Paper F6 (ZWE) Taxation (Zimbabwe) Tuesday 3 December Fundamentals Level Skills Module. The Association of Chartered Certified Accountants

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1 Fundamentals Level Skills Module Taxation (Zimbabwe) Tuesday 3 December 2013 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 pages 3 5. 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 (ZWE) The Association of Chartered Certified Accountants

2 This is a blank page. The question paper begins on page 3. 2

3 SUPPLEMENTARY INSTRUCTIONS 1. Calculations and workings need only be made to the nearest 1, unless directed otherwise. 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: Rates Individuals Year ended 31 December 2012 Taxable Rate Amount Cumulative income income band of tax within band tax liability % Up to to to to to to and over 45 NB. The AIDS levy of 3% of income tax payable, after deducting credits, remains in place. Allowable deductions year ended 31 December 2012 Pension fund contribution ceilings 2012 (a) In relation to employers: in respect of each member (b) In relation to employees: by each member of a pension fund (c) In relation to each contributor to a retirement annuity fund or funds (d) National Social Security (up to maximum of 200) 3% of gross salary Aggregate maximum contributions to all the above per employee per year Credits year ended 31 December Disabled/blind person 900* Elderly person (55 years and over) 900* Medical aid society contributions 50% Medical expenses 50% * The amount is reduced proportionately if the period of assessment is less than a full tax year. Deemed benefits year ended 31 December 2012 Motor vehicles 2012 Engine capacity: Up to 1500cc to 2000cc to 3000cc and above [P.T.O.

4 Loans The deemed benefit per annum is calculated at a rate of LIBOR +5% of the loan amount advanced. Value added tax (VAT) Standard rate 15% Capital allowances % Special initial allowance (SIA) 25 Accelerated wear and tear 25 Wear and tear: Industrial buildings 5 Farm buildings 5 Commercial buildings 2 5 Motor vehicles 20 Movable assets in general 10 Tax rates Year ended 31 December 2012 % Companies Income tax Basic rate 25 AIDS levy 3 Individuals Income tax Income from trade or investment 25 AIDS levy 3 4

5 Capital gains tax On marketable securities 20% of gain Disposal of listed marketable securities acquired after 1 February % of gross proceeds Disposal of specified assets acquired prior to 1 February % of gross proceeds On principal private residence where seller is over 55 years 0% On other immovable property acquired on or after 1 February % of gain Inflation allowance 2 5% Capital gains withholding tax on sale proceeds % Immovable property 15 Marketable securities (Listed) acquired before 1 February Marketable securities (Unlisted) 5 Note: The withholding tax is not final on the seller. Actual liability is assessed in terms of the Capital Gains Tax Act. Withholding taxes % On dividends distributed by a Zimbabwean resident company to resident shareholders other than companies and to non-resident shareholders: By a company listed on the Zimbabwe Stock Exchange 10 By any other company 15 Informal traders 10 Foreign dividends 20 Non-residents tax % On interest nil On certain fees and remittances 15 On royalties 15 Residents tax on interest % From building societies 15 From other financial institutions (including discounted securities) 15 Elderly taxpayers (55 years and over) The exemptions from income tax are as follows: Year ended 31 December 2012 Rental income Interest on deposits with a financial institution Interest on discounted instruments Income from the sale or disposal of marketable securities Pension No limit Income from the sale or disposal of a principal private residence is also exempted. 5 [P.T.O.

