THE PUBLIC ACCOUNTANTS EXAMINATION COUNCIL OF MALAWI 2013 EXAMINATIONS ACCOUNTING TECHNICIAN PROGRAMME PAPER TC 10(B): TAXATION

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1 EXAMINATION No. THE PUBLIC ACCOUNTANTS EXAMINATION COUNCIL OF MALAWI 2013 EXAMINATIONS ACCOUNTING TECHNICIAN PROGRAMME PAPER TC 10(B): TAXATION WEDNESDAY 5 JUNE 2013 TIME ALLOWED: 3 HOURS 9.00 AM NOON INSTRUCTIONS: 1. You are allowed 15 minutes reading time before the examination begins during which you should read the question paper and, if you wish, make annotations on the question paper. However, you are not allowed, under any circumstances, to open the answer book and start writing or use your calculator during this reading time. 2. Number of questions on paper The paper is divided into TWO Sections, A and B. BOTH questions to be answered in Section A and ANY THREE from Section B. 4. Each question carries 20 marks. 5. Use of non-programmable calculators is allowed. 6. You are provided with the following: (i) A set of tables containing rates of tax on taxable income (Table 1). Rates of capital allowances (Table 2). (iii) Penalty rates for underpaid provisional tax (Table 3). 7. Begin each answer on a fresh page. 8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE INVIGILATOR. This question paper contains 11 pages This question paper must not be removed from the examination hall.

2 1 SECTION A ANSWER BOTH QUESTIONS IN THIS SECTION 1. (a) Mrs Makokola, an individual taxpayer who used to trade in general merchandise, produced the following information for the year to June She now requires your assistance to enable her submit a return of income to the tax authorities. Profit and loss account for the year to 30 June 2012 Turnover Sundry income Note 1 5, ,717 Less: Depreciation Salaries Legal costs Motor vehicle repairs Road permit & licences Penalties & fines Fringe benefits tax Accountancy services Rent payable General expenses Electricity Water Profit before tax ,737 1,980 Note 1 Sundry income of K277,000 is made up of the following: Proceeds from sale of gift Rental income (net of withholding tax) Bank interest (net of withholding tax) Note 2 Legal costs of K300,000 were incurred as follows: Debt collection Documentation for processing business contracts Traffic fines

3 2 Note 3 Private motoring In addition to vehicles specifically designated for private use, Mrs Makokola and family made use of business vehicles for private purposes. Because of practical difficulties in tracking such private use, it was agreed by the Malawi Revenue Authority to estimate such private use at 30% and, therefore, disallow relevant expenses to that extent. Note 4 Penalties and fines; K120,000, were made up as follows: Late submission of tax return Fine for selling expired products Note 5 Rent payable K400,000 50% of the rent payable was in relation to a house Mrs Makokola used as her residence. Note 6 General expenses : K525,000 Donations to orphan care centre Donations to local church Office refreshments Donation to MACOHA Capital allowances of K620,000 were to be allowed as a deduction instead of depreciation. (a) (i) Compute Mrs Makokola s taxable income for the year to 30 June ½ Marks Assume the following: (1) The taxable income in the above tax computation was K5,555,444. (2) Withholding tax was deducted from the bank interest at a rate of 20%. (3) Withholding tax was deducted from rentals received at 15%; and (4) Provisional tax of K840,000 was paid within the year under review. Compute the amount of net tax payable. 5½ Marks

4 3 (b) (i) Mention any five general conditions that all traders dealing in goods and services that attract excise tax must comply with, according to the customs and excise tax law. 2½ Marks For purposes of customs duty, the law demands that all goods must be cleared at the border port except in circumstances where the importer is allowed to clear them at an inland port. Name any five reasons/circumstances that may necessitate the Commissioner General of the Malawi Revenue Authority to allow an importer to clear their goods inland. 2½ Marks (TOTAL: 20 MARKS) 2. (a) State the circumstances under which an investment allowance is given to a taxpayer. (b) For purposes of paragraph 4 of the Second Schedule to the Taxation Act: (i) State the types of motor vehicles in respect of which investment allowance cannot be given. Define the term manufacturer as stipulated in the Second Schedule to the Taxation Act. (c) For purposes of the Second Schedule to the Taxation Act, the definition of farm improvement excludes three types of buildings. Mention the three types of buildings. Continued/

