BSc (Hons) Accounting with Business Cohort: BACB/08/FT Examinations for 2010 2011 Semester I / 2010 Semester II MODULE: BUSINESS TAXATION MODULE CODE: ACCF3115 Duration: 2 Hours Reading time: 15 Minutes Instructions to Candidates: 1. This paper consists of Section A and Section B. 2. Section A is Compulsory. 3. Answer any two questions from Section B. 4. Always start a new question on a fresh page. 5. Total marks 100. This question paper contains 5 questions and 11 pages. Page 1 of 11
SECTION A: COMPULSORY QUESTION 1: (40 MARKS) Sue Lin was made redundant from her employment on 15 March 2009. She is a motor car enthusiast, and so decided to take this opportunity to indulge her hobby. On 1 July 2008 Sue took out a bank loan of Rs750,000 at an annual interest rate of10%, rented a workshop for twelve months at a rent of Rs4,000 per month, and purchased high precision equipment at a cost of Rs235,000. On 10 July 2008 Sue purchased four dilapidated motor cars for Rs80,000 each. The restoration of the four motor cars was completed on 10 June 2009 at a cost Rs120,000 per motor car. Sue immediately sold all of the motor cars for a total of Rs2,000,000- Sue was then offered employment elsewhere in the country commencing on 1 July 2009. She therefore sold the equipment for Rs150,000 on 20 June 2009, repaid the bank loan on 30 June 2009. As she has just been indulging her hobby, Sue believes that the disposal of the motor cars during the tax year 2008/9 should be exempt from tax. Sue has done some research on the Internet and has discovered that whether or not she is treated as carrying on a trade will be determined according to the 'badges of trade': Sue had no other income during the tax year 2008/9 except as indicated above and was entitled to deductions in respect of 3 dependents. Page 2 of 11
(a) (b) (c) List the nine badges of trade and briefly explain the meaning of each of the badges of trade' listed. You are not expected to quote from decided cases. (18 marks) Briefly explain why Sue is likely to be treated as carrying on a trade in respect of her motor car activities. (8 marks) Calculate Sue's income tax liability for the tax year 2008/9, if she is treated as carrying on a trade in respect of her motor car activities. (14 marks) Page 3 of 11
SECTION B: ANSWER ANY TWO QUESTIONS QUESTION 2: (30 MARKS) Ranjiv earns an annual salary of Rs520,000 including the end of the year bonus payable in December (i.e. he earns Rs40,000 per month). He enjoys the benefit of a company car of 1450 cc used by him partly for performing the duties of his employment and partly for private purposes. All the car running expenses are met fully by the employer. Ranjiv is also eligible for an additional bonus of Rs 70,000 for the year to31 December 2009 paid to him on 31 May 2010. Ranjiv submitted a fresh employee s declaration form (EDF) to his employer at the beginning of May 2010 as he got married in that month with Indira, a full time student of the University of Technology,Mauritius (UTM). Ranjiv is planning to leave his employment soon and set up his own consultancy business. However, he does not have a good knowledge of taxation and would like to know whether there is any fundamental difference between the income taxation of a self-employed person and that of an employee. (a) Calculate how much tax has been withheld from Ranjiv s salary in- (i) April 2010; (5 marks) (ii) May 2010; (7 marks) (iii) June 2010;and (6 marks) (iv) July 2010. (6 marks) (b) Prepare a brief report for Ranjiv listing the main differences existing between the taxation of a self-employed and that of an employee. (6 marks) Page 4 of 11
QUESTION 3: (30 MARKS) A company has employed Mr. Kumar Singh for many years. He receives a basic monthly salary of Rs70,000. He is also entitled to an end of year bonus of one-month salary. Mr. Singh is provided with a company car, which he uses to attend duty. It was established that his private mileage is 15% of the total mileage. The car of a cylinder capacity of 1,500 cc, cost Rs600,000 inclusive of registration duties. Under the term of his contract, Mr. Singh is also provided with a fully furnished house which is owned by his company. On 1 st December 2008, Mr. Singh took a seven year loan of Rs500,000 from his company. The loan was granted at an interest rate of 5% while the outside borrowing rate was 12%. The loan was used partly to buy a house located on a plot of land of 12 perches(i.e. 506.5 sq meters). He paid municipal rates amounting to Rs1,560 on 31 st January 2009. Mr. Singh has two children. He has a son who is following a full-time course at the University of Technology, and a daughter at college. Mr. Singh has some fixed deposits on which he received interest of Rs212,500 net of tax for the year to 30 th June 2009. Interests earned by his wife was Rs55,000 gross and his children earned Rs22,000 gross. During the year to 30 th June 2009, Mr. Singh bought shares from a listed company, from which he received dividends of Rs8,000. Mr. Singh received a refund of Rs35,000 gross for sick leave not taken. He also received a net income of Rs63,750 from part-time lecturing in two equal installments from another employer. (Cont.) Page 5 of 11
