Personnel Telephone Number Lecturers Elliot Wonenyika +263 4 702532/5 Zvinotendesa Mapetere +263 4 702532/5 Sufficient Muwandi +263 4 702532/5 Page 1 of 121
PRESCRIBED METHOD OF STUDY 1. Please read the prescribed study material for every study unit thoroughly before you study the additional information in section A of every study unit. 2. Do the other questions (section B) in the study unit and make sure you understand the principles contained in the questions. 3. Consider whether you have achieved the specific outcomes of the study unit. 4. After completion of all the study units - attempt the self-assessment questions to test whether you have mastered the contents of this tutorial letter. Page 2 of 121
SELF ASSESSMENT INTEGRATED QUESTIONS Question Number Topics Covered 1 Mock Exam 1 2 Mock Exam 2 3 Mock Exam 3 4 Mock Exam 4 5 Mock Exam 5 6 Mock Exam 6 7 Mock Exam 7 8 Mock Exam 8 Page 3 of 121
Mock Exam 1 Paul Magaisa is a Zimbabwean resident and has been in the employment of Ecomade (Pvt) Limited (Ecomade) for the past 20 years. Paul started working for Ecomade when he was 37 years of age and over the years he has managed to move up the ranks within the employment structures of Ecomade. Since 2010 Paul has been running his own small business to supplement his employment income given the fact that he had not received a salary increment from Ecomade since dollarization in 2009. You father has been friends with Paul since they met at a work function in 2008 at the height of the Zimbabwean economic crisis. In one of their many conversations your father indicated to Paul that you are currently undergoing your CTA studies and that one of the core courses you are studying is Zimbabwean tax. Paul therefore approached you for assistance in respect of his tax affairs for the 2015 year as he has to submit tax returns to the Zimbabwe Revenue Authority (ZIMRA). Paul provided you with the following information in respect of his economic affairs for the 2015 tax year of assessment: Part A Ecomade: Detailed below are Paul s receipts and expenses in respect of his employment with Ecomade for the period January 2015 to December 2015. Notes $ Salary 14,400 Bonus 1 - Long service award 2 3,600 Compensation 3 2,300 Fuel Allowance 4 600 Loan 5 2,400 Refund from Baku 3 900 Loan Repayments 5 (1,600) NSSA contributions (294) Ecomade Pension Fund Contributions 6 (720) Medical Expenses 3 (2,140) Purchase of shares in Ecomade 7 (3,200) Notes Page 4 of 121
1. Given the liquidity challenges which were prevailing during 2015, Ecomade decided to give its staff grocery vouchers worth $400 each to be redeemed at any OK Zimbabwe shop. Paul received 3 of these vouchers in lieu of his bonus for the 2015 year. 2. In February 2015 Paul attained 20 years of service with Ecomade. In recognition of Paul s long service he received cash amounting to $3,600 which is equivalent to his three months salary and a holiday voucher to Victoria Falls. Ecomade incurred a total cost of $600 in respect of the holiday voucher. 3. In June Paul had an accident whilst travelling from Bulawayo to Harare and was hospitalized for a period of 5 days due to the injuries he suffered as a result of the accident. Paul lodged a claim with the workers insurance compensation fund (WCIF) and he received $2,300 as compensation for the injuries suffered from the accident. In July Paul received a bill of $2,140 from Avenues Clinic in respect of medical expenses he incurred during his hospitalization. Paul paid the full amount of $2,140 in September and managed to receive a reimbursement of $900 from Baku Medical aid fund with whom he holds a medical insurance policy. 4. Paul receives a monthly fuel allowance of $50 which he uses at his sole discretion. 5. In August 2015 Paul received an interest free loan of $2,400 from Ecomade which he used to pay for his two daughters 3 rd term school fees at Dominican Convent in Harare. The loan was repayable in 6 equal monthly installments with the first installment due on the 30 th September 2015. 6. Paul contributes $60 per month to Ecomade Pension fund and Ecomade also contributes $60 per month for the benefit of Paul. 7. On 1 April 2012 Paul received 1,000 share options from Ecomade (Pvt) Limited. The scheme was in line with an employee share incentive scheme implemented inorder for Ecomade to comply with the Indigenization and Empowerment Act. The market price for each share in Ecomade at 1 April 2012 was $0.90. The terms of the share options granted to Paul were as follows: The share options have a vesting period of 3 years commencing 1 April 2012. Each option gives Paul the right to buy 5 shares in Ecomade (Pvt) Limited. The strike price per share amounts to $0.80. Any options which would not have been exercised by 31 December 2016 will automatically lapse. Page 5 of 121
Paul exercised 800 of his share options on 1 September 2015 and paid the purchase consideration under the share option scheme on the same date. On the date that Paul exercised his share options the market price for each share in Ecomade was $1.60. However in November 2015 Paul sold 2,000 of the shares acquired under the share option scheme for an amount of $2.30/share. Other Information Consumer price indices that may be relevant were as follows: April 2012 1.40% 2012 Average 1.20% 2013 Average 1.20% 2014 Average 1.50% September 2015 1.83% November 2015 1.85% 2015 Average 1.75% Page 6 of 121
Required Part A a. With reference to the information in note 7 Paul has requested your advice on the tax implications of the share option scheme in terms of the Income Tax Act. You should provide supporting calculations where applicable. 10 1 b. Calculate the income tax payable in respect of Paul s taxable income from employment for the 2015 tax year of assessment. For items which are neither taxable nor deductible provide a brief explanation and indicate by the use of a zero in your tax computation. 25 2 Provide the dates for which the following should be done: a) Registration for PAYE purposes b) Submission of PAYE monthly return c) Submission of PAYE annual return d) Payment of monthly PAYE due 1 1 2 1 TOTAL 40 Page 7 of 121
