ADVANCED TAXATION - MALAYSIA (ATX-MYS) - Read the mind of a marker (Part 1) - ACCA Global
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ADVANCED TAXATION – MALAYSIA (ATX-MYS) Read the mind of a marker (Part 1)
Contents
INTRODUCTION 3
SECTION A Q1 4
n Question 1 4
n Observations on the requirements 5
Q1 CANDIDATE 1 6
n Marks awarded and comments 6
Q1 CANDIDATE 2 9
n Marks awarded and comments 9
CONCLUSION 12
READ THE MIND OF AN ATX-MYS MARKER – PART 1 2Introduction
This article provides candidates and tutors with insights into how a marker awards
marks when marking candidate scripts for Question 1 of the ATX-MYS exam.
We use Question 1 from the December 2020 exam to You may find it useful to compare the length and style
demonstrate how marks are awarded and to show what is of the published answers with the candidate answers
required to achieve a pass mark in questions of this type. shown in this article. It is important to remember that a
candidate is able to achieve a pass mark without referring
Insight into a marker’s thinking, and an appreciation to all of the points included in the published answer.
of how marks are awarded, will help candidates gain
more marks. The tax rates and allowances used in this article are
those which applied to the December 2020 exam. These
For tutors, greater knowledge of the marking process will will continue to apply until the September 2021 exam.
enable student mock exam scripts to be marked more The marking insights communicated in this article will
accurately and will improve the quality of feedback that remain valid regardless of subsequent changes to tax
tutors provide to students. rates and allowances.
The December 2020 exam questions and published For insight into the marking of a question from Section B
answers are available from this webpage. of the ATX-MYS exam, please refer to Read the mind of
an Advanced Taxation – Malaysia marker (Part 2).
INSIGHT INTO A MARKER’S
THINKING, AND AN
APPRECIATION OF HOW
MARKS ARE AWARDED,
WILL HELP CANDIDATES
GAIN MORE MARKS.
READ THE MIND OF AN ATX-MYS MARKER – PART 1 3Section A Q1
Summary of testing points, how the requirements are set, and how candidates can
achieve the allocated marks
QUESTION 1 Part (c) tests the tax deductibility of expenditure
This is a 35-mark question in which candidates are (capital versus revenue and deemed business of a
required to draft a report giving advice on a mix of listed investment holding company):
tax issues for a given corporate structure comprising
a listed investment holding company (BHB), an export
(c) Deductibility of expenditure for BHB
company (BP) and a company carrying our research and
development activity (BR&D). Explain the tax deductibility of the following
expenditure to BHB:
Part (a)(i) examines the two incentive measures of (i) IPO expenditure of RM1·8 million; (1 mark)
allowance for significant increased exports (ASIE) and (ii) Annual operating expenses of RM750,000 in
reinvestment allowance (RA), and part (a)(ii) examines maintaining the corporate headquarters for
the relative timing of the relevant claims to avoid the Burong Group of companies. (3 marks)
their mutual exclusion:
Part (d) examines the interplay of the research and
(a) Tax incentives available to BP
development (R&D) incentives of investment tax
(i) Explain why BP is eligible for the following allowance and double deduction:
incentives and how each incentive measure
operates:
– ASIE of 30%; and (d) Preferred company to claim for R&D incentive
– RA. (i) Explain why BR&D is potentially eligible
Remember to highlight the ownership for the status of R&D company, and
requirement for ASIE. (8 marks) compute the tax savings for BP and BR&D
if BR&D obtains approval for investment
(ii) As the two incentives are mutually exclusive, tax allowance (ITA) under the Promotion of
explain the importance to BP of timing claims Investments Act. (4 marks)
for each incentive measure. (3 marks)
(ii) A
ssuming BR&D qualifies as an R&D company,
assess BP’s eligibility for the double Deduction
Part (b) tests the tax principles relating to plant incentive in respect of the R&D fees it incurs
(functional test versus the business setting): over the three years of assessment and
compute the tax savings. (4 marks)
(iii) Based on the computation of tax savings,
(b) Birds’ hotels recommend which company should claim the
Given that the production and harvesting of the R&D incentive. Attach your computations as
birds’ nests constitute ‘manufacturing’, present an appendix to the report. (3 marks)
your arguments for the birds’ hotels qualifying as
industrial buildings (IBs) and as plant.
