Fundamentals Level Skills Module, Paper F6 (LSO)

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2 Fundamentals Level Skills odule, Paper F6 (LSO) Taxation (Lesotho) Section A June 05 Answers and arking Scheme arks A (30,000 x 30%) = 93,000 C 3 D 4 B (5,500 x 3%)*0/30 = 55 5 A 6 C (55,000 40,000 4,500) x 4/4)) =,89 7 C (,800,000 {(550,000 x 35/0) + (35,000 x 35/40)}) =,867,560 8 B (,500 +,500) = 3,000 registration plus accommodation 9 B (90,000 0,000)*5% = 7,500 0 D D D 3 D (5,000 x 50%) + (5,000 x /3 x 8%) x 0 3/0 7 = 6,643 4 B (0,000 65,000) x 00% = 74,000 5 C (7, ,49) = 95,49 marks each 30 9

3 Section B arks Niki anufacturers Branch taxation (a) (i) Niki anufacturers qualifies to be a resident company because it undertakes the majority of its operations in Lesotho, though its head office is in China. (ii) The branch of a non-resident company is a separate person which is a resident company. The branch is subject to tax on its worldwide income. That is Lesotho source and foreign source income. (b) (i) Repatriated profits Income after tax: (,00,000*90%),080,000 (8,900*75%),675,0,675 Reinvested profits in Lesotho (,0,675*85%) (936,44) Repatriated profits 65,5 Tax payable on repatriated profits (65,5*5%) 4,33 4 Tutorial note: The company in this case has manufacturing income which is subject to 0% corporation tax, the income after tax represents 90% of the total income. There is also nonmanufacturing income in the form of interest which is subject to tax at the rate of 5%, income after tax is therefore 75% of total interest. (ii) Withholding taxes anagement fees (,500*5%) 3,5 Hire of equipment (8,000*0%),800 4,95 0 0

4 Chargeable gains: r Phuthi arks () Land Sale price 430,000 Adjusted cost base (ACB): hectares (6,000*46/0) 89,63 8 hectares (80,000*46/35) 94,667 (84,90) Chargeable gain 45,70 () Warehouse Sale price 70,000 ACB: Original cost (7,000*47/40) 8,350 Extension 4,600 (4,950) Chargeable gain 7,050 (3) Boreholes and windmills Sale price 80,900 ACB (38,800*48/4) (40,439) Chargeable gain 40,46 (4) Tractors and equipment Sale price 50,000 ACB (40,000) Chargeable income 70,000 (5) Livestock Sale price 40,000 ACB (0,000) Chargeable income 30,000 Total chargeable gains 63, Excluded items: Residential house This is a private asset. Neither a gain nor a loss is recognised on the disposal of private assets. Cost of maintenance and repairs for boreholes and windmills This is revenue expenditure Tutorial notes: The adjusted cost base (ACB) of the asset acquired in a non-arm s length transaction (otherwise than by way of gift) is the market value of the asset at the date of acquisition. Where the asset is disposed of is an investment asset held by the taxpayer for more than months, the ACB of the asset should be indexed for inflation. 0

5 arks 3 (a) VAT payable for the month of April 05 Output VAT Sales revenue (55,900*4/4) 6,865 Bad debt recovered (5,500*4/4) 675 Credit note for returned stock (6,00*4/4) 76 8,30 Input VAT Rent (4,500/3*4/4) 84 Sundry expenses (5,400*4/4) 3,9 3,303 VAT payable (8,30 3,303) 4,998 6 Tutorial note: Credit note received or debit note issued are to be reflected as output tax on the VAT return. The liability arises in the tax period when the event giving rise to the adjustment takes place and must be shown on the tax return for that month as in the case of LFW above. (b) Input VAT on bad debt written off (,500*4/4),535. LFW was entitled to a credit during any tax period from September 04. Tutorial note: The credit arises on the later of: The date on which the bad debt was written off in the accounts of the vendor. months after the end of the tax period in which the VAT was paid in respect of the supply. September 04 is the later period when a bad debt was written off in the books of LFW. (c) An operating lease agreement represents periodic payments for which the supply is treated as being on a continuous basis. Each successive supply occurs at the earlier of payment being received or when payment becomes due. 0 4 Eric Fringe benefits tax (FBT) (a) FBT payable by BCE Housing fringe benefit ((4,000,500)*9),500 Car fringe benefit ((5,000*5%)*9/) 5,33 edical expenses fringe benefit (exempt) 0 Utilities fringe benefit (,000*9) 8,000 Excessive superannuation fund fringe benefit (W) 8,00 Taxable values 73,93 Taxable amount (73,93/0 70) 05,590 FBT (05,590*30%) 3,677 Workings: Excessive superannuation fund fringe benefit Ceiling (65,500*9*0%) 7,900 Employee contributions (4,600*9) (4,400) aximum allowable to employer 76,500 Employer contributions (9,400*9) (84,600) Excessive superannuation fund contributions 8,00 7

