PROGRESS TEST 2

Paper ATX(MYS)
ADVANCED TAXATION
NAME:___________________________
STUDENT ID:______________________
GROUP:__________________________
LECTURER:________________________

THURSDAY
21 MAY 2020
QUESTION PAPER
This question paper is divided into TWO sections:
Section A – ALL questions are compulsory and MUST be
attempted
Section B – ALL questions are compulsory and MUST be
attempted

Do NOT open this question 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.
Do not open this paper until instructed by the supervisor

Section A: /50
Section B: /30
TOTAL /80

THE ASSOCIATION OF CHARTERED CERTIFIED ACCOUNTANTS

 Section A – BOTH questions are compulsory and MUST be attempted

1. You are a tax assistant in Tax Firm which has the SYZ group as one of its clients.

The holding company, SYZ Sdn Bhd (SYZ), operates an established oil palm plantation, milling the fresh
fruit bunches into crude palm oil. SYZ sells its entire crude palm oil output to its wholly owned
subsidiary, DEF Sdn Bhd (DEF), to be refined into speciality oils for the Malaysian food industry. Both
SYZ and DEF are very profitable companies, close their accounts annually to 30 September, and have
no unabsorbed losses or unabsorbed capital allowances brought forward.

A few days ago, your tax partner met with the group managing director of the SYZ group and learned
that the group is planning to carry out research and development (R&D) to enable them to process
and recycle the waste products from the mill into high grade poultry feed. The production of poultry
feed in Malaysia is encouraged by the Malaysian Investment Development Authority (MIDA), and it is
therefore listed as a promoted product.

If this proves to be successful, the SYZ group sees scope for further R&D activities for both SYZ and
DEF arising from other plantation by-products (such as fronds and timber) and speciality oils.
The SYZ group intends to spend RM20 million in total on the first project in year one as follows:

R&D business – RM’000

– purchase of research equipment and facility 3,000
– manpower and fees to carry out the R&D 4,000
Poultry feed business –
New factory premises and plant and machinery for
Poultry feed business 13,000

SYZ is seeking advice from Tax Firm regarding how best to carry out the project within the SYZ group,
and the impact of this choice on a future disposal of the R&D and/or poultry feed business.

This morning, you received an email from your tax partner regarding the SYZ group.

Extract from your tax partner’s email

Please draft a report to the chairman of the SYZ board of directors addressing the following
issues:
(a) R&D activity
Explain the relevant tax incentives available if the R&D is carried out:
– by SYZ itself; or
– by a new Company X incorporated solely to carry out R&D work to cater for the research needs
of SYZ initially, and subsequently DEF as well. Company X would be a 100% subsidiary of SYZ.
For this part (a), assume that Company X will:
– charge an R&D fee of RM4 million to SYZ; and
– will be profitable after 12 months of operation.

(b) Production of poultry feed

Explain the relevant tax incentives available if the production of poultry feed is undertaken:
– by DEF as a diversification project under the Income Tax Act; or
 – by another new Company Y incorporated as a 100% subsidiary of SYZ, which intends to apply
for incentives under the Income Tax Act or the Promotion of Investments Act.
– For this part (b), assume the poultry feed business will take 36 months of operation to become
profitable.

(c) Tax savings

Illustrate the tax impact of the R&D activity and the poultry feed production by computing the
potential tax savings for the SYZ group in total of the project under each of the alternative
strategies in parts (a) and (b).
You should assume that all companies in the SYZ group pay tax at a rate of 24%.

(d) Recommendations
Recommend, based on the relative tax treatment and tax savings identified in parts (a), (b) and
(c), which company should undertake the R&D work and which company should undertake the
production of poultry feed.

(e) Future disposal of R&D business and/or poultry feed business

Advise whether your recommendations would change if SYZ were planning to dispose of the R&D
business and/or the poultry feed business in the fifth year of operation

Required:

Prepare the draft report to the chairman of the SYZ Sdn Bhd board of directors as instructed by your
tax partner.

