SOLUTIONS TAX INVESTIGATION 8 SEM (JULY 2020 - DEC 2016)

JULY 2020,Q1, SESSION 2

Capital Statement of Mustapha Maarof for YA 2018 and 2019

2017 2018 2019
ASSETS
Capital 10,000 10,000 10,000
Balance of retained earnings 60,000 70,000 80,000
Drawings (45,000) (50,000) (60,000)
Proprietor’s fund (business in Kuantan) 25,000 30,000 30,000
Proprietor’s fund (business in Jengka) - - 98,000
Semi-detached house (cost) 155,000 155,000 155,000
BMW car - 300,000 300,000
Shares 75,000 75,000 Nil
Loan to aunty 225,000 125,000 Nil
Fixed deposit 40,000 30,000 50,000
Saving accounts 15,500 7,500 18,900
Current accounts - 15,000 16,200
Diamond ring ** - 25,000 Nil
Unit trust - - 200,000
Land - - 300,000
TOTAL ASSETS 535,500 762,500 1,168,100
LIABILITIES
Loan (Semi-D House) (95,000) (80,000) (75,000)
Loan (BMW) - (212,500) (137,500)
Current account - Overdraft (20,000) - -
NET ASSETS 420,500 470,000 955,600
NET ASSETS b/f (420,500) (470,000)
INCREASE IN NET ASSETS 49,500 485,600
Adjustments:
Add: Personal Expenses & Capital Loss
Interest on HP loan.(750x2) / (750 x 12) - 1,500 9,000
Loan to aunty forfeited 125,000
Loss on disposal of diamond ring (stolen) - 25,000
Personal & private expenses 70,500 80,500
Income tax paid 30,000 50,000
Diamond ring ** (alternative solution) 25,000 Nil
Less: Capital Receipt and Gain
Gain on disposal - shares(125k-75k) (50,000)
Cash received – birthday gift from son (30,000)
Cash money won (500,000)
APPARENT INCOME 121,500 225,100
REPORTED INCOME 125,000 200,000
UNREPORTED INCOME NIL 25,100

** Diamond ring can also be treated as personal expenses.

 b) Differences between tax avoidance and tax evasion
Tax Avoidance Tax Evasion
1 Planning the tax using legal means Planning the tax using illegal means
(permissible under the Act) in order to (not permissible under the Act) in order
minimize, avoid or defer tax liability. to minimize, avoid or defer tax liability.
2 Choose the most tax-efficient Making false statement or entry in a tax
investment incentives. return.

DEC 2019, Q3

Year of Assessment 2017 2018 2019

RM RM RM
ASSETS
Capital as at 1 January 165,000 168,000 186,000
Net Profit for the year 153,000 145,000 150,000
Drawings for the year (32,000) (38,000) (40,000)
1 Sole proprietorship fund 286,000 275,000 296,000
(Capital +Net Profit - Drawing)
2 House in Sepetang 280,000 280,000 Nil
3 Condominium 950,000 Nil Nil
3 Shares in Nicewind - 520,000 520,000
(1.2m-350k-288k-20k-22k)
4 Apartment in KL 650,000 650,000 nil
Bank in Singapore 420,000
5 Volvo Car - 276,800 276,800
6 Account in Maybank - 17,000 -
Account in Public bank 290,000 860,000 1,200,000
Total assets 2,456,000 2,878,800 2,712,800
LIABILITIES
2 Loan – house in Sepetang 54,000 30,000 Nil
3 Loan from father 400,000 50,000 50,000
5 HP loan (Volvo) - 129,200 83,600
6 Overdraft in Maybank 30,000 20,000
Total liabilities 484,000 209,200 153,600

Total assets 2,456,000 2,878,800 2,712,800

Less: Total liabilities 484,000 209,200 153,600
Net Worth/ Assets 1,972,000 2,669,600 2,559,200
Less: Net Worth B/F (1,972,000) (2,669,600)
Increase/ (Decrease) in NW 697,600 (110,400)
ADJUSTMENTS
ADD Personal Expenses & Capital loss
Incidental cost - disposal of house 18,000*
Incidental expenses - condo 20,000*
Commission expenses -condo 22,000*
3 Donation to political party 288,000
4 Loss on disposal-apartmt (650k-420k) 230,000
5 HP interest (300x2) / (300x12) 600 3,600
 7 Domestic and private expenses 199,000 218,000
LESS Capital Receipt
2 Gain on disposal of house**
(500k-280k-18k) (202,000) @
(500k-280k) (220,000)*
3 Gain on disposal of condominium**
(1.2M-950k-20k-22k) (208,000)@
(1.2M – 950k) (250,000)*
Apparent income 977,200 139,200
Less: Reported income 630,000 550,000
Under reported income 347,200 NIL

** Gain on Disposal should be set off with incidental cost and commission
expenses. But if the incidental cost were recorded as personal expenses, the gain
on disposal must exclude the incidental cost.

