1 Fundamentals Level Skills Module Taxation (Botswana) Tuesday 12 June 2012 Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FIVE questions are compulsory and MUST be attempted. Tax rates and allowances are on pages 2 5. Do NOT open this paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall. aper F6 (BWA) The Association of Chartered Certified Accountants The Botswana Institute of Chartered Accountants
2 SULEMENTARY INSTRUCTIONS: 1. Calculations and workings need only be made to the nearest. 2. All apportionments should be made to the nearest month. 3. All workings should be shown. TAX RATES AND ALLOWANCES The following rates of tax and allowances are to be used when answering the questions. Rates of tax 2011/2012 tax year Resident companies On taxable income Standard rate 22% Manufacturing company rate 15% Resident individuals 0 36, % 36,001 72, % 72, ,000 1, % 108, ,000 6, % 144, , % Non-resident individuals, trusts and estates 0 72, % 72, ,000 3, % 108, ,000 8, % 144, , % Capital gains individuals 0 12, % 12,500 43, % 43,750 62,500 1, % 62,500 81,250 3, % 81, ,000 6, % 100, , % Capital gains companies Net aggregate gains are taxable at the company rates of tax. VAT rate 12% Basis of valuation of benefits Individual s vehicle benefit Employee s Fuel cost Vehicle cost benefit adjustment 1 50,000 2,500 1,000 50, ,000 5,000 2, , ,000 7,500 3, , ,000 10,000 4,000 Benefit on the excess of 200,000 will be 15% thereof with a maximum fuel benefit of 5,000. Where the cost of fuel is paid for by the employee the fuel cost adjustment is deducted from the benefit, but where the cost is borne by the employer the full benefit is taxable. 2
3 Medical contributions The employer s contributions to a medical benefit fund on behalf of his employee up to an amount equal to 100% of the required contributions shall not become taxable in the hands of the employee. Individual s housing benefit If rated: 10% of the property s rateable value prorated by occupation and reduced by any charge borne by the employee. If not rated: The lower of (a) or (b) prorated by occupation and reduced by any charge borne by the employee: (a) Gross floor area x 250 per sq metre x 8% (b) 25% of taxable employment income before housing benefit Individual s furniture benefit 10% of furniture cost in excess of 15,000 by usage. Capital allowances The annual allowance on plant and machinery is between 10% and 25% of the cost incurred. The following are the rates fixed by the Commissioner General of Taxes as fair and reasonable having regard to the expected lives of the assets listed. Capital allowances Furniture and fittings 10% Office equipment and machinery 15% lant and machinery including farming 15% Motor vehicles, boats and aircraft 25% Heavy plant and machinery 25% Computer hardware 25% Industrial and commercial buildings Industrial building initial allowance 25% Industrial building annual allowance 2 5% Commercial building annual allowance 2 5% Withholding tax rates Resident Non-resident Interest 10% 15% Dividends 7 50% 7 50% Entertainment fee 10% Management and consultancy fees 15% Commercial royalty 15% Rent 5% 5% Commission or brokerage 10% 10% Construction contracts 3% 3% 3 [.T.O.
4 Capital gains tax indexation allowance aragraph 8 of the tenth Schedule to the Income Tax Act Table of factors from the National Cost of Living Indices January February March April May June July August September October November December January February March April May June July August September October November December January February March April May June July August September October November December January February March April May June July August September October November December
5 January February March April May June July August September October November December [.T.O.
6 ALL FIVE questions are compulsory and MUST be attempted 1 Elliot Shabane is employed by Trident Furnishers (ty) Ltd in Francistown. In addition, he is the owner of a woodwork business which is based in Tonota, and is a 40% partner with his brother in a cattle farm in the North Eastern District. Elliot approaches you to submit his tax return for the tax year ended 30 June 2012 and provides you with the following information: Employment package Trident: Salary 390,000 Company car Cost 250,000 Accounts of the woodwork business: Sales 1,862,773 Capital introduced 200,000 Sale of shares listed on BSE 71,064 Financial Assistance olicy (FA) receipt 67,389 2,201,226 urchases 862,516 Wages 739,961 urchase of bakkie for business 125,000 rivate expenditure 48,383 urchase of shares in Standard Chartered Bank 102,087 urchase of woodwork equipment 67,500 Rent of business premises 48,000 House rent of Elliot Shabane 60,000 Other allowable business expenditure 265,082 University fees of Elliot s daughter 35,750 Donation to the Red Cross 10,000 2,364,279 Net loss (163,053) Other information: 1. Trident deducted AYE amounting to 83, The opening stock of the woodwork business at 1 July 2011 was 94,166 and the closing stock at 30 June 2012 was 187, The cost of plant and equipment of the woodwork business at 1 July 2011 amounted to 137,200 and capital allowances amounted to 28, Elliot advises that he has been made an offer for the woodwork business amounting to 500,000, made up as follows: Assets 300,000 Goodwill 200, , The chargeable loss for the year from the farming partnership was 206,520. The partnership tax loss at 1 July 2011 was 172,910. 6
7 Required: In respect of Elliot Shabane for the tax year ended 30 June 2012: (a) Calculate his chargeable income from the woodwork business, starting with the loss above. (10 marks) (b) Calculate his taxable income, indicating how the losses from the woodwork business and the farm business are to be dealt with. (4 marks) (c) Calculate the tax losses (if any) to be carried forward. (3 marks) (d) (e) Advise Elliot how much tax he would be liable to pay if he accepts the offer of 500,000 for his business (assume the maximum tax rate is applicable). (5 marks) Explain the requirements for registering for value added tax (VAT) and state whether Elliot is liable to register. (3 marks) (25 marks) 7 [.T.O.
