Fundamentals Level Skills Module, Paper F6 (LSO)

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2 Fundamentals Level Skills odule, Paper F6 (LSO) Taxation (Lesotho) r Chauke December 202 Answers and arking Scheme arks (a) Tax payable for the year ended arch 202 Basic salary 650,000 otor car allowances (5,400*2) 64,800 Education allowance (5,500*2),000 Entertainment allowance 2,600 Dividends received (exempt) 0 Award 2,00 Gross income 740,700 Less: allowable expenses Superannuation contributions 9,600 embership fee 2,600 Trade and management journals 4,800 Gift (disallowed) 0 (77,000) Chargeable income 66,700 Tax payable 40,68*22% 8,88 62,2*5% 28,66 227,047 Less: personal tax credit (5,000) Net tax payable 222,047 9 (c) Allowable superannuation fund contributions to LKZ 20% of employment income (740,700 2,00*20%) 47,680 Less: employee contributions (9,600) aximum allowable deduction 08,080 2 If LKZ Business Consultants Ltd (LKZ) were a tax exempt employer, the excess contributions (which would not be allowed as a deduction to LKZ because of the application of 20% ceiling) would constitute an excessive superannuation contributions fringe benefit. Fringe benefit tax payable aximum allowable deduction as in above 08,080 LKZ contributions (9,00*2),600 Excess contributions,520 FBT (,520/0 65*5%)),895

3 (d) (e) arks Fringe benefits tax payable Housing fringe benefit (8,500*2) 02,000 Loan fringe benefit (Working) 26,776 Debt waiver fringe benefit (27,900*50%),950 Utilities fringe benefit 5,800 Domestic assistance fringe benefit 4,700 Taxable values 5,226 Taxable amount (5,226/0 65) 25,72 Fringe benefits tax (25,72*5%) 82,506 Working Taxable value for loan fringe benefit (420,000* 2 / *6%) (420,000*5%) 2,800 2 (27,900* 2 / *6%) 2,976 26,776 8 A gift is not exempt from income tax if one of the following conditions prevail: Income is derived from the property which is the subject of the gift. The gift is itself income. The gift is made by an employer to an employee Ponto anufacturers (Pty) Ltd (a) The Lesotho Revenue Authority (LRA) is justified because, according to the Income Tax Act, when a resident company, not principally engaged in money lending transactions, has a debt to equity ratio in excess of :, the Commissioner may disallow interest payable on that part of the excess. As it stands, Ponto has debt to equity ratio in excess of :. Working : Disallowed interest in excess of debt to equity ratio of : Excess debt 00,000 Disallowed interest (00,000/250,000*62,500) 25,000 5 Tutorial note: If equity is 50,000, debt should be 50,000 (50,000*). Excess debt is therefore 00,000. Interest attributable to excess debt is 25,000. A loan made by a company to a shareholder which, in substance, is a distribution is treated as a disguised dividend. Ponto will therefore be liable for advance corporation tax (ACT) on the amount of 75,000. ACT 75,000 * 25/75 25,000 4

4 (c) arks Corporation tax payable Business Property income income Trading income: Local (478,800*00/4) 420,000 Exports (70, ,49) 805,99 Interest: Foreign (8, ,800) 26,000 Local (5,200*00/90) 9, Foreign dividends 25,00 Gain from disposal of immovable property (W) 7,75 Profit from disposal of business asset (W2) 68,428 Gross income,294,42 97,86 Less: allowable deductions Operating expenses (W) (657,7) 0 Chargeable income 67,284 97,86 Tax payable anufacturing income at 0% 6,728 Non-manufacturing income at 25% 24,46 88,074 Less: foreign tax credit (W4) (8,625) Local withholding tax (,9) ACT (as in above) (25,000) Tax overpayment 22,462 Workings:. Gain from disposal of immovable property Proceeds 8,750 Adjusted cost base (ACB) (8,500*20/25) (,575) Chargeable gain 7,75 2. Profit from disposal of business asset 0 November 200 cost 96,500 Depreciation (25%) (0/2) (20,04) 0 Sept 20 ACB 76,96 Year ended 0 September 202: Depreciation to July 202 (25%) (9/2) (4,24) ACB 62,072 Proceeds (0,500) Profit 68,428. Operating expenses Total cost incurred 70,00 Less: disallowed expenses: Non-compliance fees 4,700 Cost of new equipment 44,200 Interest payable (as in (a) above) 25,000 (7,900) 656,400 Add depreciation on new equipment (20%) (/2) ,7 5

