Lupane State University Building Communities through Knowledge

Lupane State University Building Communities through Knowledge FACULTY OF COMMERCE DEPARTMENT OF ACCOUNTING AND FINANCE BACHELOR OF COMMERCE HONOURS DEGREE IN ACCOUNTING AND FINANCE INSTRUCTIONS PART FOUR FIRST SEMESTER EXAMINATION TAXATION 1 [COAF 4103] DECEMBER 2013 DURATION: 3 HOURS + 15 MINUTES PLANNING TIME 1. Answer all four (4) questions 2. Begin each question on a new page. INFORMATION 1. Marks per question are as indicated. 2. Questions may be answered in any order 3. Credit will be given for showing all appropriate workings This paper consists of 11 printed pages Page 1 of 11

Individual tax Rates Cumulative tax % 0-3 000-0 - - 3 000-12 000 20% of excess over 3 000 12 0 0 1-2 4 000 1800 +25 % of excess over 12 000 24 001-60 000 4 800 +30 % of excess over 24 000 60 0 0 1-9 0 000 15 600 +35 % of excess over 60 000 90 001-120 26 100 + 40 % of excess over 90 000 000 120 001 and over 38 100 + 45 % of excess over 120 000 Engine capacity per annum Not exceeding 1500cc 1,800 1501cc- 2000cc 2,400 2001cc- 3000cc 3,600 Exceeding 3000cc 4,800 CAPITAL ALLOWANCES Special initial allowance 25% Accelerated wear and tear 25% Wear and tear: Industrial buildings 5% Farm building 5% Commercial building 2.5% Motor vehicles 20% Movable assets in general 10% Page 2 of 11

QUESTION 1 [25 marks] John Seed is a qualified geologist with several years working experience in geological surveys. He also sits on the boards of a number of reputable mining conglomerates including the company he currently works for, Chrome Ltd. Due to his extensive knowledge in geological work, John is often subcontracted by Chrome Ltd to offer training services to other unconnected mining companies. During the year ended 31 December 2012, Chrome Limited established an office in Harare and John was transferred to work at the new office. Below are John's earnings and deductions from employment for the year ended 31 December 2012 Notes Salary from Chrome Limited 80,000 Earnings from subcontracted work 1 95,000 Thirteenth cheque 7,000 Clothing allowance 3,000 School fees for children 12,000 Passage benefit 2 6,000 Conference allowance 3 15,000 Cash in lieu of leave 6,700 Deductions Funeral policy contributions (2,000) Subscriptions: Institute of geological surveys (4,000) Retirement annuity fund contributions (5,350) NSSA contributions (72) Rental paid to Chrome Limited for company house 4 (7,000) PAYE 5 (23,000) Page 3 of 11

Other earnings Rental income from principal private residence 95,000 Contract fees 6 65,000 Notes 1. The amount is computed based on 5% of the amount invoiced by John's employer whenever he is subcontracted to offer training to other mining companies. 2. The amount refers to the cost of John's relocation to Harare and was fully paid by his employer. His place of ordinary residence before his engagement with the mining company has always been Mutare. 3. The amount below was paid by Chrome limited for John's participation at a weeklong mining managers' conference that was held in Victoria Falls during the year: Travelling expenses (amount incurred) 2,000 Accommodation, meals and related direct expenses 8,000 Spouse's shopping 5,000 15,000 4. John was offered a fully furnished company house for his accommodation. The company house is located in Dawning Park, just outside the municipality of Harare. The household furniture was bought by Chrome limited at a cost of 25,000. 5. The PAYE was wholly paid by Chrome Limited on behalf of John as part of the agreed engagement terms, such that John received his full gross salary. 6. The contract fees were paid by one of two companies which engaged John as an independent contractor during the year. The other company paid John for his services by giving him 35,000 listed shares valued at 1, 30. Additional information. While analysing the chemical composition of a mineral deposit in the laboratory on the 31 May 2012, John was accidentally permanently blinded in one eye. The medical expenses were covered by Chrome limited and NSSA paid John a total amount of 20,000 as compensation for the occupational accident. Chrome limited henceforth increased his monthly medical contributions from 1,000 to 1,200 per month in order Page 4 of 11

