TAXATION II (ATX10203)

FACULTY OF BUSINESS MANAGEMENT

AND PROFESSIONAL STUDIES

SEMESTER FEBRUARY 2020

TAXATION II
ATX10203

ASSIGNMENT 2

PREPARED BY:

No Name ID No
.
1. AGILAAN A/L MURTHI 012017071007

PREPARED FOR:
Madam Farah Binti Abdul Aziz

SUBMISSION DATE:
10 MAY 2020
 TAXATION II (ATX10203)

PART A
MCQ

Kite Sdn Bhd (KSB), a resident company, trades in recycling products. KSB closes
its accounts annually on 31 May, and in its year ended 31 May 2018, the
company acquired the following asset:
Lorry
The lorry was acquired under a hire purchase scheme and the relevant
details are as follows:
Cost RM 210,000
Deposit paid on 10 January 2018 RM30,000
Loan RM180,000
Interest RM2,000
Instalment period 24 months
First instalment due on 1 February 2018

1. What is the Residual expenditure for the lorry in year 2018?

(A) RM37,000
(B) RM36,000
I RM35,000
(D) RM38,000
(6 MARKS)

2. What is the total capital allowance for year 2018?

(A) RM28,000
(B) RM27,000
(C) RM24,000
(D) RM21,000
(5 MARKS)

Yap and Viji opened a new car wash centre. It was agreed that Yap would manage
the operations of the centre and receive a fixed salary each month and Viji would
receive a fixed salary and any profits or losses remaining after deduction of
expenses and taxes.
3. Is a partnership exists in the above situation?
(A) yes
(B) No
(2 MARKS)
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Tara and Neem are partners of T&N Enterprise and have been carrying on a
business as taxi operators for many years. The partnership deed provides the
following:
(1) Monthly salary of RM5,000 for each partner.

(2) 5% interest per annum to be paid to Tara and Neem on their respective capital
contributions of RM100,000 and RM200,000.

(3) A profit sharing ratio of 75% for Tara and 25% for Neem. Details of the
partnership’s income statement for the year ended 31 December 2018 are as
follows:

 Provisional adjusted income RM120,000

 Capital allowances RM10,000

Additional information:
 Neem has a brought forward business loss of RM10,000 from the year of
assessment 2017.
 Tara also runs a travel agency as a sole proprietorship. During the year of
assessment 2018, the business made an adjusted loss of RM7,000.

4. What is divisible income or divisible loss for the partnership above?

(A) RM18,000
(B) RM (18,000)
(C) RM15,000
(D) RM (15,000)
(10 MARKS)
5. What are the chargeable income for Neem and Tara?
(A)
Neem RM39,250
Tara RM53,750

(B)
Neem RM37,250
Tara RM53,950

(C)
Neem RM38,250
Tara RM51,750

(D)
Neem RM36,250
Tara RM53,790
(15 MARKS)
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6. For expenditure to qualify for deduction,

I It must be related to the taxpayer’s business
II It should not be of a personal nature
III It cannot be pre-operation expenses
IV The expenditure cannot be incurred after the cessation of business
A I only
B I, II
C I, II, V
D All of the above
(2 MARKS)

7 Which of the following statements is NOT true?

A To be deductible, the expenditure must be wholly and exclusively
incurred in the production of gross income. This is the cardinal
requirement of Section 33 of the Income Tax Act 1967.
B A business expense must be incurred before the period in which the
income is brought to charge.
C The issue of whether expenditure is revenue or capital depends on the
facts of the case.
D Expenditure must be of a revenue character to be allowed as a
deduction.
(1 MARK)

8. Which of the following “entertainment” is not tax deductible?

A Aladdin Sdn Bhd’s annual dinner for staff.
B Jasmine Travel Sdn Bhd gives out souvenirs, bags and travel ticket to
visitors at trade fairs.
C Aladdin, after discussing his business proposal with his prospective
client Jasmine, takes her and her assistant out for dinner at Genie
Restaurant.
D Aladdin Sdn Bhd gives free samples of its candles to guests at the
launch of its new therapeutic candles.
(1 MARK)

9. Capital allowances include two components, namely:

I initial allowance
II Industrial building allowance
III Investment allowance
IV annual allowance
A I, II
B I, III
C I, IV
D III and IV
(2 MARK)
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10. Which of the following do NOT qualify for capital allowance?

