate direct payments to the independent
contractors and shippers.
There is a double tax agreement between Malaysia and Halvana.

Required:
(a) State, with reasons, whether the relationship of Mr A and the foreign publishing company (FPC) is one of
master–servant or principal–agent. (3 marks)

(b) Explain whether Mr A will be subject to tax in Malaysia in respect of the remuneration he receives from FPC.
(5 marks)

(c) Explain whether FPC will have a permanent establishment in Malaysia. (6 marks)

(d) Explain the significance of FPC having a permanent establishment in Malaysia. (4 marks)

(18 marks)

7 [P.T.O.
5 On 1 April 2009, Vroom Sdn Bhd (Vroom), a newly incorporated company, was granted a concession by the
Malaysian Government. Under this concession, Vroom would design, build and operate a tolled motorway and
ancillary services such as food outlets for 30 years, after which it will hand over the motorway to the Government for
RM1.
Vroom secured financing of RM200 million for the project on 4 June 2009, at which time it appointed professional
consultants for the design and survey component of the project. The design work commenced on 1 July 2009 and
construction began on 2 January 2010. The motorway was opened to the public on 1 January 2011.
Vroom’s principal source of revenue is the toll collections from users of the motorway and rental income from the food
outlets in the motorway rest area.
Vroom, which closes its accounts annually to 31 December, incurred qualifying expenditure on the motorway as
follows:
RM million
Public road 100
Ancillary structures:
Toll booths and office buildings 10
Rest area structures 5

Required:
(a) For each of the five dates referred to in the scenario, state, with reasons, whether that is (is not) the date on
which Vroom Sdn Bhd (Vroom) commenced its business. (7 marks)

(b) With reference to the rental income received by Vroom from the food outlets in the rest area:
(i) State, with reasons, whether you would classify the income as rental income (under s.4(d)) or as part
of the business income from operating the motorway (under s.4(a)); (4 marks)
(ii) Explain the income tax impact if the rental income received from the food outlets is classified as rental
income (under s.4(d)). (4 marks)

(c) Assuming that the rental income is part of the business of operating the motorway, state, with reasons, from
when Vroom is first eligible for the industrial building allowance and compute the allowance available in the
first year of assessment if the annual allowance rate for public road and ancillary structures is 6%.
(3 marks)

(18 marks)

End of Question Paper

8
Answers
Professional Level – Options Module, Paper P6 (MYS)
Advanced Taxation (Malaysia) June 2012 Answers

All statutory references are to the Income Tax Act 1967, as amended, unless otherwise stated.

1 Moodes Sdn Bhd

To: Financial Controller, Moodes Sdn Bhd

From Tax Adviser
Date: 15 June 2012
Report on the tax treatment of the sale of the swimwear product line and the research and development project
As instructed, we append below the tax implications of the sale of the swimwear product line and the approved research and
development (R&D) project by Moodes Sdn Bhd (MSB).

