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Andy Lee [email protected] BP34203 TAXATION II SPE, UMS

ALLOWANCES-ADVANCED TAXATION

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Page 1: ALLOWANCES-ADVANCED TAXATION

Andy [email protected]

BP34203TAXATION II

SPE, UMS

Page 2: ALLOWANCES-ADVANCED TAXATION

Week 3 AllowancesMalaysian Taxation

SPE, UMS

Page 3: ALLOWANCES-ADVANCED TAXATION

Lecture outlineAgriculture AllowancesForest AllowancesMining AllowancesProspecting Expenditures

SPE, UMS

Page 4: ALLOWANCES-ADVANCED TAXATION

Allowances Chp 13Schedule 3 of ITACapital Allowance on Plant & MachineryIndustrial Building AllowanceAgriculture Allowance (p. 542) Forest Allowance (p. 549) Schedule 4A of ITAApproved Agriculture Project (p. 549)

[Deleted]Schedule 2Mining Allowance (p. 529)Schedule 4 of ITAProspecting Expenditure (p. 539)

Page 5: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesOverviewAllowances given to a person carrying

agriculture activities including cultivation of crops, animal farming, aquaculture, inland fishing and other agriculture activities (S. 18 ITA 1967)

Computation of agriculture allowance is provided under Schedule 3 of ITA 1967

Similar to Capital Allowance, agriculture allowance is deducted from adjusted income to get statutory income

Agriculture allowance not fully absorbed in a YA is c/fwd to the following YA

Page 6: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesQualifying Agriculture Expenditure (QE)Clearing and preparation of land for the

purpose of agriculturePlanting (not replanting) of crops on land

cleared for plantingConstruction on a farm of a road or bridgeConstruction on a farm of a building used

for the purpose of business (wholly or partly for the farm), a building for the welfare of persons or as a living quarters for a person, employed in connection of that farm – if the farm ceases to work, such buildings have little or no value to the other person

Page 7: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesNote:Subsidies given by the government (such

as subsidy for fertilizer) is not deductible in the income statement

Agriculture allowance is only given upon agriculture expenditure incurred for new planting. Any agriculture expenditure incurred in respect of replanting will be treated as revenue expenditure and deductible from gross income

Page 8: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowanceEligibilityThe company or individual must be owner

at the end of basis periodQE was spent during the basis periodA taxpayer who is entitled to an

agriculture allowance shall not qualify for other allowances on the same expenditure

Page 9: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesRate of allowancesBuilding used for the welfare of persons

or as living accommodation for a person employed to work on the farm (20% p.a. of the expenditure incurred)

Other buildings (10% p.a. of the expenditure incurred)

QE other than buildings (50% p.a. of the expenditure incurred)

Note: No Initial Allowance for QE

Page 10: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesRate of allowances (E.g. 1)Syarikat KelapaMas Sdn Bhd incurred

qualifying agriculture expenditure for coconut plantation for year 2008

Purchase of land 150,000

Clearing and preparation of land

25,000

Planting of crops 60,000

Construction of workers quarters

20,000

Construction of office building 10,000

Page 11: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesRequired: Calculate the qualifying expenditure and

agriculture allowances for Syarikat KelapaMas Sdn Bhd for year of assessment 2008. The company closes its accounts on 31 December 2008.

Page 12: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesAnswer:All expenditure except purchase of land

qualifies as Qualifying Expenditure for agriculture allowance. The calculation of Qualifying Expenditure and Agriculture Allowance for Syarikat KelapaMas Sdn. Bhd. for YA 2008 is as follows:

Page 13: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesAnswer:

Clearing and

preparation of land

Planting of

crops

Worker quarte

rs

Office buildin

g

Agriculture Allowance Rates

50% 50% 20% 10%

Qualifying Expenditure

25,000 60,000 20,000 10,000

Agriculture Allowance for YA 2008

12,500 30,000 4,000 1,000

Balance of Agriculture Expenditure on 31.12.08

12,500 30,000 16,000 9,000

Page 14: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesNo allowances are to be given if the taxpayer is

not the owner of the asset at the end of basis period, or the asset was not in use for business

No allowances will be given where the asset is transferred in the basis year and not in use for the business within one month before the transfer

In the event of sale or transfers of an asset, an apportionment of the allowances is made on a time basis to the vendor/seller and the purchaser

Page 15: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesE.g. 2: Continue from E.g. 1 (Syarikat

KelapaMas Sdn. Bhd.). On 1 July 2009, Syarikat KelapaMas Sdn. Bhd. sold the workers quarters to KKCoconut Berhad, another coconut planter next to its plantation. The price was RM100,000. Compute the agriculture allowances for both companies for YA 2009 and 2010. KKCoconut Berhad which closes its account on 30 September.

