Fundamentals Level Skills Module, Paper F6 (ZWE)

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2 Fundamentals Level Skills Module, Paper F6 (ZWE) Taxation (Zimbabwe) 1 Gwen Brown December 2011 Answers and Marking Scheme (a) (i) Tax treatment of the following: Housing benefit The taxable benefit for the use of the employer s accommodation where the house is located outside the municipal area is 12 5% of the employee s salary or 7% of the cost of construction of the house. The taxable benefit is reduced in accordance with any rent charged by the employer. Taxable housing benefit (12 5% x ) (150 x 12) The taxable benefit for using the employer s furniture is based on the value to the employee if applicable or 8% of the cost of the furniture. The furniture benefit is (8% x ) Motor vehicle benefit Taxable benefit (25 000/ x 10/12 x 4 800) Taxable benefit on sale of motor vehicle ( ) Loan benefit The loan amount applied for educational purposes is exempted from tax. Taxable benefit (6 5% 2%) x x 6/ Benefit on free goods The taxable benefit is the cost to the employer (ii) Lump sum receipt The lump sum receipt is taxable subject to an allowance for the prior disallowed contributions divided by the life expectancy of the annuity. Taxable annuity portion (8 300/10) (b) (i) Obligation of the Public Services Salaries Bureau To request a tax clearance certificate for the year ended 31 December 2010 from the Institute of Internal Auditors. 1 In the absence of the tax clearance certificate the Public Services Salaries Bureau is required to withhold 10% of the disbursement and remit it to ZIMRA. 1 2 (ii) ZIMRA s breached PAYE requirements PAYE registration requirements The private college should have registered for PAYE within 14 days of becoming an employer. 1 PAYE remittance requirements Every employer is obliged to remit PAYE by the 10th of every month 1 ZIMRA s remedies To charge a penalty and interest on the outstanding PAYE amount after the remittance date. The penalty is usually 100% of the PAYE amount and the interest is based on the going market rates

3 (c) Calculation of taxable income from employment Fuel coupons (6 x 300) Overtime (6 x 200) Salary Bonus ( ) Fuel allowance Entertainment allowance (25% x 7 500) NSSA and pension fund contributions (4 600) Housing benefit Furniture benefit Motor vehicle benefit Benefit on sale of motor vehicle Loan benefit 338 Free goods benefit Annuity Part time lecturing Taxable income Tax on sliding scale: Up to ( ) x 35% Gross tax Less credits: Medical expenses (2 500 x 50%) (1 250) Add 3% AIDS levy Less PAYE (15 000) Tax payable Income tax calculation: Other income Royalties ( x 25 75%) Dividends ( x 15%) Interest (taxed at source) nil Tax payable Solar Tech Enterprises (Private) Limited (a) Tax accounting of: (i) The expenses incurred during the year ended 31 December 2009 The expenses were incurred prior to production period and should be carried forward and accounted for in The procurement of raw material for is an allowable expense. The following are capital expenses and therefore disallowed: Construction of the showroom Plant and machinery Commercial vehicles Capital allowances, such as Special Initial Allowance, can be claimed on the above fixed assets. 2 22

4 (ii) (iii) Consultancy fee The consultancy fee of paid to the Botswana company is an allowable expense in the books of Solar Tech Enterprises as the amount is incurred in the process of trade. 1 The amount is, however, subjected to a withholding tax on payment. 1 2 Interest paid What determines the deductibility or non-deductibility of the interest paid is how the loan was applied. Where the loan was used to acquire a fixed asset, the interest component is accordingly capitalised and hence disallowed. Interest incurred after the assets are brought into use is allowable. In this case, the only portion of the interest accrued in 2009 that is deductible is that pertaining to the interest on the amount expended towards the procurement of raw materials and the consultancy fee. Allowable Disallowable amount amount Establishment fee: 1 Fixed assets ( / x ) Raw material ( / x ) Unproductive (30 000/ x ) interest paid: 1 Fixed assets ( / x ) Raw material ( / x ) Unproductive (30 000/ x ) interest paid: 1 Fixed assets ( / x ) Raw material ( / x ) Consultancy fee (30 000/ x ) (b) (i) Maximum capital allowances for the year ended 31 December 2010 Dande showroom 25% x %( x 2% x 15% x 6/12) Growth point investment allowance on Dande showroom 15% x Plant and machinery 25% x %( x 2% x 15% x 6/12) Commercial vehicles 25% x %( x 2% x 15% x 6/12) Head office building (2 5% x ) Factory building ( ) x 25% Furniture and fittings (25% x ) Passenger vehicles (25% x ) Vehicle tracking equipment (25% x )