5 arks 4. Foreign tax credit Average Lesotho tax rate 88,074/74,670 = 2% Foreign Amount Foreign Lesotho Credit income tax paid tax available Exports 805,99 75,49 96,79 75,49 Interest 26,000 7,800,20,20 Dividends 25,00,765,02,02 8, icky Ltd (a) Value added tax (VAT) payable Input VAT Purchases Supplies taxed at 5% (2,00*5/5) 00 Supplies taxed at 4% (8,500*4/4) 2,27 Supplies taxed at 0% (4,400 zero rated) 0 Equipment (8,500*4/4),044 Repairs (excluded non-vendor) 0 Accounting fees (400*4/4) 49 Bank charges (exempt) 0 Utilities (4,200*5/05) 200 iscellaneous expenses (6,500*4/4) 798 4,662 Output VAT Restaurant takings ((64, )*4/4) 8,029 Rentals: BBC Furnitures (5,400*4/4) 66 Honju anufactures (exempt) 0 8,692 VAT payable (8,692 4,662) 4,00 2 If the invoice accounting method is used, output VAT may be due to be paid over to the Lesotho Revenue Authority before the customer has paid the invoice, thus adversely affecting cash flow. The cash accounting method allows output VAT to be accounted for based on actual cash receipts for the tax period instead of amounts invoiced. However, using the cash accounting method means that input VAT can only be claimed according to the tax period in which the business has paid its suppliers, rather than in which invoices are received from suppliers. 5 4 Boitumelo Trust (a) Notional chargeable income Lesotho Foreign Total source source Trading income 240,000 20,200 60,200 Gross income 240,000 20,200 60,200 Less: expenses (85,000) (60,400) (45,400) Loss brought forward (45,000) (45,000) 0,000 60,400 90,400 Notional chargeable income 0,000 59,800 69,800 6

6 (c) arks Tax payable by beneficiary and trustee Beneficiary Trustee Share of trust income: Lesotho source (0%),000 (70%) 77,000 2 Foreign source (0%) 7,940 (70%) 4,860 2 Gross income 50,940 8,860 Tax payable at marginal rates 40,68*22% 8,88 0,572*5%,700 2,58 Less: personal tax credit (5,000) 7,58 Tax payable at 5% 4,60 8 The trustee is chargeable to tax on the trust foreign source income when any one of the following conditions is satisfied: Where the grantor was a resident of Lesotho at the time of making a transfer to the trustee..5 Where the grantor was a resident of Lesotho in the relevant year of assessment..5 Where a resident person may ultimately benefit from the income (a) Source of income (i) Lesotho source (ii) Lesotho source (iii) Lesotho source (iv) Foreign source (v) Lesotho source (vi) Foreign source 6 Cargo Ltd (i) Withholding tax payable and exempt amount(s) from withholding tax () Lease rentals (40,000*0%) 4,000 (2) Patent fees (25,000*0%) 2,500 () Dividends (exempt) 0 (4) Transportation costs (5,000*0%),500 (5) anagement fees (2,500*25%),25 5 Tutorial note: A standard rate of 25% is applicable on international transactions except where the following prevail: There is a double tax treaty entered into with the government of Lesotho. In the case between Lesotho and South Africa, a lower tax rate of 0% is applicable. Royalties paid in respect of rights to use the actual manufacturing technology, a lower rate of 0% is applicable. Dividends are paid out of manufacturing income, no withholding tax payable. 7

7 (ii) (iii) arks Tax payable by Woodmasters Ltd (electing non-resident) Income: Lease rentals 40,000 Transportation fees 5,000 Gross income 75,000 Expenses: aintenance and service 6,500 Transportation 5,000 (,500) Chargeable income 4,500 Tax payable (4,500*5%) 5,225 Tax payable by withholding (4,000 +,500) 7,500 Tax payable by assessment 5,225 As it stands, paying tax through the withholding tax system is the most cost efficient option for Woodmasters Ltd. 5 8