(i) Sale of the swimwear product line

MSB has entered into a sale and purchase agreement to dispose of the swimwear product line for RM12·8 million. It is
important to determine the nature of this amount so that the appropriate tax treatment is accorded in the coming year(s).
(1) Capital or revenue receipt?
Capital receipt
MSB is in the business of producing and selling casual wear. The product lines it owns are intangible fixed assets.
Hence, a product line is MSB’s capital asset, not its stock or circulating asset. After the disposal of the swimwear
production line, MSB will no longer be able to produce the swimwear under the product line. The transaction relates
more to the capital structure rather than the operations of MSB.
The fact that the proceeds are payable in eight instalments spanning three years does not alter its capital nature. The
instalment payment scheme is merely a way of settling the debt which arose as a result of the sale of a capital asset.
Therefore, the RM12·8 million represents a capital receipt and should not be assessed to income tax as it is not income.
Revenue receipt
At first glance, it appears that the product lines are fixed intangible assets. However, the product lines are many in
number and they are constantly changing. The buying and selling of product lines is regularly carried out as and when
the opportunity and conditions warrant. The frequency of such sales renders them revenue in nature.
Moreover, it is noted that the disposal of the swimwear product line did not bring about a significant impact on the
company’s turnover or staff strength. In fact, MSB is going to recruit more staff and it looks like business will be more
than usual. Therefore, the sale of the swimwear product line has not had a substantial impact on the capital structure
of the business.
Given the attendant circumstances, the disposal of product lines is a normal incidence in MSB’s business. Therefore,
the receipt of RM12·8 million represents a revenue receipt and should be subject to income tax.
Conclusion
The above arguments show that there are compelling grounds for the amount to be capital in nature and equally
convincing arguments to be made for it being revenue in nature.
On balance, we would lean towards the capital receipt argument. The reasons for our view are:
– a product line is undeniably a fixed capital asset of MSB;
– a disposal of a fixed asset, however often repeated, remains a disposal of a fixed asset; and
– when a receipt is capable of being either capital or revenue, the benefit of the doubt should be given to the taxpayer.
Therefore, we maintain that the RM12·8 million is not revenue income, hence, it is not subject to income tax.
(2) Recognition of the RM12·8 million as revenue income
Assuming that the RM12·8 million is revenue in nature, there are two possible bases for recognising the income.
Entire sum
This approach recognises the entire sum of RM12·8 million as income when the disposal is concluded. The fact that
the entire sum has not been received is not relevant as the accrual basis of recognising income is adopted for business
source income.
The basis for this approach is that upon the conclusion of the transaction, a debt of RM12·8 million has arisen. The
entire sum is payable: the instalment arrangement is merely a mutually agreed mode of payment.
On this basis, the entire sum of RM12·8 million should be included as gross income for the year of assessment 2012.

11
 Instalments
This approach takes cognisance of the fact that the instalment scheme constitutes part of the sale and purchase
agreement and is therefore legally binding on the contracting parties. This means that the debt arises only upon the
quarterly due dates. MSB cannot legally demand payment of the entire sum in 2012: it can only demand payment of
each instalment as the relevant quarter elapses.
As business income is recognised on an accrual basis, i.e. when a debt falls due, MSB should recognise a receipt of
income only when each instalment falls due.
If an instalment is not paid according to the schedule, such an instalment must nevertheless be recognised as income
because the debt has arisen.
Conclusion
The important factor in this case is that the instalment scheme is clearly part and parcel of the sale and purchase
agreement. The deferred payment scheme is legally binding on both parties. Therefore, the debts arise only with each
quarter.
We are of the view that income should only be recognised in respect of the instalments that fall due during the basis
period for a year of assessment. Therefore the amount to be recognised as income will be RM4·8 million for the year of
assessment 2012, RM6·4 million for the year of assessment 2013 and RM1·6 million for the year of assessment 2014.

(ii) Approved R&D incentive

We turn next to the approved R&D project and the determination of the quantum of the incentive by considering the eligibility
of the R&D expenditure.
The approved R&D incentive provides for a double deduction for qualifying expenditure incurred during the basis period on
research approved by the Minister of Finance. The R&D expenditure must not be capital expenditure on plant, machinery,
fixtures, land, premises, buildings etc or rights over any property.
With the above in mind, an appendix comprising the computation of statutory income for the casual wear business is attached
herewith for your reference.
Our comments with reference to the appendix are as follows:
Remuneration for research personnel – RM1,500,000
This is not capital expenditure on any plant, machinery etc. The remuneration is for personnel who carry out the research.
Therefore, this item qualifies for the R&D incentive.
Laboratory testing, analysis and evaluation – RM800,000
This item is directly related to the research process. The expenditure is not on plant, machinery etc. Therefore, this item also
qualifies for the R&D incentive.
Royalty paid to a Malaysian resident for secret processes – RM700,000
By paying a royalty to have access to secret processes, MSB is not carrying out research: it is buying ready-made research.
Therefore, this item does not qualify for the R&D incentive.
Further, this item is connected to the R&D project, which itself (i.e. production of synthetic gold) is not related to the
production of gross income from the producing and selling of garments. Therefore, as it is not incurred in the production of
gross income, the royalty payment does not qualify for the single deduction [under s.33(1)] either.
Research equipment and research assets – RM2 million
This item is clearly capital expenditure on plant, machinery etc. Therefore, it does not qualify for the R&D incentive. However,
it does qualify for capital allowance as this has been specifically allowed [under paragraph 37D of Schedule 3] for approved
R&D. Thus, MSB may claim the initial and annual allowances in respect of the research equipment and assets.
Double deduction
The two items, i.e. remuneration for research personnel and laboratory testing etc, eligible for the incentive total
RM2·3 million. A double deduction is given as the R&D incentive: so RM4·6 million is deductible in arriving at the adjusted
income.
Capital allowance
The total capital allowance of RM1·68 million (RM1 million for existing assets and RM680,000 for the research assets) is
deductible from the adjusted income in arriving at the statutory income.

