Fundamentals Level Skills Module Taxation (Malawi) Monday 6 June 2011 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 page 2. 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. Paper F6 (MWI) The Association of Chartered Certified Accountants The Public Accountants Examination Council of Malawi
SUPPLEMENTARY 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 tax rates and allowances are to be used when answering the questions Income tax rates: Individuals Cumulative 72,000 120,000 0 120,001 156,000 15% 5,400 156,001+ 30% Company rate Locally incorporated 30% Externally incorporated 35% Annual Allowance rates (Guidelines laid down by the Commissioner of Taxes) 5% Industrial buildings Railway lines Farm improvements 10% General plant and machinery Trailers Farm fencing 15% Mobile cranes 17 5% General plant and equipment on double shift 20% Motor cycles Cars Pick-ups Light Lorries (for light work) Cement mixers Tractors 25% Light Lorries (for heavy work) Tippers Tracked tractors Tree-dozers Scrapers Graders Bulldozers General plant and equipment working 24 hours a day Tractors (for heavy work) Transport services 40% Computers 2
ALL FIVE questions are compulsory and MUST be attempted 1 Maziko Tourism Limited is a company incorporated in Malawi, and has been in operation since 2003. The company owns five hotels throughout the country. In addition it operates a tour management division, which conducts guided tours throughout Malawi. The tour management division, which is called Warm Heart Tours and Travel has operational offices from the hotels operated by Maziko Tourism. The company makes up its accounts to 31 December each year. The following are the financial results for the hotel operations for the year ended 31 December 2010. Comprehensive Income Statement Year ended 31 December 2010 Income Accommodation 37,000,800 Restaurant and bars 45,000,000 82,000,800 Cost of sales Accommodation 19,550,500 Restaurant and bars 28,500,500 (48,051,000) Gross profit 33,949,800 Administration costs 18,500,000 Finance costs 8,500,600 Other expenses 4,560,800 (31,561,400) 2,388,400 Other income 3,850,000 Profit before taxation 6,238,400 The following information is available in connection with these financial results. (i) (ii) Included in cost of sales are the following: Accommodation: VAT charged on staff meals and accommodation 345,000 Losses on replacements of linen 165,000 Provision for exchange losses on imports of soaps and lotions 235,800 Stock pilferage 55,000 Salaries and wages 7,550,800 Depreciation 5,560,500 Restaurant and bars: Christmas party 245,600 Provisions for losses on glasses and bottles 512,000 Customs and excise duties on liquor 850,000 Salaries and wages 4,500,000 Included in administration costs are the following: Legal fees for increase in share capital 322,590 Salaries and wages 6,550,100 Contract gratuity 750,000 Severance pay provision 890,100 Fringe benefits tax 355,870 Depreciation 3,200,500 During the year 650,000 was paid out in severance pay to employees whose services were terminated. This amount was charged against amounts previously provided for. 3 [P.T.O.
(iii) Finance costs include: Audit fee 750,000 Provision for doubtful debts 2% of debtors 85,800 Interest for late payment of taxes 75,000 Interest on bank overdraft 1,256,900 Exchange losses on payment of foreign creditors 640,800 Exchange losses on conversion of year end creditor balances 554,800 (iv) Other expenses include: (v) Donations School for the blind 65,000 Save the Children Fund 55,000 Subscriptions ACCA for the company s accounting students 165,000 Golf club for the Managing director 880,000 Institute of Hotel Management 90,000 Directors fees 345,000 Traffic fines 85,600 Medical aid contributions for hotel staff 115,000 Other income is made up of: Rental from shops in hotels 2,690,000 Capital gain from old foreign debtors 655,000 Rental of computers by Warm Heat Tours 255,000 Profit on sale of assets 250,000 3,850,000 The rental income is stated gross and withholding tax was deducted on payment. (vi) The results for Warm Heart Tours and Travel for the year ended 31 December 2010 after depreciation charged of 2,165,890 and before capital allowances for the year show a loss of 2,500,456. These results are not incorporated in the results for the Hotel business above. (vii) The buses run by Warm Heart Tours and Travel had a net tax written down value of 15,565,000, as at 1 January 2010. No additional buses were bought during the year. The division uses computers belonging to the hotel, for which they are charged