Fundamentals Level Skills Module, Paper F6 (MLA) Tax liability for the year of assessment Aldo Maria Greco Greco

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2 Fundamentals Level Skills Module, Paper F6 (MLA) Taxation (Malta) 1 (a) Aldo and Maria Greco June 21 Answers and Marking Scheme Marks Tax liability for the year of assessment 21. Aldo Maria Greco Greco Aldo business profits Turnover (exclusive of VAT) 35, 5 Motor vehicle wear & tear allowance ( 7, x 2%) (1,4) Fuel (inclusive of irrecoverable VAT) (944) Motor vehicle maintenance (inclusive of irrecoverable VAT) (354) Office stationery (exclusive of recoverable VAT) (2) 32,12 Maria Employment income Gross salary 22, 5 Disturbance allowance 2,4 5 Car cash allowance ( 2,4 less 5% exempt (maximum 1,17 exempt)) 1, Childcare allowance (exempt) Use of mobile phone (exempt) Bond interest Sportelli SpA remitted to Malta 8 Bond interest Sportelli SpA not remitted to Malta Proceeds on sale of Sportelli SpA bonds (tax exempt bonds are not securities ) Dividend from Caracalla SpA 12, Dividend from Maltese taxed account of Spikes Ltd ( 4,875/ 65) 7,5 Loss on sale of shares in Spikes Ltd (disallowed as gain would have been exempt) Dividend from final tax account of Promo Ltd Gain on sale of shares in Promo Ltd ( 28, (3, x ( 35,/4,))) 1,75 Rental income Gross rent 8, 5 Further deduction on rental income ( 8, x 2%) (1,6) 5 Bank interest ( 1, x 8% = 8,) limited to (6,4) 54,152 25,63 Tax payable Separate computation Aldo Greco to 8,5 x % 8,51 to 14,5 x 15% 9 14,51 to 19,5 x 25% 1,25 19,51 to 54,152 x 35% 12,128 Tax chargeable 14,278 Credit for tax at source on dividend from Spikes Limited (2,625) Tax payable 11,653 Maria Greco to 8,5 x % 8,51 to 14,5 x 15% 9 14,51 to 19,5 x 25% 1,25 19,51 to 25,63 x 35% 2,145 Tax chargeable and payable 4,295 Total tax payable separate computation ( 11, ,295) 15,

3 Marks (b) (i) Since David s full time activity is that of a self employed tile layer, he cannot benefit from the part time rules on his part time employment as a kitchen hand. The part time rules only apply to persons who, apart from income from part time activities, derive income from a full time employment registered as such with the Employment and Training Corporation or from a pension. 2 (ii) Marika cannot benefit from the part time rules on the director s fee because directors fees are specifically excluded from qualifying as a part time activity under the Part Time Rules. (iii) Philip qualifies under the part time work rules because he derives his main income from a pension and carries out his part time employment for fewer than 3 hours a week. 2 However, the beneficial tax rate of 15% can only be applied on the first 7, that he earns from his part time activity and he has to declare the remaining 3, in his income tax return and be taxed thereon at his marginal rates of tax. 3 (iv) Sandra cannot apply the part time work rules to her part time business income since one of the rules relating to part time self employment income is that the person does not engage employees in such part time activity. Since Sandra employs two junior sales persons, the income from her part time business activity is taxable under the normal income tax rules. 2 Total mark 3 2 (a) Omega Ltd (i) (ii) Tax payable and allocation to tax accounts Maltese Final taxed tax Untaxed Distributable account account account profits Profit as per accounts 78,1 78,1 5 Adjustments Add General provision for doubtful debts 2, (2,) Add Specific provision for doubtful debt 9 (9) Deduct Unrealised exchange gain ( 7,2/ 8) ( 7,2/ 9) (1,) 1, No adjustment for realised exchange gain 5 Interest on Malta government stock 1, 1, Chargeable income/distributable profits 8, 1, (1,9) 79,1 Tax chargeable (28,) (15) (28,15) Allocation to taxed accounts 52, 85 (1,9) 5, Tax payable On income allocated to the Maltese taxed account 28, On income allocated to the final tax account 15 28,15 Credit for tax at source on interest income on Malta Government stock (15) 5 Tax payable 28, 8 Tax refunds available to non resident shareholders Distributable profits (78,1 + 1, 28,15) 5,95 5 Amount to be distributed to shareholders (5%) 25,475 5 Distributed in the following order: From the final tax account 85 5 From the Maltese taxed account 24,625 5 Tax attached to the dividend distributed from the Maltese taxed account ( 24,625/ 65 x 35) 13,26 Tax refund available to the non resident shareholders ( 13,26 x 6/7) 11,

