Question 3 Avenger Sdn Bhd (Avenger), a company with an issued share capital of RM2 million, makes up its accounts annually to 31 December. The company just commenced the business in January 2018 and this is the first year of the company preparing its tax computation. Avenger main business is manufacturing technology equipment for local market. Avenger's statement of profit or loss for the financial year ended 31 December 2018 is as follows: Note RM ('000) RM ('000) Sales Less: Cost of sales Gross profit 1 15,000 (8,000) 7,000 Add: Other income Dividend income Interest on overdue trade receivables 2 10 15 7,025 Less: Expenses Salaries Marketing expenses Motor vehicle expenses Audit fees Lease rental Pre-commencement expenses Secretarial fees Tax filing fees Depreciation (Motor vehicle & furniture & fittings) 3 4 5 6 7 8 1,000 200 10 50 84 25 20 63 100 (1,552) 5,473 Net profit before tax Notes: (1) Cost of sales includes: Depreciation of plant, property and equipment Research and development (R&D) expenditure* RM'000 10 200 * Approved research expenditure by the Minister (S 34A) (2) The dividend was received from an investment in ZZ Berhad, a company listed on the Bursa Malaysia (3) Details of salaries as follows: RM'000 Salary for Monica (Senior Manager) Salary Employee provident fund (EPF) 40 12 Salary (General) Inclusive in the salaries: a) Remuneration of RM2,000 per month for a member of staff who was certified disabled by the relevant authority. b) Remuneration amounting RM800 per month for an ex-convict who just work with the company in June 2018. (4) Marketing expenses comprise: RM'000 a) Advertisement 60 b) Entertainment expenses -gifts of company products with logo for a customer's annual dinner 87 c) Sponsorship of local football league entitling Avenger to free advertisement showcasing the company logo and products d) Cash donation to an approved institution 20 (5) Motor vehicle expenses comprise Traffic offences by marketing staff Yearly maintenance of the motor vehicle RM'000 5 5 (6) Audit fees include: Audit for the preparation of annual report for the year 2018 amounting RM45,000. Avenger incurred RM5,000 on a special audit of another company, Stork Sdn Bhd that it intends to acquire in near future. (7) This expense related to lease rental of passenger car amounting RM7,000 per month. (8) Pre-Commencement expenses: RM'000 Recruitment (paid to recruitment agency on 30 December 2016) 15 Training cost to the employee (Paid to AAA IT Consultancy on 1 April 2017) 5 Utilities expenses paid on 30 June 2017 5 The annual allowance as at 31.12.2018 as follows: (exclude the purchase of new passenger vehicle) Motor vehicle Plant, property & equipment Furniture & fittings RM'000 20 10 70 During the year the company purchased new passenger vehicle for general manager of marketing department amounting RM200,000. Required: (a) Compute the income tax payable by Avenger Sdn Bhd for the year of assessment 2018. (Explanation is not required) (27 marks) (b) Avenger Sdn Bhd intends to acquire a second-hand machine for RM30,000 from a company which is ceasing operations. The machine cannot be used in Avenger's business without significant repair costs being incurred which are estimated to be RM5,000. Required: State, with reasons, whether the repair costs should be treated as revenue or capital expenditure for tax purposes by Avenger Sdn. Bhd. (3 marks) Question 3 Avenger Sdn Bhd (Avenger), a company with an issued share capital of RM2 million, makes up its accounts annually to 31 December. The company just commenced the business in January 2018 and this is the first year of the company preparing its tax computation. Avenger main business is manufacturing technology equipment for local market. Avenger's statement of profit or loss for the financial year ended 31 December 2018 is as follows: Note RM ('000) RM ('000) Sales Less: Cost of sales Gross profit 1 15,000 (8,000) 7,000 Add: Other income Dividend income Interest on overdue trade receivables 2 10 15 7,025 Less: Expenses Salaries Marketing expenses Motor vehicle expenses Audit fees Lease rental Pre-commencement expenses Secretarial fees Tax filing fees Depreciation (Motor vehicle & furniture & fittings) 3 4 5 6 7 8 1,000 200 10 50 84 25 20 63 100 (1,552) 5,473 Net profit before tax Notes: (1) Cost of sales includes: Depreciation of plant, property and equipment Research and development (R&D) expenditure* RM'000 10 200 * Approved research expenditure by the Minister (S 34A) (2) The dividend was received from an investment in ZZ Berhad, a company listed on the Bursa Malaysia (3) Details of salaries as follows: RM'000 Salary for Monica (Senior Manager) Salary Employee provident fund (EPF) 40 12 Salary (General) Inclusive in the salaries: a) Remuneration of RM2,000 per month for a member of staff who was certified disabled by the relevant authority. b) Remuneration amounting RM800 per month for an ex-convict who just work with the company in June 2018. (4) Marketing expenses comprise: RM'000 a) Advertisement 60 b) Entertainment expenses -gifts of company products with logo for a customer's annual dinner 87 c) Sponsorship of local football league entitling Avenger to free advertisement showcasing the company logo and products d) Cash donation to an approved institution 20 (5) Motor vehicle expenses comprise Traffic offences by marketing staff Yearly maintenance of the motor vehicle RM'000 5 5 (6) Audit fees include: Audit for the preparation of annual report for the year 2018 amounting RM45,000. Avenger incurred RM5,000 on a special audit of another company, Stork Sdn Bhd that it intends to acquire in near future. (7) This expense related to lease rental of passenger car amounting RM7,000 per month. (8) Pre-Commencement expenses: RM'000 Recruitment (paid to recruitment agency on 30 December 2016) 15 Training cost to the employee (Paid to AAA IT Consultancy on 1 April 2017) 5 Utilities expenses paid on 30 June 2017 5 The annual allowance as at 31.12.2018 as follows: (exclude the purchase of new passenger vehicle) Motor vehicle Plant, property & equipment Furniture & fittings RM'000 20 10 70 During the year the company purchased new passenger vehicle for general manager of marketing department amounting RM200,000. Required: (a) Compute the income tax payable by Avenger Sdn Bhd for the year of assessment 2018. (Explanation is not required) (27 marks) (b) Avenger Sdn Bhd intends to acquire a second-hand machine for RM30,000 from a company which is ceasing operations. The machine cannot be used in Avenger's business without significant repair costs being incurred which are estimated to be RM5,000. Required: State, with reasons, whether the repair costs should be treated as revenue or capital expenditure for tax purposes by Avenger Sdn. Bhd