Paper F6 (MWI) Taxation (Malawi) Tuesday 4 December Fundamentals Level Skills Module. Time allowed

Transcription

1 Fundamentals Level Skills Module Taxation (Malawi) Tuesday 4 December 2012 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

2 SUPPLEMENTARY INSTRUCTIONS 1. Calculations and workings should be made to the nearest. 2. All apportionments should be made to the nearest whole 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 Malawi Income Tax: Rates Individual Cumulative 72, ,000 0% 0 144, ,000 15% 5, , % Company rate Locally incorporated 30% Externally incorporated 35% Value Added Tax Standard rate 16 5% Annual Allowance Rates (Guidelines laid down by the Commissioner of Taxes) 5% Industrial buildings Railway lines Farm improvements 10% General plant and equipment 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 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

3 ALL FIVE questions are compulsory and MUST be attempted 1 Tapiko Limited is a company incorporated in Malawi. It is a subsidiary of a South African registered company. The company is in the retail trade and operates supermarkets in the four major towns of Malawi. The company prepares its financial statements to 30 June each year. The following are the financial results for the year ended 30 June 2012: Note Turnover 100,150,000 Cost of sales 1 (57,800,000) Gross profit 42,350,000 Less expenditure: Marketing costs 2 16,800,500 Administration costs 3 22,100,000 Finance costs 4 5,500,100 (44,400,600) Loss from trading activities (2,050,600) Other income Profit on disposal of assets 65,700 Rental income 860,500 Dividend received 175,800 Sundry income ( taxable) 18,250 1,120,250 Loss before taxation (930,350) The following additional information is available in connection with these financial results: 1. Cost of sales Opening stock 18,400,500 Purchases 64,100,000 Closing stock (32,525,500) 49,975,000 Stock pilferage 1,415,000 Provision for stock losses (1% of purchases) 6,410,000 57,800, Marketing costs include the following: Bill board advertising 650,000 Salaries and wages 6,500,000 Motor vehicle expenses 2,568,900 Traffic fines 155,500 Customer entertainment 387,500 Depreciation 895, Administration costs include the following: Salaries and wages 14,500,000 Depreciation 545,800 Donations to local chiefs 85,000 Donations to Save the Children Fund 185,000 Provision for indexation on severance pay balance 165,890 Subscription to Chamber of Commerce 175,000 Replacement of roof on rented premises 464,000 3 [P.T.O.

4 4. Finance costs include the following: Exchange loss on conversion of year-end balances 225,500 Interest on bank overdraft 58,800 Interest on late payment of taxes 98,000 The following additional information is also available: (i) (ii) The company has additional houses which it rents out. The rental received is shown in the income gross; however, withholding tax had been deducted by the tenants. The company made a payment of 456,000 to the pension fund. This represents an instalment of the amount which was accrued into the pension fund from severance pay provision. The company opted to pay the balance over an eight-year period. (iii) Included in salaries and wages charged to the various cost centres is fringe benefit valued at 475,100. The respective tax has been included in finance costs. (iv) The company has 185 employees who are all members of the pension scheme. The employees contribute 5% and the company 10% of basic salary towards the pension fund. (v) The employees salary information is as follows: 45 employees earned 62,222 each per annum 100 employees earned 85,000 each per annum 30 employees earned 90,000 each per annum and 10 employees earned 700,000 each per annum. The company s contribution has been charged to salaries and wages. The following information is available in connection with the company s assets: Asset Date of acquisition Original cost Delivery vans (3) 1 March ,500,100 Motor vehicles (saloons 4) 1 April ,250,000 Computers 31 May ,000 Plant and equipment 31 August ,450,000 Shop buildings 1 July ,550,000 Plant and equipment 15 August ,750,000 Computers 20 September ,000 Delivery vans (2) 5 January ,100,000 The plant and equipment represents refrigeration plant installed in the shops. All the above assets, except for motor vehicles, were new and unused at the date of acquisition. One motor vehicle, which cost 450,000 when bought and had a book value of 360,000 at the beginning of the financial year, was sold during the year at 425,000. Estimated profits for the year ended 30 June 2012 were 800,000. 4

