A new manufacturing company, RSP Sdn Bhd (RSP) was awarded a contract to supply product X (a promoted product) to all government hospitals in Malaysia. The company has forecasted minor losses in the first 4 years of operation (YA 2017 to YA 2020) and a small profit in the 5th year (YA 2021). It is a capital-intensive kind of business as such it is expected that the company will incur approximately RM40 million for the purchase of machinery. In addition, RM500,000 is expected to be incurred for staff remuneration costs prior to the commencement of the manufacturing process.

In addition to business income, the company is also expected to earn other income comprising rental and interest income. The rental income is expected to be quite substantial as it is derived from renting out 5 blocks of apartments to its factory workers whereas the interest income would be paid by its subsidiary, TSV Sdn Bhd (TSV). The fund for the construction of the 5 blocks of the apartment is internally generated whereas the loan given to TSV is borrowed from financial institutions whereby RSP has to pay interest at the market rate which is much higher than the interest rate charged by RSP to TSV. TSV is expected to have a current year loss of RM300,000 annually from YA 2019 to YA 2021.

Some of the machinery is expected to be disposed of after several years of usage and this will give rise to a huge profit on the disposal of fixed assets as these assets have a very high resale value. The company has yet to decide as to whether to dispose of these assets to its subsidiary Inara Sdn Bhd (Inara) which is a loss making company or to unrelated companies. Inara is forecasted to have a current year loss of RM800,000 annually from YA 2019 to YA 2021.

Another subsidiary, Top Sdn Bhd (Top) is a profitable company which provides management service to all government hospitals. The company’s capital allowances claimed is expected to be small amount as its nature of business does not require to incur a huge amount of capital expenditure. Its forecasted aggregate income is approximately RM1 million per annum from YA 2019 onwards.

RSP’s percentage of shareholding in its subsidiaries is as follows: -

60% in TSV Sdn Bhd

75% in Inara Sdn Bhd

73% in Top Sdn Bhd

Required:

You are required to advise RSP Sdn Bhd on tax planning opportunities to reduce tax liabilities for RSP. Your answer should cover the following areas: -

1. ITA or Pioneer Status, choose the best option.

2. Commencement of business- minimize nonallowable expenses.

3. Leasing or outright purchasing of assets for assets not qualified under ITA (e.g motor vehicles), choose the best option.

4. Interest restriction- RSP, Financial Institution, and TSV.

5. Tax planning on disposal of fixed assets.

6. Group relief taxes

Answer rating: 100% (QA)

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