Summary
The tax treatment of the proceeds from the sale of the swimwear product line should be borne in mind when preparing the tax
computation for the year of assessment 2012, while the proper treatment of the R&D incentive and the research assets should be
put through in the tax computation for the year of assessment 2011.

End of Report

12
 Appendix
Moodes Sdn Bhd
Tax computation
Year of assessment 2011
RM’000 RM’000
Adjusted income 10,000
Less Approved R&D expenditure:
Remuneration for research personnel 1,500
Cost of laboratory testing, analysis and evaluation 800
Royalty for secret processes nil
Research equipment and assets nil
––––––
Eligible for R&D incentive 2,300
Double deduction 2,300
––––––
(4,600)
–––––––
5,400
Less Capital allowances
Existing business assets 1,000
Research equipment and assets RM2 million x (20% + 14%) 680
––––––
(1,680)
–––––––
Statutory income 3,720
–––––––

2 Small Sdn Bhd

(a) Inventory
As at 31 May 2012, the net realisable value of Small’s inventory is valued at RM280,000. Small will transfer all its assets,
liabilities and activities to Big in two months’ time, i.e. on 1 August 2012. This means that Small will carry out business
operations for two months in the year of assessment 2013. With an unabsorbed loss of RM10,000 and capital allowance of
RM50,000 brought forward from the year of assessment 2012, Small should seek to generate sufficient income to at least
absorb this RM60,000 deficit. If not absorbed, these amounts would be lost on the cessation of the business.
Apart from the income generated from the business operations during these two months, the transfer of the inventory to Big
represents another source of revenue that will augment the adjusted income.
For going concerns, inventory must be valued [according to s.35(3)] at the end of the basis period at the market value, or,
on election, at cost (including the cost of bringing it to its condition and location). However, for a business about to cease
operations [according to s.35(5)], the value of inventory shall be the price paid on the sale, provided that the inventory
represents trading stock to both the disposer and the acquirer and the said price is taken to be the ending inventory value
and the opening inventory value, respectively.
In the case of Small’s inventory to be transferred to Big on 1 August 2012 together with other assets and liabilities, the value
attributable to the inventory in the global sale price of the business may be enhanced to achieve the required level of income.
Of course, the enhanced price must still be within reasonable boundaries of market price.
Therefore, the strategy should be to attribute a reasonably enhanced value for the inventory which will help Small to absorb
its brought forward loss and capital allowance, while Big will be able to claim this full price as its opening inventory value or
as part of its purchases of inventory in the initial basis period.

(b) Distribution of dividends

Small has the following balances as at 31 May 2012:
RM’000
Section 108 balance 75
Exempt account balance 130
Retained earnings 590
Small should adopt the policy that all of its s.108 balances and exempt account balances should be fully utilised before the
transfer of its shares to Big on 15 July 2012, as only dividends distributed at the latest by 14 July 2012 will benefit the
current (outgoing) shareholders of the company.
However, any distribution is subject to the over-riding restriction that Small may distribute only up to the amount of its retained
earnings.