The following marks are available:

(a) The tax incentives for the R&D activity;
(7 marks)
(b) The tax incentives for the production of the new product of poultry feed;
(6 marks)
(c) Computation of potential tax savings for parts (a) and (b);
(8 marks)
(d) Recommendations of which SYZ group company should undertake the R&D activity and which
should undertake the poultry feed business;
(6 marks)
(e) Changes to your recommendations if an exit is planned for the fifth year of operation.
(4 marks)

Professional marks will be awarded in question 1 for adopting a logical approach, the appropriateness
of the format and presentation of the report, and the effectiveness with which the information is
communicated.
(4 marks)
(35 marks)
Question 2

A foreign publishing company, Edit Star (EDS) carries out its main publishing functions such as liaison
with writers, editorial work, and global marketing in the foreign country of Madagascar, where it is
resident. EDS does not have an office, a branch, or any appreciable presence in Malaysia.

EDS has appointed Mr. Joey as its representative in Malaysia. Mr. Joey works exclusively for EDS, he
works from his home in Malaysia, taking instructions and communicating with the distribution
department of EDS through the telephone and email. Mr. Joey is not vested with authority to enter
into contracts on behalf of EDS.

He is paid a fixed monthly remuneration by EDS into his bank account in Madagascar.

Mr Joey’s duties include:

− liaising with the Malaysian contractors appointed by EDS 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 EDS’s distribution department to facilitate direct payments to
the independent contractors and shippers.

There is a double tax agreement between Malaysia and Madagascar.

Required:
a) State, with reasons, whether the relationship of Mr Joey and the foreign publishing
company (EDS) is one of master–servant or principal–agent.
(2 marks)
b) Explain whether Mr Joey will be subject to tax in Malaysia in respect of the remuneration
he receives from EDS.
(4 marks)
c) Explain whether EDS will have a permanent establishment in Malaysia.
(5 marks)
d) Explain the significance of EDS having a permanent establishment in Malaysia.
(4 marks)
(15 marks)
Section B- Answer all questions

Question 3
a) Explain why determining the basis period is significant for tax purposes.
(2 marks)

b) Sushi Sdn Bhd was incorporated on 1 September 2018 and commenced operations on 1 October
2018 with paid up ordinary share capital more than RM2.5million. It is contemplating closing its
first set of accounts to one of the following alternative dates:

(i) 30 November 2018 (3 months), thereafter to 30 November annually

(ii) 31 January 2019 (5 months), thereafter to 31 January annually
(iii) 31 October 2019 (14 months), thereafter to 31 October annually, or
(iv) 31 January 2020 (17 months), thereafter to 31 January annually.

Determine the basis periods for all the alternatives up to and including year of assessment
2020.
(4 marks)

c) With reference to the four alternatives in (b) above, state with reason, the first year of
assessment the company needs to furnish an estimate for each alternative.
(2 marks)

d) Would your answer be different from (c) above if the paid-up ordinary share capital is
RM2.5million? If yes, explain how It is different.
(3 marks)

e) State with reasons, whether the following transfer is a controlled transfer and explain the
tax implications of the transfer. If yes, indicate in your answer the first day of the
disposer’s final period.

ABC Bhd owned 70% of P Sdn Bhd, 60% of Q Sdn Bhd and 30% of R Sdn Bhd. P Sdn Bhd
owned 30% of R Sdn Bhd. On 1 June 2020 ABC bought an asset for RM5,000 and subsequently,
on 1 August the same year sold the asset to Q for RM3,000. ABC’s and Q’s financial year ends
are 30 June and 30 September, respectively.
(4 marks)
(15 marks)
Question 4

Miss Everly Fross, a university lecturer in environmental studies, commissioned a feasibility study and
presented a business plan for a wetlands resort in 2020. Several individuals expressed their support
and willingness to invest in the project.

On 2 April 2020, Miss Fross acquired a tract of coastal land deemed suitable for the proposed resort
development. She financed the purchase price of RM780,000 with her entire savings. Since then, she
has learnt, to her dismay, that the global financial crisis has prevented her potential investors from
fulfilling their promises to invest.

Faced with the prospect of having to set up the resort project business on her own, Miss Fross is
seriously considering an offer from Green Sdn Bhd to purchase the coastal land from her for
RM1,200,000 together with a promise to appoint her as their technical adviser. The current market
value of the coastal land is at least double what Miss Fross paid for it in 2020.

Required:

a) Explain the tax deductibility of the cost to Miss Fross of commissioning the feasibility study
and of the business plan against her employment income.
(4 marks)
b) With reference to the proposed sale of the coastal land:
i. Provide arguments for treating the gain from the disposal as (1) a capital gain; and (2) a
revenue gain from an adventure in the nature of trade;
(8 marks)
ii. State, giving reasons, which alternative you would support.
(3 marks)
(15 marks)

End of questions