6 arks (b) BCE should file a fringe benefit tax return within 4 days after the end of every quarter. (c) If BCE were a public international organisation (PIO), it would be exempt from FBT of 3,677. All taxable fringe benefits amounting to 73,93 paid to Eric by BCE would constitute part of his employment income. Eric would be liable to additional tax of,74 (73,93*30%). 0 5 Kumdah Long-term contract (a) Tax payable for years ended 3 arch: Chargeable income: (800,000*74%) 59,000 W (800,000*6%) 08,000 W Tax payable at 30% 77,600 6,400 Less: Withholding tax (95,000) (65,000) Net tax payable/(refundable) 8,600 (,600) Workings: Chargeable income = (estimated profit) * (percentage of contract completed) Estimated profit = (total contract price total costs) (,600, ,000) 800,000 Percentage of contract completed = Year ended 3 arch 04 Year ended 3 arch 05 Contract costs incurred Total contract costs 590, ,000 0, ,000 74% 6% 6 (b) (i) The advantage of being an electing non-resident is that when a taxpayer files an income tax return, the taxpayer has an advantage to claim all the tax deductible expenses in computing chargeable income. (ii) It was advantageous for Kumdah to be an electing non-resident because the net amount of tax he paid for this contract amounted to 80,000, (8,600,600)). If he had not elected to be taxed by assessment, the tax withheld at source of 60,000 (95, ,000) would have been a final tax. This means there is a tax saving of 80,000 (60,000 80,000). 3 (c) A South African citizen, as a non-resident taxpayer, will set off the loss against Lesotho s profits in the first year of the project provided that the loss cannot be carried forward, as there will be no relevant income in the subsequent year(s). 3 This can occur when the project is a one-off deal in Lesotho. The taxpayer has to convince the Commissioner that he cannot obtain the benefit of the loss for tax purposes in other jurisdictions

7 6 JJ otor Spares Pty Ltd (JJ) arks (a) (b) (c) Income tax instalments Tax payable 96,700 Less: Withholding taxes (3,00) ACT: no adjustment required 93,600 Each instalment (93,600*30%) 8,080 Total instalments (8,080*3) 84,40 Advance corporation tax (ACT) payable Dividends paid out of unqualified income 54,600 ACT (54,600*5/75) 8,00 To be set off against the first instalment of 8,080. Payable on 30 ay 04. Therefore no ACT payable by JJ. Tax payable Profit before tax 343,000 Add: Disallowed expenses Renewal of trader s licence 0 Penalty for late renewal of trader s licence 450 Capital expenditure cost 500 Audit fees 0 Insurance premium payable to: Non-resident insurer 4,00 Resident insurer 0 Extension costs 44,000 inor repairs 0 unicipality rates paid in advance 85 39,35 Less: Profit on disposal of motor vehicle (30,000) Lesotho source dividends (4,300) Foreign source dividends 0 Rental income received in advance (4,050) Add: Tax profit on disposal of motor vehicle (65,000 0,000) 45,000 Chargeable income 388,885 Tax payable (388,885 at 5%) 97, Less: Foreign tax credit (8,300*5%) (,075) Income tax instalments (8,080*3) (84,40) Net tax payable 0,906 5 Tutorial note: The full amount of instalments is credited against the income tax liability regardless of whether the income tax liability for ACT has been set off against the instalment. 4