2017 EXAMINATIONS ACCOUNTING TECHNICIAN PROGRAMME PAPER TC 10(B): TAXATION

Transcription

1 EXAMINATION NO EXAMINATIONS ACCOUNTING TECHNICIAN PROGRAMME PAPER TC 10(B): TAXATION TUESDAY 6 JUNE 2017 INSTRUCTIONS: TIME ALLOWED: 3 HOURS 9.00 AM NOON 1. You are allowed 15 minutes reading time before the examination begins during which you should read the question paper and, if you wish, make annotations on the question paper. However, you are not allowed, under any circumstances, to open the answer book and start writing or use your calculator during this reading time. 2. Number of questions on paper The paper is divided into TWO Sections, A and B. Answer BOTH questions in Section A and ANY THREE from Section B. 4. Each question carries 20 marks. 5. Use of non-programmable calculators is allowed. 6. You are provided with the following: (i) A set of tables containing rates of tax on taxable income (Table 1). Rates of capital allowances (Table 2). (iii) Penalty rates for underpaid provisional tax (Table 3). 7. Begin each answer on a fresh page. 8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE INVIGILATOR. This question paper contains 12 pages.

2 This question paper must not be removed from the examination hall. SECTION A- ANSWER BOTH QUESTIONS 1. (a) Thandeka Limited is a company incorporated in Malawi and operates from anengo Industrial site. The company manufactures cartons which it sells locally. The company s latest income statement for the year ended 30 June, 2016 is as follows: Sales Cost of sales Gross profit Selling expenses Administration expenses Finance costs Other income Profit before tax Note ,297,750 (46,378,650) 30,919,100 (8,540,000) (16,800,230) (5,901,300) 3,185,000 2,862,570 The following additional information in connection with the income statement is available: (1) Cost of sales Cost of sales includes the following: Cost of raw materials Plant depreciation Factory salaries and wages Penalty not following Malawi Bureau of Standards rules Bonuses provision for current year bonuses Bonuses provision for last year but paid in current year Other allowable expenses (2) Selling expenses comprise the following: Commissions for sales persons VAT on advertisements Fuel, tyres and repairs for delivery vans Depreciation for delivery vans Other allowable expenses 32,465,055 2,318,930 3,763, ,850 1,947, ,560 4,358,425 46,378,650 1,341,600 85,400 4,270, ,000 2,416,000 8,540,000 Page 2 of 12

3 Continued/ (3) Administration expenses comprise: Audit fees Debt collection Bad debts written off Provision for bad debts 2% of debtors Property valuation Stamp duty increase on share capital Subscription Production magazine Fringe benefits tax Donations Malawi Against Physical Disabilities Donations to the Institute of Chartered Accountants in Malawi (ICAM) conference Other allowable expenses (4) Finance expenses: Interest on bank overdraft Interest on late payment of PAYE Interest on loan on feasibility study on new cartons (5) Other income: Profit on disposal of old machine Sale of scrap metal Dividends received Interest from staff loans Exchange gain conversion of foreign creditors to Malawi wacha at year end 3,495, ,250 98,540 1,516,470 1,530,000 2,400, ,400 2,356, , ,000 3,889,870 16,800,230 4,694, , ,116 5,901, , , , , ,000 3,185,000 Compute the taxable income for Thandeka Limited for the year ended 30 June Marks (b) (i) Mention the characteristic of Value Added Tax (VAT) as a form of tax. 1 Mark State any three advantages of taxes that have a characteristic like that of VAT. 3 Marks Page 3 of 12

4 (iii) Continued/.. The following transactions were recorded in the books of a VAT registered taxpayer for the month of September 2016: Business related expenditure, inclusive of VAT at 16.5% Legal expenses Office furniture Business related expenditure exclusive of VAT - Postal services 87, , ,033 3,125 3,125 In addition to the above transactions, the value of sales net of VAT were 6,000,000 and 2,000,000 in respect of local sales and export sales respectively. (1) State any four obligations of a VAT registered taxpayer. (2) Calculate the amount of VAT paid or payable on each of the following expenditure and income items: (i) (iii) (iv) legal expenses office furniture postal services sales 5 Marks (TOTAL : 20 MARS) Continued/ Page 4 of 12