6 ALL FIVE questions are compulsory and MUST be attempted 1 Moira Demo works for the Ministry of Health and Child Welfare as an eye surgeon and optician based at Midlands provincial hospital in Gweru. She dedicates most of her free time to her private practice, as well as writing books and articles for the Zimbabwe Medical Journal. Moira is also part of the medical team for the local NGO, Sight Restoration, which is involved in cataract surgery for the disadvantaged members of society in remote rural areas. Moira s private practice is located in Gweru and has a staff complement of six employees who all work full time. Moira only attends to the patients at her private practice strictly by appointment and her patient base has been steadily growing due to her experience and dedication. In terms of her service contract with Sight Restoration, Moira is required to participate in all the cataract operations scheduled for the year. Her service contract is for a year, subject to renewal as and when donor support is available. Sight Restoration s field staff, of which Moira is one, are paid a predetermined monthly salary plus an attendance allowance which is paid only after each cataract operation. The field staff are also entitled to a one-off representation allowance for participating in scheduled seminars. Moira Demo s earnings and deductions for the year ended 31 December 2012 were: Notes From Ministry of Health and Child Welfare Salary On call allowance Accommodation allowance Transport allowance Bonus Representation allowance Cash in lieu of leave Employee pension contributions (2 250) Loan repayment (1) (3 500) Employee subscriptions to the Medical Professions Association (2 000) Employee contributions to the Health Professions Medical Aid Society (8 000) Life policy stop order (1 000) PAYE (14 000) From her private practice Salary School fees benefit Home security benefit Gym subscriptions benefit South African trip (2) Utility bills benefit Retirement annuity fund (RAF) contributions (3 000) PAYE (3) 0 From Sight Restoration Salary Attendance allowance Representation allowance PAYE (19 930) Notes: (1) This amount is a part repayment of the interest free personal loan of advanced to Moira on 30 June She used half the loan amount towards the tuition expenses for her MBA studies and the other half to sink a borehole at her house. The LIBOR for the year ended 31 December 2012 was constant at 2 5%. (2) This amount was fully expended towards the travelling costs for Moira and her minor son for his medical treatment in South Africa. The actual medical treatment expenses were fully covered by the Health Professions Medical Aid Society (HPMAS) of which Moira is a member. However, HPMAS disallowed a total of from Moira s claim for prescription drugs acquired during the year ended 31 December 2012, as being above the stipulated limit. 6

7 (3) No employees tax (PAYE) or corporate income tax was paid in respect of the amounts paid to the employees of the private practice (including Moira) or the profits from the practice. This was because in Moira s opinion her operations were private and as such not subject to tax and also because she believed that she was already contributing her fair tax share from her other two employers. Additional information For her private practice work, Moira makes use of a fully expensed motor vehicle, with an engine capacity of 3000cc. Moira is a NSSA registered member and for the year ended 31 December 2012, the Ministry of Health and Child Welfare duly deducted her monthly contributions from her earnings in terms of the mandatory requirements. Required: (a) (i) State the ZIMRA requirements which have been breached by Moira Demo based on the information given in note (3). (3 marks) (ii) Explain the possible consequences of breaching the ZIMRA requirements as identified in your answer to (i) above. (2 marks) (b) (c) Assuming that Moira Demo s private practice had been fully tax compliant in the year ended 31 December 2012, identify TWO tax planning techniques which Moira Demo could have applied in order to minimise or defer the tax due in respect of her private practice. (2 marks) Compare and contrast the tax treatment of the two representation allowances received by Moira Demo for the year ended 31 December (2 marks) (d) (i) Calculate Moira Demo s NSSA contributions for the year ended 31 December (1 mark) (ii) Calculate the PAYE (employees tax) which should have been deducted from the salary and benefits Moira Demo received from her private practice for the year ended 31 December Note: Indicate any amounts which are not taxable or deductible by the use of zero (0). (6 marks) (iii) Calculate the taxable income of and income tax payable by Moira Demo for the year ended 31 December Note: Indicate any amounts which are not taxable or not deductible by the use of zero (0). (14 marks) (30 marks) 7 [P.T.O.

8 2 Absolute Milling Company (Private) Limited (AMC) produces mealie-meal, flour and various soup powders. At 1 January 2012, AMC owned two milling plants in Harare (Harare No. 1 and Harare No. 2) and several milling plants in other major towns in Zimbabwe. Each milling plant comprises the milling building, the milling plant and equipment and an adjacent warehouse, all of which were owned by AMC. AMC has been having financial difficulties and on 1 February 2012, engaged the services of a business consultant to recommend a survival plan for the company. Staff morale was very low when the business consultant was engaged because their salaries were six months in arrears. The business consultant s recommendations were agreed and implemented in the year ended 31 December 2012 as follows: (1) The milling buildings, plant and equipment and warehouses relating to the milling plants in all the major towns were transferred to their employees at market value, to be operated by the employees as independent business ventures. The stock in the warehouses at the respective milling plants was also transferred to these new business ventures at cost. (2) The Harare No. 1 milling plant was disposed of, together with all its related fixed assets, in order to fund AMC s future business operations and to pay off part of the arrears of salary due to the employees. The employees at this milling plant were all reassigned elsewhere. The stock at the Harare No. 1 milling plant warehouse, valued at cost, was given to the employees as final settlement of their arrears of salary. Both the disposal of the Harare No. 1 milling plant assets and the transfer of the town milling plant assets to their employees were made on 30 March Details of the fixed asset disposals and transfers are: Asset Date acquired Cost () Market value () Town milling plant and equipment Town milling buildings Town milling warehouses Harare No. 1 milling plant and equipment Harare No. 1 milling building Harare No. 1 warehouse Details of the stock transferred are: Location Cost () Selling value () Town warehouses Harare No. 1 warehouse AMC s statement of profit or loss for the year ended 31 December 2012 is as follows: Note Revenue Cost of sales 2 ( ) Gross profit Other income Distribution costs 4 ( ) Administrative expenses 5 ( ) Other expenses 6 ( ) Finance costs 7 (95 000) Profit before tax Income tax expense 8 (50 000) Profit for the period