to ensure adequate medical cover. The amount was paid by Chrome limited in full as part of the contractual agreement. For the period January 2012 to November 2012, John was granted the use of Jaguar X- type, with an engine capacity of 2500cc. On the 1st December 2012, the company sold the vehicle to John for 6,000 which he paid. The market value of this type of vehicle is 10,000 according to Automobile Association of Zimbabwe valuation report. Required a) Identify ANY TWO factors which determine an engagement is treated as employment and ANY TWO which indicate self-employment. [2 marks] b) Explain the tax treatment of the following items : i. Earnings from subcontracted work (notel) [ 1 mark] ii. Passage benefit (note 2) [ 1 mark] c) iii. Conference allowance ( note 3) [ 1 mark] iv. PAYE (note 5) [ 1 mark] v. NSSA compensation as detailed in the additional information [ 1 mark] I. Calculate the value of taxable benefits arising from John Seed's usage of thehouse. [2 marks II. Calculate the taxable income and tax payable by John Seed for the year ended 31 December 2012. [16 marks] QUESTION 2 [30 marks] Cradle Roll Ltd is a subsidiary of Adventure Ltd, a South African registered company. Cradle Roll commenced business operations in retailing of assortments of toys in Zimbabwe in 2011. Cradle Roll purchases all its stocks of toys from Adventure Ltd. Cradle Roll's head office is situated in Hillside, Bulawayo and has a network of shops in most shopping malls of the major cities of the country. The head office was constructed in terms of an eight year lease signed with the municipality on 25 March 2011. The lease can be renewed for a further eight years and the provisions of the lease are as follows: i. Cradle Roll was to construct two buildings, with minimum structural specifications, valued at not less than 100,000 each ii. One building was to be utilised as an administration block and another as a warehouse. iii. Cradle Roll was obliged to pay a premium of 50,000 upfront and thereafter monthly rental of 3,200 until the expiry of the lease. Page 5 of 11

The construction of the buildings was completed on 25 August 2011, according to specifications, at an actual cost of 80,000 and 115,000 for the administration block and the warehouse. Cradle Roll commenced business operations on the 1st September 2011. The following is Cradle Roll statement of profit or loss for the year ended 31 December 2012 Turnover Less: cost of sales Gross profit Other operating income (note 1) 1.960.000 (980.000) 980.000 45,000 Administrative expenses: Staff costs (note 2) Repairs and maintenance (note 3) Motor vehicle expenses (note 4) Office expenses (note 5) Donations (note 6) Finance costs (220,000) (135.000) (104.000) (182.000) (18,000) (165,000) (824.000) Profit for the year 201.000 Notes 1. Other operating income includes : Bank interest received 6,000 VAT refund 10,000 2. Staff costs includes 32,200 representing the payment by Cradle Roll of 10,733 towards the pension contributions of its three senior managers 3. Repairs and maintenance comprised of the following : Page 6 of 11

Replacement of faulty electrical installations at shops 76,500 Paving around the Hillside shop 53,200 Computer repairs 5,300 4. Motor vehicle expenses comprised of the following: Fuel and maintenance costs 28,000 2 passenger vehicles procured under hire purchase agreement 62,500 Traffic fines 1,200 Insurance and licensing costs 12,300 5. Office expenses included : Outsourcing of payroll function 15,000 Fit and supply contract for Hillside shop kitchen 29,000 Utility payments 27,700 Depreciation 37,000 Rental expenses 58,000 Interim audit fees 12,000 6. Donations included the following : Local church 5,000 Ministry of health - Mpilo hospital Paediatrics unit 13,000 Additional information Cradle Roll does not have a formal tax policy on fixed assets. The following were assets brought into use as at the commencement of business operations. Cost Commercial vehicles 53,000 Furniture & fittings 80,000 133,000 During the year ended 31 December 2011, Cradle roll acquired a business building in Hillside for 70,000 and converted it into a shop. Page 7 of 11

REQUIRED a) Calculate the capital allowances for Cradle Roll, granted by ZIMRA for the years ended 31 December 2011 and 2012. [9 marks] b) Outline Cradle Roll's obligations to ZIMRA concerning the first two payments in note 5. [2 marks] c) State with reasons, the amounts to be used for calculating the lease improvement allowances for the administration block and the warehouse for the lessee. [2 marks] d) Compute the taxable income and respective tax payable for the year ended 31 December 2012. [17 marks] QUESTION 3 [25 marks] Ndione Ranchers (Pvt) Ltd was incorporated in January 2012. In March 2012, the company acquired a farm in Insiza under the A2 land resettlement scheme and immediately commenced livestock farming operations. The company paid an amount of 120,000 allocated to the farm improvements on the farms as follows: Farm managers' house 20,000 Staff housing (10 units) 30,000 Dam 25,000 Farm implements 45.000 In April 2012, the company purchased the following livestock: 120.000 3 bulls 2,400 150 cows 60,000 90 oxen 32,000 28 heifers 7,000 35 Tollies 5,600 50 calves 5,200 Page 8 of 11 112.200