5 2. (a) The tax written down value of business assets of anga Limited, a manufacturer, as at 31 December, 2015 was as follows: Item Factory buildings Plant and machinery Motor vehicles Furniture and fittings Computers Tax written down value ,200 68,000 54,600 16,300 7,500 Agreed rate for annual allowance 5% 10% 20% 10% 40% During the year to 31 December 2016 the following transactions took place: (1) The company disposed of some plant and machinery for 9,900,000 resulting into a capital loss of 800,000. New replacement plant and machinery was bought during the year at 12,700,000. (2) One motor vehicle was sold during the year for 4,820,000 resulting in a capital loss of 720,000. A second hand five ton lorry was purchased using the sales proceeds, amounting to 4,820,000. (3) The company realized a capital gain of 490,000 after selling office furniture for 1,680,000. (4) A new computer was purchased at a cost of 980,000. (i) Calculate the tax written down value for the assets that have been disposed of during the year. 3 Marks Compute capital allowances i.e. initial or investment allowances as the case may be, and annual allowances, on the business assets for anga Limited, for the financial year ended 31 December Marks (b) State five types of expenditure which a farmer, who derives income from livestock production and other farming operations, is allowed to deduct from his/her income in line with Section 58(2) of the Taxation Act. 5 Marks Page 5 of 12

6 Continued/ (c) (i) Why does the Taxation Act provide taxpayers with an opportunity to appeal? 1 Mark A taxpayer received a notice of assessment from the Commissioner General on 7 October 2016 which was dispatched on the same day. Since he had cash flow problems, on 11 November 2016, he wrote the High Court appealing to it that it should assist him to reduce the amount and allow him to pay when his cash flow situation improves. Comment on the procedure for appeal to be followed by the taxpayer. (TOTAL : 20 MARS) Page 6 of 12 Continued/

7 SECTION B ANSWER ANY THREE QUESTIONS FROM THIS SECTION 3. (a) Tadala Limited imported goods worth US$67,500 from China on an open account. The country of origin for these goods was deemed to be China, hence the company declared the same when clearing them. Required (i) Why is the correct completion of the certificate of origin (form 18) significant for customs duty taxes? 3 Marks Compute the duties and taxes that the company paid in order to clear the goods. (Assume that the goods attracted 25% customs duty, 30% excise duty and 16.5% value added tax and the exchange rate used at the time of clearing was 755 to 1$). 7 Marks (b) State the circumstances when the following income is not assessed to tax in Malawi. (i) Leave passages 2 Marks Income of an expatriate 1 Mark (iii) Foreign exchange gain 2 Marks (iv) Capital gains on shares traded on the stock exchange 1 Mark (c) Section 45 of the Taxation Act disallows some expenditure from being deducted from the assessable income of a taxpayer. State any four examples of such expenditure. (TOTAL : 20 MARS) Continued/ Page 7 of 12

8 4. (a) (i) Emoluments from employment received by or accrued to or in favour of a wife may not qualify as earned income if paid under certain circumstances. State the four circumstances. How is an employer s pension contribution, which is allowed as a deduction from assessable income according to Section 37 of the Taxation Act, determined? 3 Marks (b) (i) Mention two examples of income which is liable to a final tax. 2 Marks Mr Limpopo, a Zimbabwean, left Malawi two years ago having worked for ten years for an insurance company which is registered and operates in Malawi. He left some investments in Malawi in form of shares in a stock exchange listed company and money in a savings account. Since he left for Zimbabwe, he has not returned to Malawi. During the twelve months ended 30 June, 2016, the following amounts were remitted to him in Zimbabwe: - 200,000 dividends from a company in which he owns shares in Malawi - 345,200 bank interest from a savings account - 600,000 withdrawal from his savings account (1) State the type of tax which is payable on each of the above amounts. Give reasons for your answers. (2) Calculate the tax due on the above amounts. 2 Marks (c) State the circumstances that will necessitate the Commissioner General to issue an assessment or additional assessment to a taxpayer, in line with section Marks (d) (i) Mention the term used to describe the levying of income tax by more than one country on the same income of a taxpayer. 1 Mark Explain one way in which the levying of income tax by more than one country arises. 2 Marks (TOTAL : 20 MARS) Page 8 of 12