9 Notes: 1 This amount represents AMC s ordinary sales for the year. 2 Included in the cost of sales is the total value of the stock at cost transferred to the employees (in accordance with the business consultant s recommendations) on 30 March No other adjustments were recorded regarding this stock transfer. 3 Other income comprises: Profit on the sale of assets Hire of milling plants Distribution costs comprise: Motor vehicle expenses Vehicle licence penalty Replacement of a damaged vehicle trailer Administrative expenses comprise: Staff costs PAYE on arrears of salaries PAYE penalty on arrears of salaries Software upgrade Allowance for receivables Depreciation Other expenses comprise: Cost of asset disposals: Harare No. 1 milling plant and equipment Harare No. 1 milling building Harare No. 1 warehouse General entertainment Management staff share scheme (as detailed below) The share scheme was introduced three years ago in order to retain critical management staff. The expense relates to the cost of the company shares awarded to management staff on attaining five years of continuous service with AMC. 7 Finance costs relate to: Trade payables Long-term borrowings (to fund an extension to the Harare No. 2 warehouse) [P.T.O.

10 8 Income tax expense: This amount relates to the total provisional corporate tax payments made by AMC in respect of the year ended 31 December In their 2012 budget, AMC had projected a taxable income for the year of before taking into account the following prior year assessed losses: Additional information: As at 1 January 2012 AMC s fixed assets were all fully depreciated, except for the following: Date acquired Cost/valuation () Office building Commercial vehicles AMC s policy on fixed assets has always been to claim the maximum allowances possible in any given year. Required: (a) (b) Outline the tax consequences for Absolute Milling Company (Private) Ltd (AMC) as a result of the transfer of the fixed assets and stock to the employees on 30 March 2012, stating when any taxes due should be paid. (6 marks) Calculate the provisional corporate tax underpaid by AMC for the year ended 31 December 2012, based on the information in note 8. (2 marks) (c) Calculate the capital gains tax payable by AMC for the year ended 31 December (3 marks) (d) Calculate the taxable income of and corporate tax payable by AMC for the year ended 31 December Note: Your computation should list all of the items referred to in notes 1 to 7, indicating by the use of zero (0) any items which do not require adjustment. (14 marks) (25 marks) 10

11 3 Billy Wells works as a marketing manager in Harare. Over the past seven years, Billy has tried to save enough money to develop his half acre residential plot in Rolf Valley, Harare without much success. All he has managed to do is to erect a concrete wall around the property and to have the plans for both the main house and the outbuilding approved. Convinced that he will not be able to build his dream house in Rolf Valley, Billy decided to dispose of his residential plot and buy a house in Parklands. He also decided to dispose of his entire investment in shares to help fund the acquisition of the Parklands house. Billy has never owned any other residential property apart from the Rolf Valley plot and he has always lived in rented accommodation. Billy sold both the Rolf Valley property and his share investments on 5 May On 1 July 2012, he signed the agreement of sale for the acquisition of the Parklands house for Details of the Rolf Valley property and the share investments are as follows: Date acquired/constructed Original cost/valuation() Rolf Valley plot 25 April Rolf Valley improvement 20 January Quoted shares 20 April Unquoted shares 1 March The Rolf Valley property was sold at a total price of while the quoted and unquoted shares were sold for and respectively. Billy incurred disposal expenses of 5% on both the immovable property and the marketable securities. Billy applied for a rollover relief on the disposal of the Rolf Valley property on the basis that it was the only residential property which he owned and hence his principal private residence, but ZIMRA disallowed the rollover relief. Required: (a) (b) (c) (d) Define a principal private residence for capital gains tax purposes, clearly identifying the conditions necessary for a property to qualify as such. (5 marks) Briefly comment on the probable reasons for ZIMRA s disallowance of the rollover relief claim by Billy Wells. (3 marks) Calculate the withholding tax which will be deducted on Billy Wells disposal of the Rolf Valley plot and the marketable securities, and state whether or not this will be the final tax. (3 marks) Calculate the capital gains tax payable by or refundable to Billy Wells in respect of his sale of the unquoted shares. (4 marks) (15 marks) 11 [P.T.O.