Professional marks will be awarded in question 1 for
Explain the difference in capital allowances
adopting a logical approach, the appropriateness of
available for IBs and plant, and recommend the
the format and presentation of the report, and the
appropriate treatment for BP. (5 marks)
effectiveness with which the information is communicated.
(4 marks)
35 MARKS
READ THE MIND OF AN ATX-MYS MARKER – PART 1 4OBSERVATIONS ON THE REQUIREMENTS
a. The requirement calls for candidates to explain how b. The requirement stipulates that the birds’ hotel
the conditions for each incentive measure are satisfied. qualifies as an IB and as plant and invites candidates
This means that candidates should apply knowledge to present arguments to substantiate the duality
to the facts given in the scenario; merely stating the situation. The argument of the functional test
eligibility requirements will only earn half the marks. versus the business setting test is therefore central
to the substantiation.
The tax partner’s instructions contain a clue:
“Remember to highlight the ownership requirement” The requirement further calls for candidates to
which refers to the requirement that at least 60% of explain the differences in a capital allowance (CA)
the company must be owned directly by Malaysian claim for IB and plant, and candidates are expected
citizens. Against the impending takeover of the export to recommend that the CA claim as plant is preferable
company (BP) by a listed vehicle (BHB) after the initial because of the evidently shorter write-off period.
public offering (IPO), candidates should then conclude
that BP will no longer qualify for the ASIE after the IPO. c. The requirement calls for candidates to explain
the tax deductibility of the expenditure of the
Candidates should also apply their knowledge to
listed investment holding company (BHB). The IPO
recognise backward integration as expansion and
expenditure is perhaps the less challenging aspect.
therefore a qualifying project for RA.
Not as simple is the tax treatment of the annual
operating expenses which candidates must link
to the prescribed treatment of common expenses
CANDIDATES SHOULD against the deemed business sources of BHB as a
APPLY KNOWLEDGE listed investment holding company.
TO THE FACTS GIVEN IN
d. The requirement calls for candidates to explain using
THE SCENARIO; MERELY supporting computations, the trade-off between
STATING THE ELIGIBILITY the claim for double deduction for R&D fees by
REQUIREMENTS WILL ONLY the R&D user (BP)and the claim for ITA by the R&D
EARN HALF THE MARKS company (BR&D). The calculation of tax savings under
each choice should steer candidates to making an
appropriate recommendation.
READ THE MIND OF AN ATX-MYS MARKER – PART 1 5Q1 Candidate 1
TOTAL MARKS: 21.5/35
Marks
Candidate 1 Answer awarded Comments
Professional marks awarded for: adopting a logical approach,
the appropriateness of the format and presentation of the report, 2/4
and the effectiveness with which the information is communicated.
1(a)(i) Tax incentives available to BP
BP is eligible to claim allowance for significant increase in exports (ASIE) Marks are given for identifying the
because it qualifies all the following conditions: crucial eligibility conditions and how
each is satisfied.
- A Malaysian resident company 0.5
- Incorporated in Malaysia 0.5
- Owned by Malaysian by at least 60%. BP is wholly owned by Lee family who 0.5
are citizens of Malaysia, so it is considered wholly owned by Malaysian. 0.5
- Achieve significant increase in exports by at least 50%. 0.5
BP expects increases of 60% to 80% in exports. 0.5
- Manufacturing company 0.5
Therefore, BP is eligible to claim ASIE of 30% on value of increased exports. 0.5
The amount will be exempted to be deducted against 70% of SI. Any amount
unabsorbed will be carried forward to be deducted against 70% of SI. The amount 0.5 Mark for incentive mechanism.
exempted is credited into exempt account (EIA) to pay tax exempt dividend.
