Fundamentals Level Skills Module Taxation (Malawi) Monday 7 June 2010 Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FIVE questions are compulsory and MUST be attempted. Tax rates and allowances are on page 2. Do NOT open this paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall. Paper F6 (MWI) The Association of Chartered Certified Accountants The Public Accountants Examination Council of Malawi
SUPPLEMENTARY INSTRUCTIONS 1. Calculations and workings need only be made to the nearest. 2. All apportionments should be made to the nearest month. 3. All workings should be shown. TAX RATES AND ALLOWANCES The following tax rates and allowances are to be used when answering the questions Malawi Income Tax: Rates Individual Cumulative 72,000 120,000 0% 0 120,001 156,000 15% 5,400 156,001+ 30% Company rate Locally incorporated 30% Externally incorporated 35% Annual Allowance Rates (Guidelines laid down by the Commissioner of Taxes) 5% Industrial buildings Railway lines Farm improvements 10% General plant and equipment Trailers Farm fencing 15% Mobile cranes 17 5% General plant and equipment on double shift 20% Motor cycles Cars Pick-ups Light lorries (for light work) Cement mixers 25% Light lorries (for heavy work) Tippers Tracked tractors Tree-dozers Scrapers Graders Bulldozers General plant and equipment working 24 hours a day Tractors (for heavy work) Transport services 40% Computers 2
ALL FIVE questions are compulsory and MUST be attempted 1 Bengo, Siliya and Mabvuto are brothers and are in partnership as Tiyesele Farms in Mzuzu. They are involved in growing tobacco, coffee and maize. The partnership makes up its accounts to 31 December annually, and shares profits in the ratio 5:3:2. The following is the partnership Income Statement for the year ended 31 December 2009. Turnover 32,500,000 Less: selling expenses 162,500 Total sales proceeds 32,337,500 Less: expenses Growing costs 9,586,100 Curing and processing costs 8,560,500 Administration costs 6,500,000 Finance costs 4,567,000 Marketing and other costs 856,000 30,069,600 2,267,900 Other income Bank interest received (gross) 125,500 Interest on staff loans 85,700 Sundry income (all taxable) 45,000 256,200 Net profit before taxation 2,524,100 The following additional information is available in connection with this income statement: (1) Growing costs include the following: Wages for field staff 2,560,100 Fertiliser and pesticides 3,506,175 Fuel for tractors 1,237,988 Fertiliser and pesticides, includes an amount of 455,100 being the cost of pesticides bought in advance to be applied in the next growing season. (2) Curing and processing costs comprise: Electricity 650,000 Wages and salaries 3,500,000 Packaging materials 2,256,890 Depreciation 855,000 Repairs and maintenance: Tobacco barns 650,000 Staff housing 263,610 Mabvuto s house in Mzuzu 385,000 8,560,500 3 [P.T.O.
(3) Administration costs include the following: Fringe benefit tax 345,000 Wages and salaries 2,356,900 Partners salaries: Bengo 950,000 Siliya 650,000 Mabvuto 445,000 Donations: Local church 15,000 Save the Children Fund 45,000 amuzu Foundation Fund 100 PAYE of 243,600, 153,600 and 92,100 respectively was duly deducted from the salaries earned by the partners. (4) Finance costs include: Accounting fees 175,000 Interest payable for late payment of tax 65,400 Provision for doubtful debts (2%) of debtors 415,000 Bad debts written off 112,000 Depreciation office machines and computers 435,000 Provision for doubtful debts is in connection with the sale of maize to other estates and traders. (5) Marketing and other costs include: Advertisement 125,000 Travel expenses (all business) 346,000 Customers party 95,000 Donation to paramount chief 65,000 Holiday expenses Bengo 135,000 (6) The partnership agreement provides that each partner would introduce to the business capital in proportion to their profits sharing ratio, which is 5:3:2. The following were the credit balances in the capital account as at 1 January 2009. Bengo 500,000 Siliya 300,000 Mabvuto 200,000 Interest is charged and paid at 4% per annum on the capital account at the beginning of each year. The interest on the partners capital account has not been paid nor included in the income statement for the year; this will be paid after the end of the year. (7) During the year the following expenditure of a capital nature was incurred: Purchased a double cab motor vehicle 895,000 Construction of new staff housing 1,250,100 Purchasing of a new tobacco curing machine 2,250,000 Building tobacco barns (new) 225,000 Clearing of land for additional coffee plantation 1,727,500 (8) The partnership s capital allowances for the year have been agreed at 2,990,500. Other personal income received by the partners and their spouses during the year is as follows: Bengo Siliya Mabvuto Wife s unearned income 250,000 125,000 Bank interest (gross) 15,000 5,000 28,000 Rent received on a house (gross) 455,000 Repairs to the let house 82,000 4
(9) Other income is all taxable. (10) Provisional tax payable by the partnership for the year was 200,000. (11) No withholding tax was deducted from the sale of tobacco, maize and coffee, as the partnership had withholding tax exemption certificate. (a) State the capital allowances that the partnership can claim in respect of each item of capital expenditure listed in note (7). Note: you are not required to calculate the capital allowances. (5 marks) (b) Compute the taxable income of the partnership for the year ended 31 December 2009. (10 marks) (c) Show the allocation of the partnership profits amongst the partners. (5 marks) (d) Calculate the tax payable by each of the partners for the year ended 31 December 2009. (10 marks) (30 marks) 5 [P.T.O.