12 4 Tom Veld acquired a farm in Mash East province on 4 October 2010 for the purposes of venturing into dairy farming. Tom is a qualified farmer with a masters degree in animal husbandry and had practised farming in Australia for ten years before relocating to Zimbabwe. Tom spent the first year putting up infrastructure at his farm and preparing the pastures. He incurred the following costs during the years ended 31 December 2010 and 31 December 2011: Temporary farm roads Farm and pasture fencing Clearing and land preparation Dip tanks Dam construction Wages Sinking of boreholes and wells Borehole equipment Staff houses (6 units) Tom acquired the following cattle on 15 September 2011: 40 dairy cows heifers steers bulls During the year ended 31 December 2012, a total of 20 calves were born on the farm and 15 steers were sold. The approved fixed standard value is 380. Calves are valued at 200 each, while the dairy cows and the bulls are valued at the purchase price. Commercial production of milk and sales commenced on 1 February Tom recorded a total farm revenue of for the year ended 31 December The related farm expenses were: Wages Animal feed supplement Contour ridges Other farm running expenses Additional information Tom s workforce is mostly comprised of casual workers who are paid 6 per day in line with the industry rates. His permanent workers are paid monthly wages ranging between 200 and

13 Required: (a) State, with reasons, the taxes for which Tom Veld is obliged to register with ZIMRA and the tax obligation in respect of which he does not need to register. (3 marks) (b) State whether, and if so why, Tom Veld can claim relief for the expenditure incurred prior to 1 February (1 mark) (c) (i) List the special deductions available to Tom Veld for the year ended 31 December (3 marks) (ii) Calculate the value of Tom Veld s closing livestock for the year ended 31 December (2 marks) (iii) Calculate Tom Veld s minimum taxable income and tax payable for the year ended 31 December (6 marks) (15 marks) 13 [P.T.O.

14 5 Rhino Printers Limited (RPL) is in the business of printing exercise books and note books. The books are sold directly to other wholesalers by RPL and to the public and other retailers through RPL s wholly owned subsidiary, Rhino Booksellers (Private) Limited (RB). Both RPL and RB are registered operators for value added tax (VAT). For the past two years, RB has been facing a lot of competition from unregistered book vendors. Consequently RB s monthly turnover has been on a consistent downward trend. The following is an extract from RB s monthly sales records for the year ended 31 December 2012: Sales (inclusive of VAT) () January February March April May June July August September October November December RB s operational expenses for the year ended 31 December 2012 (inclusive of VAT where applicable) were: Repairs and maintenance Staff costs Rental expenses Loan establishment fee Other general expenses Additional information: 1. RB sells the books at a mark up of 30%. 2. During the year ended 31 December 2012, RPL had transferred stock to RB with a value of , including VAT. 3. RB s closing stock at 31 December 2012 had a VAT exclusive cost of RB held no opening stock at 1 January RB s landlord is not registered for VAT. RB was only able to meet its operational expenses during the six months July to December 2012 due to the overdraft facility offered by the bank to distressed companies. In order to limit their exposure to the bank, RPL has taken over RB s debt and passed a resolution to wind up RB s operations on 10 January

15 Required: (a) Explain Rhino Printers Limited s (RPL s) value added tax (VAT) obligations in respect of the stock transferred to Rhino Booksellers (Private) Limited (RB) during the year ended 31 December 2012 and determine the amount of VAT due, if any. (2 marks) (b) Calculate the VAT to be paid by or refunded to RB for the year ended 31 December (5 marks) (c) (i) State the circumstances in which a registered operator can deregister for VAT purposes, including when and how ZIMRA should be notified. (3 marks) (ii) Determine the earliest date when RB can deregister for VAT. (2 marks) (iii) Explain RB s VAT obligations on deregistration and assuming that RB carries out no further transactions after 31 December 2012, calculate the VAT to be accounted for to ZIMRA. (3 marks) (15 marks) End of Question Paper 15