YA Value increased exports 30% allowance
2021 RM50 m RM15 m
2022 RM50 m RM15 m
2023 RM50 m RM15 m
Since BP expects increase of RM50 m for exports, BP is eligible for RM15 m 0.5 As above.
(RM50 m x 30%) each year from 2021 to 2023 to be deducted against 70% of SI.
Any amount unabsorbed will be c/f.
Reinvestment allowance
BP is eligible to claim RA because it satisfies all the following conditions:
- Resident company in Msia involves in manufacturing.
- Incorporated in Msia. 0.5 Only 1 mark allocated for eligibility
conditions, i.e. the crucial one
- Involves in qualifying project. BP plans to build birds’ hotels to produce its 0.5
relating to the qualifying project.
own birds’ nests. This can be considered as a backward integration, which is
considered an expansion. Expansion qualifies for qualifying project.
- Incur qualifying capital expenditure (QCE) on qualifying project.
BP will incur RM18 m on the qualifying project.
However, BP will only be eligible to claim RA if it operates for at least
36 months.
RA is a tax relief given on top of capital allowance (CA) given on the same QCE. 0.5
60% of QCE incurred will be deducted against 70% of SI. The tax relief period 0.5 Marks for amount and mechanism.
(TRP) for claiming RA is 15 years starting when it first claim RA. The absorbed 0.5
amount will be credited into EIA to pay exempt dividend. Any unabsorbed
amount will be c/f until seven years after TRP.
7.5/8
READ THE MIND OF AN ATX-MYS MARKER – PART 1 6Marks
Candidate 1 Answer awarded Comments
(a)(ii) Timing of each incentive
BP expects to register annual increase in exports 0.5 Did not achieve full 3 marks
for YA 2021 until YA 2023. Therefore, BP should claim ASIE from YA 2021 0.5 because did not accurately state
until YA 2023. why RA may be claimed in YA 2024.
Thereafter, since BP has already been in operation for at least 36 months, 0
BP can claim RA from YA 2024 onwards. This way, BP will fully utilize 0.5
all incentives available. 0.5
2/3
(b) Birds’ hotels
Birds’ nests constitute manufacturing. It can therefore qualify as IB and as plant.
The birds’ nests can qualify as IB because it is a building that is used for 0.5 The answer relating to plant is
manufacturing. It has been stated that the production and harvesting of birds’ 0.5 somewhat short as it did not refer
nests constitute manufacturing activity. Therefore, it eligible to claim industrial to the functional aspects of the
building allowance (IBA) at rate of initial allowance (10%) and annual allowance building.
(3%). In the first year, BP is eligible to claim total allowance of RM2,340,000 0.5 Note that one mark is awarded for
(RM18m x 13%). 0.5 having a conclusion.
On the other hand, it can be said that the birds’ hotels constitute a plant. 0
This is because the birds’ hotels is actively used in the business. It is a capital
asset to generate income source. The birds’ hotel is built so that it will not have
to depend from external suppliers. It can be said that the birds’ hotel is to ease 0
and smoothen the business structure. Therefore, it is eligible to claim CA at rate
of initial allowance (20%) and annual allowance (14%. In the first year, BP id 0.5
eligible to claim total allowance of RM6,120,000. 0.5
In conclusion, it can be said that the birds’ hotel is an IB because the birds’
nests are periodically harvested and processed. Besides, the tax authorities
have confirmed that the production and harvesting of birds’ nests constitutes a 0.5
manufacturing activity. Therefore, BP eligible to claim IBA. 0.5
4/5
(c) Deductibility of expenditure for BHB
(i) IPO expenditure
The IPO expenditure of RM1.8 m is capital in nature, thus not eligible for 0.5 Only a half mark is awarded
deduction. It is capital in nature because it is a one-off payment. 0.5/1 because the reason for the capital
nature is incorrect.
