Paper F6 (MWI) Taxation (Malawi) Monday 1 June Fundamentals Level Skills Module. Time allowed

Transcription

1 Fundamentals Level Skills Module Taxation (Malawi) Monday 1 June 2009 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 need only be made to the nearest. 2. All apportionments should be made to the nearest 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 Income tax rates: Individuals Cumulative 72, , , ,000 15% 5, , % Company rates Locally incorporated 30% Externally incorporated 35% 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 Segio Transport (The Company) is a company in Malawi which is involved in the trucking business and in addition it operates buses and luxury coaches around the country. The Company prepares its accounts to 31 December each year. The following are the results for its most recent financial year ending 31 December Income statement for the year ended 31 December 2008 Turnover 113,100,100 Cost of sales (69,556,895) Gross Profit 43,543,205 Other operating expenses Management expenses 10,876,500 Financing expenses 12,566,900 Marketing expenses 8,225,100 Exchange losses 5,498,700 37,167,200 Operating profit 6,376,005 Other Income Interest receivable 235,590 Profit on sale of assets 456,567 Sundry income 95, ,957 Profit before taxation 7,163,962 The Company owned most of its assets, however, during the year it sold most of its plant and leased it back under a sale and lease back transaction it entered with the National Bank of Malawi. Further, it bought new vehicles for its general manager and finance manager under an operating lease. The following information is available in connection with these financial statements: (1) Cost of sales includes: Depreciation 1,657,000 Wages and salaries 4,510,000 Severance pay provision on employees in service 869,000 Severance pay on employees who left 765,978 Uniforms and staff meals 456,890 Provision for spare parts losses 125,000 Fines traffic 65,000 3 [P.T.O.

4 (2) Management expenses include: Audit fees 450,000 Fringe benefits tax 135,890 Insurance 456,097 Depreciation on motor vehicles 456,890 Depreciation on equipment 63,500 Legal fees debt collection 35,000 Subscription and donations: Malawi Chamber of Commerce and industry 45,000 Save the Children Fund 200 Chisomo children s village 345,000 Newspapers 24,550 Salaries and wages 4,559,560 Gratuities provisions 586,000 Pension costs 456,000 Rentals 2,567,900 The Company employs the general manager and finance manager and the marketing manager on contract. There are another 10 senior members of staff who are employed on pensionable terms. The remainder of the staff are drivers and mechanics and are on non-pensionable terms. (3) Finance expenses Penalties for late payment of PAYE 65,800 Arrangement fee for overdraft 345,890 Lease charges for operating lease 2,829,500 Loss on restating year end debtor balances in accordance with IAS provisions 65,900 Write off of debtors balances 456,100 (5) Marketing expenses Billboards 65,000 Newspaper advertising 125,000 Donations to Chigwirizano Church 45,000 Gifts of spare parts to local garage 314,500 (6) Exchange losses Losses on payment for spare parts 2,584,698 Losses on conversion of year end balances 2,914,002 5,498,700 (7) Interest receivable is made of Overdue accounts 65,900 Bank interest 169, ,590 The interest is stated gross before deduction of any withholding tax payable (8) Sundry income is all from sale of used tyres (9) The tax written down values of the Company s plant and equipment as at 1 January 2008 were: Trucks 7,458,900 Buses 4,500,000 Computers 450,000 Furniture and fittings 235,000 Office equipment 165,000 Motor vehicles 2,500,000 4

5 (10) During the year the Company entered into the following transactions in connection with property, plant and equipment. Sold five trucks on a sale and lease back arrangement. The trucks had a tax written down value of 5,650,000. They were sold for 8 million wacha. These are now being leased back at a monthly charge of 235,000. Bought two second-hand coaches at a price of 18,000,000. Entered into operating leases on two saloon cars for use by the general manager and the finance manager. Each vehicle cost 2,300,500. (11) The Company decided to do its own manufacturing of the spares for its buses and trucks, which were subcontracted to a third party before. As a result of this, it built and brought into use its own building at a cost of 6,500,000, and in addition bought second-hand machinery to be used in the garage at a cost of 675,000. (12) The Company paid provisional tax during the year as follows: Quarter ending 31 March ,000 Quarter ending 30 June ,000 Quarter ending 30 September ,000 (13) Unrelieved tax losses from the previous year were: On trading operations 125,650 Capital losses were 65,000 (on assets on which capital allowances were not claimed) (a) Calculate the capital allowances to be claimed by the Company for the year ended 31 December (18 marks) Compute the profits on which the Company will be subject to taxation for the year ended 31 December (10 marks) (c) Calculate the tax payable by the Company for the year ended 31 December (2 marks) (30 marks) 5 [P.T.O.