A plant
B Machines
C Rental
D Furniture
(1 MARK)

11. Which of the following statements are TRUE?

I Capital allowances are given only in respect of a business source and only
for the person who incurs the qualifying expenditure.
II Capital allowance is computed for a year of assessment and is deducted
from the adjusted income of the business in arriving at statutory income.
III Capital allowance is provided for plant and machinery.
IV A person deriving employment income can claim capital allowances on
machinery from that employment income.
A I, II only
B I, II, III only
C III only
D All of the above
(2 MARK)

12. JustTwo Sdn Bhd bought a new machine costing RM400,000. As the
noise it made disturbed other staff working on the floor above it, JustTwo
installed sound-proof walls at the cost of RM120,000. What is total qualifying
expenditure?
A RM520,000
B RM400,000
C RM120,000
D RM320,000
(4 MARKS)

13. JustThree Sdn Bhd bought a new machine costing RM500,000. Assuming
initial allowance and annual allowance rates for both is 20%, what is the
capital allowance for the first year?
A RM500,000
B RM250,000
C RM200,000
D Not eligible to claim capital allowance
(5 MARKS)

14. Which Section of the Income Tax Act 1967 below prescribes the prohibited
deductions?
A Section 33
B Section 34A
C Section 39
D Section 40
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(1 MARKS)

15. Which Section of the Income Tax Act 1967 below prescribes the allowable
deductions?
A Section 33
B Section 34A
C Section 39
D Section 40
(1 MARKS)

16. For an expense to be deductible as a trade or business expense:

I It must be related to carrying on a trade or business activity
II It must be ordinary and necessary
III It must be reasonable
IV It must be paid or incurred during the taxable year.
A I, II, III
B I, II, IV
C I, III, IV
D I, II, III, IV
(2 MARKS)

17. Which of the following cannot be deducted from gross rental income
(disallowed expenses)?
A Renovation of property
B Repair of property
C Sewage charge
D Interest on loan borrowed for purchase of property
(1 MARKS)

18. Elvis Ltd, a company resident in the United States, sold 2 units of printing
machines to Senja Sdn Bhd (SSB), a printing company in Malaysia at a
price of RM500,000. SSB closes its accounts on 31 December each year. On
01.12.2017, an additional sum of RM120,000 was paid to Elvis Ltd for the
services, i.e. installation and handling of the printing machines in Malaysia.
Calculate the amount of capital allowances SSB can claim.
A RM500,000
B RM608,000
C RM620,000
D RM632,000
(5 MARKS)
 TAXATION II (ATX10203)

PART B
TRUE OR FALSE?

19. Capital receipts and capital expenditures are not taxable under the Income
Tax Act 1967. (TRUE)
(1 MARK)

20. Repairs, which includes improvements, to a business premises are tax

deductible. (TRUE )
(1 MARK)

21. The cost of developing a website is capital in nature, while the cost of
maintaining a website is deductible because it is a revenue expense. (TRUE)
(1 MARK)

22. Generally, expenses incurred by a person prior to the commencement of

his operations or his business would not be allowable as a deduction
against the gross income of his business as they are considered not
wholly and exclusively incurred in the production of the income. (TRUE)
(1 MARK)

23. Accounting and audit fees for preparing a company’s tax return as well as for
tax advice are generally tax deductible. (FALSE)
(1 MARK)
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PART C
STRUCTURED QUESTIONS.

24. Delkin Sdn Bhd was incorporated in March 2001 and commenced the
business of manufacturing air-conditioner. It closes its accounts to 31
December each year. The trading results for the year ended 31 December
2015 is appended below:

Delkin Sdn Bhd

Statement of Comprehensive Income for the year ended
31 December 2015
Note RM’000 RM’000
Sales 263,079
Less: Cost of sales (143,737)
Gross profit 119,342

Add: Other income

Dividend (i) 14
Interest (ii) 36
119,392
Less: Expenses
Loan interest (iii) 62
Entertainment (iv) 104
Depreciation 54
Repair and maintenance (v) 67
Bad and doubtful debts (vi) 285
Motor vehicle expenses (vii) 53
Professional fees (viii) 53
Insurance (ix) 35
Donation (x) 12 ( 725)
Profit before taxation 118,667

Notes to the account:

(i) Dividend

A single tier dividend was received during the year from an investment
in a local company amounting of RM14,000.