5 4 (d) A taxpayer s schedule of capital allowances as at 31 December 2011 is as follows: Type of asset Factory building Plant & machinery Motor vehicles Furniture & fittings Office equipment and computers Tax written down value 55,200 72,400 45,600 17,200 12,500 Rate of annual allowance 5% 10% 20% 10% 40% During the year to 31 December 2012, transactions recorded were as follows: Plant and machinery New machinery was bought during the year at a cost of K4,500,000. Some machinery was sold during the year for K2,200,000 which resulted in a capital loss of K100,000. Motor vehicles One motor vehicle which was acquired in April 2010 for K3,200,000 was sold during the year for K1,825,000. Furniture and fittings New furniture and fittings were purchased at a cost of K1,500,000 and additional secondhand fittings were purchased at a cost of K520,000. Office Equipment Six new computers were purchased at K1,800,000. Factory building A total of K6,500,000 was spent on extending the factory building. (i) Calculate the tax written down value of the machinery that was sold. 1½ Marks Calculate the capital gain or loss on the saloon vehicle that was sold during the year. (iii) Calculate the capital allowances due for the year to 31 December ½ Marks (TOTAL: 20 MARKS) Continued/

6 5 SECTION B ANSWER THREE QUESTIONS ONLY FROM THIS SECTION 3. (a) (i) State three circumstances under which liability to non-resident tax arises. 1½ Marks Mention the rate at which the non-resident tax is charged. (b) Non-resident tax is not payable on certain types of income. State the two types of the income. 2 Marks (c) (d) Define the term person resident in Malawi as it refers to an individual, partnership or company. 3½ Marks Apao Limited is a company registered in Malawi trading in motor vehicle spare parts. In August 2011, the firm became indebted to a supplier based in China in the sum of $6,500,000 on account of the spare parts supplied. $3.0 million was paid in November 2011 and $2.5 million was paid in January The balance of $1 million was included in the 30 June 2012 accounts at K300 million using an exchange rate of $1 = K300. (i) Using the formula specified in the Taxation Act, calculate the foreign exchange gains or losses on the transactions given above, to be claimed for the year of assessment to 30 June Assume the following exchange rates were in use: August 2011 November 2011 January 2012 $1 = 160 $1 = 250 $1 = Marks State whether the foreign exchange loss on the outstanding balance of $1 million which has been converted to K300 million and included in the accounts to 30 June 2012 is an allowable deduction. Give reasons for your answer. 2 Marks (e) Mapando Limited is registered for purposes of operating withholding tax from salaries, commonly known as PAYE. PAYE tax for April 2011 amounting to K2,455,000, was paid to the Malawi Revenue Authority (MRA) on 17 November 2011, several months late. Calculate additional sums chargeable as a result of paying the tax late. 5 Marks (TOTAL: 20 MARKS)

7 6 4. (a) Malawi taxation is based on source. Explain what the above statement means. 2½ Marks (b) Under section 45 of the Taxation Act, the deduction of contributions made by a taxpayer to a fund providing for sickness, accident, unemployment or other benefits for employees or widows, children or nominees of deceased employees is prohibited. Mention five other types of expenditure whose deduction is similarly prohibited. 5 Marks (c) (i) State the restrictions, if any, that are imposed on the deductibility of a realized foreign exchange loss. 2½ Marks State the amount that would be allowed as a deduction from the taxpayer s assessable income where realized foreign exchange losses of K250,000 are equal to the unrealized foreign exchange gains of K250,000. (d) Chabwera Limited had computed taxable income of K24,950,000 for the year to 30 June The tax paid in advance by way of provisional tax was K5,900,000. Withholding tax amounting to K550,000 was also deducted from payments made to the company during the year under review. (i) Calculate the balance of tax payable for the tax year to 30 June Calculate the penalty, if any, for the underpaid provisional tax. 4 Marks (TOTAL: 20 MARKS) Continued/