Solution Part A a) With reference to the information in note 7 Paul has requested your advice on the tax implications of the share option scheme in terms of the Income Tax Act. You should provide supporting calculations where applicable. 10 marks Income Tax Act On the grant date of the share options in 2012 there is no income tax implications. 2 Paul will only be taxed upon exercising his right to purchase shares under this scheme, which in this case was on 1 September 2015. 1 A taxable benefit is calculated on this date in terms of sect 8 (1) (t) of the income tax act and this benefit is subject to PAYE. 2 The amount of the benefit is calculated by applying the following formula: A-(B+C). A: market value at time of exercise: $1.60 * 800 * 5 = $6,400. 1 B: exercise price : $0.80*800*5 = $3,200 1 C: Inflation allowance: (D-E)*B E D: CPI at date of exercise E: CPI on grant date Inflation Allowance : (1.83 1.4) *$3,200 2 1.4 : $983 Benefit = $6,400 ($3,200+983) = $2,217 1 Page 8 of 121
b) Calculate the income tax payable in respect of Paul s taxable income from employment for the 2015 tax year of assessment. For items which are neither taxable nor deductible provide a brief explanation and indicate by the use of a zero in your tax computation. 20 marks $ Marks Salary sect 8 (1) (b) 14,400 ½ Bonus sect 8 (1) (b) - $400*3 1,200 ½ Less exemption 3 rd schedule par 4 (1,000) 200 1 Long service award : cash 3,600 2 : holiday voucher 600 2 Compensation: Exempt 3 rd schedule par 6 (e) 0 2 Fuel allowance sect 8 (1) (f) 600 1 Loan: used to pay for education related costs hence interest benefit is not taxable sect 8 (1) (f) 0 2 Refund from Baku capital in nature 0 2 Loan repayments : capital in nature 0 2 NSSA Contributions (294) ½ Ecomade Pension fund contributions ( (720) 1 Purchase of share in Ecomade capital in nature 0 1 Share option benefit sect 8(1) (t) 2,217 ½ Taxable Income 20,603 Apply tax tables On the 1 st $12,000 1,800 1 ($20,603-$12,000)*25% 2,151 1 3,951 Page 9 of 121
Less Credits Medical expenses ($2,140 - $900) * 50% (620) 1 Elderly person s credit (900) 1 2,431 Add 3% AIDS Levy 73 1 Total tax payable 2,504 Total Presentation 2 23 2. Marks e) Registration for PAYE purposes Within 14 days of becoming an employer 1 f) Submission of PAYE monthly return Within 10 days of the end of the every month 1 g) Submission of PAYE annual return Within 30 days after the end of the tax year h) Payment of monthly PAYE due Within 10 days of the end of 1 every month Total 5 2 Page 10 of 121
Mock 2 You are a second year trainee accountant in the tax department of ETW Chartered Accountants, a medium sized firm with operations in Harare. Mike Tom the manager in the tax department was recently informed that you were now undergoing you ZCTA studies and he was also made aware that one of your core courses is taxation. Upon hearing this Mike gave you two files that he had been working on in respect of queries that he got from his clients. He has therefore tasked you to come up with appropriate responses to the clients queries. Part A Mashco (Pvt) Ltd (Mashco) is a company incorporated in Zimbabwe and is listed on the Zimbabwe Stock Exchange. The company owns properties which it leases out to domestic and commercial tenants under operating lease agreements. Over the years due to economic decline Mascho has seen its property occupancy levels fall from highs of 90% seen soon after dollarization to the current levels of 30%. Mashco s finance manager Denford Mambo requested your firm assistance with the following queries: Query 1 During the 2015 tax year one of Mashco s tenants Tatenda Venture Capital (Tatenda) decided to cancel their lease agreement they had with Mashco as they were facing viability challenges. After intensive negotiations between the two parties an agreement for the cancellation of the lease was agreed with the following terms: 1. Tatenda to pay Mashco an amount of $15 000 which is equivalent to 3 month s rentals. The amount was to compensate Mashco for the failure by Tatenda to give 3 months notice as required by the terms of the lease agreement. 2. Tatenda to pay Mashco an amount of $25 000 in respect of rentals outstanding from the past year of occupation. 3. Tatenda forfeited their rights to a refundable deposit of $10 000 that they had paid to Mashco on inception of the lease. Mashco received the full amount of $40 000 in respect of the agreement above on the 31 st of July 2015. Denford is requested your advice on whether they should include the above amounts as stipulated in the cancellation agreement as part of their gross income for tax purposes. Query 2 Due to the persistent low occupancy levels a decision was made in May 2015 to dispose of one of the properties used by Mashco for letting out, to alleviate cash flow problems which were now Page 11 of 121
crippling the company. A buyer for the property was duly found in August and the property was sold for an amount of $80 000. Mashco made a profit of $20 000 on the sale. Denford is again requesting your advice on whether either the $80 000 or the $20 000 constitute gross income in terms of the income tax act. Part B Tapiwa Makosa is a 45 year old qualified mechanical engineer and had been working for NewDawn Engineers (NewDawn) for the past 15 years. Over the years Tapiwa had managed to rise to the positions of operations director, a post he held for the past 2 years. In August 2015 Tapiwa decided to resign from NewDawn in order to pursue his dream of starting his own engineering company. Tapiwa s last working day for NewDawn was the 31 st of August 2015. You were provided with the following information in respect of Tawanda s employment income for the year of assessment ended 31 December 2015: Notes $ Gross Basic Salary 1 45 000 Bonus 900 Cash in lieu of leave 1 500 Gratuity 2 5 000 Fuel allowance 3 1 200 Loan 4 6 000 NSSA contribution 5 (294) Pension fund contributions 6 (3 200) Notes: 1. During the 2015 tax year Tapiwa received his full gross salary of $45 000 as cash, with Makuti remitting the monthly Pay As You Earn (PAYE) to the tax authorities at the company s cost. The total PAYE as you earn remitted during the year amounted to $4 800. 2. When Tapiwa resigned from NewDawn, the company paid him an amount of $5 000 as a thank you for all the years of service he had dedicated to the company. 3. As part of his employment terms Tapiwa received a monthly fuel allowance of $150. Tapiwa also had usage of a company allocated vehicle a Toyota corolla sedan, engine capacity 2 300ccs. When he resigned, Tapiwa bought the corolla that he had been using for an amount of $1 500 and at that date of purchase the vehicle had a market value of $2 000. During the Page 12 of 121