5 (ii) Calculation of the taxable income and tax payable Net profit Add: Depreciation PAYE penalty Payroll software licence Entertainment marketing director s family and friends Solar panels installation Vehicle tracking equipment Operating licence Interest disallowed Architect s fees factory building Donation to a political party Less: Bank interest (15 000) VAT refund (11 000) Advertising and marketing foreign markets (double deduction) (85 000) 1 Raw material procurement (pre-trading) ( ) Capital allowances (as above) ( ) 1 Taxable income Tax at 25% Add 3% AIDS levy Less provisional tax paid ( ) Tax payable Chipo Chitanda (a) Amounts to be included in the gross capital amount Proceeds from: Land Farmhouse Staff houses Tobacco barns Storage building Gross capital amount Exemption: Proceeds from the sale of the farmhouse The amounts to be included in the gross capital amount only refer to specified assets which are restricted to the sale of immovable assets in this case. The disposal of a principal private residence by an elderly person is exempted from capital gains tax. 3 24

6 (b) (i) Calculation of the taxable income and tax payable Recoupment on: Staff houses Tobacco barns Irrigation equipment Water pumps Tractors Grinding mill Storage building Taxable income Tax at 25% Add 3% AIDS levy Tax payable (ii) Calculation of capital gain and tax payable Gross capital amount Less recoupment on: Staff houses Tobacco barns Storage building ( ) 1 Less exemption ( ) Less cost: 1 Land Staff houses Tobacco barns Storage building Recoupment ( ) ( ) Less inflation allowances: Land (2 5% x 2 x ) Staff houses (2 5% x 2 x ) Tobacco barns (2 5% x 2 x ) Storage building (2 5% x 2 x ) (17 550) 1 Legal and ancillary costs (15 000) Capital gain Tax at 20% (iii) Rollover relief: The rollover relief in connection with the procurement of the townhouse is not applicable in this case because the proceeds on the sale of the farmhouse were exempted from capital gains tax as Chipo Chitanda is considered an elderly person William Mark (a) Tax reliefs William Mark qualifies for an enforced tax relief since he was forced to sell 60% of his livestock herd due to the stress of drought. The taxable income from such a sale is taxable over three years in equal yearly instalments commencing with the year of sale. William Mark can also elect to spread his other farm taxable income equally over three years provided that the income is less than the enforced sale income. On restocking the livestock that was depleted due to drought, William Mark can claim a restocking allowance of 50% of the purchase price of every animal purchased for the sole purpose of restocking his herd. 25

7 Calculation of the tax reliefs Enforced tax relief Drought induced sales Less: Purchases (180 x 100) + (120 x 80) (27 600) Direct livestock expenses: (300/( )/2) x ( ) (48 249) Enforced sale taxable income Relief given in 2010 ( x 2/3) Restocking allowance 50% of (b) (i) Livestock closing stock Bulls Cows Oxen Heifers Tollies Calves Total Opening stock Theft (2) (2) Drought sales (180) (120) (300) CSC sales (20) (30) (50) Promotions in Promotions out (20) (10) (15) (45) Births Closing stock PPV/FSV () Closing stock () (ii) Calculation of the minimum taxable income and tax payable Drought induced sales CSC sales Recoupment on sale of commercial vehicle Closing stock Less: Stock feed Deeping chemicals and vaccines Wages Livestock purchases Restocking allowance Wells (deductible in full) Capital expenses: Staff housing (3 x x 25%) Deep tanks (25% x ) Opening stock ( ) Income Less enforced tax relief (2/3 x ) (35 434) Taxable income Tax payable at 25% AIDS levy at 3%

8 5 Farai Mambo (a) (i) Registered operator s general obligations Complete and submit VAT returns as per requirements Calculate and remit the VAT due to ZIMRA within 10 days of the end of the tax period Issue tax invoices for any taxable supplies Keep proper accounting records for a period of at least six years after the relevant tax period Advise ZIMRA of any changes in business details Allow ZIMRA officials to enter one s business premises and examine business records 1 mark each, maximum 3 (ii) Specific Obligations due to cessation of trade Notify ZIMRA in writing within 21 days of ceasing to trade 1 Account for VAT in the retained closing stock 1 2 (iii) Tax implications of the negotiated settlement PAYE on unsettled salaries should be paid to ZIMRA on the due date regardless of the fact that the employees have not actually been paid. PAYE accrues to ZIMRA monthly on the due date. The fact that the negotiated settlement involves a compensation for unsettled salaries can be interpreted to mean that the salaries were actually paid in kind. The difference between the market values of the motor vehicles and the agreed selling prices is therefore the attributable salaries amount on which PAYE should be deducted. (b) (i) Output tax calculation: motoring benefits Toyota Corolla Toyota Harrier Nissan truck Toyota Prado Output tax at 15/ Pro-rate x 10/ (ii) Calculation of VAT position Output tax: Sales (15/115 x ) Commission received (15/115 x ) Purchases returns (15/115 x 4 500) 587 Insurance claim 0 Motoring benefits Less input tax: Purchases (15/115 x ) Rent (15/115 x ) Motor vehicle expenses (15/115 x x 80%) General office expenses (15/115 x 3 700) 483 Staff expenses 0 Repairs and maintenance (15/115) x ( ) Interest paid 0 (7 167) VAT payable