4 (b) Consolidated Limited Tax payable and allocation to tax accounts Marks Final Foreign Immovable tax income property Untaxed account account account account Stains Ltd dividend 6,5 5 Turcos Ltd net dividend 9,5 5 Grossing up for flat rate foreign tax credit (25%) 2,375 (2,375) 5 Melita Ltd gross dividend 2, 5 Palms Ltd dividend 9, 5 Less FTA and UA dividends that do not form part of chargeable income (6,5) (9,) Chargeable income 11,875 2, (2,375) Flat rate foreign tax credit (2,375) 2,375 5 Malta tax payable before tax at source (1,781) (7,) Allocation to taxed accounts 7,719 13, Allocation to taxed accounts of dividends from Stains Ltd and Palms Ltd 6,5 9, 5 Total allocations to taxed accounts 6,5 7,719 13, 9, 2 Tax payable On income allocated to the foreign income account 1,781 On income allocated to the immovable property account 7, 8,781 Credit for tax at source on dividend received from Melita Ltd (7,) 5 1,781 8 (c) Goliath Ltd Allocation of profits to the tax accounts Maltese Immovable taxed property Untaxed Distributable account account account profits Business profits 72, 72, 5 Rental income 8, 8, 5 2% further deduction on rental income (1,6) 1,6 Chargeable income/distributable profits 72, 6,4 1,6 8, Tax chargeable (25,2) (2,24) (27,44) 5 Primary allocation to taxed accounts 46,8 4,16 1,6 52,56 5 Allocation to IPA re property rented from parent company (12m 2 x 6) 4,8 (2,4) 2,4 5 Allocation to IPA re property owned and used for its business (75m 2 x 6) (4,5) 4,5 5 Final allocation to taxed accounts 39, 11,6 1,6 52,56 5 Total mark 25 17

5 3 (a) Mr Paul Ellul Marks Tax payable on sale of penthouse in Valletta The tax exemption on the transfer of one s own residence will not apply to this transfer as Mr Ellul would not, at the time of sale in 21, have occupied the penthouse for more than three years, having only moved into it in September Since the property was bought less than five years before its expected selling date, the tax rules allow Mr Ellul to choose between two options of taxation, either at 35% of the capital gain or at 12% of the transfer value. The tax chargeable under these two options is the following: Option 1 Tax at 35% of the chargeable gain Selling price 11, 5 Original cost of the property in 26 (8,) 5 Inflation allowance: 8, x [( )/684 88] (8,775) Maintenance allowance: 8, x 4% x 4 years (1,28) (9,55) Improvements to the property in 27 (2,) 5 Inflation allowance on improvements: 2, x [( /73 88)] (1,595) Maintenance allowance: 2, x 4% x 3 years (24) (21,835) Theoretical capital loss (1,89) The Capital Gains Rules restrict the deduction for inflation to the selling price less the cost of acquisition and improvements less the other allowable deductions. In this transaction, the deduction for inflation shall be restricted as follows: Selling price 11, Cost of acquisition and improvements (1,) Other allowable deductions maintenance allowances ( 1, ) (1,52) Inflation allowance restricted to: (8,48) Capital gain/loss As a result of this restriction, this transaction will result in no gain or loss for income tax purposes. Option 2 Tax at 12% of transfer value Selling price and transfer value 11, 5 Tax at 12% of transfer value 13,2 5 Since under option 1 no tax is payable whilst tax amounting to 13,2 is payable under option 2, Mr Ellul should choose option 1. 5 Tax payable on sale of terraced house in Sliema This property was bought less than five years before its expected selling date. Thus, the tax rules allow the seller to choose between two options of taxation, either at 35% of the gain or at 12% of the transfer value. The tax under these two options is the following: Option 1 Tax at 35% of the chargeable gain Selling price 13, 5 Purchase price as per deed of acquisition (1,) 5 Notarial and agent s fees (2,5) 5 Cost of acquisition (12,5) Inflation allowance: 12,5 x [( )/684 88] (11,243) Maintenance allowance: 1, x 4% x 4 years (1,6) (115,343) 14,657 Brokerage fees limited to 5% of selling price (6,5) Chargeable capital gain 8,157 Tax charge at 35% 2,