13
 The component dividends to be distributed are as follows:
RM
Gross franked dividend 75,000/25 x 100 300,000
Exempt dividend 130,000
––––––––
Total dividends 430,000
––––––––
As Small has retained earnings of RM590,000, distributing dividends as above will be within this restriction.

(c) Trade receivables

Before the transfer of the business to Big, it is imperative that the list of trade receivables be closely examined and their
recoverability assessed. If any trade receivable is assessed to be potentially bad or doubtful, it should be written off as bad or
a provision for doubtful debt be made pre-transfer. Of course, the normal due diligence should have been undertaken such
as due recovery action, including legal action.
Provided that the normal requisites are fulfilled, such bad debts or doubtful debts will rank for tax deduction in Small for the
year of assessment 2013 (basis period: 1 June 2012–31 July 2012).
The trade receivables, when taken over by Big, become its book debts, i.e. capital assets. Any debt becoming doubtful or
turning bad after Big’s takeover of the business will not qualify for tax deduction as such debts taken over have not been part
of its gross income.

(d) Capital allowance

Big will acquire the entire share capital of Small on 15 July 2012, then acquire Small’s trading business on 1 August 2012.
Big therefore controls Small on 1 August 2012. The assets transferred to Big along with the business are thus a transaction
under controlled conditions. The controlled sale provisions will therefore apply.
Big closes its accounts annually to 31 July while Small closes its accounts annually to 31 May. As the disposal will take place
on 1 August 2012, it falls within the basis period of 1 August 2012 to 31 July 2013 for Big.
Applying the rules of controlled sale, the first year of assessment that Big qualifies for capital allowance in respect of the assets
taken over from Small is the year of assessment 2013. The year of assessment 2013 will therefore be the final period for
Small. The assets are therefore deemed to be disposed of on the first day of the final period of Small, i.e. 1 June 2012.
Thus, Small will claim capital allowances in respect of its qualifying assets up to and including the year of assessment 2012.
Big will be eligible to claim the capital allowances for the said assets commencing from the year of assessment 2013.
As these are controlled transfers, there will be no balancing allowances or charges for Small in the year of assessment 2013
as the disposals are deemed to be transacted at the residual expenditure of the assets.
Big will not be able to claim initial allowance under the controlled transfers provisions, except for the qualifying assets that
were actually acquired by Small on or after 1 June 2012, i.e. on 5 June 2012, as the qualifying expenditure on these assets
would be deemed to have been incurred by Big, not Small [under Rule 4 of the controlled sales provisions].

3 Mr Grandpa and Niki

(a) Transfer of shop house: a settlement

The transfer of the shop house by Mr Grandpa to his granddaughter Niki constitutes a settlement [under s.65] because the
requisite conditions are satisfied:
– There is a transfer of an asset and the transfer was made without valuable and adequate consideration.
– The ‘settlor’ (Mr Grandpa) was the owner of the property, and the settlement was made during the life of the settlor.
– As a result of the transfer, his granddaughter (Niki), who is a ‘relative’ as defined [in s.65(11)], becomes the owner of
the property and therefore legally entitled to the rental income produced.
– Niki was unmarried and had not attained the age of 21 years at the beginning of the year of assessment 2011, i.e. on
1 January 2011 (her 21st birthday only fell on 1 February 2011).
When a settlement subsists, the provisions [of s.65] stipulate that any income from such asset transferred shall be deemed
to be the income of the settlor and not the income of the relative. Thus, although the shop house was transferred to Niki, the
rental income is deemed to be that of Mr Grandpa.

(b) Rental income

The rental income from the shop house will be treated as follows:
Year of assessment 2011
1 January–31 January 2011 (1 month)
RM5,000 x 1 month = RM5,000 is the income of Mr Grandpa.
1 February–31 December 2011 (11 months)
RM5,000 x 11 months = RM55,000 is deemed income of Mr Grandpa [s.65].

