Paper F6 (ZWE) Taxation (Zimbabwe) Tuesday 2 June Fundamentals Level Skills Module. The Association of Chartered Certified Accountants

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1 Fundamentals Level Skills Module Taxation (Zimbabwe) Tuesday 2 June 2015 Time allowed Reading and planning: 15 minutes Writing: 3 hours This paper is divided into two sections: Section A ALL 15 questions are compulsory and MUST be attempted Section B ALL SIX questions are compulsory and MUST be attempted Tax rates and allowances are on pages 2 4. 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. Do NOT record any of your answers on the exam paper. This question paper must not be removed from the examination hall. Paper F6 (ZWE) The Association of Chartered Certified Accountants

2 SUPPLEMENTARY INSTRUCTIONS 1. Calculations and workings need only be made to the nearest 1, unless directed otherwise. 2. All apportionments should be made to the nearest month. 3. All workings should be shown in Section B. TAX RATES AND ALLOWANCES The following tax rates and allowances are to be used when answering the questions. Tax rates Individuals employment income Year ended 31 December 2014 Taxable Rate Amount Cumulative income income band of tax within band tax liability % Up to to to to to to to and over 50 NB. The AIDS levy of 3% is chargeable on income tax payable, after deducting credits. Allowable deductions year ended 31 December 2014 Pension fund contribution ceilings (a) In relation to employers: in respect of each member (b) In relation to employees: by each member of a pension fund (c) In relation to each contributor to a retirement annuity fund or funds (d) National Social Security contributions (on a maximum monthly gross salary of 700) 3 5% of gross salary Aggregate maximum contributions to all the above per employee per year Credits year ended 31 December 2014 Disabled/blind person 900* Elderly person (55 years and over) 900* Medical aid society contributions 50% Medical expenses 50% * The amount is reduced proportionately if the period of assessment is less than a full tax year. Deemed benefits year ended 31 December 2014 Motor vehicles Engine capacity: Up to 1500cc to 2000cc to 3000cc and above

3 Loans The deemed benefit per annum is calculated at a rate of LIBOR +5% of the loan amount advanced. Value added tax (VAT) Standard rate 15% Capital allowances % Special initial allowance (SIA) 25 Accelerated wear and tear 25 Wear and tear: Industrial buildings 5 Farm buildings 5 Commercial buildings 2 5 Motor vehicles 20 Movable assets in general 10 Tax rates Other than employment income Year ended 31 December 2014 % Companies Income tax: Basic rate 25 AIDS levy 3 Individuals Income tax: Income from trade or investment 25 AIDS levy 3 3 [P.T.O.

4 Capital gains tax Immovable property and unlisted marketable securities acquired after 1 February % of gain Immovable property and unlisted marketable securities acquired prior to 1 February % of gross proceeds Disposal of listed marketable securities 1% of gross proceeds On principal private residence where the seller is over 55 years 0% Inflation allowance 2 5% Capital gains withholding tax on sale proceeds % Immovable property 15 Marketable securities (listed) 1 Marketable securities (unlisted) 5 Note: Other than the withholding tax on listed marketable securities, the withholding tax is not final on the seller. The actual liability is assessed in terms of the Capital Gains Tax Act. Withholding taxes % On dividends distributed by a Zimbabwean resident company to resident shareholders other than companies and to non-resident shareholders: By a company listed on the Zimbabwe Stock Exchange 10 By any other company 15 Informal traders 10 Foreign dividends 20 Non-executive director s fees 20 Contracts (ITF 263) 10 Non-residents tax % On interest nil On certain fees and remittances 15 On royalties 15 Residents tax on interest % From building societies 15 From other financial institutions (including discounted securities) 15 Elderly taxpayers (55 years and over) Exemptions from income tax year ended 31 December 2014 Rental income Interest on deposits with a financial institution Interest on discounted instruments Income from the sale or disposal of marketable securities Pension No limit Income from the sale or disposal of a principal private residence is also exempt. Benefit derived from the acquisition of a passenger motor vehicle from an employer is exempt. 4

5 Section A ALL 15 questions are compulsory and MUST be attempted Please use the grid provided on page two of the Candidate Answer Booklet to record your answers to each multiple choice question. Do not write out the answers to the MCQs on the lined pages of the answer booklet. Each question is worth 2 marks. 1 During the year ended 31 December 2014, Ron contributed a total of to a medical aid society in Zimbabwe and his employer reimbursed him of this amount. In addition, during the year, he incurred of costs in respect of his son who was hospitalised of these costs were paid by the medical aid society. Ron is not ordinarily resident in Zimbabwe. What is the amount of Ron s total tax credit for 2014 in respect of medical expenses? A B C D Mary registered for value added tax (VAT) under category A on commencement of business operations on 1 January Mary s VAT inclusive sales and purchases for her first quarter are as follows: Sales: Purchases: Month Month January January February February March March What is the net amount of value added tax (VAT) payable by Mary for the tax period which includes the results from March 2014? A B C D During 2014, Chipo sold the following shares: (1) Shares in A Limited, a company listed on the Zimbabwe Stock Exchange (ZSE) for total proceeds of The shares had originally cost when purchased on 1 March 2009 (2) Shares acquired in Grey Limited, an unlisted company for total proceeds of The shares had originally cost when purchased in June What is Chipo s final capital gains tax liability in connection with the disposal of these shares? A B C D [P.T.O.