period January to August 2015 Tapiwa kept a log book of his mileage which indicated the following: Km Business travel 24 000 Personal travel 16 000 40 000 4. Tapiwa was advanced the loan amount to $6 000 interest free on 1 January 2015. He used $1 000 of the loan to pay for his fees with the University of Zimbabwe (he is studying towards a post graduate diploma in mechanical engineering) and the balance he used to acquire a pick up truck for his personal use. On his retirement NewDawn waived the repayment of the full $6 000. 5. The NSSA contribution was deducted from Tapiwa s salary and remitted to NSSA. New Dawn also contributed an equivalent amount to NSSA for the benefit of Tawanda. 6. The pension fund contributions are to a registered pension fund. In September 2015 Tawanda decided to cash out from the fund and he received a lump sum of $45 000 plus a monthly annuity of $300 commencing 1 September 2015. At the time of exiting the pension fund, Tapiwa s pension entitlement was $90 000. 7. From January to August 2015 NewDawn paid a total of $1 500 in respect of Tapiwa s contributions to a medical aid. 8. During the 2015 tax year Tapiwa paid for the following medical expenses which were not refunded by the medical aid fund: $ Hospital bills for Tapiwa s mother 2 300 Wheel chair for Tapiwa s 30 year old son who is disabled 600 Page 13 of 121
Required Part A 1. With reference to the Income Tax Act and applicable case law write an email to respond to the queries from Mashco. 20 marks Part B 2. Calculate the income tax payable by Tapiwa for the tax year ended 31 December 2015. For items which are neither taxable nor deductible indicate by the use of a zero and provide a brief explanation. 20 marks Page 14 of 121
Solution PART A Solution 1 To: From: Denford Mambo Me Date: 18 Feb 2016 Subject: Tax Queries Mashco Dear Denford, I hope I find you well. Further to your queries in your email below please find our responses to matters raised. Query 1 (max 14 marks) From the information you provided us it appears that the contentious issue is on whether the amount received of $40 000 is revenue or capital in nature, given that the gross income definition excludes capital receipts. 1 The $40,000 received should be assessed in its separate components as to whether or not they should be included in gross income. 1 Item 1. $15,000 Three months rentals in lieu of notice As held in the Burmah Steamship Co Ltd case we need to determine whether the compensation received was to fill a hole in the profits or go to fill a hole in the fixed assets. 2 If the receipt are to fill a hole in the profits then they will be revenue in nature and qualify as gross income. 1 If the receipts are to fill a hole in the fixed assets then they will be capital in nature and therefore not constitute gross income. 1 Since the $15 000 was received as compensation for loss of rentals for the next three months it can be concluded that it is fill a hole in the profits of the company. 1 Therefore the $15 000 is revenue in nature and qualifies to be included as part Mascho s gross income. 1 Item 2. $25,000 Outstanding rentals The question to answer is to determine whether the receipt of $25 000 accrued during the 2015 year of assessment. 1 In terms of the gross income definition amount are taxed during the year they are received or accrued. 1 Page 15 of 121
As held in the case between lategan v CIR income is accrued when the tax payer becomes entitled to it. 1 Since in our case the $25 000 relates to rentals for the 2014 and 2013 year it means the Mascho became entitled to the rentals during those years and would have been taxed in those years. 1 Therefore the $25 000 will not be included in Mashco s gross income for the 2015 year of assessment. 1 Item 3. $10,000 Security Deposit The question to answer is whether the deposit of $10 00 has been received during the current of assessment with reference to the gross income definition. 1 As held in the Geldenhuys v CIR the amount to be included as part of gross income the amount must have been received for the tax payers benefit. 2 Initially when Mascho received the deposit of $10 000 from Tatenda Venture Capital, they had an obligation to return it to the lessee since it was refundable. Therefore the deposit would not have been included in gross income as at that date. 1 However on the date of forfeiture by Tatenda of the deposit, Mascho could now use the $10 000 for their own. Therefore since forfeiture occurred during the 2015 year, the $10 000 would be included in Mashco s gross income for the 2015 tax year. 1 Query 2 (max 5 marks) Proceeds of $80 000 We need to determine whether the proceeds of $80 000 are capital or revenue in nature as the gross income definition excludes capital receipts. 1 As held in the case between COT Southern Rhodesia v Levy 1952 the nature of the amount will be determined with reference to the intention of the taxpayer at the time of acquisition of the property. 1 In your case Mascho had acquired the property for letting purposes, which means the property is capital in nature used to generate rental income. 1 Also the fact that Mascho made a profit on the sale does not change anything as was again held in the above case that the taxpayer is not required to exclude the slightest contemplation of profitable resale. 1 Therefore the proceeds of $80 000 are capital in nature and are not included in the gross income. 1 Profit of $20 000 Issue is to determine whether Mascho actually received an amount of $20 000 as per the gross income definition. 1 The $20 000 is calculated using accounting principles, this means no actual money or property was received equivalent to the $20 000. 1 Total Available 25 marks Page 16 of 121
Award 1 mark for writing in email format PART B Solution 2 Computation of income tax payable by Tapiwa for the year ended 31 December 2015 $ $ Marks Gross basic salary 45 000 ½ PAYE remitted at the company s cost 4 800 1 Bonus 900 Exemption 1 st $1,000 (900) 0 1 Cash in lieu of leave 1 500 ½ Gratuity 5 000 1 Fuel Allowance ($150 x 8) 1 200 The extent it was used for business (60% x 1 200) (720) 480 2 Motoring benefit: ($600 x 8) monthly 4 800 1 On disposal ($2,000 - $1 500) 500 1 Interest benefit: To acquire motor vehicle : $5 000 *6% * 8/12 200 2 To pay for UZ fees: interest benefit exempt (sect 8 (1) (f) 0 1 Loan waiver: For the purchase of motor vehicle 5 000 1 For fees @ University exempt (used to fund education related expenses) - 5 000 1 NSSA contribution employer exempt 0 ½ Page 17 of 121
