CONFIDENTIAL 1 JUNE 2020/TAX667/GROUP PROJECT

GROUP PROJECT/ ASSIGNMENT

COURSE : ADVANCED TAXATION

COURSE CODE : TAX 667
EXAMINATION : JUNE 2020
TIME : 2 WEEKS

INSTRUCTIONS TO CANDIDATES

1. This is a group project/ assignment.

2. Students are required to form a group of 4 persons for this project/ assignment.

3. This question paper consists of three (3) questions.

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

5. The report (answer) must be submitted within 2 weeks.

This examination paper consists of 5 printed pages

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QUESTION 1

A new manufacturing company, ICON Sdn Bhd (ICON) was awarded a contract to supply
product X (a promoted product) to all government hospitals in Malaysia. The company has
forecasted minor losses in the first 4 years of operation (YA 2016 to YA 2019) and a small
profit in the 5th year (YA 2020). It is a capital-intensive kind of business as such it is expected
that the company will incur approximately RM40 million and RM3 million for purchase of
machineries and raw material respectively prior to commencement of manufacturing process.

In addition to business income, the company is also expected to earn other income comprising
rental and interest income. The rental income is expected to be quite substantial as it is derived
from renting out 5 blocks of apartment to its factory workers whereas the interest income would
be paid by its subsidiary, Levi Sdn Bhd (Levi). The fund for the construction of the 5 blocks of
apartment is internally generated whereas loan given to Levi is borrowed from financial
institutions whereby ICON have to pay interest at market rate which is much higher than the
interest rate charged by ICON to Levi. Levi is expected to have a current year loss of RM300,
000 annually from YA 2018 to YA 2020.

Some of the machineries are expected to be disposed after several years of usage and this
will give rise to a huge profit on disposal of fixed assets as these assets have a very high resale
value. The company has yet to decide as to whether to dispose these assets to its subsidiary
Textwood Sdn Bhd (Textwood) which is a loss making company or to a third party. Textwood
is forecasted to have a current year loss of RM800,000 annually from YA 2018 to YA 2020.

Another subsidiary, Jean Sdn Bhd (Jean) is a profitable company which provides management
service to all government hospitals. The company’s capital allowances claimed is expected to
be small amount as its nature of business does not require it to incur a huge amount of capital
expenditure. Its forecasted aggregate income is approximately RM1 million per annum from
YA 2018 onwards.

ICON’s percentage of shareholding in its subsidiaries is as follows: -

a. 60% in Levi Sdn Bhd
b. 75% in Textwood Sdn Bhd
c. 73% in Jean Sdn Bhd

Required:

You are required to advise ICON Sdn Bhd on tax planning opportunities for all the companies
in its group to minimize the tax liabilities for ICON group of companies. Your answer should
cover the following areas: -
a) ITA or Pioneer Status, choose the best option.
b) Commencement of business- minimize non allowable expenses
c) Leasing or outright purchase of assets for assets not qualified under ITA (e.g. motor
vehicles), choose the best option.

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d) Interest restriction- ICON, Financial Institution and Levi.

e) Tax planning on disposal of fixed assets.
f) Group relief- ICON, Textwood, Levi and Jean.
(10 marks)

QUESTION 2

Spark Sdn Bhd is a manufacturer of electrical goods. For the financial year ended 30 June
2019, its Statement of Profit or Loss showed the following:

Note RM’000 RM”000

Turnover 6,500
Less: Cost of sales 1 (4,225)
Gross Profit 2,275
Add: Other income:
Dividend (single tier) 2 250
Interest 3 65
Rental 92
Profit on sale of fixed assets 45 452
2,727

Less: Operating expenses

Lease rentals 4 48
Marketing and selling 5 48
Staff remuneration 6 720
Director’s remuneration 170
Professional fees & subscriptions 7 175
Provision for doubtful debts 8 124
Repairs and maintenance 9 140 (1,425)
Net profit before taxation 1,302

Notes

1. Cost of sales
Included in the cost of sales figure were the following: RM’000
- Depreciation of plant and machinery 75
- Provision for warranty 48.5
[warranty payments made during the year were RM44,500]
- Compensation received from a supplier for damaged goods (110)
- Marine insurance for the import of raw materials paid to Malaysian 28
incorporated insurance companies

2. Dividend
The dividend income was derived from investment in stock and shares of Malaysian
resident companies.

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3. Interest
Interest income derived from fixed deposits placed in local financial institutions.

4. Lease rentals
Included in the expenses were lease rentals in respect of a motor car for director’s use,
that was leased at a monthly rate of RM4,000 since January 2019. The cost of the car
was RM160,000.

5. Marketing and selling

The expenses included an expenditure of RM20,000 for holding a dinner for its supplier.
The dinner was also attended by its employees.

6. Staff remuneration
During the year, a disabled individual was employed as a telephone operator at a
monthly salary of RM800.

7. Professional fees and subscriptions

The amount included cash donation of RM20,000 to an approved institution and five
cartons of cooking oils worth RM3,000 to some charitable institutions.

8. Provision for doubtful debts

The provision includes RM92,000 which was written off as bad debts and a general
provision for doubtful debts for the year amounted to RM12,000.

9. Repairs and maintenance

Included in the above were:

RM’000
New display shelves 5
Rewiring 6
Depreciation 45
Repairs of shop houses (rented out) 15
Maintenance of motor vehicles 15

Additional notes:

The current year and balance brought forward capital allowances for the company’s non-
current assets amounted to RM95,000 and RM50,000 respectively. The company’s
balancing charge for the year was RM45,000.

Required:

i. Explain the effect on the income tax liability of Spark Sdn Bhd if the company is
to lease a motor car that cost RM90,000 instead of RM160,000.
(2 marks)

ii. Based on the above information, propose three tax planning strategies that would
reduce the income tax liability of Spark Sdn Bhd in future years.
(3 marks)
(Total: 5 marks)

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QUESTION 3

A) AB Sdn Bhd carries on a business of selling software in Malaysia. It has a website hosted
on a server located outside Malaysia. The website allows customers to identify products,
answer queries on its products, order the products online and make payments for the
purchase. The website also allows the downloading of the software in digitized format.
Apart from these functions performed by the website, all business activities of the company
such as procurement of software, the supply of information for the website, the storage of
software, the physical delivery of software (compact disc) and the maintenance of the
website are carried on in Malaysia.

Required:

Explain whether the income from selling of the compact disc is taxable in Malaysia.

(1.5 marks)

B) CD Sdn Bhd carries on a business selling clothes online in Malaysia. Its website is hosted
on server outside Malaysia. The website allows customers to identify the clothes, answer
queries on the product, order the products online and make payments for the purchase.
CD Sdn Bhd’s business activities include sourcing for contents/ procurement of clothes,
promotions and advertisement, selling and arranging for delivery of the products in
Malaysia.

Required:

Explain whether the income from selling of the clothes is taxable in Malaysia.

(2 marks)

C) XY Limited, a resident company in Indonesia, carries on a business selling home

appliances through internet. Its website which is hosted on a server in Malaysia allows
customers to identify the products and make the order and pay for it online. The company
also has a branch in Malaysia which deals with the selling, marketing, servicing, delivering
the products and providing technical support of the website.

Required:

Explain whether income of XY Limited and its branch are taxable in Malaysia.

(1.5 marks)

(Total: 5 marks)

END OF QUESTION PAPER

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