Question 3B
 Inspection visit without notice to the taxpayer's business premises, residences, tax agent’s
premises, third parties and other premises.
 Examination of Documents to gather evidence of tax evasion and request any party to
produce documents in his custody or control.
 Record Statement
 Finalisation of Investigation i.e. case be prosecuted or not to be prosecuted or civil
settlement

JUNE 2019, Q3
A.
2017 2018
ASSETS
Capital 180,000 -
Net Profit (261+135-85)K 311,000 -
Proprietor’s fund (Groceries business) 491,000 Nil
Proprietor’s fund (Restaurant business) - 385,000
Land 400,000 400,000
Condominium 750,000 750,000
Vehicle 90,000 90,000
Shares in Kardinya Bhd(70k – 30k) 40,000 Nil
Current account balances Nil 52,000
Savings account (wife) - 33,000
TOTAL ASSETS 1,771,000 1,710,000

Less: LIABILITIES
Interest-free loan(brother) [320k - (320k/20=16k (128,000) Nil
x12=192)]
Loan (Condo)(660k-21500)/ (570k-19k) (638,500) (551,000)
Loan(vehicle)(90k-35k=55k-2.2kx17)/17.6-2.2kx8) (17,600) Nil

Loan (Wealthy Bank) (92k-23k)/(69k-23k) (69,000) (46,000)

Current account (overdraft) 16,000
 TOTAL LIABILITIES 869,100 597,000
NET ASSETS (TA-TL) 901,900 1,113,000
NET ASSETS c/f (901,900)
Increase in NET ASSETS 211,100

Adjustments in 2018:
Less: Capital Receipt
: Gains on disposal of business (120,000)
: Gains on disposal of shares (43,700-40k) (3,700)

Add: Personal Expenses &Capital Loss

: Interest expense (Condo) 19,000
: HP Interest (Vehicle) (288 x 8 months) 2,304
: Brokerage fee (shares) 7,800
: Interest expense (Wealthy Bank) 3,150
: Donation 8,000
: Income Tax 6,700
: Gift for wife 46,000
APPARENT INCOME 180,354
DECLARED INCOME 32,000
UNDISCLOSED INCOME 148,354

B. The company should provide reasonable facilities and assistance to enable the audit
officer to carry out his duties which includes the following:
- Giving access to the audit officer to his business premises, providing information and
making available documents and records required for examination.
- Giving explanation regarding the business, the accounting and information systems
- Giving permission to examine and make copies of records, documents and books of
account whether in the physical and/ or electronic medium.
- Assisting in the provision of or providing access to records, documents and books of
accounts in the physical and/ or electronic medium; and
- Allowing the use of copiers, telephone and other communication equipment, lighting
and power, office space, furniture and providing facilities for copying of electronic
records onto tapes, disks or diskettes.

DEC 2018, Q3

A. Computation of Unreported Income of Encik Sukdev for the YA 2017

Capital Statement
YA 2016 2017
Assets as at 31 December: RM RM
Business - Capital 1,000,000 1100,000
- Profit and Loss 700,500 920,500
Proprietor’s fund 1,700,500 2,020,500
Loan to his sister 70,000 70,000
Investment shares (640,500-210k) 640,500 430,500
Maybank shares - 42,500
 MAS shares - 51,500
Shah Alam house 600,000 nil
SD house 850,000 850,000
BMW car - 500,000
Fixed deposit 90,000 390,000
Current account 120,150 -
Car for 2nd son - 50,000
Total Assets 4,071,150 4,405,000
Liabilities as 31 December:
Loan from his brother (150k-90k) 60,000 nil
510,000 450,000
Housing loans - SD house
Loan- BMW 200,000
Current account (overdraft) - 23,550
Total Liabilities 570,000 673,550
_______
Net Asset as at 31 December 3,501,150 3,731,450
Net Asset as at 1 January (3,501,150)
Increase in Net Asset 230,300
Adjustments in 2017:
Add: Non-business expenses &
capital loss
Loan interest –SD House 51,000
Daughter education fee 60,000
Income tax 35,120
Gifts - to son : Shah Alam House 600,000
- to parent 20,000
Less: Capital receipts
Gain on sale of shares (780k-210k) (570,000)
Apparent Income 426,420
Reported Income (40,100)
Unreported Income 386,320