9 5. (a) Explain the following canons of tax, according to Adam Smith: (i) certainity economy (b) Vinthukutu Limited produces and sells limestone locally and in the neighbouring countries of Tanzania, Zambia and Mozambique. The following information is available for the financial year ended 30 June, 2016: (1) Taxable profits for the year (before adjusting for taxable foreign exchange losses and gains) 34,566,000 (2) Provisional tax paid during the year 4,675,000 (3) Tax withheld by its debtors when paying, in form of withholding tax amounted to 2,190,000 (4) An analysis of its foreign exchange account for the year revealed the following balances: realized foreign exchange gains 16,872,430 realized foreign exchange losses 10,500,420 unrealized foreign exchange gains of 3,778,100 (Note: The taxable profits have not taken into account exchange differences from the accounting and from the tax position). (i) State the foreign exchange gains and losses that will be allowable for tax purposes for Vinthukutu Limited. 3 Marks Compute the tax to be paid by Vinthukutu Limited after year end.8 Marks (c) (i) State the due date for the submission of the monthly excise duty return by a registered licensee. 1 Mark Give any four examples of disposal details of excisable goods that an excise return must show. (TOTAL : 20 MARS) Page 9 of 12

10 6. (a) Lusangazi Sports Complex and Club is a fast growing taxable club registered in Malawi. For the financial year ended 30 June, 2016, it presented the following income and expenditure account: 000 Income Gambling machine 8,100 Membership fees 10,340 Live band performances 1,560 Sale of food 5,102 Video shows 940 Sale of drinks 9,430 Total income 35,472 Expenditure Repairs and maintenance 2, 300 Salaries and wages 5,320 Cost of goods sold 6,355 Sundry expenses 1,230 Grounds maintenance 960 Total expenditure 16,165 Surplus 19,307 (i) Compute the taxable income of Lusangazi Sports Complex and Club for the year ended 30 June, Assuming the taxable income for Lusangazi Sports Complex and Club is 2,550,000, calculate the tax payable. 2 Marks Continued/ Page 10 of 12

11 (b) Lusangazi Club offered the following fringe benefits to its Manager for the period ended 30 June a car with unrestricted usage and was bought at 9 million. - school fees for one child and in April 2016 the club paid 50,000 directly to the school. - monthly DSTV subscription at 48,000 per month. Compute the fringe benefits tax payable by Lusangazi Club for the quarter ended 30 June Marks (c) (i) Define the term relief supplies. 1 Mark Give any four examples of relief supplies. (TOTAL : 20 MARS) 7. (a) Mr Pemba Phiri was employed by an entrepreneurer as a Business Development Manager on a three year contract. The terms of the contract were as follows: Contract period : Salary : House allowance : Contract gratuity : 3 years (starting on 01/07/13, ending on 30/06/16). 820,000 per month (salary was the same throughout the contract period). 1% of salary, 25% of total salary received during the contract period. Mr Phiri was paid the contract gratuity on expiry of his contract on 30 June, Other transactions during the year for Mr. Phiri were as follows: (1) Received rental income of 510,000 net of tax from his tenant who occupies his house in asungu Page 11 of 12 Continued/

12 (2) Paid city rates of 15,000 to asungu Town Assembly (3) Made a donation of 1,000 to the Malawi Red Cross Society during the flag week campaign Compute Mr Pemba Phiri s tax liability for the year ended 30 June, Marks (b) (c) Define mining expenditure in line with paragraph 11 of the second schedule of the Taxation Act. 6 Marks Chimoka Limited recovered PAYE from its employees in the month of January 2016 amounting to 317,526 and remitted it to the Malawi Revenue Authority (MRA) on 30 May (i) (iii) State the latest date that Chimoka Limited should have paid the PAYE to MRA, in line with the tax rules. 1 Mark State the penalties that an employer who fails to pay PAYE by the due date is liable to. 2 Marks Compute the penalties that Chimoka Limited paid to MRA for paying PAYE late. 3 Marks (TOTAL : 20 MARS) E N D Page 12 of 12