Leisure Computer Manufacturing Sdn. Bhd. (LCM) is a tax-resident company in Malaysia which manufactures computers components since 2012. The company closes its accounts to 31 December every year. LCM intends to take up the following transactions in the year of assessment 2020 for the benefits of the company:

1. Acquisition of a new production machine ( heavy machinery):

The purchase of the new machine is required in order to meet the customers demand. The cost of the machine is RM920,000. Due to the high cost incurred, LCM plans to finance the acquisition either through hire purchase or lease. The first installment under hire purchase will commence on 1 July 2020 with monthly installment of RM8,500 (excluding interest of RM340). On the other hand, the monthly lease rental will be RM8,840 and commence on 1 July 2020 as well.

2. Disposal of a production machine (heavy machinery):

LCM plans to sell its secondhand production machine that was acquired in February 2019 at RM180,000. The machine is not producing the quantities of computer keyboards as expected. The machine is expected to be disposed at RM100,000. LCM had already claimed capital allowances for this machine in the year of assessment 2019.

3. Expand business in trading computer components:

All this while, LCM focuses on manufacturing computer components to be sold to the suppliers instead of directly to the customers. Therefore, LCM intends to expand its business to sell the components directly to customers by opening five computers shops in year 2020 and it expects to get high income from this new business.

4. LCM is currently planning to raise capital of RM2.8 million to finance and expand its future operations. Thus, LCM is evaluating two financing options that can give advantage for the company, either by debt financing or equity financing.

Required:

Make recommendations to LCM from tax perspective for the followings:

1. Acquisition of a new production machinery (heavy machinery) Recommend to LCM either to acquire the machine through hire purchase or lease. Assume that LCMs adjusted income for the year of assessment 2020 is RM860,000.

(6 marks)

2. Disposal of production machine (heavy machinery)

Recommend to LCM whether the company should dispose of the production machine in the year of assessment 2020.

(6 marks)

3. Tax treatment of a new business income

Evaluate whether LCM should treat the existing business and new business as a single or separate source.

(4 marks)

4. Raising capital

Advise LCM on its plan to raise capital by debt financing or equity financing.

(4 marks)

Note: Support your recommendation with relevant computation if necessary.

[Total: 20 marks]