B. A taxpayer who is selected for an audit will be notified by IRBM through a letter of
notification of audit. The period between the date of notification of audit and the audit visit
is 14 days.√√ However, with the agreement of the taxpayer, a shorter period of
notification may be fixed by IRBM.√ A letter confirming the visit is usually preceded
by a phone call.√ A taxpayer may also request for the audit visit to be deferred due
to unavoidable circumstances and reasonable grounds. √

Other than the intended date of the visit, the letter will indicate the records that
should be made available for audit,√√ the years of assessment to be audited √ and
the names of audit officers who will conduct the audit √ as well as the expected
time frame required for the audit visit. √ A taxpayer may contact the Branch Audit
Manager or Branch Director of IRBM for the purpose of confirming the audit visit.
JUNE 2018, Q3

Answer A
Mr Lim Capital Statement
As at 31 December 2013 2014 2015
ASSETS RM RM RM
Proprietor’s fund 325,000 565,000 847,000
New car - 393,000 393,000
Second hand car 157,500 - -
House 500,000 500,000 500,000
Shares in Swansa Bhd 675,000 337,500 337,500
Loan to her sister 225,000 -
Fixed deposit 162,000 186,000
Current account 288,000 528,000 548,000
TOTAL ASSETS 1,945,500 2,710,500 2,811,500
(LESS): LIABILITIES
Loan - New car (282,150) (219,450)
Loan - house (200,000) (100,000) nil
TOTAL LIABILITIES (200,000) (382,150) (219,450)
NET ASSETS 1,745,500 2,328,350 2,592,050
(LESS): NET ASSETS AS AT 31/12/2013 (1,745,500)
(LESS): NET ASSETS AS AT 31/12/2014 (2,328,350)
INCREASE IN NET ASSETS 582,850 263,700
ADD: PRIVATE EXPENSES & CAPITAL LOSS
Interest - New car 15,675 31,350
Renovation cost-inherited condominium 40,000
Interest - house 22,500 20,500
Brokerage fees 37,500 -
Household & domestic expenses 142,400 141,600
Holiday trip 21,600 54,000
Income tax and insurance premium paid 48,240 63,600
Cash donation to Old Folk’s Home 30,000 32,040
Loss on compensation from insurance company 120,000 -
[157,500 – 37,500]
Loan to niece forfeited 225,000
(LESS): NON TAXABLE RECEIPT
Gain on disposal of condominium - (360,000)
Gain on disposal of shares [675,000 -337,500] (337,500) -
APPARENT INCOME 723,265 471,790
(LESS): REPORTED INCOME (530,000) (350,000)
UNREPORTED INCOME / EVADED INCOME 193,265 121,790
Answer B

Tax avoidance
Tax avoidance is the legal use of the tax regime in a single territory to one's own advantage to
reduce the amount of tax that is payable by means that are within the law.

Tax Evasion
- Illegal and a criminal offence (white collar crime i.e. violations of tax laws.
- Taxpayers use illegal ways to conceal their income by falsifications of returns and
accounts.
Any of below:
- Omitting income from a return
- Giving a false statement or entry in return
- Preparing, maintaining or authorizing the preparation or maintenance of false accounts
- Making use or authorizing the use of any fraud, artifice or contrivance’.

JAN 2018, Q3

A. Capital Statement as at 31 December …

2015 2016
ASSETS (at cost)
Proprietor’s funds 392,300 588,500
Land (inherited) Nil Nil
Condominium 450,000 Nil
Commercial Property - 1,000,000
Shares (25k x 1.80) / (25k-10k x 1.80) 45,000 27,000
Car - son 170,000 170,000
Bank - 53,000
Loan to friend 30,000 30,000
TOTAL ASSETS 1,087,300 1,868,500

Less: LIABILITIES
Loan –commercial property - (280,000)
Hire Purchase loan – son’s car (115,000) (80,000)
Bank overdraft (17,000) -
TOTAL LIABILITIES 132,000 360,000
NET ASSETS 955,300 1,508,500
NET ASSETS (previous year) (955,300)
INCREASE IN NET ASSETS 553,200

