Answers
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 46 000) (150 x 12) 3 950 1 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 22 000) 1 760 Motor vehicle benefit Taxable benefit (25 000/45 000 x 10/12 x 4 800) 2 222 1 Taxable benefit on sale of motor vehicle (10 000 5 200) 4 800 Loan benefit The loan amount applied for educational purposes is exempted from tax. Taxable benefit (6 5% 2%) x 15 000 x 6/12 338 Benefit on free goods The taxable benefit is the cost to the employer 6 000 1 6 (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 6 500 (8 300/10) 5 670 1 (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. 1 3 21
(c) Calculation of taxable income from employment Fuel coupons (6 x 300) 1 800 Overtime (6 x 200) 1 200 Salary 46 000 Bonus (4 000 400) 3 600 1 Fuel allowance 1 750 Entertainment allowance (25% x 7 500) 1 875 NSSA and pension fund contributions (4 600) Housing benefit 3 950 Furniture benefit 1 760 Motor vehicle benefit 2 222 Benefit on sale of motor vehicle 4 800 Loan benefit 338 Free goods benefit 6 000 Annuity 5 670 Part time lecturing 5 000 Taxable income 81 365 Tax on sliding scale: Up to 18 000 4 104 (80 615 18 000) x 35% 22 178 Gross tax 26 282 Less credits: Medical expenses (2 500 x 50%) (1 250) 25 032 Add 3% AIDS levy 751 25 783 Less PAYE (15 000) Tax payable 10 783 Income tax calculation: Other income Royalties (30 000 x 25 75%) 7 725 1 Dividends (13 000 x 15%) 1 950 1 Interest (taxed at source) nil Tax payable 9 675 13 25 2 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 2010. The procurement of raw material for 300 000 is an allowable expense. The following are capital expenses and therefore disallowed: Construction of the showroom 100 000 Plant and machinery 250 000 Commercial vehicles 70 000 Capital allowances, such as Special Initial Allowance, can be claimed on the above fixed assets. 2 22
(ii) (iii) Consultancy fee The consultancy fee of 30000 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 (420 000/750 000 x 15 000) 8 400 Raw material (300 000/750 000 x 15 000) 6 000 Unproductive (30 000/750 000 x 15 000) 600 2009 interest paid: 1 Fixed assets (420 000/750 000 x 56 250) 31 500 Raw material (300 000/750 000 x 56 250) 22 500 Unproductive (30 000/750 000 x 56 250) 2 250 2010 interest paid: 1 Fixed assets (420 000/750 000 x 112 500) 63 000 Raw material (300 000/750 000 x 112 500) 45 000 Consultancy fee (30 000/750 000 x 112 500) 4 500 141 000 42 750 6 (b) (i) Maximum capital allowances for the year ended 31 December 2010 Dande showroom 25% x 100 000 + 25%(100 000 x 2% + 100 000 x 15% x 6/12) 27 375 2 Growth point investment allowance on Dande showroom 15% x 109 500 16 425 1 Plant and machinery 25% x 250 000 + 25%(250 000 x 2% + 250 000 x 15% x 6/12) 68 438 1 Commercial vehicles 25% x 70 000 + 25%(70 000 x 2% + 70 000 x 15% x 6/12) 19 163 1 Head office building (2 5% x 150 000) 3 750 Factory building (120 000 + 10 000) x 25% 32 500 1 Furniture and fittings (25% x 65 000) 16 250 4 Passenger vehicles (25% x 40 000) 10 000 Vehicle tracking equipment (25% x 30 000) 7 500 201 401 9 23