NSSA Contribution employee (294) ½ Pension fund contributions (registered pension fund) (3 200) (3 294) ½ Monthly annuity ($300 x 4 months) 1 200 1 Contribution medical Aid employer exempt 0 1 TAXABLE INCOME 65 186 On the 1 st $60 000 14 580 ½ (65 186 60 000)*35% 1 815 ½ Lump sum Receipt: Pension fund receipts (taxed at the highest marginal tax rate) 16 395 $45 000 * 35% 15 750 2 Tax Credits: Medical Expenses 32 145 Hospital bills for Tapiwa s mother (not a dependent) - 1 Wheel chair (invalid appliance) ($600 2) 300 (300) 1 31 845 Aids Levy @ 3% (31 845 * 3%) 955 1 Income Tax Payable 32 800 Less: PAYE Remitted (4 800) ½ Income Tax due 28 000 Total Available 23 Page 18 of 121
Mock 3 Fudge Ltd is a manufacturing company listed on the Zimbabwe Stock Exchange. The company has a foreign branch. The financial manager has prepared the following draft summarised trial balance for the year ended 31 December 2015. The notes indicate how various items have been processed in the draft summarised trial balance. DRAFT SUMMARISED TRIAL BALANCE 31 December 2015 Debit Credit Notes $ $ Property, plant and equipment Owned 1 3 876 000 Leased 2 1 560 000 Investment properties 3 880 000 Goodwill 4 564 000 Intangible assets 5 594 000 Available-for-sale assets 6 350 000 Inventories 7 1 456 765 Trade and other receivables 8 2 265 987 Cash and cash equivalents 2 925 208 Share capital 9 2 823 600 Retained earnings on 1 March 2008 979 159 Available-for-sale equity reserve 10 260 696 Profit before tax 11 5 545 937 Foreign tax 11 195 000 Dividends paid 12 560 000 Deferred tax on 1 March 2008 448 991 Long-term liabilities 13 2 356 000 Short-term liabilities 14 2 812 577 15 226 960 15 226 960 Notes 1 Owned property, plant and equipment The total depreciation expense for owned property, plant and equipment for the year ended 31 December 2015 amounted to $890 400 which included an amount of $32 242 relating to office buildings and $103 394 in respect of other non-manufacturing assets. The policy of the company is to depreciate all property, plant and equipment, except land, on a straightline basis from the date the assets became available for use by the company. Page 19 of 121
An analysis of owned property, plant and equipment at 31 December 2015 was as follows: Cost Accumulated Carrying Depreciation value $ $ $ Land 354 400 0 354 400 Office buildings 680 200 273 400 406 800 Manufacturing buildings 1 376 700 503 200 873 500 Other manufacturing plant 3 825 100 1 967 400 1 857 700 Other movable assets purchased in 2010 651 400 267 800 383 600 Balance at 31 December 2014 6 887 800 3 011 800 3 876 000 Erection of the original manufacturing buildings by Fudge Ltd commenced in September 2006 and these buildings were completed and brought into use on 31 July 2007. Improvements of $370 700 were capitalised to manufacturing buildings effective from 31 August 2013. Office buildings were constructed in 2012 Details of manufacturing plant held at 31 December 2015 were as follows: Cost Year of acquisition $ Year ended 31 December 2010 1 602 600 Year ended 31 December 2012 880 700 Year ended 31 December 2014 1 341 800 3 825 100 The company only acquires new and unused plant. Exchange differences recognised in profit before tax include realised exchange losses of $250 000 incurred on the acquisition of plant brought into use for the year ended 31 December 2015. 2 Leased property, plant and equipment The movement in leased property, plant and equipment was as follows: $ Balance at the beginning of the year 2 080 000 Depreciation (520 000) Balance at 31 December 2015 1 560 000 The leased assets consist of manufacturing plant, which is leased in terms of a finance lease. The lease liability is included in long-term and short-term liabilities (see notes 13 and 14). 3 Investment properties Page 20 of 121
It is the policy of the company to measure investment properties at fair value. The investment properties are office buildings which were acquired during 2007. The original cost of the investment properties held at 31 December 2015 was $420 100. An investment property with a cost of $234 600 was sold during the 2014 financial year for $324 600. The movement in investment properties was as follows: $ Balance at the beginning of the year 1 006 400 Investment property sold (324 600) Fair value adjustments 198 200 Balance at 31 December 2015 880 000 The company made a decision in 2013 to sell all of its investment properties over the course of the next three years as they were not considered to be core to operations. 4 Goodwill The goodwill arose on the acquisition of the assets and liabilities of two businesses on 1 March 2012. One of the businesses was not as profitable as was expected and an impairment loss was recognised in terms of IAS 36, Impairment of assets. The movement in goodwill was as follows: $ Balance at the beginning of the year 727 000 Impairment (163 000) Balance at 31 December 2015 564 000 5 Intangible assets The movement in intangible assets was as follows: Design Assets Other intangible assets Total $ $ $ Balance at the beginning of the year 219 000 701 000 920 000 Amortisation (14 000) (202 000) (216 000) Impairment 0 (110 000) (110 000) Balance at 31 December 2015 205 000 389 000 594 000 The intangible assets include a design which was purchased by the company at a cost of $280 000. The design was brought into use during the financial year ended 28 February 2013. Page 21 of 121
All the other intangible assets arose on the acquisition of the two businesses effective from 1 March 2012 and are not subject to any allowances for tax purposes (see note 4). Page 22 of 121