6 4 Nursery (Private) Ltd commenced business operations on 1 July 2014 and employs five full-time employees. The monthly payroll is as follows: Employee 1 (aged 67) Employee 2 (aged 72) 850 Employee Employee Employee Gross What is the total amount of National Social Security Authority (NSSA) contributions payable by Nursery (Private) Ltd for the year ended 31 December 2014? A 777 B C 672 D Which of the following statements are true in connection with a taxpayer raising an objection to an assessment by the Zimbabwe Revenue Authority (ZIMRA)? (1) The full disputed tax amount should still be paid as the objection does not suspend payment of tax (2) The objection should give the detailed grounds for the objection in writing (3) The objection should not include supporting documentation, as this will be requested by ZIMRA if necessary (4) The objection must be lodged within 90 days of receipt of the assessment A 1 and 2 only B 1, 2, 3 and 4 C 1 and 4 only D 2 and 3 only 6 O Limited was incorporated on 20 November 2012 and commenced business operations on 5 January The company incurred the following expenses between 20 November 2012 and 4 January 2014: Stationery Repairs and maintenance Purchase of 10 motor cycles What is the maximum amount of tax deduction which O Limited can claim in respect of the above expenses for the year ended 31 December 2014? A B C D

7 7 Motsi Land Developers Limited (MLD) entered into an approved build, own, operate and transfer (BOOT) arrangement with the Ministry of Transport for the construction of a highway and bridge. The BOOT arrangement was signed in MLD s taxable income for the years ended 31 December 2013 and 31 December 2014 is as follows: What is MLD s total corporate tax liability for 31 December 2013 and 31 December 2014? A B Nil C D Which of the following are legitimate tax avoidance measures? (1) Understating taxable income (2) Overstating allowable expenses (3) Claiming the maximum deductions permitted by law (4) Falsifying records (5) Taking advantage of all available tax dispensations in any given year (6) Use of debt within the limits of the thin capitalisation rules (7) Claiming deductions where the necessary conditions are not fully met A 1, 3 and 7 B 3, 5 and 6 C 2, 4 and 6 D 1, 4, 5 and 7 9 XY Limited s accountant submitted the company s Pay As You Earn (PAYE) returns to the Zimbabwe Revenue Authority (ZIMRA) for the quarter ended 30 June 2014 on the following dates: Date April 10 May 2014 May 25 June 2014 June 30 July 2014 For how many days in total during the quarter ended 30 June 2014 were XY Limited late in filing their Pay As You Earn (PAYE) returns? A B C D 15 days 25 days 65 days 35 days 7 [P.T.O.

8 10 Farai received the following dividend income (net) during the year ended 31 December 2014: Source Amount () A company listed on the Zimbabwe Stock Exchange (ZSE) An unlisted company How much tax was withheld at source in total from Farai s dividend income in 2014? A B C D Tino is in the process of finalising her value added tax (VAT) return for the month of August Her VAT payable for the month is before taking into account the following VAT inclusive adjustments: Sales value of goods applied to own use Recovery of impaired debts Purchases returns What is the adjusted VAT payable by Tino for the month of August 2014? A B C D Peter is employed and earns a gross monthly salary of during the year ended 31 December He contributed 5% of his monthly salary towards a registered retirement annuity fund. On 1 June 2014, Peter became a member of a pension fund into which he contributed 7 5% of his monthly salary in addition to his payments to the registered retirement annuity fund. This pension fund had not yet registered with the Commissioner of Insurance, Pension and Provident Funds as at 31 December What is the amount of Peter s allowable deductions in respect of his contributions to the pension funds for the year ended 31 December 2014? A B C D S Limited s industrial building was completely destroyed by a fire in March The industrial building was constructed at a cost of and brought into use on 25 April S Limited s insurance company paid them compensation of in April 2014 in respect of the destruction of the building. What is the amount of capital gains tax payable by S Limited for the year ended 31 December 2014? A 0 B C D

9 14 James was provided with accommodation in a newly constructed company house by his employer on 1 June The house is in the northern suburbs of Harare. The construction of the house cost James s employer The market rental for the house is per month. James paid his employer rent of 50 per month for occupation of the house. What is the amount of the fringe benefit to be included in James s gross income for the year ended 31 December 2014? A B C D R Limited accurately remitted provisional tax of to the Zimbabwe Revenue Authority (ZIMRA) on 20 June 2014 in respect of its second Quarter Payment Date (QPD) for the year ended 31 December There have been no subsequent revisions to R Limited s estimate of revenue for the year. What is the amount of provisional tax which should have been remitted to ZIMRA in respect of R Limited s third QPD for the year ended 31 December 2014? A B C D (30 marks) 9 [P.T.O.

