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BKAT 2013 - PRINCIPLES OF TAXATION TUTORIAL 5: CAPITAL ALLOWANCES PLANT AND MACHINERY, AND INDUSTRIAL BUILDING ALLOWANCE DATE OF SUBMISSION: 28 APRIL 2016 QUESTION 1 A. State THREE (3) qualifying criterion for a person to claim capital allowance. B. Al-Hijrah Sdn Bhd manufactures irons and steels for construction purpose. The company prepares its accounts to 31 December annually. The company provides the following information relating to the assets purchased for business use: Item Small value assets comprising cash register, table, cupboard, and airconditioners. Cutting machine Date of Purchased 2 February 2014 Cost (RM) 14,000 5 June 2014 130,000 Loader machine) 1 September 2013 240,000 8 November 2015 70,000 (heavy Custom-made machine Remark - The machine was imported from China. The foreign exchange loss suffered in the course of purchase was RM8,000. The machine was purchased on a hire purchase term. Deposit paid on 1 September 2013 was RM24,000. The hire purchase amount of RM230,000 are to be paid within 24 months beginning 1 September 2013. In order to install the machine, the company incurred cost of preparing, cutting and levelling the land for RM220,000. REQUIRED: Compute the allowances and residual expenditures for the relevant years of assessment up to 2015. Show your workings whenever relevant. 1 C. Ikhsan Sdn Bhd has constructed its own factory in Kulim Hi-Tech at the following costs: a. Cost of land of RM500,000. b. Cost of legal fees relating to the acquisition of the land amounting to RM12,500. c. Cost of preparing plans to obtain approval from the local authority of RM19,000. d. Cost of construction which includes labor, materials, haulage, supervision, and other overhead of RM1,600,000. e. Interest on loan borrowed to construct the building for RM96,000. REQUIRED: Compute the qualifying building expenditure for the constructed factory. QUESTION 2 Anuar, a sub-contractor in road construction, owned the following assets: Assets Lorry (second hand) Asphalt Road Cutter Car (new) Purchase Date and Price (RM) 25 February 2013 (RM60,000) 1 March 2013 (RM55,000) 1 July 2014 (RM110,000) Notes The lorry is licensed for commercial purpose. The cutter is not heavy machinery. 2/3 of the usage was for private purpose. In addition to the above, Anuar also purchased the following assets in year 2015: Assets Electric shovels (10 units) Road Skittles (2 units) Road Safety Signboards (2 units) Purchase Price (RM) RM700.00 per unit RM950 RM850 per unit REQUIRED: a) Calculate the capital allowances entitled to be claimed for each asset in the relevant years of assessment up to year of assessment 2015; and b) Determine the balancing charge or balancing allowance (if any) if the car was sold on 23 November 2015 for RM80,000. What is the tax implication of the disposal? 2 QUESTION 3 Murni Sdn Bhd (financial year-end 31 December) is one of the pillow, mattress & bedding product manufacturers situated in Mergong, Kedah. On 1 March 2011, the company purchased a building for RM1.9 million including RM1 million cost of land and turned it into a factory. Due to high demand for its products, the management of the company decided to increase the production capacity. Thus, in September 2012, the company has started to construct a new building. The following expenditures were incurred throughout the construction process: Expenditures Architect fee Interest on loan for construction purpose Legal charge related to loan application Cost of clearing site Piling and foundation Construction cost Wiring and electricity works Drainage and water system Roads and parking area within the factory compound RM 35,000 90,000 15,000 100,000 250,000 650,000 95,000 110,000 72,000 The construction of the building was completed in June 2013. The company purchased the latest technology machine at a cost of RM520,000. The installation of the machine involved cost of preparing and levelling the site of RM700,000. The installation process was completed on 31 July 2013 and the production works were immediately started. Twelve (12) percent of the building was used as site office and the remaining as factory. In November 2015, the company decided to stop the production works in the old building and the building was sold to Serasi Sdn Bhd for a consideration of RM1 million. REQUIRED: Compute the industrial building allowances, balancing charges or balancing allowances (if any) for Murni Sdn Bhd for all relevant years of assessment up to the year of assessment 2015. (Show all relevant workings). 3 BKAT 2013 - PRINCIPLES OF TAXATION TUTORIAL 6: BUSINESS INCOME DATE OF SUBMISSION: QUESTION 1 Anis Safiah owns and manages Sofea SPA and Reflexology (SSR). In addition to SPA and reflexology services, she also sells beauty and health product at her business premise. The following is the income statement for SSR for the year ended 31 December 2015: Sofea SPA and Reflexology Income Statement For The Year Ended 31 December 2015 Notes Sales Less: Cost of sales Gross profit Less: Operating Expenses Remuneration Staff training Depreciation Travelling Entertainment Insurance Repair and maintenance Professional fees Compensation Utilities Loss on sales of fixed asset Donations and zakah Financial payments Communication Total Operating Expenses Add: Other incomes Rental Net profit RM 1 2 3 4 5 6 7 8 9 10 11 12 13 14 RM 791,000 (192,850) 598,150 168,200 5,000 10,000 11,000 18,000 5,500 16,500 3,200 3,800 8,300 1,800 9,900 18,000 14,000 (293,200) 304,950 15 33,883 338,833 Notes to the account: 1. Cost of sales includes beauty product taken to be given as a token for best employee of the year. This is an annual event of SSR as an appreciation to the employees. The cost and market value of the product is RM1,800 and RM2,500, respectively. 