6 Available-for-sale assets Available-for-sale assets consist of shares in listed companies. It is the policy of the company to invest surplus funds in listed shares. The company is not regarded as a share dealer for income tax purposes. For financial reporting purposes the shares are classified as available for sale in terms of IAS 39, financial instruments: Recognition and measurement. The movement in the available-for-sale assets was as follows: $ Balance at the beginning of the year 250 000 Acquisitions at cost 45 000 Fair value adjustment for the year 120 000 Sold during the year (65 000) Fair value balance at 31 December 2015 350 000 In the accounting records the total proceeds of $65 000 on the sale of the shares were credited to the available-for-sale asset account. No other entries were processed in respect of the sales. The cost of the shares sold during the year amounted to $10 000. 7 Inventories In terms of IAS 2, Inventory, the company measures inventory at the lower of cost or net realisable value. 31 December 2014 31 December 2015 $ $ Cost 1 283 875 1 716 765 Provision for write down to net asset value (156 000) (260 000) Balance 1 127 875 1 456 765 8 Trade and other receivables Trade and other receivables were as follows: 31 December 2014 31 December 2015 $ $ Trade receivables 2 102 225 2 395 600 Provision for doubtful debts (240 600) (350 600) Other receivables 181 100 220 987 Balance 2 042 725 2 265 987 Page 23 of 121
9 Share capital Share capital increased by $276 000 during the financial year ended 31 December 2015. The increase relates to shares issued to directors in terms of a bonus scheme. The decision was made not to pay any cash bonuses to the directors of the company for the financial year ended 31 December 2015. Instead of a cash bonus, 138 000 shares were granted to the directors at an issue price of $2 per share on 1 October 2015. The fair value of the shares of Fudge Ltd was $3 per share on 1 October 2015. The only journal entry processed in respect of this transaction was the following: Dr Cr Bank 276 000 Share capital 276 000 Shares granted to directors on 1 October 2015 10 Available-for-sale equity reserve This consists of the fair value adjustments on the available-for-sale investments. The movement in this reserve was as follows: $ Balance at the beginning of the year (net of deferred tax of $22 904) 140 696 Fair value adjustment for the year 120 000 Balance as at 31 December 2015 260 696 11 Profit before tax The profit before tax includes the profits of $650 000 of the foreign branch which are not taxable in Zimbabwe. Income tax of $195 000 is due and payable to the foreign country for the year ended 31 December 2015. The profit before tax also includes local dividends received on the available-for-sale investments of $128 000. $12 000 of the dividends were received during October 2015 and the balance before 15 September 2015. The dividends received before 15 September 2015 were the only dividends received during the dividend cycle ending on 15 September 2015. Expenses deducted in determining profit before tax for the financial year ended 31 December 2015 include interest recognised on the lease liability of $362 000; and interest recognised on other liabilities of $298 600. The Zimbabwe taxation expense for 2014 has not yet been calculated or provided for. 12 Dividends paid The company declared a dividend of $560 000 on 15 September 2015. Local dividends amounting to $16 000 were received in the previous year. Page 24 of 121
13 Long-term liabilities The long-term liabilities were as follows: 31 December 2014 31 December 2015 $ $ Lease liabilities 1 632 400 1 209 800 Other liabilities 1 362 327 1 146 200 Balance 2 994 727 2 356 000 The lease liability arose on the acquisition of manufacturing plant by means of a finance lease (see note 2). Instalments paid on the lease liability during the financial year ended 31 December 2015 amounted to $693 450 (including VAT). VAT on the original transaction amounted to $468 000 while the lease payments up to 31 December 2015 amounted to $3 015 001 and the future lease payments amount to $2 285 353. Instalments paid during the financial year ended 31 December 2015 in respect of the other liabilities amounted to $425 480. 14 Short-term liabilities The short-term liabilities were as follows: 31 December 2014 31 December 2015 $ $ Trade payables 1 420 100 1 324 450 Other payables 159 460 186 200 Current portion of lease liabilities 596 300 693 480 Current portion of other liabilities 519 200 608 447 Balance 2 695 060 2 812 577 Other payables include a provision for leave pay of $88 200 (2012: $42 600). All other items have been correctly accounted for in the draft summarised trial balance and all VAT entries have been processed appropriately. Page 25 of 121
Required 1. Calculate the profit before tax of Fudge Ltd for the financial year ended 31 December 2015 in accordance with International Financial Reporting Standards. 3 2. Calculate the normal tax payable in Zimbabwe by Fudge Ltd for the 31 December 2015 year of assessment. Begin your calculation with the profit before tax as calculated in (1) above. 37 TOTAL 40 Page 26 of 121
Solution Fudge Ltd Part (a) Calculation of profit before tax $ Marks Profit before tax (given) 5,545,937 Less SBP expense [276,000/2x(3-2)] (138,000) 2 Profit before tax 5,407,937 1 Part (b) Calculation of normal tax payable $ Profit before tax 5,407,937 0.5 Note 1 Depreciation 890,400 1 Capital Allowances - section 15 (2) (c) & 4th Schedule Land - 1 Office buildings (680,200x2.5%) (17,005) 1 Manufacturing building:fully written off - 1 Improvements on manufacturing building (370,700x25%) (92,675) 1 Manufacturing plant 2010:fully written off - 1 Manufacturing plant 2012(880,700x25%) (220,175) 1 Realised Exchange Loss on acquisition of manufacturing plant : Capital nature 250,000 2 Manufacturing plant 2015 Manufacturing Plant Cost 1,341,800 Add Realised Exchange 250,000 1,591,800 1 Page 27 of 121
SIA on new cost (1,591,800*25%) (397,950) 2 Other non-manufacturing assets (651,400*25%) (162,850) 1 Note 2, Note 11 & Note 13 Leased PPE: Depreciation 520,000 1 Interest paid 362,000 1 Installment paid(693,450-((693,450/5,300,354)x468,000)) (632,221) 2 Note 3 Fair value adjustment (198,200) 2 Recoupment Proceeds 324600 Less ITV (Purcahsed pre 2009) - Possible Recoupment 324,600 Limited to Capital allowances previously granted - 2 Note 4 Impairment of goodwill 163,000 1 Note 5 Impairment of intangible assets 110,000 1 Amortisation of intangible assets 216,000 1 Note 6 Fair value adjustment (120,000) 1 Note 7 Provision for write down to net asset value(260,000-156,000) 104,000 2 Note 8 Provision for doubtful debts (350,600-240,600) 110,000 2 Note 9 IFRS 2 SBP expense-prohibited deduction Sectio 16 (1) (l) - 2 Note 11 Page 28 of 121