(ii) Interest

During the year, the company charged a total of RM25,000 interest to

customers who settled their overdue account. RM11,000 was interest
on fixed deposit account received from a local bank.
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(iii) Loan Interest

The company took a bank loan to make an investment (from which the
dividend was received). The interest charged was RM14,000. The
company took another loan for working capital. The interest paid was
RM48,000.

(iv) Entertainment

Particulars RM
Annual dinner for staff and their family 14,000
Entertainment expenses on clients 90,000

(v) Repair and maintenance

The company had incurred the following expenses during the year to
the factory premises:

Particulars of expenditure RM’000

Construction of a covered car park 17
Replacing the factory door 50
Total 67

(vi) Bad and doubtful debts

 General provision RM190,000

 Specific provision trading debts RM95,000

(vii) Motor vehicle expenses

 RM4,000 relates to traffic offences.

 Motor vehicle maintenance charges of RM49,000 is made up of
repairs, spares, insurance, and road tax for the company
vehicles.

(viii) Professional fees

The company incurred RM31,000 for income tax appeal and due to the
company’s record keeping system that was not satisfactory the
company on the advice of its accountants, set up a new integrated
accounting and audit system that will comply with the Inland Revenue
Board’s requirements, at a cost of RM22,000.

(ix) Insurance

 The company paid a total of RM12,000 to a local insurance

company, being premium for insurance on cargo imported as
well as exported overseas during the year.
 TAXATION II (ATX10203)

 Another RM23,000 was incurred on premium for insurance on

the company’s assets, plant and machinery. .

(x) Donation

On social responsibility program for the year, the company distribute

cash gift of RM12,000 to an approved charitable institution.

(xi) For the year of assessment 2013, the company is claiming capital
allowance of RM26,000 on its assets used in the business.

Required

Based on the information given, compute the chargeable income of Delkin

Sdn Bhd for the year of assessment 2015.

Note:

Your computation should start with the profit before taxation figure and follow
the description used in the Statement of profit or loss and where applicable
the description used in the notes to the accounts. In making your tax
adjustments to the entries, you should indicate ‘Nil’ where no adjustments are
made or are not required.
(25 marks)

ANSWER:

Delkin Sdn Bhd

Computation of Chargeable Income for the YA 2015

RM’000 RM’000

118,667
Profit before taxation

Less : Non business income

Dividend (14,000)
Interest charged on debtors NIL

Interest received (11,000)

93,667

Add : Non allowable expenses

 TAXATION II (ATX10203)

Interest on loan 14,000

Interest on working capital NIL
Depreciation 54,000
Annual dinner for staff and their family 7,000
(50% x 14,000)
Entertainment expenses on clients NIL
Construction of a covered car park 17,000
Replacing the factory door 50,000
General provision 190,000
Specific provision trading debts NIL
Traffic offences NIL
Motor vehicle maintenance 49,000
Fees on income tax appeal 12,000 424,000
517,667
Less : Double Deduction
Insurance ( Local ) (12,000)
Insurance ( Premium ) (23,000)
4
Less : Capital Allowances (26,000)
Statutory Business Income 456,667
Add : Business Income
Dividend – single tier Exempt
Interest on fixed deposit 11,000
Aggregate Income 467,667
Less : Approved donation
Approved Institution
= ( 10% x of AI )
= ( 10% x 467,667 ) (12,000)
Total Chargeable Income 455,667

25. Briefly discuss the tax treatment in respect of loans or advances to a director
made from internal funds and external funds.
(5 MARKS)
ANSWER:
Company that provides loans or advance from directors without interest or with
interest rate lower safe rate is deemed to receive interest income from the loans from
advance for the basis period for year of assessment and assessed under paragraph
 TAXATION II (ATX10203)

4(c) of the ITA. If the company provides loans or advances to directors which are fully
funded from internal funds, the company shall be deemed to have gross income
consisting of interest such loans or advances for that basis period and section 140B
of the ITA is applicable. If the loans or advances to directors are financed from
external funds or third party, the provision of section 140B of the ITA is not
applicable.