2. Remuneration consists of: RM Anis Safiah's salary as a manager Blind reflexology employee's salary Salary of three (3) full time employees Salary of an internship student (for six months) Employees Provident Fund (EPF) contribution (No EPF contribution has been made to internship student. 72,000 24,000 54,000 3,000 15,200 3. Staff training consists of: Business course for Anis Safiah Approved internship program RM 1,000 4,000 4. Travelling consists of: Reimbursement made by employees Reimbursement made by Anis Safiah to travel to clients' places RM 4,000 7,000 5. Entertainment comprise of: Entertaining existing customers Discount vouchers for customers Lucky draw prizes to distributors RM 4,000 6,000 8,000 6. Insurance consists of: Fire insurance on beauty and health products outlet Personal accident insurance of employees Education insurance of Anis Safiah's children RM 2,200 1,800 1,500 7. Repair and maintenance consists of: Purchase of a new reflexology chair Replacement of a bathtub at SPA section Renovation made to the pathway to assist the blind employee RM 5,500 3,000 8,000 8. Professional fees consist of: Preparation and submission of good and service tax (GST) return Secretarial fee Recruitment cost of new employee Tax appeal RM 800 1,200 700 500 9. Compensation was paid to unsatisfactory employee at RM3,800. 10. Utilities include: Payment made to organiser for an approved career fair Child care allowance paid to employees 11. Loss on sales of fixed asset was from disposal of a van used in the business. 12. Donations and zakah comprise of: Cash contribution to Bantuan Pelajar Miskin 1Malaysia Fund (for the needy students) Cash contribution to public hospital Zakah paid on business income RM 1,000 2,400 RM 2,600 1,000 6,300 13. 92% of the payments represent the capital portion, leaving the remaining as interest portion. 14. Communication expense was related to the cost of developing website in implementing the new electronic commerce division, which has been introduced in the basis year. 15. Rental income is derived from Anis Safiah's rental properties. Included in the rental income is RM3,883 of non-allowable expenses Additional information: a. b. c. Current year capital allowance amounted to RM8,000. Balancing allowance for the disposed van was RM2,000. Unabsorbed losses amounted to RM15,000. REQUIRED: Determine the total income of Anis Safiah for the year of assessment 2015. (All relevant expenses are supported by the original receipt. Every item mentioned in the notes to the accounts must be stated in your computation irrespective of whether an adjustment is required or not. Where no adjustment is required, indicate 'NIL' in the appropriate column) QUESTION 2 Azlin Jargus is the owner as well as the manager for A&J Autoparts. He has been involved in selling small components for motor vehicles since 2008. The following is the income statement for the year ended 31 December 2015: A&J Autoparts Income Statement For The Year Ended 31 December 2015 Notes RM Sales Less: Cost of sales Gross profit Less: Expenditure Salary and bonus Entertainment expenses Transportation Repair expenses Professional fees Insurance expenses Advertising expenses Utilities expenses Training and research Donations Financial payments Communication expenses Bad debt Employment Provident Fund (EPF) Add: Other incomes Dividend Net profit Notes to the account: 1. 3. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 81,400 4,620 3,190 4,180 4,950 4,400 2,420 4,400 7,700 5,500 12,980 2,420 3,575 13,816 (155,551) 31,449 990 32,439 RM Cost of sales includes: Imported car accessories taken by Azlin for his wife. The market value of the accessories is RM2,200. Depreciation for van 2. 1 RM 385,000 (198,000) 187,000 Salary and bonus comprises of: Azlin Employees One (1) disabled employee Entertainment expenses comprise of: Yearly gathering for employees Entertaining existing clients 5,280 30,800 37,620 12,980 1,320 3,300 4. 5. 6. 7. 8. 