Foreign income (650,000) 1 Interest recognised on other liabilities - 1 Dividends received (128,000) 1 Note 14 Provision for leave pay (88,200-42,600) 45,600 2 Taxable Income 5,559,861 Tax @25.75% 1,431,664 1 40.5 Page 29 of 121
Mock 4 Question 1 65 marks You have recently been transferred to the tax services department of Bonde Chartered Accountants after you had indicated your intention to specialise in tax related services. Tapiwa Mapande a manager in the tax department was your assigned supervisor and he gave you a file for one his clients Jonathan Pinkett. The file given to you contained the following information. Background information. Jonathan Pinkett died on the 31 st of Mach 2015 after a long battle with prostate cancer which had seen him hospitalised during the last weeks of March. At the time of his death, Jonathan was survived by his wife Patricia and three children, Martin (27 years of age), Pauline (24 years of age) and Nolan (17 years of age). Jonathan was born in 1965 in the then republic of Rhodesia which later on became Zimbabwe after attaining independence in 1980. At the time of his death, Jonathan was employed by the ministry of home affairs as a security adviser. Jonathan s widow, Patricia has approached you, that you assist her with the preparation of her family s income tax returns for the 2015 year. After a meeting held with Patricia, she provided you with the following information. Receipts and Expenses: January to December 2015: Notes $ Salary: January to April 1 8,000 Cash in lieu of leave 2 1,500 Bonus 3 1,600 Fuel Allowance 4 300 Housing allowance 400 Funeral assistance 5 500 Pension lump sum 6 15,000 Pension annuity 6 800 Medical Expenses 7 (3,500) NSSA Contributions Self (72) Executors expenses 8 (800) Notes Page 30 of 121
1. In terms of his employment contract with the ministry of home affairs Jonathan was on $2,000 monthly salary. When Jonathan passed on the permanent secretary in the Ministry decided to pay Jonathan s deceased estate the salary for the month of April and the amount was paid to the estate on the 18 th of May 2015. 2. In May 2015 the ministry of home affairs paid this amount to Jonathan s deceased estate in connection with the leave days he had accumulated at the time of his death. 3. The government of Zimbabwe made an announcement that they will be paying bonuses to all civil servants in respect of the 2014 year on the 22 nd of December. On the same day all employees in the Ministry of home affairs were informed that they will only be paid their bonuses in May of 2015. The $1,600 was paid to Jonathan s deceased estate on the 22 nd of May 2015. 4. The fuel allowance was received during the months of January to March 2015 and Jonathan never kept a log book of his travels. 5. The $500 was given to Jonathan s wife from the ministry of home affairs to assist with Jonathan s funeral expenses. 6. In August 2015 Jonathan s deceased estate received a lump sum of $15,000 from NSSA and Jonathan s pension entitlement from NSSA amounted to $30,000. With effect from September NSSA paid a monthly annuity of $200 in respect of Jonathan s policy. 7. In June 2015, the executors of Jonathan s deceased estate paid the amount of $3,500 to Avenues Clinic in respect of Jonathan s medical bills that had been accumulated up to the date of his death. 8. This was in connection with the fees charged by the executors in administering Jonathan s deceased estate. Assets Details At the time of his death on the 31 st of March 2015, Jonathan had the following assets with attached values for estate valuation purposes: Notes $ Mazda 323 sedan Vehicle 3,200 3 Bedroomed flat in the Avenues area of Harare* 1 70,000 Commercial property in the Harare CBD* 2 150,000 Family house in Chisipite co-owned with Patricia 90,000 Bank balances 30,000 Notes: 1. For the 2015 year the 3 bedroomed apartment was being leased out for a monthly rental of $600. Page 31 of 121
2. The commercial property was also being leased out for the 2015 year for a monthly rental of $1,800. *Jonathan acquired both properties in 2007. Jonathan s will The terms of Jonathan s will were as follows: The mazda 323 sedan vehicle and the 3 bedroomed apartment were bequeathed to his wife Patricia. The commercial property in the Harare CBD was bequeathed to the Pinkett Trust. The residue in the estate was bequeathed to Patricia. The affairs of Jonathan s deceased estate were wound up on the 31 st of August 2015 where the final distribution account was filed with the master of the high court. You were also provided with the following information in connection with the Pinkett Trust The Pinket trust was formed by Jonathan Pinket in the early 90 s with an initial donation to the equivalent of $100 being made. Over the years the Pinket trust has acquired assets which generate income for distribution to the beneficiaries of the trust in terms of the trust deed. The following is an extract from the accounting records of the Pinket Trust for the year ended 31 December 2015. Notes $ Income Rental Income 1 35,000 Realised exchange gain 2 500 Unrealised exchange gain 2 300 Insurance proceeds 3 1,200 Interest income 4 1,600 Annuity 5 4,500 Dividends 6 1,500 Expenditures and distributions Deductible Repairs and maintenance costs on properties (2,000) Properties caretakers salaries (2,500) Trustee s fees (5,500) Annuity 7 (6,000) Page 32 of 121