The amount of tax deducted under the PAYE system was Rs6,300 per month, apart from the month of December 2008 when it was Rs12,700 and February 2009 when it was Rs11,000. He has not kept a record of the amount of PAYE deducted from his part-time lecturing. Mr. Singh is a partner in Singha and Associates, which expects to make a tax adjusted profit of Rs450,000 for the year to 30 th June 2009. Mr. Singh is entitled to 30% of the profit. Mr. Singh s wife works as an administrative officer, earning Rs20,000 per month. (a) Prepare an income tax computation showing clearly the total income tax payable by Mr. Singh for the year ended 30 June 2009 as well as the tax liability shown on his income tax return for that year and which was due for payment on 30 September 2009. (24 marks) (b) Calculate the total income tax payable by Mr. Singh s wife for the income year ended 30 June 2009. (6 marks) Page 6 of 11
QUESTION 4: (30 MARKS) On 1 July 2008 William Wayne, aged 38, commenced in self-employment running a retail clothing shop. William s Profit and loss account for the year ended 30 June 2009: Rs Gross Profit 1,398,800 Rs Administration expenses: Depreciation 47,600 Light and heat (Note 1) 15,250 Motor Expenses (Note 2) 47,200 Repairs and renewals (Note 3) 56,600 Rent and rates (Note 1) 39,000 Professional fees (Note 4) 23,000 Wages and Salaries (Note 5) 838,250 (1,066,900) Other operating expenses (29,900) Net Profit 302,000 Notes: ======== (1) Private accommodation William and his wife live in a flat that is situated above the clothing shop. Of the expenditure included in the profit and loss account for light, heat, rent and rates, 40% relates to the flat. (2) Motor expenses During the year ended 30 June 2009, William drove a total of 12,000 miles, of which 9,000 were for private journeys. Page 7 of 11
(3) Repairs and renewals The figure of Rs 56,600 for repairs and renewals includes Rs 22,000 for decorating the clothing shop during December 2008, and Rs 10,500 for decorating the private flat during July 2008. The building was in a usable state when it was first occupied by William. (4) Professional fees Accountancy Rs 5,000 Legal fees in connection with the long lease agreement of the Shop 14,500 Debt collection 3,500 23,000 (5) Wages and Salaries The figure of Rs 838,250 for wages and salaries includes the annual salary of Rs 155,000 paid to William s wife. She works in the clothing shop as a sales assistant. The other sales assistants doing the same job are paid an annual salary of Rs 110,000. (6) Other operating expenses The figure of Rs 29,900 for other operating expenses, includes Rs 6,400 for gifts to customers of food hampers costing Rs 400 each, Rs 3,200 for gifts to customers of pens carrying an advertisement for the clothing shop costing Rs 16 each and Rs 1,000 for a donation to a charity. (7) Goods for own use During the year ended 30 June 2009, William took clothes out of the shop for his personal use without paying for them. The cost of these clothes was Rs 4,600, and they had a selling price of Rs 6,500. (8) Plant and Machinery The capital allowances available for the year ended30 June 2009 are Rs 70,060. Page 8 of 11
(a) Calculate William s tax adjusted trading profit for the year ended 30 June 2009. (18 marks) (b) Compute William s income tax liability for the year ended 30 June 2009 assuming he has no other income apart from his trade Income and that he has a dependent child. (4 marks) (c) List the main categories of expenditure that are excluded from tax relief. (8 marks) QUESTION 5: (30 MARKS) (a) Distinguish between exemption and zero-rating for VAT purposes. (4 marks) (b) Give four examples of transactions normally: (i) Zero-rated (ii) Exempt from VAT (c) Why is it important for a business to register for VAT? (2 marks) (2 marks) (2 marks) (d) Registration under the VAT Act brings with it both duties and rights for the persons concerned. List some of the duties and the most important right. (7 marks) (e) Allen has been the owner of a hardware shop for a number of years. He has not previously registered for VAT as his turnover has consistently been below the minimum criteria. However, he now feels that he should register and seeks your advice. Page 9 of 11
Turnover since January 2009 has been as indicated below: 2009 2010 Rs Rs January 82,500 177,500 February 95,000 335,000 March 100,000 220,000 April 95,000 100,000 May 45,000 170,000 June 115,000 230,000 July 140,000 250,000 August 142,500 280,000 September 150,000 300,000 October 155,000 310,000 November 167,500 320,000 December 250,000 350,000 Estimate Provide suitable advice to Allen (6 marks) Page 10 of 11
(f) A VAT registered trader is engaged in the sale of computer hardware and software. The following supplies are made to him in a particular month, by VAT registered suppliers. Rs (Excluding VAT) Purchase of hardware 500,000 Purchase of software 300,000 Expenses Telephone, rent, office requisites 140,000 Entertainment expenses 20,000 Capital Expenditure - Car 800,000 - Fax machine 12,000 Calculate the allowable input tax (7 marks) ***END OF QUESTION PAPER*** Page 11 of 11