6 2 Pilirani Maseko is a businessman involved in the produce business. The business is unincorporated and operates under the name of Nzeru Zache Produce. He contracts Zeni Zeni Associates to prepare his accounts each year. For the year to 30 June 2008, his taxable profits have been worked out at 1,258,100. Pilirani is not involved full time in the business as he is employed as an agricultural extension officer at Mizere Research Station. The business is being run full time by his brother Paul. Pilirani is married to Namabecha, who works as a duty manager at a local hotel. The following information is available in connection with their earnings for the year ended 30 June Pilirani Namabecha Income from employment Salary 865, ,000 Housing allowance 120,000 Other income Directors fees 120,000 Dividends from National Bank 15,500 Interest on call accounts NBS Bank 32,000 6,500 Rental Chirimba house 200,000 Proceeds from sale of shares 200,000 The following were their outgoings for the year Rented Property: Chirimba House Repairs to the house 35,000 City rates 22,500 Extension to the kitchen 10,000 Mortgage payments (of which 60% is interest) 80,000 Other outgoings: Professional subscription 35,000 8,500 Tithe to local church 9,500 Rents and interest received are stated gross, but withholding tax had been deducted on payment where appropriate. PAYE was deducted from the salaries paid to Pilirani and Nabecha during the year and paid over to the Malawi Revenue Authority. Pilirani held 10,000 shares in New Era Limited, an unlisted company. These shares were bought in 2005 at 10 per share. All these shares were sold during the year. The inflation conversion factor applicable to the year 2005 was On review of the financial statements prepared for Nzeru Zache Produce, it was found that sales had been accounted for which related to a transaction of produce worth 500,000, shipments of which had not been made by year end. The stock was still in the warehouse at the year end. The value of this stock is 60% of the sales value. Further, the business being of a seasonal nature, it was agreed with the commissioner of taxes to pay provisional tax of 75,000 by 31 March However, by the end of the year only 50,000 had been paid. (a) Calculate the tax to be paid by Pilirani and Namabecha for the year ended 30 June 2008 on the assumption that they have elected to file a joint return. (20 marks) State the provisional tax requirements and how these will be dealt with on the basis that Pilirani has seasonal income from his business. State any penalties for non-payment of this tax. Note: you are not required to do any calculations in part. (5 marks) (25 marks) 6

7 3 (a) Pirimiti Limited is involved in wholesale business. The company is registered for value added tax (VAT). In the month of December 2008, the company entered into the following transactions (where applicable, all income is shown exclusive of VAT and all expenses are shown inclusive of VAT): (1) Sold soap worth 265,000 to Tiligu Investments. (2) Sold tyres to Matayo Phiri worth 165,000. (3) Sold clothing worth 125,000 to Tiligu Investments. (4) The managing director travelled to Lilongwe on business where he stayed at Lilongwe Hotel. He paid 15,962 for accommodation and meals. (5) The amount paid for electricity used in his business was 6,509. (6) Paid salaries for the month totalling 125,000. (7) Bought motor vehicle spares worth 65,000. (8) Paid for fuel for use in company motor vehicles for the month worth 50,000. (i) State how each of these transactions will be dealt with for the purpose of submitting Pirimiti Limited s VAT return for the month of December (4 marks) (ii) Calculate the VAT payable or VAT credit for the month of December (3 marks) (c) State, in general terms, the rules regarding the deductibility of input tax from output tax charged on taxable supplies and services and how any excess input tax is dealt with. (4 marks) State what the implications would be if Pirimiti Limited did not register for VAT or if registered they did not submit a VAT return for the month of December (4 marks) (15 marks) 7 [P.T.O.

8 4 Michiru Sports Club was formed to provide recreational activities to its members. The club prepares its accounts to 31 March, each year. The statement of its receipts and payments for the year ended 31 March 2009 is as follows: Receipts Entrance fee new members 22,000 Membership subscription 225,000 Bar sales 625,890 Sale of dance tickets 58,900 Restaurant sales 335,600 Theatre 45,000 Gambling fees 65,000 1,377,390 Payments Purchases for the bar 556,870 Purchases for the restaurant 285,000 Hire of band 157,900 Sales and wages 16,500 Wages for groundsmen 45,000 Expenses for theatre 32,000 1,093,270 Excess of receipts over payments 284,120 The following further information is available 31 March March 2008 Bar stocks 165,600 15,750 Subscriptions received in advance 15,000 7,500 Subscriptions received in arrears 24,500 12,500 Debtors for bar sales 22,800 12,600 Creditors for restaurant purchases 9,500 10,500 (a) Calculate the income tax payable by Michiru Sports Club for the year to 31 March 2009, clearly explaining the treatment adopted for tax purposes for the income and expenditure items. (11 marks) Compare the tax treatment of incorporated and unincorporated businesses, highlighting similarities and differences. (4 marks) (15 marks) 8

9 5 Peter Lungu is the Finance Director of Bwanje Mining Company Limited. The company wishes to employ a marketing consultant in the marketing team. He has approached you to assist in the choice of remuneration package that should be offered to the consultant. He is considering employing the consultant either on pensionable terms or on a contract. The contract term will be a fixed term of two years. The salary on the contract will be at 72,000 per month and an end of contract gratuity of 5% of total salary earnings will be payable. In addition the following benefits will also be provided. Company car with unlimited use. The car will cost the company 5 million. Housing Allowance of 10% of salary. School fees for his children who currently attend St Martins secondary school. The total fee payable will be 28,000. If, instead of being employed on contract, the consultant is employed on pensionable terms, the following will be payable: Salary of 82,800 per month. Pension contribution of 5% will be deducted from the employee s gross salary whilst the company will contribute 15% of the employee s salary. No housing allowance is payable, but the company will provide use of a company car as set out above in the terms of employment on contract. School fees for the children will not be payable. The consultant will, however, be entitled to a bonus payable at the end of the tax year, based on 0 5% of profits before tax. The taxable profits for the year ended 30 June 2008 are estimated to be 3,560,000. (a) Calculate the tax to be paid by the consultant for the year ended 30 June 2008, on the assumption that he is employed by 1 July 2007 and advise him on the best option for his employment. (7 marks) Compare the after tax cost to the company of the two options for employing the consultant and advise the Finance Director on the least costly alternative for the company. (8 marks) (15 marks) End of Question Paper 9