Answers
Fundamentals Level Skills Module, Paper F6 (MWI) Taxation (Malawi) Section B June 27 Answers and Marking Scheme Marks (a) A supply for value added tax (VAT) purposes is deemed to have occurred: In the case of goods, when an owner of the goods parts with or will part with possession of goods including sale, barter, lease, transfer, gift or appropriation to own use In the case of services includes on: The performance of services for another person; The making available of any facility or advantage; Tolerating any situation or refraining from the doing of any activity. 3 (b) Calculation of output and input VAT for the month of December 26 6 5% Income Residential property rental 65, Rental for commercial property,2, 98, Sold commercial property 32,, 5,28, Deposit on sale of residential property 4,5, 38,35, 5,478, Expenditure Salaries 45, Purchase of building materials R 4,, Purchase of building materials C 2,, 3,465, Motor vehicle repairs R,375, Motor vehicle repairs C,375, 226,875 Motor vehicle fuel 375, Rental of offices C 425, 7,25 Rental of offices R 425, Electricity R 22,5 Electricity C 22,5 3,72 39,47, 3,765,72 VAT payable,72,288 7 2 (a) A capital gain or loss is calculated as the difference between the disposal proceeds of an asset and its adjusted cost. Capital gains are included in income and taxed at the rate applicable to the taxpayer. The determination of adjusted cost depends on whether capital allowances have been claimed or not. On assets where capital allowances have been claimed, the adjusted cost is the tax written down value of the asset. The excess of disposal proceeds over tax written down value is treated as taxable income. Where no capital allowances have been claimed, and it is a qualifying asset for capital gains, the cost of the asset is adjusted using consumer price indices at the date of disposal of the asset and that applicable to the year in which the asset was purchased or constructed or completed, or the 992 index where a 992 valuation was registered. 3 7
Marks (b) Calculation of gains chargeable to Sani Mega Limited for the year ended 3 December 26 Warehouse Sales proceeds 2,55, Less cost,5, Adjusted cost 23,55 58/22,393 5 9 897 4,53,55 Capital gain 8,8,45 Motor lorry Because the lorry was sold for less than cost, there is no capital gain. Neither is there a capital loss, but there is a balancing charge if sales proceeds exceed the tax written down value. A balancing charge will be worked out and this will reduce the amount of capital allowances to be claimed. The balancing charge is disposal proceeds less tax written down value. The balancing charge is,5,. Shares Sales proceeds 35, shares at 3,4 (fair value) 9,, Less cost 35, shares at 5 7,5, Adjusted cost 26,343 66/29,564 96 6 9793 22,37,75 (3,37,75) The total chargeable gain 4,88,7 7 3 (a) Computation of taxable profits for DYX Mining Limited for the year ended 3 December 26 Profit before taxation 9,4,2 Items not allowed for taxation Depreciation 3,95, Premium,425, Legal fees capital restructuring 5, Fringe benefits tax 675, Donations 5, 6,6, 5,64,2 Less Annual allowance machinery 75, Annual allowance building 425,,75, Taxable profits 4,466,2 5 8
(b) Tax payable Marks Income tax at 3% 4,339,86 Resource rent tax Taxable profits 4,466,2 Taxation paid 75, Less: Expenditure from financing (,25,) Resource rent 3,966,2 Tax 5% 2,94,93 Total tax 6,434,79 5 4 (a) Calculation of tax payable by Mafuleka 3 September 3 September 3 September 25 26 27 Adjusted profits before capital allowances (35,) 675,,85, Less capital allowances (235,) (475,) (425,) Add balancing charge 35, Adjusted profits for tax (585,) 2,,56, Less loss relief (2,) (385,) Loss carried forward (585,) (385,) Pre-trading loss (not a manufacturer) Profit after loss relief,75, Capital gain from sale of shares, Less capital loss from sale of unlisted shares (65,) Dividend received Taxable profits,2, Tax at 3% 363, Less: Provisional tax (75,) Withholding tax (35,) (22,) (45,) Tax payable/(refundable) (35,) (22,) 43, 8 Tutorial note: The capital gain on the property will not be taxable as it is to be rolled over into the new property. (b) Trading losses are carried forward to be offset against future profits. Capital losses may be offset only against capital gains and not against trading profits. Trading losses may be carried forward for a maximum of six years in this particular instance. Pre-operating losses may not be offset against future income unless it is for a manufacturer and was incurred in the course of setting up the business. 2 9
Marks 5 (a) Computation of taxable income for Simon and Jennifer Phiri for the year ended 3 June 26. Business income Simon Profit before taxation 85, Add items not allowed for taxation Depreciation 34, Simon s salary 65, School fees 45, Utilities for house 25, Office rental Accounting fee,565, 2,45, Less capital allowances (48,5) Adjusted profits,934,5 Simon Jennifer Business income,934,5 Salary 65, Bonus 5, Interest Simon 5, Director s fee Jennifer 25, Dividends House rental 86, Less: Mortgage capital payment Mortgage interest (345,) Repairs to house (25,) Donations (,2) Taxable income 2,338,3 725, 2 Tutorial note: Jennifer s rental income is taxed on Simon, because this is unearned income. (b) Tax implications of amounts paid to or for Simon if the business were a limited company The salary would be an allowable business expense and in Simon s personal income. The company would be required to account for PAYE on the amount. With regard to the payment of school fees and utilities, these would be subject to either PAYE or fringe benefits tax. If the amounts are paid in cash to Simon, then PAYE would be payable. However, if the school fees are paid directly to the school, then fringe benefits tax would apply. The FBT would be on 5% of the fee and charged at 3% of the amount. With regard to utilities, if paid directly to the provider, then FBT would be on the total amount paid at 3%. 3 5 2
6 (a) Calculation of capital allowances to be claimed by Sawelenga Limited for the year ended 3 December 26 Asset TWDV Additions Total Allowances TWDV January Investment Initial Annual Total 3 December 26 26 Factory building 5,5, 5,5, 275, 275, 5,225, Plant and equipment 4,45, 2,8, 7,25, 4%,2, 725,,845, 5,45, 2 Motor lorries 2,25, 2,25, 45, 45,,8, Motor cars 895, 6,5, 7,395,,479,,479, 5,96, - 3,95, 9,3, 22,395,,2, 2,929, 4,49, 8,346, - Summary of allowances Mark for indicating closing TWDV Investment,2, Initial Annual 2,929, 4,49, 5 (b) Calculation of tax to be paid by Sawelenga Limited for the year ended 3 December 26 Net profit before taxation 3,25,2 Add items not allowable Fringe benefits tax 65, Provision for doubtful debts 985, Donations 65, Provision for stock losses 475, Depreciation 89, 3,65, 6,865,2 Less capital allowances (4,49,) Taxable profit 2,86,2 Tax at 3% 844,86 Provisional tax paid (65,) Withholding tax interest 22,*2% (4,4) Tax payable 9,46 7 Marks (c) The balance of the tax should be paid on the submission of the tax return which is due 8 days from the end of the financial year. In this case it will be on 3 June 27. Interest is due where the balance of tax due is not paid at the time of filing. The interest is calculated on the outstanding amount at the prevailing bank interest rate plus 5% per annum. In addition, there is a penalty for late filing of 2,. 3 5 2