Answers
Fundamentals Level Skills Module, Paper F6 (ZWE) Taxation (Zimbabwe) John Kyle June 03 Answers and Marking Scheme (a) (b) Factors which determine whether an engagement is treated as employment or self-employment Employment engagement Employee subject to the organisation s code of conduct. Employee entitled to leave and benefits such as pension, medical aid, etc. Self-employment engagement The contractor is independent of the employer. Raises an invoice for the work completed. Note: Other relevant factors will also be awarded credit. mark each, maximum Tax treatment of the following: (i) Earnings from subcontracted work The amount is subject to PAYE since it was paid consequent to John Kyle being an employee and rendering his services to his employer. (ii) Passage benefit The amount is exempted from tax since it was incurred by the employer for the first time since John s engagement. (iii) Conference allowance The 5 000 relating to John s spouse shopping is taxed in his hands. The amount relating to travelling and other direct conference expenses is not taxable. (iv) PAYE The amount is treated as a taxable benefit and included in John s gross income. (v) NSSA compensation The amount is of a capital nature and exempted from tax. (c) (i) Calculation of the taxable benefits Housing benefit ( 5% of salary: 5% x 80 000) less rent charged by employer (0 000 3 000) 7 000 Furniture benefit (8% of furniture cost: 8% x 35 000) 800 (ii) Calculation of the taxable income and tax arising from the share transactions Taxable income corporate tax rate 30 000 x 50 45 000 Tax at 5 75% 588 Capital gains tax Disposal of 0 000 shares at $7 per share Gross proceeds 70 000 Tax at % of proceeds U$700 3 9
(iii) Calculation of the taxable income and tax payable by John Kyle for the year ended 3 December 0 Employment income Salary 80 000 Earnings from subcontracted work 95 000 Passage benefit exempt 0 Director s fees 40 000 Thirteenth cheque (7 000 700) 6 300 Representation allowance 0 000 Conference allowance ((b)(iii) above) 5 000 Fuel allowance (/3 x 000) 4 000 Motor vehicle benefit 3300cc 4 800 Leave pay 6 700 Performance bonus 9 500 Housing benefit ((c)(i) above) 7 000 Furniture benefit ((c)(i) above) 800 PAYE benefit 3 000 NSSA compensation not taxable 0 Funeral policy contributions not allowable 0 Subscriptions to the Institute of Geological Surveys (4 000) Pension contributions (maximum) (5 400) Taxable income 84 700 Tax on sliding scale: Up to 0 000 38 00 (84 700 0 000) x 45% 74 5 Gross tax 5 Blind person s credit (apportioned for the year (900 x 50%)) (450) 765 Add: 3% AIDS levy 3 353 Tax payable 5 8 Business income Rental income 95 000 Contract fees 65 000 Shares 45 000 Taxable income 05 000 Tax at 5 75% 5 788 3 5 Green Feeds Limited (GF) (a) (i) Taxation of income GF qualifies for a special rate of tax of 0% since the company exports over 50% of their manufacturing output. Calculation: Export volume 00 (500 000/ 000 000 x 00) 50% 0 (800 000/ 400 000 x 00) 57% 0 (950 000/ 550 000 x 00) 6% 0
(ii) (iii) Tax treatment of the interest Interest income of 800 Interest from the financial institutions of 300 is taxed at source and therefore exempted from the gross income of GF. The interest on overdue credit customers of 0 500 is normal business income and is included in the gross income. Interest expense of 58 000 The following interest is not allowable: Purchase of shares (50 000/90 000 x 58 000) capital expense 30 000 Fencing of one farm (35 000/90 000 x 58 000) unproductive interest 7 000 Motor vehicle (30 000/90 000 x 58 000) excess of the restricted amount 6 000 Motor vehicle (5 000/90 000 x 58 000) non-business portion 000 44 000 Allowable interest Fencing of one farm (35 000/90 000 x 58 000) 7 000 Sinking of boreholes (30 000/90 000 x 58 000) 6 000 Motor vehicle (5 000/90 000 x 58 000) 000 4 000 5 Conditions for the deductibility of impaired debts The debt must have been incurred by a taxpayer in the production of income. The debt must be due and payable to the taxpayer. The debt must be proved to be irrecoverable. (b) (i) Calculation of the provisional tax Projected taxable income 345 500 Taxed at 0 6% including AIDS levy 7 73 Tax due on: 5 March 0 0% 7 7 5 June 0 5% 7 793 5 September 0 30% 35 0 December 0 35% 4 9 7 73 3
