Question 1

Mr Jim is being investigated by the Inland Revenue Board (IRB) for under-declaring his income and has been issued a notice to furnish a Capital Statement for the years 2018 to 2020. Mr Jim has requested you as his tax advisor to prepare the Capital Statement based on the following information in respect of his assets and liabilities:

1.Mr Jim registered a partnership, Tasty Buns in 2015 with his friend, Mr Tim, with a profit-sharing ratio of 50:50. His capital contribution to the partnership was RM70,000. The partnership capital was increased to RM700,000 in December 2018.

On July 1, 2019, the partnership business was transferred to a company, Tasty Buns Sdn Bhd (TBSB) for a consideration of RM1,350,000. The consideration for the transfer was satisfied by the issuance of 1,350,000 ordinary shares of RM1.00 each in TBSB. Mr Jim and Mr Tim received shares in TBSB based on their profit-sharing ratio in the partnership.

Mr Jim sold his shares in TBSB to Mr Tim in December 2020 for a cash consideration of RM2,000,000.

2.Mr Jim purchased 500,000 shares in BNS Bank Bhd (BBB) of RM0.50 each for a consideration of RM5.00 per share in 2015. He received 300,000 bonus shares from BBB on November 5, 2018. Mr Jim sold all his shareholding in BBB in January 2019 for a consideration of RM7.00 per share.

3.Mr Jim bought a double storey bungalow in Petaling Jaya in May 2019 at a cost of RM900,000. The market value of the bungalow increased to RM1,000,000 in 2020.

4.Mr Jim owns a Mercedes Benz car bought in February 2018 for RM700,000. He paid a down payment of RM400,000 and took a 3 year hire purchase loan of RM300,000. The outstanding loan balance as at end of 2018, 2019 and 2020 amounted to RM250,000, RM150,000 and nil respectively.

5.Cost of jewellery belonging to his wife as at end of 2018, 2019 and 2020 was estimated at RM100,000, RM150,000 and RM300,000 respectively.

6.Mr Jim also bought a Honda Civic car for RM130,000 for his daughter in 2020 as her wedding gift.

7.The fixed deposit account of Mr Jim with HHN Bank Bhd showed the following balances:-

RM

December 31, 2018700,000

December 31, 2019800,000

December 31, 20201,500,000

8.Cash in hand as at end of 2018, 2019 and 2020 was estimated at RM30,000, RM50,000 and RM70,000 respectively.

9.Mr Jim produced sufficient documentary evidence as proof of his lottery winnings of RM200,000 in February, 2019. After much negotiation with the IRB, it was agreed that Mr Jim's expenses on lottery betting for the years 2018, 2019 and 2020 amounted to RM500 per month.

10.Mr Jim has a son who was studying in the United Kingdom. He estimated that he spent about RM300,000 per year on his son's education in 2018 and 2019. Mr Jim's son graduated in December 2019 and has since been giving RM7,000 per month to Mr Jim commencing January 2020.

11.Mr Jim's monthly household expenses were estimated to be RM30,000 per month for the years 2018 to 2020.

12.Mr Jim has declared income of RM250,000, RM100,000 and RM54,000 for the years of assessment 2018, 2019 and 2020 respectively, and paid income taxes of RM46,000 (in 2019) and RM100,000 (in 2020). His wife had no income for the respective years of assessment.

Required:

(a)Prepare Mr Jim's Capital Statements (Statement of Assets and Liabilities) as at end of the years 2018 to 2020 and determine his additional income, if any, for the years 2019 and 2020.(20 marks)

(b)Tax mitigation can be distinguished from tax avoidance. With reference to the general anti-avoidance provisions in the Income Tax Act in Malaysia and decided cases, discuss the relevant provisions and principles. (10 marks)

(Total : 30 marks)