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Form of income derived from the investment by Planet Sdn Bhd (Planet)
Under Option 1, Planet will invest by way of acquiring the entire equity of Sun. In return, the income it derives from the
investment will come in the form of a single-tier dividend from Sun. It is also reasonable to expect a dividend from year one
as Sun is likely to make a profit of RM85 million in the year ended 31 May 2016.
Under Option 2, Planet will effectively commence a new business of manufacturing solar panels as it will acquire all the
assets and liabilities of the manufacturing business previously owned by Sun. The investment return to Planet will come in
the form of trading profits from this business source.
(ii)
17
Under Option 2, the manufacturing business will be transferred to Planet, a different entity, and the tax consequences are
outlined below:
Trade receivables
The trade receivables transferred to Planet are book debts taken over which have not formed part of the gross income of
Planet. Thereafter, any of such book debts becoming irrecoverable or doubtful will not rank for a tax deduction in Planet
[pursuant to s.34(3)(a)]. By the same reasoning, Planet will not be taxable on any subsequent recovery of irrecoverable debts
or write-back of an allowance for trade receivables relating to such taken-over book debts.
Inventory
The situation is one of Sun ceasing business and transferring its closing inventory to another person, Planet, who will use the
transferred inventory in its business. As such, the amount (being a component of the RM75 million in respect of the transfer
of the manufacturing business) attributable to the closing inventory on the date of transfer constitutes gross income to Sun
as it represents the sale of inventory [pursuant to s.35(5)]. Correspondingly, Planet will be able to claim the same amount
as its cost of purchasing the inventory [under s.33(1)].
There is no requirement to value the inventory at market value. Instead, the value of the inventory is the price paid or the
value of the consideration received.
(v)
18
We hope you are now clear as to the tax consequences of each option. Please do not hesitate to contact us should you require
further clarification.
Yours faithfully,
..
(Tax principal)
Appendix
Computation of the chargeable income of Suns manufacturing business for YA 2016
RM000
Adjusted income before interest deduction
Less Interest expense
Adjusted income
Less CA
Brought forward
Current year
1,500
300
Aggregate/total/chargeable income
RM000
Option 2
Planet
RM000
9,800
(7,725)*
2,075
nil
540
(1,800)
8,000
(6,800)
1,200
Statutory income
Less Unabsorbed loss brought forward
*RM55,000,000 at 115%
RM20,000,000 at 7%
Option 1
Sun
RM000
9,800
nil
9,800
(540)
1,535
nil
1,535
RM
6,325,000
1,400,000
7,725,000
[Tutorial note: The interest deductions under Option 2 assume that no TP adjustment is made in relation to the interest on the
loan from Planets parent company.]
(ii)
Commission of RM100,000
This payment was made to a non-resident for a sales introduction service. Hence, this does not fall under technical
services and is thus not caught as a special class of income [under s.4A].
The non-resident recipient operates a business of sales introductory services in Brazil. He charges a commission for
introducing customers to businesses. This commission therefore constitutes business income to Mr Santiago.
Therefore, the commission does not fall under other income [under s.4(f)] to Mr Santiago. As such, contrary to the
IRBs assumption, the commission payment is not subject to withholding tax for other income [under s.109F].
As Inovasi has not breached any withholding tax provisions, the payment of commission should be accorded a full 100%
tax deduction.
19
(c)
Valid appeal
For a valid appeal to the Special Commissioners of Income Tax, Inovasi must lodge its appeal in the prescribed form
[Form Q] against the additional assessment within 30 days after the date of service of the additional assessment. For practical
purposes, the date of service is normally taken to be the date stated on the notice of assessment, i.e. 5 May 2015. This
would mean that the deadline for appeal is 4 June 2015.
As the notice of assessment and the letter from the IRB were only delivered to Inovasi on 30 May 2015, Inovasi has valid
reasons for not being able to file its appeal within the said 30 days.
Therefore, Inovasi may apply to the Director General of Inland Revenue for an extension of time to submit its appeal against
the additional assessment. The application must be made in a prescribed form [Form N] as soon as possible.
(15 months)
(12 months)
In determining the basis periods as above, the underlying principles per Public Ruling [7 of 2001] are fulfilled:
(1) no accounting period or year of assessment will be left out; and
(2) there is no overlapping of basis periods.
20
(b)
(c)
(d)
Facts
Rajin will spend 182 days in Malaysia (1 January 2015 to 1 July 2015 plus
her three monthly progress visits after this date).
Even if less than 182 days are spent in Malaysia, it can be linked to a period
of 182 or more consecutive days in 2014.
Residence status
Resident [s.7(1)(a) or (b)]
2016
Rajin will spend four weeks in Malaysia (being her three-monthly progress
visits): less than 90 days. However, she will be resident for the three
immediately preceding YAs before and the YA after.
Resident [s.7(1)(d)]
2017
Rajins stay in Malaysia for less than 182 days is mitigated by the fact that the
period will be linked to a period of 182 or more days in Malaysia in 2018.
Resident [s.7(1)(b)]
Rajin will be a tax resident of Malaysia for all three YAs. Her rental income, being derived from Malaysia, will be subject to
tax in Malaysia. Due to her residence status, Rajin will be accorded personal reliefs and charged to tax at the scale rates.