(ii) Annual operating expenses
The annual operating expense of RM750,000 in maintain the corporate 0.5 The answer is worth a half mark as
headquarters is eligible for tax deduction as it is revenue in nature. The payment it is all in relation to the revenue
is revenue in nature as it is a recurring expenses and is incurred wholly and nature, completely omitting the
exclusively in the production of gross income. Therefore, the RM750,000 will be prescribed treatment for a listed
deductible in arriving BHB’s adjusted income. investment holding company.
0.5/3
READ THE MIND OF AN ATX-MYS MARKER – PART 1 7Marks
Candidate 1 Answer awarded Comments
(d) R&D incentive
(i) BR&D is potentially eligible for the status of R&D company because it
will provide R&D service/project to its related companies. Besides, BR&D 0.5
is incorporated and also resident in Malaysia, therefore it is considered an
R&D company.
Computation
BR&D
ITA
100% of QCE RM… 0.5
1/4
(ii)If BR&D is an R&D company, BP as the user is 0.5
eligible to claim double deduction on R&D fee 0.5
Succinct and cogent: full marks.
R&D fee RM5,000,000
Double deduction RM5,000,000 0.5
RM10,000,000 0.5
Tax saving @ 24% 2,400,000
However, BP is eligible to claim double deduction provided that BR&D 0.5
does not claim ITA. 0.5
The tax saving BP will have if it claims double deduction is RM2,400,000 0.5
0.5
4/4
(iii) Recommendation 0/3
READ THE MIND OF AN ATX-MYS MARKER – PART 1 8Q1 Candidate 2
TOTAL MARKS: 21/35
Marks
Candidate 2 Answer awarded Comments
Professional marks awarded for: adopting a logical approach, the
appropriateness of the format and presentation of the report, and the 1.5/4
effectiveness with which the information is communicated.
1(a)(i) Tax incentives available to BP
BP is eligible to claim allowance for significant increase in exports of 30% 0.5, 0.5
because it is incorporated and thus, resident in Malaysia. The company is in the 0.5 Full marks are not awarded as
business of manufacturing and it exports its products manufactured. There is an 0.5 not all the conditions are discussed,
increase achieved in exports of 60% to 80%, thus qualifying for a 30% allowance 0.5 and there was no mention of the
as the increase exceeds the threshold of 50%, qualifying for a significant increase impact of the listed status on
in exports. citizen- ownership.
The company gets to claim a 30% deduction of the value of increase exports. This 0.5
is restricted to 70% of its statutory income. Any excess will be carried forward 0.5
and set off against future income. BP will qualify for this incentive as long as it
meets the requisites required.
BP is also eligible for reinvestment allowance as it is a company resident in
Malaysia and it has been in operation for at least 36 months. It will be engaged in 0.5
a qualifying project which relates to expansion.
This is evidenced by the fact that the company is currently involved in processing
raw birds’ nest into ready-to-consume bottled birds’ nest. It will be expanding to 0.5
start building birds’ hotels to produce its own birds’ nest. This expansion will incur
substantial capital expenditure of RM18 million.
0.5
In reinvestment allowance, BP is eligible for an additional 60% relief on 0.5
qualifying capital expenditure over and under capital allowances. This is set off
against 70% of BP’s statutory income. This incentive is granted for a period of 15
years. 5.5/8
(a)(ii) Timing of each incentive 0.5 Full marks: discussion of the timing
As the two incentives are mutually exclusive, it is highly important that is direct, to the point and complete.
BP plans ahead to be able to enjoy the maximum relief.
0.5
As the expansion plans will only take place in October 2023, BP may 0.5
start to claim the incentive for reinvestment allowance in YA 2024. 0.5
This will not collide with the increase in exports incentive available for 0.5
YA 2021 to YA 2023.
0.5
Thus, BP will be able to claim both tax incentives accordingly. 3/3
READ THE MIND OF AN ATX-MYS MARKER – PART 1 9Marks
Candidate 2 Answer awarded Comments
(b) Birds’ hotels
Birds’ nests can be argued to constitute a plant to BP because it is used as an 0.5 Well argued, hence the full marks,
apparatus, not a setting. Further, it is a permanent employment in the business 0.5 even though the conclusion does
and will present BP with enduring advantage. It also has an active function in the not coincide with the model answer,
business. 0.5 because it is reasonable.