Page 16: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesAnswer:

Syarikat KelapaMas Sdn Bhd

YA 2008 (20% x 20,000) 4,000

YA 2009 (20% x 20,000) x 6/12mths

2,000

YA 2010 NIL

KKCoconut Bhd

YA 2009 (20% x 20,000) x 6/12mths

2,000

YA 2010 (20% x 20,000) 4,000

Page 17: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesNote:Sale price of RM100,000 is not consideredAgriculture Allowance is based on old/cost

price of RM20,000Apportionment between Syarikat

KelapaMas Sdn Bhd and KKCoconut Bhd in YA 2009 is based on number of months, which Syarikat KelapaMas Sdn Bhd had used (i.e., 6 months: 01.01.09 – 01.07.09)

Page 18: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesExample 3: Continue from Example 2

(Syarikat KelapaMas Sdn. Bhd.). If the sale of the worker quarters was 1 Oct 2009, what would be calculation of Agriculture Allowance for both companies?

Page 19: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesAnswer:

Syarikat KelapaMas Sdn Bhd

YA 2008 (20% x 20,000) 4,000

YA 2009 (20% x 20,000) x 9/12mths

3,000

YA 2010 NIL

KKCoconut Bhd

YA 2009 (20% x 20,000) x 3/12mths

1,000

YA 2010 (20% x 20,000) 4,000

Page 20: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesAgriculture ChargeAgricultural charge is the withdrawal of

agriculture allowance claimed (similar to balancing charge)

It arises (1) when grants or subsidies from the government or statutory body is received by the taxpayer – the receipt is to be included as a charge in the assessable incomeIf subsidies received after the taxpayer

ceased to operate a farm – the amount received will be included in the income of the basis period of cessation of operation

Page 21: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesAgriculture Charge (cont’)It arises (2) when an asset upon which an

agriculture allowance has been made, is disposed off within a period of 6 years

A taxpayer is given an option to spread the agriculture charges over the year of assessment for which the allowances were made

Page 22: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesAgriculture Charge (e.g.)Example 3: Lohan Sdn. Bhd., established,

on 1.4.2005 is in the business of cultivating oil palm. The company closes its accounts on 30 June each year. The agriculture expenditure for the company is as follows:

Page 23: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesAgriculture Charge (e.g.)

Date Expenditure Amount

24.05.2005

Land cost 350,000

27.07.2005

Land clearing 100,000

14.02.2006

Road construction 200,000

18.03.2006

Oil palm planting 150,000

29.08.2006

Workers quarters construction

70,000

31.08.2006

Store construction 40,000

Page 24: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesAgriculture Charge (e.g.)On 24.09.2006, the company received a subsidy

from the state government for RM40,000 for oil palm planting.

On 31.12.2010, the oil palm plantation was sold to Damai Sdn Bhd, an oil palm plantation company for RM750,000Required:Calculate the agriculture allowance/charge for Lohan Sdn. Bhd. for the relevant years of assessment until year of assessment 2011.

Page 25: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesLand

clearingRoad Oil Palm

plantingWorkerquarter

s

Store

Rate 50% 50% 50% 20% 10%QE 100,000 200,00

0150,000 70,000 40,000

YA2006 – AA 50,000 100,000

75,000 - -

YA2007 – AA– AC

50,000-

100,000-

75,000(40,000)

14,000 4,000

YA2008 – AA - - - 14,000 4,000YA2009 – AA - - - 14,000 4,000YA2010 – AA - - - 14,000 4,000YA2011 – AA (*) YA2011 –

AC (**)

-(100,00

0)

-(200,00

0)

-(110,00

0)

7,000(63,000

)

2,000(18,00

0)

Page 26: ALLOWANCES-ADVANCED TAXATION

Agriculture AllowancesNotes -* In YA2011, Lohan Sdn. Bhd only entitled to 1/2

agriculture allowance because the plantation was sold.**Alternatively, subject to a written request and DGIR’s

approval, Lohan Sdn. Bhd may spread the agriculture charge to the previous YA’s as follows:

Land clearing: RM100,000 / 2 = RM50,000 in YA 2006 and 2007 Road: RM200,000 / 2 = RM100,000 in YA 2006 and 2007 Oil Palm Planting: RM110,000 / 2 = RM55,000 in YA 2006 and