Other distributions 8 (4,500) Donations 9 (1,200) Notes 1. Included in the rental income is an amount of $5,600 received in connection with a rented property located in South Africa. The $35,000 includes rental income arising from the commercial building received from Jonathan s estate. At the beginning of the 2015 tax year all the capital allowances related to the rented out properties had been fully exhausted. 2. The realised and unrealised gains were all in connection with amounts owed from the tenant in South Africa. 3. The $1,200 insurance proceeds was received in connection with damages to one of the rented out properties. The full costs of repairing the damages are included in the repairs and maintenance amount. 4. The interest income of $1,600 was received net of Zambian withholding tax. The Zambian withholding tax amounted to $160. 5. In March 2015 the trust purchased an annuity for $30,000 from New Mutual. In return for this capital contribution the trust will be receiving a monthly amount of $500 for the next 8 years commencing 1 April 2015. 6. The dividend was received from Build a House Building society registered in terms of the Banking Act of Zimbabwe. 7. The annuity was paid to the following beneficiaries of the Trust: $ Martin 3,000 Pauline 2,000 Nolan 1,000 6,000 8. Over and above the annuities above the following distributions were made to the beneficiaries: $ Martin 2,500 Pauline 2,000 4,500 The above distributions were all made from current year profits. 9. The Pinket Trust made a cash donation of $1,200 to the buy Zimbabwe campaign. Terms of the Pinket Trust deed: Page 33 of 121
The beneficiaries to the Pinket Trust deed are Martin, Pauline and Nolan. All the beneficiaries to the trust receive a monthly annuity from the trust and hold an equal share in the remaining trust income. The balance of the income to the Trust would be held in trust for any beneficiary below the age of 21 and if any of the beneficiaries were to die before reaching the age of 21, any accumulated income would be paid to the executors of their deceased estates. The Trustees have discretion over the amount to be distributed to the beneficiaries with vested rights, Question 2 35 marks Minerals (Private) Limited is a company registered in Zimbabwe and operates a gold mine located in Mvurwi. The company commenced its operations in 2009 after the adoption of the multicurrency system in Zimbabwe and has over the years seen tremendous growth in its production. In February 2016 Minerals finance manager sent to your office the audited financial statements for the year ended 31 December 2015 and have requested that you prepare their annual income tax return which was due to be submitted by the 30 th of April 2016. All amounts are exclusive of Value Added Tax unless specifically indicated otherwise. Detailed below is an extract of statement of comprehensive income for the year ended 31 December 2015: Note US $000 Sales 1 13,000 Cost of sales 2 (8,200) Gross Profit 4,800 Other Income 3 500 Administration expenses 4 (900) Selling and distribution expenses 5 (1,100) Staff costs 6 (800) Profit before interest and tax 2,100 Finance Charges 7 (700) Profit before tax 1,400 Extract of the statement of financial position as at 31 December 2015: Page 34 of 121 Note US $000
Equity and Liabilities Share Capital 10 Retained earnings 2,200 2,210 Non-Current Liabilities Long term interest bearing loan 8,200 Deferred tax 300 8,500 Current liabilities Trade payables 700 Deferred Revenue 1 40 Current portion of long term interest bearing loan 640 1,380 Total Equity and Liabilities 12,090 Notes 1. During the 2015 financial year Minerals exported 60% of their production output in quantity to customers in China. 2. Included in cost of sales were the following items: $ Depreciation 56,000 Closing stock recorded at Net Realisable Value (Cost $30,000) 24,000 3. Other income includes the following amounts amongst others: $ Dividend from Econet Limited (Listed on the ZSE) 13,000 Unrealised exchange gain on debtors 6,700 Profit on disposal of Motor Vehicles see note 8 5,000 Dividend for Probeats Limited (South African Company) 14,000(net)* *Minerals received the dividend of $14,000 in August 2015 after the deduction of South Africa Withholding tax of $800. You also incurred bank transfer charges of $200 in respect of this dividend. Page 35 of 121
4. In June 2015 Minerals was fined $20,000 by the Environment Agency (EMA) for failing to comply with environmental regulations in their mining process. This amount plus $2,000 in legal fees incurred in respect of the EMA fine has been expensed in the general administration expenses. The company also paid insurance premiums of $9,000 in December 2015 in respect of insurance cover for the period 1 January 2016 to 31 December 2016. This amount has been capitalised as a prepayment in the financial statements. 5. Included in selling and distribution expenses are the following amounts: $ Advertising costs at the Zimbabwe International Trade Fair 5,300 Depreciation 80,000 Lunches with clients 9,200 6. Included in staff costs is an amount of $2,500 paid to a former employee who was injured at work. The employee was permanently injured when a metal casing fell on his legs and he was forced to retire as a result of those injuries. Also recorded under staff costs are the following donations made during the year: $ Donation to Midlands State University: Construction of Lecture rooms 120,000 Donation to the Chief Mvurwi 3,000 123,000 7. The finance charge relate to interest paid in respect of the long term interest bearing loan. The loan was used to finance Mineral s working capital requirements. 8. In May 2015 the company sold two Toyota Corolla sedan vehicles for $8,000 each. These vehicles had been initially acquired in 2012 for $18,000 each and have always been used in Minerals trading operations. 9. Capital expenditures during the year were as follows: $ Construction of mine hospital staff housing (10 units @ $15,000 each) 150,000 Shaft sinking 50,000 3 Twin cabs (@ $30,000 each) 150,000 In your discussions with the finance manager he indicated to you that Minerals uses the new mine method for the purposes of calculating the Capital Redemption Allowance. Page 36 of 121
Required Question 1 a) Discuss with reference to the income tax act and applicable case law, in which tax year will the bonus of $1,600 be taxable. 7 marks b) Calculate the taxable income and any income tax liability for Jonathan Pinkett for the period of assessment up to the date of his death. Provide a brief reason for amounts added/deducted in the tax computation with reference to the information as provided by Patricia. 14 marks c) From the available information, calculate the taxable income for Jonathan s deceased estate for the 2015 year of assessment. For items which are not taxable provide a brief explanation. 10 marks d) Calculate the taxable income for the year ended 31 December 2015 in respect of the following tax payers: i. The Pinkett Trust - 19 marks ii. Martin Pinkett - 3 marks iii. Pauline Pinkett - 3 marks iv. Nolan Pinkett - 2 marks v. Patricia Pinket - 3 marks Presentation and clarity of communication 3 marks Question 2 a) Calculate Minerals (Private) Limited taxable income and tax payable for the year ended 31 December 2015. 33 marks Presentation 3 marks Page 37 of 121