10 Section B ALL SIX questions are compulsory and MUST be attempted Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet. 1 You should assume that today s date is 1 August Mark and Mary are married and jointly own the principal private residence (PPR) which they reside in. Mark was born on 15 July 1960 and Mary was born on 24 December The couple are contemplating disposing of their PPR. An estate agent has provided the following market values for their property as at 31 August 2014: Date acquired/constructed Cost Market value () () Main residence 15 February Outbuilding 10 April Temporary car shelter 20 November Concrete wall 18 February Lock up garage 13 March The estate agent has advised Mark and Mary that whilst there are many buyers interested in their property just now, they should consider selling as soon as possible in case the property market falls. The estate agent s commission will be 10% of the sales price. Required: (a) (b) Explain why, notwithstanding the estate agent s advice, Mark and Mary should consider delaying the disposal of their property. Advise on any tax planning which could be undertaken to allow them to sell at the earliest date possible whilst availing of the maximum tax reliefs available. (4 marks) Calculate the capital gains tax payable by Mark and Mary assuming that they dispose of their property on 31 August (6 marks) (10 marks) 10

11 2 Carpets Galore Limited (CGL) is a category C valued added tax (VAT) registered operator. The VAT returns and remittances of CGL for the month of July 2014 are as follows: VAT return VAT payable Amount remitted Remittance submitted date July 30 August October 2014 The trading activities of CGL for the month of August 2014 are detailed below. All sales are stated exclusive of VAT, where appropriate, and all purchases/expenses are stated inclusive of VAT, where appropriate. None of the purchases/expenses relate to the provision of exempt supplies. Sales Sales of carpets and accessories Exempt supplies Sales returns (defective carpets) (5 000) Purchases/other expenses Supplier VAT registration number Purchases WA45000 Purchases N/A Stationery ZA33000 Depreciation N/A Repairs and maintenance N/A Other expenses MZ64000 Purchases returns (3 000) N/A Required: (a) State the due date for Carpets Galore Limited s value added tax (VAT) return for August (1 mark) (b) Calculate Carpets Galore Limited s maximum interest and penalties in respect of its VAT return for the month of July (3 marks) (c) Calculate the VAT payable by Carpets Galore Limited for the month of August Note: You should indicate by the use of zero (0) any items referred to in the question where there is no VAT impact. (6 marks) (10 marks) 11 [P.T.O.

12 3 Z Limited owns a plot of undeveloped commercial land in Harare on which it intends to construct an industrial building. Due to cash flow constraints, Z Limited entered into a 20-year lease agreement with Evergreen Panel Beaters (Private) Limited (EPB) for the development of the commercial land. The terms of the lease agreement are as follows: (1) EPB to construct an industrial building and a security wall on the commercial land at a cost of not less than for the building and for the wall. (2) EPB to make use of the property for the duration of the lease agreement subject to payment of a monthly rent of and a one-off premium of (3) The lease agreement was signed on 1 January 2014, on which date the rent and premium were also duly paid. The construction of the building and the security wall commenced soon after the signing of the lease agreement. The agreed construction period was three months. (4) The industrial building and the security wall were constructed within the agreed cost and timeframe and brought into use by EPB on 1 May EPB obtained a loan of on 1 February 2014 from a bank in order to be able to complete the construction of the industrial building and the security wall. The interest rate on the loan is 20% per annum. EPB paid a total of in provisional tax for the year ended 31 December The accountant had calculated the taxable income for the year ended 31 December 2014 at without taking into account the lease agreement provisions and the bank loan. Required: (a) (b) Calculate the adjusted taxable income and tax payable by Evergreen Panel Beaters (Private) Limited for the year ended 31 December Note: You should indicate by the use of zero (0) any amounts for which no adjustment is required. (8 marks) Calculate the amounts to be included in the gross income of Z Limited in connection with the lease agreement for the year ended 31 December (2 marks) (10 marks) 12