Her employment income during the 24 months she is in China will not be taxable in Malaysia because:
The employment income is not derived in Malaysia as Rajin will not be exercising her employment in Malaysia, neither
is her employment in China incidental to her employment in Malaysia (as she will not have any employment in Malaysia)
(the source of employment income is where the services are performed in Rajins case; in China); and
The employment income is therefore foreign income, and when remitted back to Malaysia, will be tax exempted
specifically [under paragraph 28, Schedule 6].
The RM1 million represents proceeds from the sale of artworks and constitutes gross income from a business to the
artist as he regularly produces art pieces for sale to the public. When he transfers the RM1 million to the BnB Trust, it
is a gift; a mode of application of his income. The artist will therefore be subject to income tax in respect of the
RM1 million, being his business income.
The transfer of RM1 million to the BnB Trust represents a donation of money to a charitable trust which is not approved
by the Director General of Inland Revenue (DGIR). Hence, the artist will not be eligible for a deduction in respect of this
donation against his aggregate income [under s.44(6)].
21
(ii)
(b)
If the artist were to transfer the RM1 million to an approved organisation, he would be able to claim a tax deduction
against his aggregate income but subject to a maximum of 7% of his aggregate income. As the RM1 million is his only
income for the year 2014, his aggregate income is RM1 million and the tax deduction would be RM70,000 (7% x
RM1 million).
The BnB Trust Receipts from the provision of food and services to the homeless
Business income
It can be argued that the provision of food and services is a charitable objective to help the homeless.
In providing the one meal a day, shower and sleeping facilities, and medical attention to the homeless, it can be argued that
the BnB Trust is effectively carrying on a business because:
Accordingly, it is argued that the receipts constitute income from a business of providing food and shelter.
Other income
It can be argued that the nominal charges for the food and services represent receipts of an income nature: they are
consideration for goods and services.
However, it can be argued that the receipts are not business income because there is no profit motive.
Therefore, they are argued to be other income [under s.4(f)].
Not income
It can be argued that the objective of operating the service centre is charitable, to help the homeless, rather than the
expectation of making a profit.
The amount charged for the meals and services is merely a token, it is not proper market value consideration for the goods
and services rendered. It is more in the nature of a partial reimbursement of expenses for which a tax deduction has not been
given [s.22(2)(a)(i)].
Therefore, it is argued that the receipts are not revenue in nature and do not constitute income.
(c)
22
(d)
The BNB Trust Tax computation for the year of assessment 2015
RM
Business income:
Sale of meals and services
Malaysian dividend (exempt)
Interest from Malaysian banks (separate source)
Donations
RM
328,000
nil
nil
120,000
448,000
Less: Expenditure
Cost of meals and services
Utilities
Trustees remuneration 80% of RM12,000
Salary to caretakers
Depreciation
400,000
36,000
9,600
43,200
nil
(488,800)
nil
Adjusted/statutory income
Current year loss
Interest income
40,800
Aggregate income
Less Current year loss
(3,000)
37,800
3,000
3,000
(3,000)
nil
(i)
(ii)
23
24
(ii)
1
1
(v)
25
1
05
05
1
1
1
1
1
1
05
05
1
05
1
05
1
05
1
05
1
1
1
1
1
1
Marks
(vi) Comparative tax computations
Narrative:
Option 1
Sun has no interest expense
Sun can deduct brought forward CA and loss
Impact: lower chargeable income of RM1,200,000
Option 2
Planet can deduct interest expense
Can only deduct the current year CA of RM540,000
Higher chargeable income of RM1,535,000
Computations
05
1
05
Available
Maximum
(vii) Tax planning advice
Interest rate
Trade receivables
Inventory higher value
Increased deduction for Planet
Sun can utilise unabsorbed CAs and loss against income
1
1
Available
Maximum
Professional marks
Format and presentation of the letter
Clarity, effectiveness of communication including logical flow
Appropriate use of appendix
26
05
1
05
3
1
1
1
2
1
35
Marks
2
(i)
(ii)
Commission payment
Payment not for technical services, not s.4A
Recipients business income
Therefore not other income
Therefore no withholding tax (WHT) applicable
Accordingly, no breach of WHT provisions
Conclusion: fully deductible
1
1
05
1
05
1
05
1
1
05
1
1
(b)
(c)
1
05
1
1
05
1
1+1
1
1
1
05
1
05
Valid appeal
The appeal provisions
Late delivery, valid reason for delay
Apply for an extension
1
1
1
25
27
Marks
3
(b)
1
1+1
1+1
1
(c)
(d)
28
15
15
1
1
05
55
1.5
05
1
1
3
05
05
1
1
20
Marks
4
(b)
(c)
(d)
(ii)
Approved: deduction
Restricted to 7%, amount
1
05
05
1
1
05 + 05
2
2
2
Donations received
Income, reason
Not income, reason
15
15
29
1
05
15
05
15
05
05
05
05
20
Marks
5
(i)
(ii)
Maximisation of claim
Defer completion/commissioning to 1 October 2015 or later
Why feasible
Relevant YA YA 2016
Acquire, not lease, with reason
Maximum amount of claim
(b)
1
15
1
1
1
15
15
05
15
1
05
1
05
05
RPC status
Controlled company, with reason
75% of total tangible assets test
On 1 February 2012
On 8 March 2012
On 31 August 2012
On 30 June 2015
1
05
1
15
1
1
20
30