Solution SOLUTION 1a - The issue at hand is to determine the tax year in which the $1,600 bonus shall be taxable. 1 mark - The bonus is included in gross income in the year in which it accrues for tax purposes. 1 mark - Accrual for tax purposes happens when either an amount becomes due and payable or when a taxpayer becomes entitled to it. 1 mark - An amount accrues in the tax year in which the taxpayer becomes entitled to it. (CIR v People s Stores (Walvis Bay) (Pty) Ltd 1990 or Lategan vs CIR. So it accrues despite the fact that it may only be due and payable in the future. The entitlement principle is affirmed by section 10 (7). 2 marks - From the foregoing the bonus was announced in the 2014 tax year. This is the year in which the taxpayer became entitled to the amount despite it being payable after the last day of the 2014 year of assessment. 1 mark - Therefore the bonus of $1,600 will be taxable in the 2014 tax year of assessment. 1 mark Total Available 7 marks Page 38 of 121
SOLUTION 1 b COMPUTATION OF INCOME TAX LIABILITY FOR JONATHAN PINKETT FOR THE PERIOD OF ASSESSMENT UP TO THE DATE OF HIS DEATH EMPLOYMENT INCOME $ Marks Salary (January March) section 8 (April salary is a post death 1 6,000 award) Cash in Lieu of Leave S 11(4) (no right to claim amount during 1 - lifetime) Bonus (Taxable in the 2014 year of assessment) - 1 Fuel allowance (S 8 gross income) - 1 Housing allowance (S 8 gross income) - 1 Funeral assistance (post death income s 11(4)) - ½ Pension Lump sum (post death income s 11(4)) - ½ Pension annuity (post death income s 11(4)) - ½ NSSA Contributions - self (72) 1 Executor s expenses (post death expenses s 11(4)) - ½ TAXABLE INCOME 6,628 Tax thereon: 0-3600 = 3,600 x 0% = 0 2 605.60 3,601 6,628 = 3,028 x 20% = 605.60 Medical Credits (3,500 2) (1,750) 1 ASSESSED LOSS FOR JONATHAN PINKETT (1,144.40) TRADE AND INVESTMENT $ Marks Rental Income - Apartment (3months x $600) 1,800 1 Rental Income - Commercial Property (3months x $1,800) 5,400 1 TAXABLE INCOME 7,200 TAX PAYABLE @ 25.75% 1,854 1 Page 39 of 121
Total Available 14 SOLUTION 1 c COMPUTATION OF TAXABLE INCOME FOR JONATHAN PINKETT S DECEASED ESATE $ Marks Salary April Jonathan had no right to claim this salary as he 1 0 did not work for the month of April CILOL sect 11 (4) (a) 1,500 2 Funeral Assistance sect 11 (4) (b) ex-gratia payment 0 2 Pension annuity sect 11 (4) (a) 800 2 Executor s expenses (800) 1 Lump sum sect 11 (4) (a) and 8 (1) (r) 15,000 2 Taxable Income 16 500 Total Available 10 SOLUTION 1d (i) COMPUTATION OF TAXABLE INCOME FOR THE PINKETT TRUST FOR THE YEAR ENDED 31 DECEMBER 2015 Page 40 of 121 $ Marks Rental Income s 8 35,000 1 South African rental (foreign rentals not from source within Zim) (5,600) 1 W&T Commercial building inherited from Jonathan 2.5% x 150k (3,750) 2 Realised exchange gains (gains on receivables not from a source within 1 - Zimbabwe) Unrealised exchange gains (gains on receivables not from a source 1 - within Zimbabwe) Insurance proceeds (Burmah Steamship) filling a hole in profits 1,200 1 Interest Income Gross ($1,600 + $160) (0.5 for net, 0.5 for withholding) 1,760 1 Annuity [(($500 x 8yrs x 12months) $30,000) 96months] x 9months 1,688 2 Dividend from building society 1,500 2 Deductible R&M expenses (2,000) 1
Properties caretakers salaries (2,500) 1 Trustee s fees (5,500) 1 Annuity paid - deductible (6,000) 2 Other distributions (4,500) 1 Cash donation (not for the purposes of trade) - 1 Total TAXABLE INCOME 11,298 Less Taxable in the hands of beneficiaries with vested rights Martin ($11,298 * 1/3) (3,766) 1 Pauline ($11,298*1/3) (3,766) 1 Taxable income in the hands of the trust 3,766 Total Available 19 SOLUTION 1d (ii) COMPUTATION OF TAXABLE INCOME FOR MARTIN PINKETT FOR THE YEAR ENDED 31 DECEMBER 2015 $ Marks Annuity - Trust 3,000 1 Distributions - Trust 2,500 1 Share of trust taxable income 3,766 1 Taxable Income 9,266 Total Available 3 Page 41 of 121
SOLUTION 1d (iii) COMPUTATION OF TAXABLE INCOME FOR PAULINE PINKETT FOR THE YEAR ENDED 31 DECEMBER 2015 $ Marks Annuity - Trust 2,000 1 Distributions - Trust 2,000 1 Share of trust taxable income 3,766 1 Taxable Income 7,766 Total Available 3 SOLUTION 1 d (iv) COMPUTATION OF TAXABLE INCOME FOR NOLAN PINKETT FOR THE YEAR ENDED 31 DECEMBER 2015 $ Marks Annuity - Trust 1,000 2 Total Available 2 Solution 1d (v) COMPUTATION OF INCOME TAX LIABILITY FOR PATRCIA PINKETT FOR THE YEAR ENDED 31 DECEMBER 2015 TRADE AND INVESTMENT INCOME $ Marks Rental Income - Apartment (9 months x $600) 5,400 1 Capital allowances : 3 Bedroomed flat (exhausted) - 2 TAXABLE INCOME 3,650 Total Available 3 Page 42 of 121
SOLUTION 2 COMPUTATION OF MINERALS (PVT) LTD TAXABLE INCOME AND TAX PAYABLE FOR THE YEAR ENDED 31 DECEMBER 2015 $ Marks Profit Before Tax 1,400,000 ½ Deferred revenue s 8 (earlier of receipt or accrual) 40,000 1 Export sales (s8 Gross income) - 1 Cost of sales: Depreciation (not incurred s 15(2)) 56,000 1 Closing stock (NRV not acceptable valuation method; 2 nd schedule) 6,000 1 Other Income: Local listed co dividend (exempt) (s14 and 3 rd schedule) (13,000) 1 Unrealised exchange gain on debtors (not received s8 Gross Income) (6,700) 1 Profit on disposal of Motor Vehicles (not received s8 Gross Income) (5,000) ½ Foreign dividend (Probeats ltd) (taxed at a different rate of tax) (14,000) ½ Bank charges on gross income from a deemed source (foreign dividend) 1 200 (prohibited) EMA fine (expenditure falls upon the taxpayer as a lawbreaker rather than 1 20,000 as a businessperson.) Legal expenses related to the EMA fine 2,000 1 Insurance prepayment s15(2) deduction at the earlier of payment or 1 (9,000) accrual. Advertising @ ZITF - 0 1 Selling and Distribution depreciation (not incurred s 15(2)) 80,000 1 Lunches with clients ( entertainment - prohibited deduction s 16 (1)(m)) 9,200 1 Voluntary payments to former employee restricted to $500 p.a. s 15 (2)(q) 2,000 2 Donation to MSU Approved research institution - s 15 (2)(r2) limited to 1 20,000 $100,000 Donation to chief Mvurwi (not for the purpose of trade) 3,000 1 Finance Charges see Note 1 (s 16 (1)(q)) 175,000 3 Page 43 of 121