2007 Workers Quarters: RM63,000 / 5 = RM12,600 in YA 2007, 2008,

2009, 2010 and 2011 Store: RM18,000 / 5 = RM3,600 in YA 2007, 2008, 2009, 2010

and 2011

Page 27: ALLOWANCES-ADVANCED TAXATION

Approved Agriculture ProjectsDefinition:An approved agricultural project is an

alternative to Schedule 3 AllowanceA taxpayer carrying on an approved

agricultural project can elect that the capital expenditure incurred be deducted against his aggregate income

Qualifying expenditure – Schedule 4A, ITA 196

Deleted with effective from YA2006

Page 28: ALLOWANCES-ADVANCED TAXATION

Forest AllowanceGiven to person involved in timber

industryUnder para. 8, 30 and 31, sch 3, ITA 1967Forest – means forest in Malaysia in

respect of which a person has a concession or license to extract timber and conducting business of extracting timber from the forest

Page 29: ALLOWANCES-ADVANCED TAXATION

Forest AllowanceAllowance

• 10% - QE incurred on roads and buildings which are used for the purposes of the business of extracting timber from the forest

• 20% - QE incurred on buildings provided for the welfare or living accommodation of employee engaged in the extraction of timber

Page 30: ALLOWANCES-ADVANCED TAXATION

Forest AllowancePermanent cessation – the whole balance of

capital expenditure which has not been allowed will be given

Forest charges – when the forest is disposed of and the amount of charges is equal to the allowances made to the taxpayer

Disposal of forest – transfer or assigns the concession (license) or surrenders that concession (license) for a valuable consideration

In a transfer, apportionment of the allowances is made on a time basis to the vendor/seller and the purchaser

Page 31: ALLOWANCES-ADVANCED TAXATION

Forest AllowanceE.g. 4: TM Timber Sdn Bhd, a timber company,

closes its accounts every 31 December. The following are expenditure on the timber operations:

01.01.06 – 31.12.06 Road Construction 1

40,000

01.01.06 – 31.12.06 Workers Quarters 1

80,000

01.01.07 – 31.12.07 Road Construction 2

200,000

01.01.07 – 31.12.07 Workers Quarters 2

120,000

Page 32: ALLOWANCES-ADVANCED TAXATION

Forest AllowanceThe company stopped its operations on

30.11.2009 and disposed all the company's asset on 01.01.2010. From the sale, the company obtained RM30,000 for 2006 expenditure and RM20,000 for 2007 expenditure.Required: Calculate the forest allowance and/or forest charge for the relevant years of assessment. Show your workings clearly.

Page 33: ALLOWANCES-ADVANCED TAXATION

Forest AllowanceAnswer:

Road1

Workers

quarters 1

Road2

Workers

quarters 2

Rate 10% 20% 10% 20%

Qualifying Exp 40,000

80,000 200,000 120,000

YA2006 – FA 4,000 16,000 - -

YA2007 – FA 4,000 16,000 20,000 12,000

YA2008 – FA 4,000 16,000 20,000 12,000

YA2009 – FA 28,000

32,000 160,000 96,000

YA2009 – FC (*) (40,000)

(80,000)

(200,000)

(120,000)

Page 34: ALLOWANCES-ADVANCED TAXATION

Forest AllowanceNote:(*) Alternatively, subject to a written

request and DGIR’s approval, TM Timber Sdn. Bhd may spread the agriculture charge to the previous YA’s.

The disposal price is not considered

Page 35: ALLOWANCES-ADVANCED TAXATION

Mining AllowancesOverviewProvided under Sch 2 of ITA 1967Mining allowance is treated as revenue

expenditure (deductible expense) and is deducted from the gross income of a mining business (S. 34(6)(c) ITA 1967)

Treatment of adjusted loss from mining operation is similar to business loss. The excess of mining allowance over the gross mining income for a YA can be offset against the aggregate income for that YA

Page 36: ALLOWANCES-ADVANCED TAXATION

Mining AllowancesRationaleCertain capital assets used in mining

operations would no longer be of use (no value) once the mining operations ceased

The deduction would assist the mining operator to be more competitive

Page 37: ALLOWANCES-ADVANCED TAXATION

Mining AllowancesDefinitionMine

Source of minerals over which mining operations are, have been or can lawfully be, carried on

Minerals & depositsprecious metals, stones and non-precious minerals excluding common clay, sand, sand stones, mineral oils

Mining operationsEvery method or process by which minerals are obtained

Page 38: ALLOWANCES-ADVANCED TAXATION

Mining AllowancesQualifying Expenditure (QE)• Site and rights – *cost of site, acquiring

mineral rights, land to be used for mining works

• Prospecting (successful or not) – cost of searching, discovering, testing deposit or winning access thereto

• Works – construction work which is likely to be little or no value when the deposits are worked out. Example – tunneling, water supply, roads, railways, building including staff quarters

• Non-productive expenditure – management, administration and development expenditure before the commencement of actual production

Page 39: ALLOWANCES-ADVANCED TAXATION

Mining AllowancesComputation

Residual expenditure at the end of basis period

Residual life at the beginning of basis period

• Where account are made up for more or less than 12 months, mining allowances are computed by increasing or decreasing them proportionately.

