Examiner s report FTX (LSO) Foundations in Taxation June 2016 General Comments The aim of the FTX (LSO) syllabus is to develop the ability of candidates to prepare computations of tax liability for both individuals and businesses resident in Lesotho for the purpose of income tax, corporation tax and value added tax. In addition, to develop knowledge and understanding of the tax administration in Lesotho, including knowledge of the statutory timescales for the submission of claims and returns and the due dates for the payment of tax liabilities. On the basis of the afore mentioned, candidates who pass this paper may be required to assist individuals and businesses with filing of income, corporation and value added tax returns to the Lesotho Revenue Authority. General Comments The exam was divided into two sections, section A with ten multiple choice questions and section B which consisted of nine compulsory questions. Question 1 and 2 consisted 15 marks each, questions 3 and 4 were worth 10 marks each, questions 5 to 9 were worth six marks each. Most candidates attempted all questions. There was no indication that candidates were time pressured. For those candidates who did not attempt all questions, it appeared to be because they did not know what was required or did not plan their time well. Some of the general observations were as follows: Even though candidates are now aware that most marks are allocated to workings but in this sitting there were candidates who failed to show workings, and as a result they lost more marks, this was evident in question 2 where they did not performed the calculation of gain/loss on disposal of a motor vehicle. Candidates do not read requirement of questions, they rush to answering questions before understanding the requirement of the question. This was evident in Question 7 (b) where they rushed in answering the question without realizing that the year in the question was 2015. In this sitting, some candidates deleted the correct answers and replaced them with wrong ones. Normally candidates confuse excluded incomes with exempt income. These terms are explained below and candidates are encouraged to learn the definitions so as to avoid the confusion of using them interchangeably; - Exempt income means income that is not taxable at all. - Excluded income means income that might have been taxed elsewhere / in the hands of another taxpayer or taxed at special rate so it is excluded from chargeable income to avoid double taxation. Section A This part composed of ten multiple choice questions. All candidates attempted this section. This section was worth 20% of the final marks. It is imperative that candidates spend time practising the MCQ style questions in preparation for the real exam as the answer options provided may be confusing. This section examined most parts of the syllabus. From the analysis of marks attained in this section, the performance was fair with five questions not attempted well by a number of candidates. Examiner s report FTX (LSO) June 2016 1
Question 1 required candidates to state when a vendor must register for VAT. Many candidates chose B but the correct answer is C. They assumed that a vendor should register in the same month the threshold is reached while the Act requires that a vendor should register on the month following the month on which threshold is reached. Question 2 required calculation of chargeable income of an individual taxpayer. A number of candidates chose A while the correct answer is B. Most candidates were not aware that chargeable income is the higher of minimum chargeable income or chargeable income. In this case it was the minimum chargeable income which was lower meaning those who chose the chargeable income were wrong. Question 3 required candidates to state the method that is used for calculating stock by a cash basis taxpayer. Many candidates chose D while the correct answer is B. The cash basis taxpayer uses prime cost or absorption cost. Those who chose D assumed that the method used for calculating stock by a cash basis taxpayer is market value, and this is not correct. Question 6 required candidates to calculate advance corporation tax. A number of candidates chose C while the correct answer is D. Candidates did not realise that though the dividend was declared in June but it was actually paid in July. That being the case there is no advance corporation tax (ACT) payable in June because ACT is payable with seven days of payment of a dividend. Question 7 required calculation of tax payable by a non-resident taxpayer. Many candidates chose A while the correct answer is C. Candidates were not aware that an electing non-resident is taxed at marginal rates. The electing non-resident is treated like a resident for tax purposes. Those who chose A assumed the electing non-resident is taxed at the highest rate of tax of 30%. Section B Question 1 required the calculation of tax payable by a resident taxpayer and the question was worth 15 marks. This question was satisfactorily attempted by most candidates. Most candidates grossed up the amount of supervision of the construction of animal stables but with the wrong percentage of 10% instead of 5%. This is because they used the withholding tax of a non-resident consultant. A few did not regard the sale of vegetables from a garden as subsidence farming as they included it as income towards calculation of chargeable income. M108,376 from cost of sales was confirmed as not being part of the goods belonging to the business, and as a result had to be deducted but many candidates did not realise that they had to deduct it. While others did not include Value Added Tax on electricity when computing chargeable income. Candidates should note that taxpayers who are not registered for Value Added Tax purposes are supposed to include VAT as part of the cost of income, cost of sales and expenses as they cannot claim it. It is important that candidates read notes carefully, because notes provide additional information which assists in answering questions. Whilst note (iv) stated that 45% of the provision had been used to write off a bad debt a number of candidates treated the whole amount as a bad debt. Examiner s report FTX (LSO) June 2016 2