If it qualifies, BP will be able to claim capital allowance on the hotels consisting 0.5
of annual allowance 14% and initial allowance 20% in the
first year. 0.5
The hotels can also be argued to be industrial buildings as the main production 0.5
and collection of birds’ nest happen there. It is not excluded from being an IB as
it is not an office, showroom, dwelling house nor
retail shop.
If it qualifies, BP will claim IBA on the hotels consisting of annual allowance of 0.5
3% and initial allowance 10% in the first year. 0.5
BP is recommended to treat the hotel as an IB as the main activities 0.5
of production and harvesting are subsumed within the hotel. 0.5
5/5
(c) Deductibility of expenditure for BHB
(i) The IPO expenditure of RM1.8 million is incurred in order to get BHB listed.
It is in no way related to the production of income but merely relating to the 0.5
financing of the company. 0.5
Thus, the amount should not be allowed as a deduction.
1/1
(ii) Annual operating expenses
The cost of RM750,000 to maintain the corporate headquarters would not
be allowed because BHB would be an investment holding company and only 0.5 Mentioning investment holding
expense relating wholly and exclusively to its income of interest and dividend company (IHC) rather than listed
would be deductible, provided the income would be taxable. 0.5 IHC, and similarly the re-charging
argument, do not earn any marks.
However, it would be deductible for the related companies of BHB decides to re-
charge them their share of the amount as they are not investment holdings and
the costs incurred relates to their operations. 1/3
READ THE MIND OF AN ATX-MYS MARKER – PART 1 10Marks
Candidate 2 Answer awarded Comments
(d) R&D incentive
(i) BR&D is potentially eligible for the status of a R&D company as it will be 0.5 The 4 half marks are awarded for
providing R&D service to BP initially and may, in the future provide R&D 0.5 mentioning the highlighted terms.
services to third parties. It will also incur capital expenditure in relation to
this.
BP, who uses this service will qualify for a single deduction of the amount 0
incurred as services provided by BR&D is to a related company through
common holding.
The tax savings to BP would be RM5 million x 24% = RM1.2 million x 3 0
years = RM3.6 million.
If BR&D obtains approval for ITA, it will be qualified for a 100% additional 0.5
relief on qualifying capital expenditure incurred for a period of 10 consecutive
years. In which case BR&D will be granted a relief of 100% x RM6 million =
RM6 million restricted to 70% of its statutory income. 0.5
2/4
(ii) B
P will only qualify for the double deduction incentive if it conducts 0.5 The 2 half marks are awarded
in house R&D. In which case, it will be eligible as it carries out R&D in for mentioning the highlighted
Malaysia and has incurred capital expenditure. terms even though the associated
0.5 discussion is incorrect.
It will then be able to claim a double deduction, provided it did not apply
for ITA of 50% for 10 years. The total tax savings to this would be… 1/4
(iii) Recommendation
Therefore, it is recommended for to claim the R&D incentive as it yields a 1 1 mark is awarded for stating
higher tax savings of… a recommendation.
1/3
READ THE MIND OF AN ATX-MYS MARKER – PART 1 11Conclusion
Accountants require a comprehensive working The examining team will continue to encourage a
appreciation of tax issues. The ATX-MYS exam requires comprehensive understanding of tax issues in the
candidates to identify and explain the principles used in business environment.
their calculations and provide a cogent answer.
It examines a wide range of inter-connected issues A SKILFUL APPLICATION
commonly encountered in business operations. A skilful OF TAX PRINCIPLES
application of tax principles learned is key to doing well LEARNED IS KEY TO DOING
in this exam.
WELL IN THIS EXAM.
READ THE MIND OF AN ATX-MYS MARKER – PART 1 12For more tutor resources, visit accaglobal.com/ educationhub For more student resources, visit accaglobal.com/ exam-resources
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