5 Required: (a) Calculate the capital allowances to be claimed by Tapiko Limited for the year ended 30 June (13 marks) (b) State how income tax will be calculated on the income of Tapiko Limited for the year ended 30 June 2012 and state the rules to be followed in making provisional tax payments. (2 marks) (c) Calculate the taxable income for Tapiko Limited for the year ended 30 June (9 marks) (d) Calculate the tax payable by Tapiko Limited for the year to 30 June (2 marks) (e) On the basis of the results in (d) above, calculate the provisional tax which should have been payable by Tapiko Limited up to the quarter ended 30 June 2012, and the final tax payable or refundable for the year ended 30 June (4 marks) (30 marks) 5 [P.T.O.

6 2 Peter Mangochi is 70 years old and retired from employment as an architect on 30 November On 1 January 2012, he started a construction business which is called Lakeside Construction. This is a sole proprietorship. He has chosen 30 June as his year end. The following information is available in respect of his earnings and outgoings from employment for the five-month period from 1 July to 30 November 2011: Salary 560,000 Bonus 154,000 Leave pay 65,100 Company contribution to utilities 85,000 Encashment of leave not previously taken 145,900 Contribution to pension own contribution (28,000) Contribution to house rent (40,000) Use of company vehicle (fuel costs) Peter s private use (85,000) Professional subscriptions paid by Peter (75,000) The company provided housing to Peter. In this respect, they rented Peter s house at 40,000 per month from which they deducted withholding tax on payment. On his retirement, he sold his saloon car for 350,000 to provide a contribution towards a purchase of a 3 tonne lorry to be used in the business. The vehicle was one year old and cost Peter 285,500 when he bought it. On retirement, he opted not to commute his pension. He gets a monthly pension of 85,000 from which a tax of 6,500 is deducted. The pension payments were effected from 1 February The following are the results of Peter s construction business for the first six months of trading ended 30 June 2012: Turnover 5,100,000 Cost of sales (2,800,000) Gross profit 2,300,000 Less expenditure Salaries and wages 800,000 Depreciation 250,000 Motor vehicle expenses 65,000 Bank interest 74,750 1,189,750 Profit before taxation 1,110,250 Capital allowances were agreed at 475,500. The following is the other income earned by Peter for the year to 30 June 2012: Dividends received 65,000 Interest on savings account (gross) 110,000 Directors fees (net of 10% withholding tax) 90,000 Peter is married to Mercy. Mercy is not employed but she has income from rental of property. She has two properties in Makheta. The income and outgoings from the property for the year to 30 June 2012 is as follows: Property 1 Property 2 Rental 360,000 84,000 City rates 55,000 25,000 Repairs and maintenance 12,500 45,000 New driveway 32,000 0 Security 35,000 20,000 Withholding tax had been deducted from the rental from property 1 only. 6

7 Required: (a) Calculate the tax paid by Peter on his employment income for the year ended 30 June Note: You should indicate items not taxable or not deductible in your computation by the use of a zero. (6 marks) (b) Calculate the tax that would be payable by Peter on all of his income from various sources for the year to 30 June (17 marks) (c) State the consequences of Peter not having paid provisional tax on his business profits. (2 marks) (25 marks) 7 [P.T.O.