• Existing mining company which starts new mining operation : entitled for the whole year allowance

Page 40: ALLOWANCES-ADVANCED TAXATION

Mining AllowanceResidual Expenditure• Total qualifying mining expenditure reduced

by any deductions which have already been given in respect of mining allowances and any amount or consideration received in respect of capital expenditure (i.e compensation or recoupment)

Recovered expenditure• Any consideration (money or non monetary

received for sale or transfer of mining asset)• Deducted for purposes of arriving at the

residual value

Page 41: ALLOWANCES-ADVANCED TAXATION

Mining AllowancesLife of mine• The number of years during which the

extraction of minerals from the mine can be expected

• Determined by the mine operator immediately after the works started. Provide with details calculation on how the period is determined. If not the DG will use his/her discretion

Page 42: ALLOWANCES-ADVANCED TAXATION

Mining AllowancesLife of mine (cont’)Common formula:

Total acreage of deposits available for mining

(a) -----------------------------------------------------Expected acreage to be mine annually

Total estimated deposits in tons(b) ---------------------------------------------------

Expected rate of annual production in tons

Page 43: ALLOWANCES-ADVANCED TAXATION

Mining AllowancesE.g. 1MMC Sdn. Bhd. (accounting period ends on

31/12) started a mining operation on 1/7/2002. Expenditures incurred in the year 2002 were

1/5/02 Cost of site 350,000

1/5/02 – 30/6/02

Prospecting exp.

20,000

Roads and bridges

10,000

Labour quarters 10,000

1/5/02 – 31/12/02

Others dev. cost 10,000

Expected life of the mine is 8 years

Page 44: ALLOWANCES-ADVANCED TAXATION

Mining AllowancesRequired: Compute mining allowances for MMC

Sdn. Bhd. for years of assessment 2002 to 2004.

Page 45: ALLOWANCES-ADVANCED TAXATION

Mining AllowancesAnswer: MMC Sdn. Bhd. As all expenses qualify as mining expenditure, total Qualifying Mining Expenditure is RM400,000. Calculation of mining allowance is below:

Qualifying Mining Expenditure 400,000YA 2002

Mining Allow.Residual Exp

(400,000/8) (50,000)350,000

YA 2003

Mining Allow.Residual Exp.

(350,000/7) (50,000)300,000

YA 2004

Mining Allow.Residual Exp.

(300,000/6) (50,000)250,000

Page 46: ALLOWANCES-ADVANCED TAXATION

Mining AllowancesTwo or more mines• Should be treated separate mineCessation of a mine (Para 15, Sch2 ITA)• Permanently ceases to work a mine (other

than on death or transfer of a mine) – any recovered expenditure received after the cessation is treated as being received on the date of cessation. An election can be made by the taxpayer to have the mining allowances recomputed for the preceding five basis period. If less than 5 years, use the actual number of years

Page 47: ALLOWANCES-ADVANCED TAXATION

Mining Allowances Continue from previous e.g. (MMC Sdn.

Bhd.). Due uneconomic deposits, operations of the mine was terminated on June 2007.Required: a) Compute mining allowances for MMC

Sdn. Bhd. for YA 2002 to YA 2007.b) If an election is made under para 15

Sch 2 of ITA 1967, what would be the effect on your calculation?

Page 48: ALLOWANCES-ADVANCED TAXATION

Mining AllowancesAnswer:

Qualifying Mining Expenditure 400,000YA 2002 Mining Allow

Residual Exp(400,000/8) (50,000)

350,000YA 2003 Mining Allow

Residual Exp(350,000/7) (50,000)

300,000YA 2004 Mining Allow

Residual Exp(300,000/6) (50,000)

250,000YA 2005 Mining Allow

Residual Exp(250,000/5) (50,000)

200,000YA 2006 Mining Allow

Residual Exp(200,000/4) (50,000)

150,000YA 2007 Mining Allow(6

mths)Residual Exp

(150,000) (150,000)Nil

Page 49: ALLOWANCES-ADVANCED TAXATION

Mining AllowancesAnswer:

Qualifying Mining Expenditure 400,000

YA 2002

Mining AllowResidual Exp

(400,000/( 5 + 6/12))

(72,727)

327,273

YA 2003

Mining AllowResidual Exp

(327,723 /( 4 + 6/12))

(72,727)

254,546

YA 2004

Mining AllowResidual Exp

(254,546/( 3 + 6/12))

(72,727)

181,819

YA 2005

Mining AllowResidual Exp

(181,819/( 2 + 6/12))

(72,727)

109,092

YA 2006

Mining AllowResidual Exp

(109,092/( 1 + 6/12))

(72,727)

36,365YA

2007Mining Allow(6 mths)Residual Exp

(36,365) (36,365)

Nil

Page 50: ALLOWANCES-ADVANCED TAXATION

Prospecting ExpenditureUnder Schedule 4 ITA 1967Allowable as deduction to against

aggregate incomeIncludes searching for, discovering, or

winning access to deposits or minerals in an eligible area, or testing such deposits

Page 51: ALLOWANCES-ADVANCED TAXATION

Prospecting ExpenditureExcludes the following:

Cost of the site of resourcesCost of the site of any works which are

likely to be of little or no value when the source is no longer worked

The cost of acquiring any rights in or over any such site and/or deposit

Qualifying expenditure includes the market value of plant and machinery used in prospecting even though such asset was not originally bought for that purpose

Page 52: ALLOWANCES-ADVANCED TAXATION

Prospecting ExpenditureQualifying prospecting expenditure is

deductible against aggregate income after adjusting for the following receipts:• Consideration received on sale of plant

& machinery• Amount received or receivable from the

use of plant and machinery• Market value of unsold plant and

machinery at the date of cessation• Sale of rights or other benefits arising

from or connected with the area• Grant or payment received or receivable

from the government, statutory authorities

Page 53: ALLOWANCES-ADVANCED TAXATION

Prospecting Expenditure The prospector has two choices:

1) Deduct the expenditure when it is incurred (P5(a), Sch 4). Writing claim should be submitted to the DGIR three months after the beginning of a year of assessment

2) Accumulate the expenditure up to maximum of 10 years and deduct it at the end of the basis year (P5(b), Sch 4) when the prospecting becomes abortive

Page 54: ALLOWANCES-ADVANCED TAXATION

Prospecting Expenditure If an election is made under (1) and the

prospecting is successful, the whole expenditure will be added back to the aggregate income and mining allowance will be given when the works start

If an election is made under (2) and the prospecting is successful, the prospecting expenditure becomes qualifying mining expenditure and mining allowance will be given when the works starts

Page 55: ALLOWANCES-ADVANCED TAXATION

Prospecting ExpenditureUnder Schedule 4 ITA 1967Allowable as deduction to against

aggregate incomeIncludes searching for, discovering, or

winning access to deposits or minerals in an eligible area, or testing such deposits

Page 56: ALLOWANCES-ADVANCED TAXATION

Prospecting ExpenditureExcludes the following:

Cost of the site of resourcesCost of the site of any works which are

likely to be of little or no value when the source is no longer worked

The cost of acquiring any rights in or over any such site and/or deposit

Qualifying expenditure includes the market value of plant and machinery used in prospecting even though such asset was not originally bought for that purpose

Page 57: ALLOWANCES-ADVANCED TAXATION

Prospecting ExpenditureQualifying prospecting expenditure is

deductible against aggregate income after adjusting for the following receipts:• Consideration received on sale of plant

& machinery• Amount received or receivable from the

use of plant and machinery• Market value of unsold plant and

machinery at the date of cessation• Sale of rights or other benefits arising

from or connected with the area• Grant or payment received or receivable

from the government, statutory authorities

Page 58: ALLOWANCES-ADVANCED TAXATION

Prospecting Expenditure The prospector has two choices:

1) Deduct the expenditure when it is incurred (P5(a), Sch 4). Writing claim should be submitted to the DGIR three months after the beginning of a year of assessment

2) Accumulate the expenditure up to maximum of 10 years and deduct it at the end of the basis year (P5(b), Sch 4) when the prospecting becomes abortive

Page 59: ALLOWANCES-ADVANCED TAXATION

Prospecting Expenditure If an election is made under (1) and the

prospecting is successful, the whole expenditure will be added back to the aggregate income and mining allowance will be given when the works start

If an election is made under (2) and the prospecting is successful, the prospecting expenditure becomes qualifying mining expenditure and mining allowance will be given when the works starts