14
 Year of assessment 2012
1 January–31 December 2012 (12 months)
RM5,000 x 12 = RM60,000 is the income of Niki.
The deeming provisions [of s.65] cease to apply as Niki has attained 21 years of age as at the beginning of the year of
assessment 2012. Therefore, Mr Grandpa is no longer deemed to receive any of the rental income.

(c) Real property gains tax

Under the Real Property Gains Tax Act [in paragraph 12 of Schedule 2], where a chargeable asset is disposed of by way of
gift, and the donor and recipient are grandparent and grandchild, the transaction is deemed to be at no-gain-no-loss.
Mr Grandpa is therefore deemed to have disposed of the shop house at his acquisition price of RM380,000, while Niki is
deemed to have acquired the shop house at an acquisition price of RM380,000. Niki’s acquisition date of the shop house is
1 February 2011.

4 Foreign company and Malaysian representative

(a) Master–servant or principal–agent?

Mr A works exclusively for the foreign company.
He regularly takes instructions from the foreign company’s home base.
He has a fixed scope of duties.
He does not have authority to enter into contracts on behalf of the foreign company.
He is paid a fixed monthly remuneration.
All the above point to a master–servant relationship. Therefore, Mr A is an employee of the foreign company. He is not an
agent of the foreign company.

(b) Whether Mr A is taxable in Malaysia

As Mr A is an employee, it is necessary to examine where he physically exercises his employment. He works from his home
in Malaysia and he liaises with the Malaysian contractors and shippers. Therefore, he exercises his employment in Malaysia.
The fixed monthly remuneration he receives from the foreign company is therefore employment income derived from Malaysia.
The fact that the foreign company pays his remuneration into his bank account in a foreign country does not affect its
Malaysian-derived status. Similarly, whether or not the money is remitted to Malaysia is irrelevant.
Mr A is taxable in Malaysia in respect of the employment income derived from the exercising of employment in Malaysia.

(c) Permanent establishment (PE) in Malaysia?

To determine whether a foreign company has a PE in Malaysia, we should first examine whether it has a fixed base in the
form of a branch, office, factory, a place of management etc. In this case, the foreign company does not have such a fixed
base in Malaysia.
Next, it is necessary to consider whether Mr A’s activities on behalf of the foreign company are tantamount to a PE. Mr A
does not have the authority to enter into contracts on behalf of the foreign company. Moreover, the activities carried out by
Mr A appear to be preparatory or auxiliary in nature and none of the principal activities of a publishing business are carried
out in Malaysia. Therefore, there is no PE by virtue of Mr A’s presence as a representative of the foreign company.
Lastly, the printing, transporting and shipping of the publications for the foreign company are all performed by independent
agents acting in the ordinary course of their business. Hence, no PE is constituted by outsourcing these activities to Malaysia.
In conclusion, the foreign company does not have a PE in Malaysia.

(d) Significance of having a permanent establishment (PE)

If a foreign enterprise is said to have a PE in Malaysia, the impact is that the foreign enterprise will be subject to tax in
Malaysia in respect of its business income, but only so much as is attributable to its PE operations in Malaysia. The business
profits article in the double tax agreement lays down rules for such attribution of business profits.

5 Vroom Sdn Bhd

(a) Commencement of business

Bearing in mind Vroom’s principal business activity is to design, construct and operate a tolled motorway, the following
milestones are relevant in determining the date of commencement of business:
1 April 2009 – concession granted
This clearly is pre-commencement. None of the principal activities have begun.

