Acc 3541 malaysian taxation - calculate the capital

Question

Azmi, Elianna and Isabella are partners in Azmi & Associates, law firm. The firm commenced its operation in June 2002 with only Azmi and Elianna, who is also Azmi's wife since 1992, as the partners. Each of them contributed RM100,000 capital to the partnership. In 2013, Elianna was diagnosed with bone cancer. Both of her legs were amputated and she has to undergo a series of chemotherapy. Since then, she has become a silent partner and does not involved in the day-to-day operations of the business.

In 2014, Azmi married Isabella as his second wife and made Isabella a partner to the law firm. Isabella contributed capital of RM40,000 to the partnership.

In early 2017, Azmi married for the third time to Yasmin. Yasmin is appointed as a partner on 1 July 2017. She brought in RM60,000 capital into the partnership. On the same day, following an argument, Azmi divorced Isabella and Isabella resigned from the partnership effective immediately.

The following information is extracted from the old and new partnership agreements:

	Old (Jan-June 2017)	New (July-Dec 2017)
Profit and loss sharing ratio:
- Azmi	40%	30%
- Elianna	40%	50%
- Isabella	20%	-
- Yasmin	-	20%
Interest on capital (per annum)
- Azmi	4%	4%
- Elianna	6%	8%
- Isabella	2%	-
- Yasmin	-	1%
Monthly salary:
- Azmi	RM12,000	RM15,000
- Elianna	-	-
- Isabella	RM8,000	-
- Yasmin	-	RM6,000

The income statement of the partnership for accounting year ended 2017 is shown below:

	Note	RM
Fees	1	545,900
Expenses:
Staff costs	2	(226,000)
Rental		(60,000)
Depreciation	3	(20,000)
Loss on disposal of computer	4	(1,900)
Advertising	5	(15,400)
Maintenance and housekeeping	6	(9,200)
Insurance	7	(18,500)
Telephone and postage	8	(6,300)
Bad debt	9	(3,400)
Professional expenses	10	(10,700)
Gifts and donations	11	(34,100)
Other administrative expenses	12	(24,900)
Net income		115,500

Notes to the income statement:

1. Fees include RM6,000 paid by Azmi in relation to a traffic litigation involving his personal car. A normal client would have to pay RM10,000 for a similar service.

2. Included in staff costs are:

	RM
Salaries and bonus (employees)	160,000
EPF of employees (employer's contribution)	35,400
Staff annual dinner	21,700
Internship allowance under approved internship programme	2,700
Leave passage to New Zealand awarded to Employee of the Year (RM3,000 for airfares, RM1,200 for food and accommodation, the balance for holiday allowance)	6,200

3. Depreciation is in respect of the following assets:

Assets	Date of Purchase	Cost
Office furniture	26 June 2013	RM34,500
Passenger car	20 September 2014	RM220,000. (Bought on hire purchase basis, with 10% deposit and the balance is payable in 72 monthly instalment, starting 21/10/2014)
Photocopy machine	14 August 2014	RM6,200
Computer	3 February 2017	RM5,800
CCTV	10 July 2017	RM9,000

4. The computer bought on 3 February 2017 (see note 3) is to replace a computer bought on 1 April 2015 at the cost of RM3,200. No commercial justification was given to the IRB. The old computer was disposed for RM500.

5. Advertising consists of cost of developing website amounted to RM8,500, and the balance is cost of advertisement in a newspaper in Singapore.

6. Maintenance and housekeeping include:

	RM
Repainting of the office interior	4,600
Cost of installation of CCTV (see note 3)	1,700
Purchase of a new microwave oven	300

7. Insurance comprises of:

	RM
Keyman term life insurance - Azmi	2,500
Keyman term life insurance - Head of criminal litigation unit	1,800
Group medical insurance for staff	14,200

8. Included in telephone and postage are:

	RM
Courier and delivery service	2,100
Client reimbursement for postage	3,000

9. Bad debt is based on allowance for doubtful debt account, as follows:

Allowance for Doubtful Debt
	RM		RM
Accounts receivable	11,300	Specific provision b/d	16,300
Other receivable	5,900	General provision b/d	8,300
Specific provision c/d	14,400	Bad debt recovery	10,200
General provision c/d	6,600	Bad debt expense	3,400
	38,200		38,200

Other receivable comes from a loan to a former employee that has been outstanding for more than 12 months before it was decided to be written off.
Bad debt recovery comes from a debt which was previously disallowed by IRB.

10. Professional expenses include:

	RM
Malaysian Bar Council membership fee	2,000
Tax agent - submission of income tax return	5,400
Tax agent - submission of GST return	3,300

11. Gifts and donations comprise of:

	RM
Donation to political party (on 18/4/2017)	18,000
Donation to approved orphanage house (on 5/10/2017)	5,000
Cash donation to approved research institution (on 1/12/2017)	6,000
Gift to clients (an executive diary, with a logo of Azmi & Associates at the front cover)	5,100

12. Other administrative expenses include:

	RM
Lunches provided to potential clients	11,500
Traffic fines	1,800
Interest on overdraft facility	600

Additional information related to the partners:

a) Azmi owns several rented properties:

Property 1 : A shop house in Damansara. Currently tenanted at RM8,000 per month. However, as at 31 December 2017, 2 month rental is outstanding. Quit rent and assessment rate for this property amounted to RM1,500. The purchase of this property is financed by loan, where RM14,000 interest was paid in 2017.