Livestock movements between 1 April 2012 and December 2012 were as follows: i. 25 calves were born on the farm during the year ii. 40 calves were reclassified to heifers iii. 10 calves were reclassified to tollies iv. 5 tollies were slaughtered for rations v. 20 tollies were reclassified as oxen vi. 22 heifers were reclassified to cows. Notes i. 40 cows and 50 oxen sold for 45,000 to some private abattoirs during the first half of the year. ii. In July 2012, the farm was declared as an epidemic area by the Minister of agriculture due to an outbreak of foot and mouth disease. The company was forced to sale 30 cows for 21,000 as a result of the epidemic disease. iii. Eventually in October 2012, the epidemic was brought under control and the firm was declared by the Minister of agriculture to be free from foot and mouth. iv. The company restocked the farm with 50 cows which were purchased for 30,000 in October 2012. v. The carrying capacity of the farm is 270 herd. vi. The herd's direct running expenses for the year amounted to 8,000. All expenses are allowable for tax purposes. The following expenditure was incurred during the course of the year: Stumping and clearing of land 3,000 Sinking of boreholes and wells 12,000 New fencing 2,600 Borehole equipment 15,000 The approved fixed standard values for the livestock are: Bulls 800 Cows 600 Heifers 500 Page 9 of 11

REQUIRED a) Calculate the capital allowances for Cradle Roll, granted by ZIMRA for the years ended 31 December 2011 and 2012. [9 marks] b) Outline Cradle Roll's obligations to ZIMRA concerning the first two payments in note 5. [2 marks] c) State with reasons, the amounts to be used for calculating the lease improvement allowances for the administration block and the warehouse for the lessee. [2 marks] d) Compute the taxable income and respective tax payable for the year ended 31 December 2012. [17 marks] QUESTION 3 [25 marks] Ndione Ranchers (Pvt) Ltd was incorporated in January 2012. In March 2012, the company acquired a farm in Insiza under the A2 land resettlement scheme and immediately commenced livestock farming operations. The company paid an amount of 120,000 allocated to the farm improvements on the farms as follows: Farm managers' house 20,000 Staff housing (10 units) 30,000 Dam 25,000 Farm implements 45.000 In April 2012, the company purchased the following livestock: 120.000 3 bulls 2,400 150 cows 60,000 90 oxen 32,000 28 heifers 7,000 35 Tollies 5,600 50 calves 5,200 Page 8 of 11 112.200

Oxen 450 Tollies 250 Calves 150 Required a) Prepare a livestock reconciliation [6 marks] b) Explain and calculate the tax reliefs available to Ndione Ranchers for the year ended December 2012 in connection with the epidemic disease (foot and mouth) and restocking allowance. [8 marks] c) Calculate the minimum tax payable assuming the company makes all the elections available in the 7th schedule to minimize tax. [11 marks] QUESTION 4 [ 20 marks] Donald and Elizabeth Soap are married and are both civil engineers and are equal partners in their civil engineering firm, Soap and Associates. The net profit of Soap and Associates is as shown in the statement of profit or loss and other comprehensive income for the year ended 31 December 2012 is 342,000 after taking into account the following: Credits Notes Interest income 1 9,000 Profit on sale of computer equipment 2 2,500 Company dividends (net) 7,200 Debits Staff costs 3 141,000 Office rent 12,000 Motor vehicle expenses 4 15,000 Office sundry expenses 1,000 Depreciation 12,000 Page 10 of 11

Other operating expenses 5 64,000 Notes 1. Interest income is made up of the following Bank interest -partnership account 4,000 Interest on partners' capital accounts - Donald 3,000 Elizabeth 2,000 2. The computer equipment was sold for 6,000 and the original cost was 3,500. He income tax value on disposal was 875. 3. Staff costs consist of the following : Staff salaries (10 employees) 60,000 Donald's salary 30,000 Elizabeth's salary 25,000 Staff pension contributions 12,000 Donald's pension contribution 7,000 Elizabeth pension contribution 7,000 4. Motor vehicle expenses refer to the partners' personal vehicle running expenses. Both partners use 80% of the vehicles for business purposes and 20 % for private use. 5. Other operating expenses : Staff medical aid contributions 10,000 Donald's medical aid contributions 5,000 Elizabeth medical aid contributions 5,000 Insurance premium joint life policy 8,000 Elizabeth grocery allowance 20,000 Donald's school fees allowance 16,000 6. All the other partnership non-current assets are fully depreciated for tax purposes except for the two passenger motor vehicles which were procured on 5 February 2012 for the partner's use at a cost of 35,000 for Donald and 25,000 for Elizabeth. Required a) Briefly outline how partner's income is taxed and state when the tax should be remitted to ZIMRA. b) State how the profits for the year ended 31 December 2013 will be shared out for tax purposes between Donald and Elizabeth and the new partner. c) Calculate the minimum taxable income and tax payable by Donald and Elizabeth for the year ended 31 December 2012. [3 marks] [2 marks] [15 marks] Page 11 of 11