a fee of 255,000 a year. The expense has been deducted in arriving at the division s accounting loss of 2,500,456. (viii) Maziko Tourism Limited s tax written down values of property and equipment as at 1 January 2010 were: Hotel buildings 25,500,000 Laundry equipment 165,000 Motor vehicles 8,500,000 Furniture and equipment 4,355,800 Computers 2,400,000 (ix) The following information is also available in connection with the movement in property and equipment during 2010: Construction of additional hotel rooms 5,500,000 Purchased motor vehicle saloon 4,500,000 Purchased new heavy duty laundry equipment 3,500,000 Purchased four new desk top computers 650,000 The company installed a computerised reservation system at a cost of 2,500,000. This software has been capitalised and is being written off over a period of four years. 4
The old laundry equipment was scrapped. This was sold to a local dry cleaner at a price of 500,000. The equipment had a tax written down value of 125,000. However, this equipment had a nil book value. (x) Provisional tax paid during the year amounted to 895,500. (a) (b) (c) Calculate the capital allowances that will be claimed by Maziko Tourism Limited for the year ending 31 December 2010. The capital allowance schedule should clearly indicate the applicable capital allowance rates used. (16 marks) Compute the profits or losses for tax purposes of Maziko Tourism Limited for the year ended 31 December 2010. (12 marks) If Maziko Tourism Limited has a tax loss for the year, state how the losses would be treated for tax purposes, assuming that they have paid amounts of withholding tax and provisional tax during the year. (2 marks) (30 marks) 5 [P.T.O.
2 Peter Mazombwe is a freelance general management consultant. In addition, he runs a produce business. He buys produce, mainly rice, pigeon peas and sunflower seeds, and exports these to South Africa. He is married to Miriam. Miriam is employed as a personal assistant to the Managing Director of an engineering firm. During the year to 30 June 2010, Peter worked on three consultancies and his earnings from these consultancies were as follows: August 2009 675,500 January 2010 800,000 March 2010 911,080 The total expenses incurred in carrying out these consultancies were: Printing and stationery 56,900 Telephones 22,000 Travelling 282,500 The following results are from the produce business, for the year ended 30 June 2010. Export sales 10,500,500 Less: cost of produce 5,678,000 Transport local 325,000 Transport exports 1,256,890 Insurance 657,000 (7,916,890) 2,583,610 Less expenditure Wages 875,000 Rental for warehouse 720,000 Telephones and faxes 45,000 (1,640,000) Profit from trading 943,610 Included in wages is drawings of 250,000 made by Peter during the year. Other than for the drawings, no other expenses were paid by the business on behalf of Peter. The following are the other earnings of Peter and his wife Miriam for the year to 30 June 2010. Peter Miriam Earnings Salary 3,550,500 Directors fee 450,000 Board sitting allowances 125,000 Bank interest 35,000 Rental 420,000 Dividend from a listed company 15,000 22,000 Expenses: Donations MACOHA 125 850 Subscriptions Institute of directors 35,000 Houses on rent: Repairs and painting 75,550 New driveway 250,000 City rates 65,000 Except for export income, the relevant taxes applicable on the other income were duly deducted on payment and were received net by Peter and Miriam. 6
Bank interest relates to interest earned on a treasury bill. Peter and Miriam have three houses; two were being rented out and the third one they live in. One of the houses which was rented out was sold during the year. The cost of the new driveway relates to that property. The house which was sold was purchased in 2000 at a cost of 650,000 and it was sold during the year for 3,650,500. The Mazombwes, however, intend to use the proceeds from the sale to purchase another house also for rental purposes. Negotiations for the purchase are at an advanced stage. The new house is to cost them 4,550,000. The 2010 conversion factors are as follows: Year Factor 2000 3 439 2002 2 654 2005 1 3337 2010 1 (a) Calculate the capital gain, if any, on the house which was sold and state how this gain will be dealt with for the purposes of arriving at the taxable income of Mr and Mrs Mazombwe. (5 marks) (b) Compute the taxable income of Mr and Mrs Mazombwe for the year ended 30 June 2010. (13 marks) (c) Calculate the tax payable or refundable by or to Mr and Mrs Mazombwe for the year ended 30 June 2010. (7 marks) (25 marks) 7 [P.T.O.