8 3 Maziko Limited is a cooking oil processing company located in Ndirande, and is registered for value added tax (VAT). Maziko Limited entered into the following transactions in the month of February 2012: 1. Sold taxable supplies to customers as follows: Sales to VAT registered customers 3,250,000 and 675,000 to unregistered customers. 2. Bought a brand new pick-up from Toyota at 3,250, Bought stationery worth 65,000 from suppliers who are not registered for VAT. 4. Entertained major customers at a local hotel at a cost of 246, Bought ground nuts from local farmers at a cost of 1,250, Paid for electricity and telephone at 32,140 and 44,100, respectively. 7. A consultant on production processes was hired from South Africa. The consultant has no local office; as a result he is not registered for VAT. He invoiced 1,650,000 for the work done. 8. Wrote off 175,800 in debtors as a bad debt. This amount was due from a customer who has been put into liquidation. 9. Received a deposit on sale to a customer amounting to 465,000. Unless specifically stated, all the above persons are registered for VAT. The transactions are stated exclusive of VAT. Required: (a) Explain the treatment of each of the above items for value added tax (VAT) purposes. Note: Calculations are not required in this part of the question. (8 marks) (b) Calculate the VAT payable or any excess carried forward for the period ending 29 February Note: Indicate items on which no VAT is due, or where no VAT claim is possible, by the use of a zero. (7 marks) (15 marks) 8

9 4 John Phiri is a successful farmer in Namwera, in Mangochi district. During the year to 30 June 2012, he entered into the following transactions in respect of his capital assets: 1 A house in Lilongwe, which he had bought in 1983 for 40,000, was transferred to his wife on 1 January On the date of the transfer, the house was valued at 15 million. 2 A house he owned in Blantyre was destroyed by fire during the year. The house is for rental purposes and was bought in 1994 for 1,000,000. Insurance settled for 17 million. On 1 May 2012, 15,500,000 of the insurance proceeds were used to purchase a similar house in the same locality. 3 On 1 January 2012, he sold 25,000 shares held in a listed company since The shares were sold at 8 20 per share. The shares were bought at 4 00 each. The market value on 30 June 2011 was 8 per share. 4 John bought vacant land in 1998, which he intended to turn into a poultry farm. The land was bought for 850,000. He decided against the idea of a poultry farm. He therefore sold the land on 14 March 2012 for 4,600, He sold tobacco baling equipment for 650,000. This equipment was bought for 950,000 in 2008 and the tax written down value at 1 July 2011 was 575,000. Conversion factors inflation conversion factor factor Required: (a) State how capital gains and losses are dealt with in arriving at taxable income, distinguishing between assets on which capital allowances have been claimed and those on which capital allowances have not been claimed. (2 marks) (b) Explain how items 1 to 5 will be dealt with in arriving at the capital gain or loss. Note: No computations are required in this part of the question. (4 marks) (c) Calculate the capital gain or loss and any balancing charge that will be included in the income of John Phiri for the year ending 30 June (9 marks) (15 marks) 9 [P.T.O.

10 5 Francis Gonthi is an engineer. He currently works for a local engineering firm, Jango Engineering Limited. He has, however, been approached by a rival firm to join them in a similar position. His current earnings from Jango Engineering are as follows: Salary 1,600,000 Children s school fees 500,000 Company car 2,500,000 Bonus (fixed) 100,000 The prospective employer has offered him the following package: Salary 1,400,000 Children s school fees 500,000 Car allowance 870,000 Utilities (electricity, telephone and water) 165,000 The following additional information is available: 1. In both cases, the company contributes 10% of basic salary towards the pension fund. The employee contributes 5% of salary. 2. The prospective employer will not provide a car but instead will give a car allowance for use of his personal car. 3. Both employers will provide free medical cover for him but he will contribute 50% for his dependants. 4. The current employer does not provide housing, instead a housing allowance of 50,000 per month is paid to him. The prospective employer will rent a house for him at a rental of 40,000 per month. 5. The current employer pays school fees for his children in the form of an allowance paid directly to him. On the other hand, the prospective employer will pay the fees directly to the school. Required: (a) Calculate the tax payable, net earnings and benefits under each employer, and advise Francis Gonthi on whether he should accept the offer from the prospective employer. (12 marks) (b) Calculate the fringe benefits tax payable by each employer. (3 marks) (15 marks) End of Question Paper 10