15
 4 June 2009 – secured financing of RM200 million for the project and appointed the professional consultants
This could be the commencement date. When the professional consultants are appointed, the company is in a position to
commence the design work, which is one of its principal activities. By way of comparison, in the case of a manufacturer [per
the case of Birmingham Cattle Products], business is deemed to commence when the raw materials arrive, i.e. when the
business is in a position to start its manufacturing activity.
1 July 2009 – Design and survey work commenced
By this time, the business has definitely commenced as the design and survey activities are actually underway.
2 January 2010 – Construction began
By this time, the business is clearly well on its way as the second stage of the project is being undertaken.
1 January 2011 – Motorway opened to the public
Again, the business has long commenced, although only now will the revenue start to flow in. A business does not commence
only when the cash flow starts.
On balance, Vroom can reasonably be said to commence its business on 4 June 2009 when it secured financing and
appointed the professional consultants. The fact that the design and survey work actually started soon after on 1 July 2009
confirms its readiness to start the first of its principal activities by 4 June 2009.

(b) (i) Rental income whether s.4(a) or s.4(d)

The rest area is part and parcel of the motorway operation. The building of the rest area and the letting out of the food
outlets are therefore incidental to the motorway operation. Ancillary services such as the washrooms, prayer rooms, car
parks and playgrounds are also provided. As such, the income from the letting should properly be classified as part of
the business income from the motorway operation.
On the other hand, it may be argued that all Vroom did was to build the food outlet structures, and let out the space for
which the rent is collected thereafter. On this basis, the letting out is not intertwined with the motorway operations.
On balance, however, it is considered more reasonable to adopt the view that the rental income is part of the business
income from the motorway operations as it is clearly incidental and the services provided are all part of the package.

(ii) Tax impact if classified as rental income under s.4(d)

If it is classified as rental income under s.4(d), the rent received would not be part of the business source. It follows that
the food outlet structures would not constitute assets used in the business of motorway operations.
In this case, the structures concerned will not qualify for industrial building allowance, because as a non-business
source, the income will not qualify for any capital allowances.
Additionally, the cost of the food outlet structures would not be business assets. The cost will be considered an
investment and thus be subject to interest restriction. The interest thus restricted will be deductible against the rental
income, subject to the sufficiency of that income to absorb the interest expense.

(c) Industrial building allowance (IBA)

Vroom is eligible for industrial building allowance in respect of the public road and ancillary structures for the year of
assessment 2011 because the motorway was completed and used in the business on 1 January 2011.
IBA computation year of assessment 2011
RM million
Public road 100
Ancillary structures:
Toll booths and office buildings 10
Rest area structures 5
––––
Qualifying building expenditure 115
––––
Initial allowance 10% 11·5
Annual allowance 6% 6·9
––––
Total IBA 18·4
––––

16
Professional Level – Options Module, Paper P6 (MYS)
Advanced Taxation (Malaysia) June 2012 Marking Scheme

Marks
1 Moodes Sdn Bhd

(i) Sale of the swimwear product line

(1) Capital or revenue
Arguments for capital receipt 3
Arguments for revenue 3
Conclusion 2
–––
8
–––
(2) Recognition of income if revenue income
Lump sum 3
Instalment 3
Conclusion 2
–––
8
–––

(ii) Approved R&D incentive

How the incentive works 1
Exclusions 1
Remuneration of research personnel; qualifies, reason 1 + ½
Laboratory testing etc qualify, reason 1 + ½
Royalty: not eligible for incentive, reason 1 + ½
No single deduction, reason 1 + ½
Research equipment: not eligible, reason 1 + ½
Can claim CA, reason 1 + ½
Double deduction explained 1
Capital allowance explained 1
Appendix
Each R&D item considered (½ x 4) 2
Set-off of double deduction ½
Capital allowance ½
–––
16
–––
Professional marks
Format and presentation of report 1
Clarity, effectiveness of communication including logical flow 2
Appropriate use of appendix 1
–––
4
–––
36
–––

17
 Marks
2 Small Sdn Bhd

(a) Inventory
Unabsorbed loss and capital allowance – deficit RM60,000 1
Permanently lost if not absorbed before transfer 1
Two months’ business operation in YA2013 to generate sufficient adjusted income 1
Basis of valuation on cessation versus going concern 1½
Conditions 1
Strategy: Attribute enhanced value to inventory 1
Subject to reasonable market value 1
End result: Small can absorb deficit ½
Big can claim full price 1
–––
9
–––