13 4 Maria is in the business of interior designs and is still working on the tax computation for her income tax self-assessment return for the year ended 31 December Her net profit before tax for the year is after taking into account the following: Proceeds on disposal of non-current assets Note 1 (7 000) Company dividends received (8 000) Depreciation for the year Salaries and wages Office rent Restraint of trade payment Note Traffic fine Note 1 An extract from Maria s non-current asset register as at 31 December 2013 is as follows: Cost Tax value () () Furniture and fittings Computer equipment Office equipment nil Included in the office equipment is the cost of the equipment which was disposed of during the year. The equipment s original cost is and it was disposed of for Note 2 The restraint of trade payment was made to an ex-employee of Maria s in return for which the employee agreed not to work for any competitor of Maria for a period of two years. Maria paid a total of in provisional tax for the year ended 31 December A total of in withholding tax on contracts (ITF 263) was also deducted from invoices raised by Maria for the year ended 31 December 2013, although the income has been included gross of the withholding tax deducted in her profits for the year. Required: (a) (i) State by when Maria s income tax self-assessment return should have been submitted to the Zimbabwe Revenue Authority (ZIMRA). (1 mark) (ii) Advise Maria on ZIMRA s remedies for late submission of an income tax return. (2 marks) (b) Calculate the income tax shortfall or the income tax overpaid by Maria in respect of the year ended 31 December Note: Your calculation should start with the net profit for the year of and should indicate by the use of zero (0) any amounts referred to in the question for which no adjustment is required. (7 marks) (10 marks) 13 [P.T.O.

14 5 Josh Oak is a veterinary surgeon in the government department of animal husbandry and veterinary services. For the past five years he was based at the head office in Harare but was transferred to the Mash East office on 15 June The following are the details of his earnings during the year ended 31 December 2014: Employment income Salary and benefits (i) Salary of In addition, Josh received a bonus of 10% of his salary on 30 November (ii) (iii) Fringe benefits of being accommodation allowance of 4 000, representation allowance of 3 000, fuel allowance of and school fees allowance of for his minor children. The standard relocation allowance of when he transferred to the Mash East office. The actual expenses incurred by Josh in the transfer amounted to (iv) An interest free loan of received from his employer on 1 August Josh applied towards his post graduate studies and towards the purchase of a vehicle for his wife. The LIBOR for the year ended 31 December 2014 averaged 1 5% per annum. (v) (vi) Use of an employer allocated vehicle with an engine capacity of 3 200cc A total of from a matured retirement annuity fund (RAF). His contributions to the fund over the years were allowed as a deduction. Payments by Josh (vii) Pension contributions amounting to 7 5% of his salary. Josh also contributed 4,000 towards his RAF. (viii) Professional subscription fees of (ix) Medical aid contributions of The PAYE deducted by Josh s employer for the year amounted to Other income (x) Net rental income of from a holiday cottage in Botswana. (xi) Net non-executive director s fees (after deduction of withholding tax at source) of (xii) A share of rental income from the estate of his late father. The commercial property was transferred in equal shares to Josh and his three siblings at a value of on 1 March 2013 from which date the property was let out to tenants. The following are the details of the income and expenditure of the commercial property for the year: Gross rent Management fees (18 000) General repairs and maintenance (15 000) Permanent repairs to the security wall (10 000) Required: Calculate the taxable income and income tax payable by Josh Oak for the year ended 31 December Note: You should indicate by the use of zero (0) any amounts for which no adjustment is required. (15 marks) 14

15 6 AB Limited (AB) is engaged in the retail business of computer consumables and accessories. The year ended 31 December 2014 is AB s third year of trading. AB recorded assessed trading losses of and respectively in its first and second years of trading. AB s statement of profit or loss for the year ended 31 December 2014 is as follows: Note Gross profit Bank interest received Company dividends received Prior year suspense sales allowance Motor vehicle expenses (14 000) Insurance and licensing (7 000) Marketing expenses (25 000) Depreciation (37 000) Salaries and wages ( ) Staff pension contributions (five employees) (35 000) Staff medical aid contributions (40 000) Entertainment (10 000) Repairs and maintenance 1 (30 000) Legal fees 2 (3 000) Donations to a local church (8 000) Renewal of operating licences (9 000) Other administration expenses (45 000) Interest paid 3 (12 000) Net profit before tax Notes (1) The repair and maintenance cost all relates to the purchase of permanent fixtures and fittings. (2) The legal fees were in respect of employee contracts. (3) The interest paid was in respect of a loan to purchase shares in another company. Additional information AB s non-current asset registers shows the following assets which had been in use since the commencement of trade: Cost () Furniture and fittings Commercial vehicles Office equipment Three passenger vehicles Required: (a) (b) Briefly set out the general rule regarding how a company, like AB Limited, with brought-forward assessed trading losses may use these against its future taxable profits. (1 mark) Calculate the taxable income of and corporate tax payable by AB Limited for the year ended 31 December 2014, making use of any available reliefs. Note: You should indicate by the use of a zero (0) any amounts referred to in the question for which no adjustment is required. (14 marks) (15 marks) End of Question Paper 15