(ii) Calculation of the taxable income and tax payable Net profit 85 000 Add: Interest disallowed 44 000 Canteen expenses executive staff 4 000 Provision for directors fees 60 000 Lump sum payment 7 300 Penalty for late PAYE 6 300 Employee end of year party 0 Vehicle lease hire (restricted to 0 000 per vehicle private use disallowed 96 000 40 000 + 50% x 40 000) 76 000 Repairs and maintenance (50% x 0 000) 0 000 Depreciation 60 000 Impaired debts % of debtors book 05 000 Purchased debts 37 000 Insolvent debtor 0 Legal fees 3 000 Legal fees preparation of contracts 0 Rental of unproductive farming land 4 000 Trade mark registration 0 000 Entertainment of prospective clients 0 Less: Interest from financial institutions ( 300) Compensation from insurance (5 000) Advertising and promotion double deduction (35 000) Capital allowances: wear and tear Factory building (5% on cost) (6 50) Office building ( 5% on cost) ( 500) Plant and machinery (7 5% reducing balance) (working) (9 59) Staff houses 3 units (5% on restricted cost of 0 000) ( 500) Staff houses 5 units (disallowed cost per unit over 5 000) 0 Vehicle (0% on 0 000 business use) ( 000) Taxable income 380 5 Corporate tax at 0% 476 04 3% AIDS levy 4 83 490 387 Less: provisional tax paid (7 73) Tax payable 49 4 8 30 Working: Plant & machinery allowance reducing balance Cost in 00 80 000 Wear & tear allowance 00 at 7 5% (4 000) 66 000 Wear & tear allowance 0 at 7 5% ( 550) 54 450 Wear & tear allowance 0 at 7 5% 9 59 3 G&P Transporters (Private) Limited (a) (i) () Chargeable assets Office building Paved parking yard
(ii) (iii) () Exempt assets Goodwill. Disposal of a principal private residence by an elderly person. Transfer of specified assets to beneficiaries in a deceased estate. Disposal of specified assets by a registered licensed investor or industrial park developer. Disposal of specified assets by non-profit organisations. mark each, maximum Note: The list is not limited to the above but are some of the common exempt assets. Tax treatment of the proceeds of goodwill received Proceeds from the sale of goodwill are neither a receipt from the disposal of immovable property nor from marketable securities. As such, the proceeds from the sale of goodwill on the disposal of the Bulawayo business is exempted from capital gains tax. Capital gains tax reliefs On transfer of the immovable assets from the unincorporated family business to the company owned by the family members, George and Peter Moyo can elect to transfer the assets at the income tax values, thereby deferring potential capital gains tax to when the immovable assets are sold by the company to unrelated parties. G&P Transporters can also elect to claim rollover relief on the disposal of the immovable Bulawayo property to the extent that the amount is not fully applied towards the acquisition of the Harare immovable property. 3 (b) (i) Calculation of the potential taxable income Recoupment on: Haulage trucks (0 000 x 50% SIA) 60 000 Office building (00 000 x 5%) 500 Paved parking yard (60 000 x 5%) 500 Office equipment (5 000 x 50%) 500 76 500 (ii) Calculation of the capital gain and tax payable Sale proceeds (50 000 + 80 000 + 50 000) 80 000 Recoupment (7 500 + 4 500 + 5 000) (7 000) Less: Cost (00 000 + 60 000 + 30 000) 90 000 Recoupment (7 000) (63 000) 90 000 Inflation allowance: Office building ( 5% x 00 000 x 4) 0 000 Paved parking yard ( 5% x 60 000 x 4) 6 000 Security wall ( 5% x 30 000 x 3) 50 (8 50) Disposal expenses (0% x 80 000) (8 000) 43 750 Roll over relief (40 000/80 000 x 43 750) ( 875) Capital gain 875 Tax at 0% 4 375 6 5 3