(b) Dividends
Utilise all balances by 14 July 1
Reason – for outgoing shareholders 1
How much to distribute, up to retained earnings 1
Franked dividend, RM300,000 1
Exempt dividend, RM130,000 1
–––
5
–––

(c) Trade receivables

Examine closely to write off or make provision 1
Deductible pre transfer 1
Why Big cannot claim deduction 1+1
–––
4
–––

(d) Capital allowance

Why controlled sale provisions apply 1+1
Mechanism of controlled sale provisions
First year for acquirer – YA2013 1
Final period for disposer – YA2013 ½
Disposal deemed on the first day of final period – 1 June 2012 1
Small – claim until YA2012 ½
– no BA/BC 1
– no CA for YA2013 1
Big – first year YA2013 ½
– No IA generally 1
– Exception: assets acquired after 1 June 2012 1½
–––
10
–––
28
–––

18
 Marks
3 Mr Grandpa and Niki

(a) Why a settlement

Transfer of an asset ½
Not for valuable and adequate consideration 1
Made during lifetime of settlor (Grandpa) 1
Transfer to relative (granddaughter) 1
Who becomes owner/entitled to income ½
Granddaughter (Niki) – is unmarried ½
– is under 21 ½
– at beginning of basis year ½
Significance of settlement: deemed income of settlor 1½
–––
7
–––

(b) Rental income – tax treatment

YA2011
Grandpa, RM5,000 1
Deemed Grandpa, RM55,000 1
YA2012
Grandpa – nil 1
Niki, RM60,000 1
No deeming, over 21 years 1+1
–––
6
–––

(c) RPGT treatment

Disposal by way of gift/no valuable consideration ½
Transfer between grandparent and grandchild ½
No-gain-no-loss transaction 1
Grandpa’s deemed disposal price, RM380,000 1
Niki’s acquisition price, RM380,000 1
Acquisition date, 1 February 2011 1
–––
5
–––
18
–––

19
 Marks
4 Foreign company and local representative

(a) Relationship
Factors relating to Mr A – ½ mark each, maximum 2
Conclusion – master–servant 1
–––
3
–––

(b) Whether Mr A is taxable in Malaysia

Employment income ½
Derivation depends on where employment is exercised 1
Mr A exercised employment in Malaysia, reasons ½+½
Remuneration paid outside Malaysia – no impact 1
Whether or not remitted – no impact 1
Conclusion: taxable in Malaysia ½
–––
5
–––

(c) Permanent establishment

Fixed base – circumstances 1
– conclusion ½
Mr A’s activities: – no authority to enter into contracts 1
– preparatory and auxiliary nature 1
– conclusion ½
Activities through independent agents – nature of activities 1
– conclusion ½
Overall conclusion: no PE ½
–––
6
–––

(d) Significance of PE
Enterprise subject to tax on business income 1
Only so much as is attributable to PE operations in Malaysia 1+1
Refer to business profits article 1
–––
4
–––
18
–––

20
 Marks
5 Vroom Sdn Bhd

(a) Commencement of business

1 April – not commencement and reason 1
4 June – possibly commencement, reasons 3
1 July – definitely commenced 1
2 January – why long after commencement 1
1 January – why long after commencement 1
–––
7
–––

(b) (i) Rental income – classification

Incidental to business operations 1
Ancillary services 1
Alternative view – passive rental 1
Conclusion 1
–––
4
–––
(ii) Impact if classified as rental under s.4(d)
Not a business source ½
Not business assets ½
As rental source, no capital allowances 1
Interest restriction 1
Only deductible against rental income 1
–––
4
–––

(c) Industrial buildings allowance

Eligible in YA2011, with reason 1+½
Qualifying buildings expenditure, RM115 million ½
Initial allowance 10% ½
Annual allowance 6% ½
–––
3
–––
18
–––

21