Candidates also need to understand the application of withholding tax. Withholding tax is tax which is withheld at source, and it is not a final tax except withholding tax on interest of a resident individual. Except for the latter situation, if it has been deducted from the amount, the income used to compute chargeable income should include it (at the gross amount) and then the tax withheld will be deducted from the tax liability. It was surprising to see some candidates deducting withholding tax from the tax liability before applying the non-refundable tax credit. Whilst this gets one to correct answer (for computations purposes only), the concept is not correct. Candidates should therefore note that the tax credit is non-refundable, if the withholding tax can settle the tax liability by withholding tax, such a taxpayer will have lost the tax credit for that particular year wherein if he deducted the tax credit first (which is correct treatment) that taxpayer would apply for a refund of the unutilised withholding tax. Question 2 required the calculation of chargeable income and it was worth 15 marks. This question was also answered satisfactorily by most candidates. It is good that candidates perform calculations however, they must be aware that the purpose of performing calculations is to use them in answering the questions, not just leave them like that. This was demonstrated where candidates computed the depreciation of the heavy truck disposed, but did not include that depreciation and gain on disposal when calculating chargeable income. Some candidates had included proceeds from the disposal of a heavy truck in gross income even though the adjusted cost base of the vehicle was given in the notes. Even for those who deducted the adjusted cost base, some candidates failed to depreciate the vehicle for the number of months that it was in use before disposal. Those who computed depreciation calculated it for the whole year instead of apportioning it for eight months when the asset was still in use. Many candidates ignored the depreciation of furniture. Many candidates failed to calculate interest on maturity of an investment and included the maturity value as income, as a result could not charge the management fee of 1.5% on the interest. Some candidates on the other hand multiplied the maturity of an investment by 1.5% to compute the management fee while the question indicated that management fee was to be levied on income generated from investment. A significant number of candidates could not calculate the allowable pension contribution. Some regarded the M66,000 as allowable while others multiplied the M66,000 by 20% to arrive at the allowable amount. Only a small number knew that the maximum allowable contribution was 20% of the staff salaries. Transport allowance was part of staff costs, but most candidates excluded it. Even though the question required the calculation of chargeable income, some candidates went further to calculate tax, however using marginal rates. Question 3 required calculation of Value Added Tax (VAT) payable or refundable. Though this was answered satisfactorily by some candidates, other candidates did not do as well. A significant number of candidates were not aware that sales of maize meal are zero rated as they computed VAT for those sales. Examiner s report FTX (LSO) June 2016 3
Many candidates missed the correct calculation of sales as they deducted the whole figure of credit sales instead of only deducting the amount outstanding. Some computed VAT on rent while others computed VAT correctly on all items and afterwards calculated VAT on VAT. Question 4 required calculation of fringe benefit tax for a quarter. unsatisfactorily answered. This question was Many candidates did not seem to comprehend a situation where the vehicle was not available for personal use for the whole month. Calculation of the taxable value of a motor vehicle was problematic with the vehicle only available for personal for 21 days in a month. For those who appreciated the concept, they were confused as they stated the denominator as number of days in a year, 365 or number of days in 3 months, 90 days. They did, however, know that the value of the vehicle had to be multiplied by 15%. The calculation of fringe benefit on excessive superannuation was a big challenge. Candidates had to calculate 20% of employment income and come up with excessive superannuation contribution fringe benefit by deducting the employee and employer contributions. However, candidates failed to calculate taxable value, as they either deducted the employee contribution from the employer s or added the two amounts and regarded them as excessive superannuation contribution. A number of candidates either performed calculations for one month or one year, but the question required calculation of fringe benefit tax for a quarter. Question 5 required calculation of tax payable by a partner and stating the tax implications of an asset contributed by a partner into the partnership business. a) In order to get the correct share of partnership profit, candidates had to gross up the interest of M86,472 by 0.9 to add back the withholding tax on the interest. Most candidates were not aware that the interest was already included in the profit hence they included the whole amount of interest, while others just distributed the profit give in the question. Some candidates did not even calculate tax payable as required by the question. b) Generally this part of the question was performed well, with most candidates obtaining satisfactory marks. Question 6 required calculation interest on a finance lease and depreciation of the asset that was acquired under the finance lease. This question was fairly well answered. (a) Most candidates deducted VAT from the cost of the asset for the purposes of calculating interest. Financial institutions normally charge interest on prime rate plus some percentage. In this question, candidates had to add 4% to the prime rate of 11.75% to arrive at the rate that ad to be used for calculating interest. Many candidates calculated interest using the prime rate of 11.75% while others calculated interest at 2/3 of the prime rate. They also did not realise that the interest had to be calculated for four months. (b) Depreciation had to be calculated on cost less VAT as opposed to interest. Since this is a group two asset, depreciation had to be computed at 20%. Some candidates missed the apportionment of depreciation for four months as the asset was only available for four months, Examiner s report FTX (LSO) June 2016 4
while others calculated depreciation at 25%. Others used the prime rate of 11.75% to calculate depreciation. Question 7 required candidates to state the assets that are not depreciable and the stating the due date dates of instalments and final return of a company whose year - end is October 2015. (a) This part of the question was generally satisfactorily attempted. (b) A n7umber of candidates were not conversant with dates and deadlines, they knew the months on which the liability or the instalments had to be paid but confused the years as they stated 2015 or 2017. This was also a sign that some candidates do not read the questions carefully, they did not realise that the year-end in the question was 31 October 2015 and this should guide them to the correct years. Question 8 required candidates to state the circumstances when an individual taxpayer is not required to file a return. This question was satisfactorily answered by most candidates even though other candidates stated the residency rules. Question 9 required the calculation of withholding tax. This question was unsatisfactorily answered by many candidates. They are therefore encouraged to familiarise themselves with the withholding tax rates. Conclusion The performance of candidates in this exam was unsatisfactory. Theory questions are still a challenge to most candidates. Candidates are advised to read questions clearly and in totality because information to assist them in answering the question is contained in the whole question not in some parts. They should study certain terms of the Acts such as the ones mentioned in the general comments. Examiner s report FTX (LSO) June 2016 5