(ii) Calculation of the taxable income and tax payable Net profit 2 721 542 Add: Depreciation 32 250 PAYE penalty 5 000 Payroll software licence 14 000 Entertainment marketing director s family and friends 3 800 Solar panels installation 13 640 Vehicle tracking equipment 30 000 Operating licence 25 000 Interest disallowed 42 750 Architect s fees factory building 10 000 Donation to a political party 3 000 Less: Bank interest (15 000) VAT refund (11 000) Advertising and marketing foreign markets (double deduction) (85 000) 1 Raw material procurement (pre-trading) (300 000) Capital allowances (as above) (201 401) 1 Taxable income 2 288 581 Tax at 25% 572 145 1 Add 3% AIDS levy 17 164 589 309 Less provisional tax paid (244 625) Tax payable 344 684 11 30 3 Chipo Chitanda (a) Amounts to be included in the gross capital amount Proceeds from: Land 150 000 Farmhouse 380 000 Staff houses 130 000 Tobacco barns 102 000 Storage building 209 000 Gross capital amount 971 000 1 Exemption: Proceeds from the sale of the farmhouse 380 000 1 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
(b) (i) Calculation of the taxable income and tax payable Recoupment on: Staff houses 45 000 Tobacco barns 25 000 Irrigation equipment 22 500 Water pumps 10 000 Tractors 11 500 Grinding mill 5 000 Storage building 55 500 Taxable income 174 500 Tax at 25% 43 625 1 Add 3% AIDS levy 1 309 Tax payable 44 934 5 (ii) Calculation of capital gain and tax payable Gross capital amount 971 000 Less recoupment on: Staff houses 45 000 Tobacco barns 25 000 Storage building 55 500 (125 500) 1 Less exemption (380 000) Less cost: 1 Land 100 000 Staff houses 90 000 Tobacco barns 50 000 Storage building 111 000 Recoupment (125 500) (225 500) Less inflation allowances: Land (2 5% x 2 x 100 000) 5 000 Staff houses (2 5% x 2 x 90 000) 4 500 Tobacco barns (2 5% x 2 x 50 000) 2 500 Storage building (2 5% x 2 x 111 000) 5 550 (17 550) 1 Legal and ancillary costs (15 000) Capital gain 207 450 Tax at 20% 41 490 1 6 (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. 1 15 4 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
Calculation of the tax reliefs Enforced tax relief Drought induced sales 129 000 Less: Purchases (180 x 100) + (120 x 80) (27 600) Direct livestock expenses: (300/(500 + 173)/2) x (19 000 + 12 500 + 22 700) (48 249) Enforced sale taxable income 53 151 1 Relief given in 2010 (53 151 x 2/3) 35 434 Restocking allowance 50% of 45 000 22 500 4 (b) (i) Livestock closing stock Bulls Cows Oxen Heifers Tollies Calves Total Opening stock 10 230 170 45 30 15 500 Theft (2) (2) Drought sales (180) (120) (300) CSC sales (20) (30) (50) Promotions in 20 10 10 5 45 Promotions out (20) (10) (15) (45) Births 25 25 Closing stock 8 50 30 35 25 25 173 PPV/FSV () 200 100 80 50 40 20 Closing stock () 1 600 5 000 2 400 1 750 1 000 500 12 250 3 (ii) Calculation of the minimum taxable income and tax payable Drought induced sales 129 000 CSC sales 87 000 Recoupment on sale of commercial vehicle 13 000 Closing stock 12 250 Less: Stock feed 19 000 Deeping chemicals and vaccines 12 500 Wages 22 700 Livestock purchases 45 000 Restocking allowance 22 500 Wells (deductible in full) 9 000 Capital expenses: Staff housing (3 x 10 000 x 25%) 7 500 Deep tanks (25% x 32 000) 8 000 Opening stock 42 350 (188 550) Income 52 700 Less enforced tax relief (2/3 x 53 151) (35 434) Taxable income 17 266 Tax payable at 25% 4 317 AIDS levy at 3% 130 4 447 8 15 26
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 1 800 Toyota Harrier 3 600 Nissan truck 3 600 Toyota Prado 4 800 13 800 Output tax at 15/115 1 800 Pro-rate x 10/12 1 500 1 (ii) Calculation of VAT position Output tax: Sales (15/115 x 53 700) 7 004 Commission received (15/115 x 10 000) 1 304 Purchases returns (15/115 x 4 500) 587 Insurance claim 0 Motoring benefits 1 500 Less input tax: Purchases (15/115 x 24 900) 3 248 Rent (15/115 x 15 000) 1 957 Motor vehicle expenses (15/115 x 8 300 x 80%) 866 1 General office expenses (15/115 x 3 700) 483 Staff expenses 0 Repairs and maintenance (15/115) x (6 000 1300) 613 1 Interest paid 0 (7 167) VAT payable 3 228 7 15 2 27