6 Marks Option 2 Tax at 12% of transfer value less brokerage fees Selling price 13, 5 Brokerage fees (7,) Transfer value 123, Tax at 12% of transfer value 14,76 5 Since under option 1 the tax payable is 2,855 and under option 2 the tax payable is 14,76, Mr Ellul should choose option 1. 5 Tax payable on sale of apartment in Birgu Since the apartment was donated to Mr Ellul by his father more than five years before the expected date of sale, tax is computed at 12% of the difference between the transfer value and the acquisition value, as follows: Transfer value 65, 5 Acquisition value (4,) 25, Tax at 12% of difference between transfer value and acquisition value 3, 5 18 (b) The date by when tax on the transfer of immovable property is payable is as follows: (1) With respect to property transfers upon which tax is payable either at 12% or 7% of the transfer value or 12% of the difference between the transfer value and the value assigned to the property at the time of donation/causa mortis transmission, tax is payable by the transferor and is to be remitted to the Commissioner by the notary publishing the deed within 15 working days of the relative transfer. (2) With respect to property transfers upon which tax is not chargeable in terms of the provisions referred to above, provisional tax amounting to 7% of the consideration relating to the transfer or the value of the donation is payable by the transferor and remitted to the Commissioner by the notary publishing the deed within 15 days of the relative transfer. Any excess of the tax properly chargeable on the transfer over the provisional tax paid as above is payable by the transferor on the tax settlement date. 2 Total mark 2 4 (a) April Ltd group of companies Group tax computation April Ltd May Ltd May Ltd May Ltd June Ltd June Ltd Maltese Immovable taxed Maltese Maltese property account taxed taxed Final tax Foreign account (Capital account account account income gain/loss) (Wholesale) (Restaurant) account Accounting profit/(loss) 5, (4,) 3, (6,) 2, (3,) Depreciation 1, 2, 3, 5 6, (4,) 5, (3,) 2, (3,) Wear and tear allowances (1,5) (2,5) (2,4) 5 4,5 (4,) 2,5 (5,4) 2, (3,) Intra company loss set-off (2,5) 2,5 4,5 (4,) (2,9) 2, (3,) Loss surrender/claim (5) 5 Chargeable income 4, 2, Tax charge (35%/15%) (1,4) (3) Capital loss carried forward (4,) 5 Wear and tear allowances carried forward (2,4) Trading loss carried forward (3,)

7 Marks (b) (i) Wear and tear allowances Wear and tear allowances are allowable on assets that are used in the production of income. If the wear and tear allowances in a particular year exceed the income from the source of income in respect of which they are allowable, the excess must be carried forward to be added to the following year s wear and tear allowances that can be deducted from profits generated from that same source of income. Wear and tear allowances cannot be deducted against other sources of income and cannot be surrendered to group companies. 2 (ii) Trading loss (foreign income account) A trading loss which, had it been a profit, would have been allocated to the foreign income account can be deducted from income or capital gains of the same company that are allocated to the foreign income account, the immovable property account and the Maltese taxed account. If no such other income exists in the same year of assessment it can be carried forward to be deducted from income allocated to these same three accounts in subsequent years. It can also be surrendered to group companies to be deducted against such other companies income that stands to be allocated to their foreign income account. 2 (iii) Capital loss (immovable property account) A capital loss which, had it been a gain, would have been allocated to the immovable property account can be deducted from capital gains of the same company that are allocated to the foreign income account, the immovable property account and the Maltese taxed account. If no such other capital gains exist in the same year of assessment it can be carried forward to be deducted from capital gains allocated to these same three accounts in subsequent years. A capital loss cannot be set off against trading profits of the same company and cannot be surrendered to group companies. 2 (iv) Loss (final tax account) A loss which, had it been a profit, would have been allocated to the final tax account is specifically excluded from the definition of loss contained in article 14 (1) (g) of the Income Tax Act. Thus such a loss cannot be deducted against other income from other sources chargeable to tax in the same year, cannot be carried forward to be deducted against income of subsequent years and cannot be surrendered to group companies. 2 Total mark 15 5 Value added tax (VAT) on supplies of goods or services 1. The supply of office furniture to a foreign banking institution in connection with the refurbishment of its Malta office is subject to VAT at the standard rate of 18%. The supplier is entitled to claim input tax on any related purchases. 2. The renting of office premises by an individual to a law firm is an exempt without credit supply. The individual will not charge VAT and cannot claim input tax on any related purchases. 3. The provision of accommodation services in licensed holiday premises by an individual is subject to VAT at the reduced rate of 5%. The individual is entitled to claim input tax on any related purchases. 4. The renting of a showroom by a company to a car dealer is subject to VAT at the standard rate of 18%. The supplier is entitled to claim input tax on any related purchases. 5. The charging of fees by a commercial bank to a person established in Malta for the execution of payment instructions is an exempt without credit supply. The bank will not charge VAT and cannot claim input tax on any related purchases. 6. The supply of welfare services by a government institution in a home for the elderly is an exempt without credit supply. Thus the government institution will not charge VAT and cannot claim input tax on any related purchases. 7. The supply of services by a scheduled bus service is an exempt with credit supply. No VAT is chargeable on the provision of the service but the service provider is entitled to claim input tax on any related purchases. 8. The admission of visitors to a museum is subject to VAT at the reduced rate of 5%. The operator of the museum is entitled to claim input tax on any related purchases. 9. The international transport of passengers is an exempt with credit supply of services. No VAT is chargeable on the provision of the service but the service provider is entitled to claim input tax on any related purchases. 1. The supply of insurance services by a duly licensed person is an exempt without credit supply. The insurance company will not charge VAT and cannot claim input tax on any related purchases. Total mark 1 2