2 Malbak Limited is a Malawi Branch of a foreign registered company. The company is involved in manufacturing shoes and sells these on wholesale to traders. The company makes up its accounts to 31 March each year. The following are Malbak Limited s summarised results for the three years to 31 March 2009. Year ended 31 March 2007 2008 2009 Turnover 2,555,000 3,600,000 7,500,000 Gross profit 1,500,000 1,250,000 2,950,500 Less: Depreciation 425,000 575,000 585,000 Director s fee 60,000 60,000 60,000 Staff costs (all allowable) 235,000 645,000 685,000 Loss on disposal of assets 15,000 25,000 32,000 Impairment losses 65,000 Finance & administration costs (all allowable) 495,000 565,000 575,000 Total costs 1,230,000 1,870,000 2,002,000 Profit/(loss) 270,000 (620,000) 948,500 Add: Profit on sale of assets 12,500 8,500 Interest 25,000 28,000 36,000 Total other income 37,500 28,000 44,500 Net profit (loss) before taxation 307,500 (592,000) 993,000 The following further information is available for these periods. 2007 2008 2009 Capital allowances 250,000 623,000 575,000 Capital gain on assets: Where capital allowances have been claimed 18,000 16,500 Where capital allowances have not been claimed 22,500 17,500 Capital losses on assets: where capital allowances have been claimed (19,550) where capital allowances have not been claimed (35,000) (2,500) Withholding tax claimable 65,000 35,000 12,500 Provisional tax paid 100,000 120,000 175,000 (a) (b) For each of the three years ended 31 March 2007, 2008 and 2009, calculate the net capital gain or loss to be included in the corporation tax computation for Malbak Limited, explaining your treatment of the gains and losses. Show clearly the amount of any capital loss to be carried forward. (9 marks) Calculate the tax payable by the company for the three years, assuming relief for any losses is claimed at the earliest possible opportunity. Note: you should assume that the tax rates relevant to the year ended 31 March 2009 applied to all years. (16 marks) (25 marks) 6
3 (a) A person making taxable supplies and registered for value added tax (VAT) is supposed to issue a tax invoice on making such supplies. List the information a tax invoice must contain. (6 marks) (b) (c) Explain the circumstances under which input tax may not be available to be claimed against output tax for a tax period. (5 marks) John Makande, a retailer who trades as Chichiri Enterprises, is registered for VAT. He makes both taxable and exempt supplies. The Commissioner General gave approval for Makande to use a special retailer scheme for the purposes of VAT. In the month of March 2010, he entered into the following transactions: Total sales made 5,550,000 VAT exempt sales included in total sales 2,100,000 Total purchases for resale bought in the month 3,500,000 Value of taxable goods for resale bought in the month included in total purchases 950,500 Calculate the output tax to be included in the VAT return by John Makande for the month of March 2010. (4 marks) (15 marks) 4 (a) In 2009, amendments were made to the Taxation Act that re-introduced the provisions of Turnover Tax. (i) State when turnover tax applies and whether there are any options available to the taxpayer; (ii) State when turnover tax does not apply. (3 marks) (b) List any SIX (6) types of income which are exempt from the provision of the Taxation Act and therefore are not subject to tax. (6 marks) (c) State the conditions that must exist for a tax clearance certificate to be issued. (2 marks) (d) List the transactions that require a tax clearance certificate to be obtained before the transaction can be finalised. (4 marks) (15 marks) 7 [P.T.O.
5 Exclusive Furnishers Limited is a company that is incorporated in Malawi. The Company sells both household and office furniture, which is imported mainly from the Republic of South Africa. The company makes up its accounts to 30 June each year. The following information is available in connection with its transactions for the year ended 30 June 2009. Sales 27,500,800 Cost of sales (12,560,800) Gross profit 14,940,000 Less: Marketing expenses 1,600,800 Administration expenses 8,200,000 Finance expenses 2,500,000 (12,300,800) Net profit before tax 2,639,200 The company imported furniture from South Africa during the year as follows: R August 2008 Household furniture 35,000 March 2009 Office furniture 25,000 Freight was paid locally and was 120,000 and 85,000 respectively. The company insured the goods and insurance cost was 1% of the invoice value of each consignment. It is further observed that during the year ended 30 June 2009 and the previous year the company did not pay fringe benefit tax on the benefits provided to its General Manager. The value of these benefits has been calculated as follows: Year to 30 June 2008 650,000 Year to 30 June 2009 750,000 The company did not submit its tax return on income for the year ended 30 June 2008 until March 2009. The balance payable on the income tax at that date was 450,000. The currency exchange rate for the Rand against the Malawi wacha was 142 per Rand, throughout the year. (a) For the year ended 30 June 2009, state the different types of taxes that the company is liable to pay and is responsible for, and state any interest and penalties that the company will incur in relation to these taxes, explaining how the penalties will be calculated. Note: you are NOT required to compute the amounts of tax payable. (5 marks) (b) Calculate the taxes payable by Exclusive Furnishers Limited on the importation of furniture. (6 marks) (c) State the procedures for clearing imported goods for customs duty purposes. (4 marks) (15 marks) End of Question Paper 8