8 2 The results of Medline Supplies Limited (Medline) for the year ended 30 April 2012 are as follows: Gross profit 2,920,771 Interest received 26,862 Dividends received 39,760 rofit on sale of plant 119,300 Fair value adjustment 225, ,922 Administration costs 1,931,752 Depreciation 278,245 Impairment of investments 65,500 Donations and fines 27,116 VAT penalties 42,774 Loss on sale of warehouse 183,000 Loss on sale of shares 25,000 (2,553,387) Net profit 778,306 Further information: 1. The profit on sale of plant is made up as follows: Cost 375,000 Fair value adjustment (50,000) Depreciation (257,000) 68,000 Less: sales consideration 187,300 rofit on sale 119,300 The capital allowances previously granted amounted to 189, The loss on sale of the warehouse arose: Cost of warehouse November ,000 Fair value adjustment 675,000 Depreciation (117,000) 1,383,000 Sales consideration May ,200,000 Loss on sale (183,000) Capital allowances claimed to the date of sale amounted to 136, The loss on sale of shares was calculated: Cost of shares 200,000 Fair value adjustment 75, ,000 Sales consideration 250,000 Loss on sale (25,000) 4. The trading loss brought forward from the prior year is 407,241 and the capital loss brought forward is 69, The current year claim for capital allowances amounts to 372,994. 8
9 6. Medline purchased a new warehouse costing 2,750,000 in March 2012 Required: In respect of Medline for the year ended 30 April 2012: (a) Calculate the balancing charge or allowance in respect of the sale of plant. (1 mark) (b) Calculate the disposal gain or loss on the sale of shares and warehouse, giving any relevant reliefs or allowances, with brief explanations. (8 marks) (c) List FOUR conditions that must exist before rollover relief can be claimed. (5 marks) (d) Calculate the taxable income or loss. (11 marks) (e) Discuss the value added tax (VAT) consequences relating to the sale of shares and the warehouse. (5 marks) (30 marks) 9 [.T.O.
10 3 The following is the income statement of Ngami Enterprises (roprietary) Limited for the year ended 30 June 2012: Sales 6,927,362 Interest received 37,210 6,964,572 Less: expenses Administrative expenses 3,982,161 Rent 632,092 Management fees payable to a resident 126,508 Interest payable to a resident bank 58,023 Interest payable to non-resident bank 27,704 Interest payable to non-residents 83,772 Consultancy fees payable to a non-resident 65,000 Insurance premium payable to a non-resident 167,294 Technical fees payable to a non-resident 77,209 (5,219,763) Net profit 1,744,809 In addition, 480,000 was paid to a construction contractor in respect of capital additions to the company s buildings. The following withholding tax was paid during the year: Rent 21,307 Interest paid to non-residents 10,929 Consultancy fees paid to a non-resident 9,750 Technical fees paid to a non-resident 6,786 Required: (a) Calculate the taxable income of the company in respect of the year ended 30 June 2012, based on the information provided above, giving brief explanations. (9 marks) (b) List the types of payments on which Botswana companies must withhold tax. (5 marks) (c) State the date by which tax withheld by Botswana companies must be paid over to the Botswana Unified Revenue Services. (1 mark) (15 marks) 4 (a) Discuss the purpose and function of taxation in a modern economy. (2 marks) (b) Briefly explain the main features of direct and indirect taxes and the scope of each type of tax. (8 marks) (c) List the principal sources of tax law and practice in Botswana. (3 marks) (d) Briefly explain the difference between tax evasion and tax avoidance. (2 marks) (15 marks) 10
11 5 Excalibur Investments (ty) Ltd is a property and investment company. The following are the results for the year ended 31 December 2011: Income Dividends received 270,985 Interest received 60,480 Rent received 672,000 1,003,465 Expenses Mortgage bond interest 387,745 Insurance 39,820 Repairs and maintenance 382,215 Ground clearing work on vacant properties 91,000 Depreciation 100,813 Replacement of air conditioners 52,400 1,053,993 Net loss (50,528) Further information: (1) Capital allowances for the year amount to 78,926. (2) The following withholding tax had been deducted: Interest received 6,048 Rent received 33,600 Dividends received 40,648 (3) No SAT was paid during the year. (4) The company s tax return was only filed on 12 June In addition the company is disputing its 2011 tax assessment. Required: In respect of Excalibur for the year ended 31 December 2011: (a) Calculate the net tax payable or refundable. (6 marks) (b) State the date by which the 2012 tax return should have been filed. (1 mark) (c) Quantify the penalties and interest due as a result of filing the 2012 tax return late. (4 marks) (d) List the options available to all taxpayers when they dispute a tax assessment and explain the processes involved. (4 marks) (15 marks) End of Question aper 11