8 7 5. (a) Motamota Limited has been given a government contract to supply subsdised fertilizer and would like to pay K7,500,000 as premiums for use of a building as a warehouse. Before making the decision, the company Chief Executive Officer decided to ask you for advice. Advise the investor: (i) whether expenditure on the warehouse facilities is an allowable deduction. how the amount of deduction is arrived at, if it is allowable. 2 Marks (iii) how much will be allowed as a deduction, if the periods of use of the building is: 1-20 years; 2-36 years. (b) (i) The Taxation Act has provisions which subject clubs, societies or associations to tax under Section 61, while exempting others from tax under the First Schedule of the same Act. State the main differences between the two categories of clubs, societies or associations, and explain the taxation treatment for each type. 4 Marks State how the taxable income of the clubs, societies or associations that are liable to income tax is determined, and what is the tax rate? (c) (d) State any four types of expenditure which a farmer is allowed to claim as a deduction, under section 58 of the Taxation Act, in determining the taxable income from pastoral, agricultural or other farming operations. 2 Marks An individual taxpayer had the following income from employment in the year to 30 June (1) Basic monthly salary K150,000 for the first 6 months to December 2011 and K170,000 for the next six months to June (2) Housing allowance 20% of basic monthly salary paid together with the salary. Continued/

9 8 (3) School fees K600,000 per term for each of his 3 children for the three terms of the year. This was paid together with his salary in September 2011, January 2012 and March (4) Motor vehicle allowance A monthly gross allowance of K150,000. (5) Professional subscriptions Professional subscriptions of K120,000 were paid during the year (these were previously allowed for tax purposes). Compute the taxable income of the individual for the tax year to 30 June Marks (TOTAL : 20 MARKS) Continued/

10 9 6. (a) (i) Define the term fringe benefit as stipulated in the Taxation Act. (iii) When is an employer supposed to register for the Fringe Benefits Tax? State four instances when taxable values of certain benefits can either be reduced or completely disregarded. 4 Marks (b) Mr Ndasauka was employed by a Bank in Zomba on 1 January 2012 as a Bank Manager. According to the grade of his position, he was entitled to the following benefits: (i) (iii) (iv) (v) Salary of K850,000 per month. Use of a motor vehicle without restriction. The vehicle which was bought on 1 January 2012 cost the bank K12 million. The Bank pays a rent of K150,000 per month for a fully furnished house in Matawale. School fees for each of his two children paid directly to Sir Harry Johnston at K500,000 per term. A cook and a gardener at a cost of K15,000 and K12,000 per month, respectively. Compute the taxable values for the fringe benefits tax purposes for all the benefits provided for the quarter ended 30 April Marks (c) (d) What circumstances must one attain, if repairs to property (premises and equipment) are to be allowed as a deduction from the taxable income of a taxpayer. 4 Marks What restrictions, if any, are imposed on the deductibility of a capital loss from the assessable income of a taxpayer? 2 Marks (TOTAL: 20 MARKS) Continued/

11 10 7. (a) Marko and Sadaki are partners in an unincorporated hardware business operating in Malawi. Their partnership accounts for the year to 30 June 2012 showed the following: (1) Profits between the two partners were shared 3:2 respectively, and these amounted to K750,000. (2) The share of profits in (1) above was calculated after Marko and Sadaki had drawn salaries of K450,000 and K330,000 respectively during the year under review. (3) The share of profits in (1) above was also net of interest on capital of K82,000 for Marko and K64,000 for Sadaki and also a total depreciation of K126,000. (4) Marko received a rental income of K650,000 in the year under review. All other expenses were allowable for tax purposes. Calculate Marko s taxable income and the income tax thereon. 8½ Marks (b) A public officer of a company incorporated in Malawi is required to furnish information relating to any declaration of a dividend within 30 days of such declaration. State the items that must be submitted and what they must contain. 3½ Marks (c) (d) State three instances where penalties may be charged in connection with a return of income. State how much would be allowable or additionally allowable in each of the given circumstances below: (i) (iii) K1,450,000 training expenses incurred by an employer in training a Malawian employee to a degree qualification. 2 Marks A donation to the Malawi Council for the Handicapped (MACOHA) amounting to K2,500 by an individual. K650,000 being the total provisions for bad debts. One debtor owing K75,000 is reported sick and chances of debt repayment are diminishing every day. The balance is an estimate for several debtors. The K650,000 was included in sales when the transactions were initiated.

12 11 (iv) K700,000 being expenditure incurred in May 2011, a few months before the company began its manufacturing operations on 1 April (TOTAL: 20 MARKS) E N D