Property 2 : A fully-furnished condominium near KLCC, rented to an expatriate from Canada at RM5,500 per month. The rental is paid by the expatriate's employer quarterly. In December 2017, the employer paid in advance rental for January until March 2017. During the year, Azmi incurred quit rent and assessment rate amounted to RM2,800, maintenance fee of RM350 per month, and installation of 3 units of air- conditioner costing RM3,500.

Property 3 : A recently-completed three-storey house in Cyberjaya. Azmi received keys to the house in February 2017, and after minor works (cost RM10,000) the house is ready to be rented out in April 2017. Azmi hired a property agent to search and manage the tenancy, at the fee of equivalent to one month rental. A tenant moved into the house on 1 June 2017. On top of the RM2,200 monthly rental, the tenant has to pay deposit of two month rental, and RM300 deposit for utilities.

b) Elianna holds shares in the following companies and earned dividend:

Company A (a pioneer status company) Before tax dividend of RM25,000 Company B After tax dividend of RM18,400

In addition, in September 2017 Elianna sold 6,000 shares in Company C and made a profit of RM3.20 per share.

c) Isabella is a non-executive director of an Islamic bank. During the year, she received director's fee of RM16,000, and entertainment allowance of RM5,000.

On 1 March 2017, Isabella was granted an option to acquire up to 20,000 shares in the bank at RM2 per share not later than 30 September 2017. The market value on 1 March 2017 was RM5.50. Isabella acquired 15,000 shares on 15 June 2017 when the market value of the shares was RM6 per share. On 28 September 2017, she bought another 5,000 shares. Market value of this date was RM5.30 per share.

d) Yasmin owns a sole proprietorship trading business that she runs on cash basis. She has never prepared proper accounts for her business. However, she does keep all receipts and tax invoices properly. The following information is gathered from the source documents:

	RM
Sales	235,200
Cost of goods sold	74,600
Rental	24,000
Water and electricity	3,800
Salaries	18,000
Freight charges	5,900
Miscellaneous expenses	1,400
Commission revenue from consignment sales	42,500
Depreciation	9,300

e) Azmi and Elianna have 6 children together:

Abu Bakar	-	22 years old, disabled, studying psychology at a local university.
Zainab	-	20 years old, studying accounting at a local university. She works part time and earns RM600 per month.
Fatimah	-	17 years old, attending form 5 in a public school.
Umar	-	15 years old, full time tahfiz student in Indonesia.
Rugayah	-	9 years old, attending primary school.
Ali	-	6 years old, attending kindergarten.

f) Azmi and Isabella have 2 children together; Johan, 3 years old and Sara, 18 months old. Following the divorce, the Shariah court granted custody of the children to Isabella, and Azmi is ordered to pay maintenance of RM400 per month per child, starting from the date of divorce. Azmi also has to pay RM1,000 alimony per month to Isabella for three months.

g) Yasmin has one autistic child, now aged 7, from her previous marriage. She is the only one who pays maintenance of her child.

h) Elianna spent RM12,400 for her cancer treatment. In addition, Azmi bought a motorised wheelchair for Elianna (cost RM4,600).

i) Yasmin is currently furthering her study in Diploma in Shari'ah Law and Legal Practice at a local university on part time basis. She paid fee amounted RM7,200 in 2017, of which she withdrew from her EPF account.

j) Azmi bought a Dell laptop (cost RM2,800) for his son Abu Bakar, and Elianna bought an Asus netbook for her daughter Zainab (cost RM2,100).

k) Other expenses incurred by the partners during YA 2017:

	Azmi	Elianna	Isabella	Yasmin
	RM	RM	RM	RM
Approved donation	5,000	1,400	2,300	600
Parents' medical treatment	2,700	800	-	-
Purchase of books	400	500	300	1,200
Purchase of sport equipment	-	-	450	-
Contribution to private retirement scheme	5,400	-	2,200	3,800
Contribution to medical and education insurance	2,000	2,000	1,500	-
Contribution to life insurance	-	-	-	3,900
Zakat	4,100	2,600	2,900	3,000

l) Azmi, Elianna, Isabella and Yasmin are Malaysian citizen and tax resident in Malaysia for YA 2017.

Required:

i) Calculate the capital allowances, balancing change and/or balancing allowance (if any) due to the partnership for all relevant years of assessment up to the year of assessment 2017.

ii) Calculate provisional adjusted income and divisible income for the partnership for YA 2017.

iii) Compute total income for Azmi, Elianna, Isabella and Yasmin for YA 2017.

iv) Compute chargeable income and tax payable for Azmi, Elianna, Isabella and Yasmin for YA 2017. You have to decide whether any of the wives should elect for joint assessment.

Attachment:- SUPPLEMENTARY INSTRUCTIONS.rar