4 Floor Tiles (Private) Limited (FT) (a) (i) Advantages of voluntary VAT registration The VAT registration certificate is a prerequisite by most suppliers for consideration to participate in tenders. Being VAT compliant is also a consideration by ZIMRA for the issuance of a tax clearance certificate which saves on potential withholding tax of 0% from invoices issued to customers. Avoidance of potential penalties and interest from late VAT registration. Input tax claim from purchases obtained from VAT registered suppliers. (ii) FT should have registered for VAT when they attained a sales threshold of 5 000 monthly. They should therefore have registered for VAT in the month of May 0, and submitted the respective first VAT return on 5 June 0. (iii) Statutory duties of a registered operator (R/O) Complete and submit the VAT return as well as the remittance by the 5th day of the month following the end of a tax period. Issue tax invoices for taxable supplies. Keep accounting records for a minimum period of six years after the relevant tax period. Advise ZIMRA of any changes in business related issues such as change of address, cessation of trade, etc. Allow ZIMRA officials access to business records and entry to business premises on request. Account for VAT on closing stock on cessation of trade. mark each, maximum (iv) ZIMRA s actions Backdating the VAT registration to when the minimum monthly threshold was attained. Charge the output tax from the backdated VAT registration date. Charge penalties of 00% on overdue output tax. Charge 0% interest p.a on outstanding output tax. (b) (i) Calculation of output tax exposure Output VAT May 0 (5% x 5 300) 795 June 0 (5% x 6 00) 930 75 00% penalty 75 0% interest (0% x 75 x /) 9 754 (ii) Input tax May 0 (5/5 x 3 00) 47 June 0 purchases obtained from unregistered operators 0 Total input tax forfeited 47 4
(iii) Calculation of the VAT payable Output tax Total sales from July (5% x 48 900) 7 335 Less: input tax Purchases from registered operators (5/5 x 5 300) ( 996) Motor vehicle expenses (5/5 x 400) (33) Stationery (5/5 x 000) (30) Payroll costs 0 Other office expenses (5/5 x 900) (7) VAT payable 4 779 4 5 5 Jean Milton (a) (i) Commercial building definition A commercial building refers to a building which was constructed on or after April 975 and is used for the purposes of trade to the extent of at least 90% of the building s floor area. From the available information, Jean Milton s office buildings do qualify for the commercial building s definition since the buildings are used wholly for business purposes. (ii) Exemptions from Jean Milton s gross income Jean Milton is an elderly taxpayer, hence the following amounts are exempted from her gross income: Rental income 3 000 Pension received 3 000 Interest from discounted instruments 3 000 (iii) Tax accounting of income received () Income from voluntary organisations The income forms part of Jean Milton s gross income for the year. Jean Milton should also project the estimated taxable income to be received from the voluntary organisations and aggregate the amount with her other taxable income from business to come up with estimated tax to be remitted to ZIMRA in line with the Quarterly Payment Date (QPD) requirements. () Rental income The income forms part of Jean Milton s gross income from her ordinary business operations. The income should be accounted for tax purposes in the same way as her other business taxable income. The estimated tax should be remitted to ZIMRA in line with the QPDs. 5
(b) Calculation of the provisional taxable income and tax payable Business related income: Income from voluntary organisations 80 000 Rental income (3 000 3 000) 9 000 Less: Motor vehicle expenses (0 000/35 000 x 5 000 x 60%) + (5 000/35 000 x 5 000) (9 85) Security (5 000) Cleaning ( 000) Consultancy fees (0 000) Donations disallowed 0 Salaries and wages (33 000) Capital allowances: Commercial buildings ( 5% x 50 000) (6 50) Motor vehicles SIA (5% x 0 000 x ) (5 000) Taxable income 98 465 Tax payable at 5% 4 66 Add: AIDS levy 3% 738 5 354 Pension received exempt in full 0 Tax withheld from interest: Interest from discounted instruments (7 000 3 000 x 5%) 00 Tax withheld from dividends: Quoted shares (0/90 x 000)) 333 Unquoted shares (5/85 x 9 000) 588 9 9 5 6