3 (a) Value Added Tax (VAT) is chargeable on taxable supplies and services that are provided by tax payers who are registered for VAT. (i) (ii) State the occasions on which VAT is chargeable and the persons who are responsible for paying the tax; (3 marks) List ANY FOUR types of transaction, apart from a simple sale of goods or services, which are treated as a supply of goods or services for the purposes of VAT. (2 marks) (b) (c) Set out the THREE types of supply for VAT purposes, stating the rate at which VAT is payable (if any) and explaining whether or not input tax incurred on purchases relating to each type of supply is claimable. (3 marks) XYZ Limited, a company incorporated in Malawi, is involved in manufacturing toys. The following information is available with respect to the transactions entered into during month of April 2011, for which it wishes to submit a VAT return. Taxable supplies 3,500,200 Exempt supplies 450,000 Value of purchases on which VAT was charged 2,650,000 Capital goods purchased 1,250,000 Value of exempt purchases 75,000 Purchases from non-registered traders 125,760 Included in capital goods is the cost of a motor vehicle at 650,000. Also included in value of purchases on which VAT was charged is the cost of motor vehicle spare parts, which cost 115,000. The above figures are not inclusive of VAT. There is excess credit brought forward from the previous month of 45,650. (i) Calculate the VAT that will be payable or claimable by XYZ Limited for the month of April 2011; (5 marks) (ii) If the return for the month of April 2011 resulted in VAT in credit, state how this credit would be dealt with, and the tax position should the company continue to be in a tax credit position. (2 marks) (15 marks) 8
4 (a) Malengo Limited is a medium sized provider of ICT services, and has a total of six employees. Its financial year ends on 31 December each year. Malengo Limited s remuneration also includes benefits paid. The following are the monthly figures. General Sales Accountant Receptionist Cleaner Manager consultants (2) Messenger Salary 100,000 50,000 80,000 30,000 10,000 House rent 45,000 30,000 40,000 Water 15,000 10,000 10,000 Electricity 10,000 8,000 9,000 Telephone 10,000 8,000 10,000 Housing allowance 15,000 5,000 The house provided to the general manager is furnished. Malengo Limited pays for electricity, water and telephone for the general manager and the accountant directly to the utility providers. The remaining employees receive cash payments to cover these expenses. Malengo Limited provides a company car to its general manager. The car cost 2,500,000 new four years ago. (i) (ii) Calculate the fringe benefits tax that would be payable by Malengo Limited based on the above information for the quarter ending 31 March 2011; (8 marks) State TWO other benefits (apart from those dealt with in part (i) above) provided by an employer which attract fringe benefits tax and in each case state the basis of calculation of the taxable benefit amount. (2 marks) (b) A taxpayer is required to deduct withholding tax from certain payments, when such payments are made. Explain the procedures for the administration and payment of withholding tax, and exemption from withholding tax, and list at least FOUR payments to which withholding tax should be applied in the absence of exemption. (5 marks) (15 marks) 9 [P.T.O.
5 Malindi is considering starting a fish farming business. He has not decided whether to register this business as a sole trader under the Business Names Act or whether to incorporate the business into a limited liability company. The business will prepare its financial statements to 31 December each year. The business will be located in Salima. The turnover for the first year is expected to be 4,500,000, and the profit before tax to be 450,500. Equipment costing 500,000 will be bought in the first year and dams will be constructed costing 600,000. The expected profit is arrived at after charging: Depreciation 122,000 Malindi s salary 400,000 Feasibility study costs 225,000 Malindi will be entitled to a business car. The cost of this car will be 1,200,000. The running expenses incurred for the first year will be: Fuel 126,000 Repairs and maintenance 66,000 Insurance 114,000 It is anticipated that one-third of these expenses will be for private purposes. A house will be rented for Malindi at a monthly rental of 25,000. It has been agreed with the commissioner that this is a legitimate charge to the business. Expenses for rent and vehicle running have already been taken into account in arriving at the expected net profit for the first year of operations. (a) (b) Calculate the tax to be payable for the first year of trading: on the basis that Malindi registers the business as a sole trader; on the basis that Malindi incorporates into a limited liability company. (13 marks) Advise Malindi whether he should operate the business as a sole trader or a limited liability company. Support your answer with the tax considerations under each option. (2 marks) (15 marks) End of Question Paper 10