Add: Non-Business Expense and Capital Loss

Interest- commercial property 4,100
Brokerage fee 4,500
Personal and private expense 58,000
Income tax and insurance premium 29,000
Contribution to an approved institution 20,000
668,800
Less: Capital Receipt
Gain on disposal of land (0 - 150k) (150,000)
Gain on disposal of condominium (700k-450k) (250,000)
Gain on disposal of shares [10k x (2.30 -1.80]) (5,000)
 APPARENT INCOME 263,800
Less: Diclosed Income (24,880)
UNDISCLOSED/ UNDER REPORTED INCOME 238,920

B. A taxpayer who is selected for an audit will be notified by IRBM through a letter of notification of
audit. The period between the date of notification of audit and the audit visit is 14 days. However, with the
agreement of the taxpayer, a shorter period of notification may be fixed by IRBM. A letter confirming
the visit is usually preceded by a phone call.

A taxpayer may also request for the audit visit to be deferred due to unavoidable circumstances and
reasonable grounds. Other than the intended date of the visit, the letter will indicate the records that
should be made available for audit, the years of assessment to be audited and the names of audit
officers who will conduct the audit as well as the expected time frame required for the audit visit. A
taxpayer may contact the Branch Audit Manager or Branch Director of IRBM for the purpose of confirming
the audit visit.

JULY 2017, Q3
a.
As at 31 December 2013 2014 2015
Assets RM RM RM
Capital 300,000 440,000 500,000
Net profit 50,000 60,000 170,000
Proprietor’s fund 350,000 500,000 670,000
BIMB - current account 300,000 280,000 85,000
FD : AM Bank - - 700,000
Car - 100,000 100,000
Shares 100,000 -
Bungalow (inherited) nil nil nil
TOTAL ASSETS 750,000 880,000 1,555,000

LIABILITIES:
Loan on car - 66,112 42,779
TOTAL LIABILITIES 66,112 42,779

Net assets 750,000 813,888 1,512,221

Net assets c/f - (750,000) (813,888)
Increase in net assets 63,888 698,333
Add: Non business expenses & Cap
loss:
Donations to political party 500,000
Birthday gift – daughter 10,000
Private expenses 250,000
Travelling 80,000 120,000
Children education 480,000 500,000
Renovation expense -bungalow 400,000 -
Expenses on sale of shares 1,000 -
Interest on loan –car 912 5,472
Less: Capital Gain
Gain on disposal of bungalow - (800,000)
 Gain on disposal of shares (140k-100k) (40,000) -
Apparent income 985,800 1,283,805
Reported income (200,000) (50,000)
Undisclosed income 785,800 1,233,805

b. Audit cases are selected in the following manner:

1.1 selection based on risk analysis

1.2 information received from third party
1.3 selection based on specific industries
1.4 selection based on specific issues for a certain group of taxpayers and
1.5 selection based on location,etc.

DEC 2016, Q5

Encik Zainal
Capital Statement as at 31 December
(A)
2012 2013 2014
Assets RM RM
Capital 500,000 500,000 500,000
Balance in Profit & Loss A/c 200,000 270,000 360,000
Proprietor’s Fund 700,000 770,000 860,000
House (inherited) nil nil nil
Bungalow 900,000 900,000
Building 500,000 500,000 500,000
Car 250,000 250,000 250,000
shares 200,000 200,000 nil
Second car 150,000 150,000
Wife saving 10,000 40,000 110,000
Total assets 1,660,000 2,810,000 2,770,000

Liabilities
Outstanding Loan - Building 200,000 100,000 nil
Loan - car 150,000 50,000 nil
Outstanding HP- Second car 120,000 96,000
Total liabilities 350,000 270,000 96,000

Net assets 1,310,000 2,540,000 2,674,000

Less: net assets brought forward (1,310,000) (2,540,000)
Increase in net assets 1,230,000 134,000

Add: non-business expenses and capital

loss
Interest on loan for building 22,500 20,500
Life insurance 5,000 5,000
Income tax 3,500 5,000
Living expenses 50,000 50,000
 Children education 10,000 30,000
Loss – sale share (140k-200k) 60,000
Expenses on sale of share 10,000
Interest on loan- second car (400 x 12) 4,800

Apparent income 1,321,000 319,300

Declared income:
Business Profit 90,000 100,000
Rental income 60,000 72,000
Undeclared income 1,171,000 147,300

(B) i. The purpose of the tax investigation framework is to inform taxpayerabout IRBM’s
tax investigation procedures.
ii. 3 methods that are usually used by IRBM

1. Risk analysis
2. Information from informer
3. Review of income tax return
4. Intelligence information; and
5. Information from other law enforcement agencies