9. Transportation comprises of: Employees' transportation Leave passage for Azlin 2,310 880 Repair expenses comprises of: Replacement of wooden door with a high quality at front entrance Maintenance of air condition system 1,210 2,970 Professional fees comprises of: Business license (renew) Business registration logo Secretarial service 990 1,540 2,420 Insurance expenses comprises of: Insurance for company's van Fire and theft insurance for the business 1,878 2,522 Advertising expenses comprises of: New business sign board 2,420 Utilities expenses include: Deposit for electricity and water 1,650 10. Training and research comprises of: Total Quality Management (TQM) course for Azlin Employees training skill at Standards and Industrial Research Institute, Malaysia (SIRIM) 11. Donations comprise of: Cash donation to public hospital Donation to a neighbour whose house was damaged by flood 3,960 3,740 3,850 1,650 12. Financial payments include: RM6,820 interest on financing the business under a long term loan. 13. Communication expenses comprise of: New facsimile machine Repair of a photocopy machine 1,925 495 Bad debt comprises of: Bad debt written-off Provision for bad debt - general - specific 1,100 1,375 1,100 14. 15. 16. EPF comprises of: Azlin Employees 3,696 10,120 Dividend This is a net dividend received from a company listed on the Second Board of Bursa Malaysia. Additional information: The following information has not been recorded: 1. 2. 3. 4. Current year capital allowance amounted to RM2,112. Unabsorbed losses amounted to RM30,800. The amount of bad debt that was earlier written-off but recovered during the year is RM550. Balancing charge amounted to RM2,002. REQUIRED: Determine the total income of Azlin for the year of assessment 2015. (All relevant expenses are supported by the original receipt. Every item mentioned in the notes to the accounts must be stated in your computation irrespective of whether an adjustment is required or not. Where no adjustment is required, indicate 'NIL' in the appropriate column) QUESTION 3 Syamil Enterprise is involved in selling computers since 2011. Syamil, the owner of the business, has provided a profit and loss account for the year ended 31 December 2015 as follows: Sales Less: Cost of sales Gross Profit Less: Operating expenses: Remuneration Entertainment Training Professional fees Bank charges Repairs and maintenance Bad and doubtful debts Compensation Loss on sale of machine Contributions Depreciation Employees benefits Miscellaneous Profit before taxation Note 1 2 RM 1,444,440 417,640 RM 1,026,800 3 4 5 6 7 8 9 10 11 12 13 14 285,640 12,500 12,000 7,500 5,500 25,000 15,000 4,500 10,000 25,000 13,000 18,500 3,780 437,920 588,880 Notes: 1 The amount of sales include goods valued at cost of RM4,000 which were taken for Syamil's personal use. The market value of these goods were RM7,500. 2 Cost of sales include a provision for stock obsolescence amounting RM8,000. 3 Remuneration includes: a. b. c. d. Syamil's salary as the manager at RM8,000 per month. Salary of a disabled (with eyesight problem) sales executive at RM3,000 per month. Salary of other employees at RM10,000 per month, including a casual worker at RM1,000 per mon Total contribution to the Employees Provident Fund (EPF) is RM33,640. 4 Entertainment expenses include: a. b. c. d. 5 Training expenses include: a. b. 6 Annual dinner for employee, RM2,500. Entertaining employees and client during 'Bonanza Sales Day', RM3,000. Hari raya dinner for employees and client, RM5,000. Entertaining supplier, RM2,000. Food allowance to employees attending an approved training program, RM2,000. Training expenses for non-employees, RM3,000. Professional fees include: a. Accounting fees and secretarial fees b. Legal fees for securing a new tender c. Obtaining Halal certificate 7 Bank charges include interest on overdraft and short-term loan incurred to finance the operation o business amounting RM2,840. 8 Repairs and maintenance include: a. Upgrading the fire safety system 9 b. Rewiring the entire business premise c. Small renovation on the business's toilet Bad and doubtful debts comprise: a. Bad debts written off during the year b. Net increase in general provision 1 2 c. Bad debts recovered during the year (5 1 All the debts are trade debts except for a sum of RM2,000 written off which is related to a loan made ex-employee. 10 Compensation payment was made for dismissing an unsatisfactory employee. 11 The machine was purchased on 1 December 2012 at a cost of RM50,000 and sold on 30 October 201 RM25,000. The book value at the time of sale was RM35,000. 12 Contributions comprise: a. Cash donation to Sekolah Menengah Kebangsaan Jitra, Kedah 1 b. 1 Cash donation to an approved research institute 2 13 14 Employees benefits includes: a. Employees travelling allowance b. Mobile phone and its monthly bills for supervisors c. Leave passage to Korea for an accountant and his family Miscellaneous expenses comprise: a. Insurance claim for damage of office equipment b. Losses due to theft of stock in trade c. Fire insurance premium for business' premises d. Compensation to clients for damaged goods e. Traffic fines paid for the manager (3 Additional information: i. Rental income for RM1,000 per month and renovation of kitchen due to tenant's request amou RM4,000. ii. Business loss brought forward from previous year amounted RM9,000. iii. Capital allowances computed for the current year amounted RM10,000 and balancing c amounted RM15,000. REQUIRED: Compute the total income of Syamil Enterprise for the year of assessment 2015. Every item mentioned in the notes to the accounts must be stated in your computation irrespective of whether an adjustment is required or not. Where no adjustment is required, indicate 'NIL' in the appropriate column