Answers
Fundamentals Level Skills Module, Paper F6 (MWI) Taxation (Malawi) June 203 Answers and Marking Scheme Marks (a) Calculation of capital gain or losses for the year ended 3 December 202 Office building Cost October 2003 875,000 Conversion factor 2 6042 Adjusted value 2,278,675 Sales proceeds,32,000 Capital loss (957,675) The proceeds were all reinvested in a new office building. However, as there is a loss it will be offset against any capital gain in the year. Shares Cost 2004 25,200 Conversion factor 2 3346 Adjusted value 292,292 Sales proceeds 2,00 Capital loss (280,92 ) As these are not listed shares, any gain is taxable and relief will be available for any losses. As there are no capital gains in the year, the losses will be carried forward for offset against any future gains arising from similar class of assets. The capital losses for the year are: Brought forward from previous period 5,800 On transaction in the year office building 957,675 On transaction in the year shares 280,92 Total capital losses carried forward,253,667 9 (b) Calculation of balancing allowance or charge Office equipment Tax written down value Cost 657,000 Less: Capital allowances claimed (525,600) Tax written down value 3,400 Sales proceeds 7,700 Balancing allowances 3,700 3
(c) Profits or losses chargeable to tax for Madimba Engineering Limited for the year ended 3 December 202 Net profit before tax,080,520 Add: Items not allowed for taxation Fringe benefits tax 36,250 Donations to local school 75,000 Interest on loan 35,800 Stamp duty for share capital 292,850 Loss on sale of shares 78,00 Impairment of investments 75,580 Loss on sale of equipment 85,400 Depreciation 675,00 Tax penalties 44,500 2,023,580 3,04,00 Less: Items deductible Dividends 25,600 Fair value adjustment 235,800 Profit on sale of property 336,600 Capital allowances 695,250 (,393,250),70,850 Add: Capital gain(loss) 0 Less: Trading losses (485,00) Taxable income,225,750 2 (d) (e) Provisional tax The company is required to have paid at least in aggregate an amount for the year not less than 90% of the actual income tax liability for the year of assessment. Penalties apply where provisional tax is underpaid. If the amount of tax underpaid, as a percentage of the total tax liability: does not exceed 0% Nil exceeds 0% but does not exceed 50% 25% exceeds 50% 30% In the case of Madimba Engineering Limited, the total tax liability is 30% of,225,750, that is 367,725. As no tax was paid this exceeds 50%, hence the penalty payable is 0,37 5 Trading losses The carry forward of tax losses for trading operations is restricted to six years. However, persons engaged in manufacturing, agricultural and mining operations may carry forward losses indefinitely. Trading losses may be offset against capital losses. Capital losses can only be offset against capital gains. 3 30 4
2 (a) Computation of taxable profits for the partnership for the year ended 30 June 202 Capital allowances Boat Pick up Total Cost 325,000 675,000,000,000 Less: Capital allowances Initial 20% 65,000 35,000 200,000 2 Annual 0% 32,500 32,500 20% 35,000 35,000 97,500 270,000 367,500 Adjustment of profits for tax purposes for the partnership Net profit 2,287,400 Add: Items not allowed for tax Partners salaries 720,000 Depreciation 35,000 House rent for Dengu 360,000 School fees for Dengu s children 400,000 Donation to local chief 5,000,630,000 3,97,400 Less: Allowable items Capital allowances 367,500 Fishing nets 25,000 (492,500) 3,424,900 No capital allowances have been claimed on nets as they get damaged each time they are in use; they are treated as a revenue item. 9 (b) Allocation of profits between the partners Mwai Dengu Total Salary 20,000 600,000 720,000 House rent 360,000 360,000 School fees 400,000 400,000 Share of profits 583,470,36,430,944,900 703,470 2,72,430 3,424,900 3 (c) Tax payable by Mwai Salary 800,000 Bonus 225,000 Utilities 70,000 Total earnings,095,000 Tax payable First 80,000 at 0% 0 Next 60,000 at 5% 9,000 Excess over 240,000 at 30% (,095,000 240,000) 256,500 Total PAYE 265,500 5
Fringe benefits tax by employer Car 5% of 3,000,000 450,000 Fuel included in car benefit House Higher of rental or 0% of salary Rental 480,000 480,000 0% of salary of 800,000 80,000 Taxable value 930,000 Fringe benefits tax 30% 279,000 5 (d) Tax payable by or refundable to Mwai for the year ended 30 June 202 Earnings Share of partnership profits 703,470 Employment income,095,000 Dividends 0 Director s fee (27,000*00/90) 30,000 Bank interest 25,000 Total taxable income,853,470 Tax First 80,000 at 0% 0 Next 60,000 at 5% 9,000 Balance:,853,470 240,000 at 30% 484,04 Total tax 493,04 Less: Tax credits PAYE (265,500) Withholding tax on partnership (600,000*30%) (80,000) Withholding tax on director s fee (3,000) Withholding tax on interest at 20% (25,000*20%) (5,000) Tax payable 39,54 8 25 3 (a) A taxable person may deduct from output tax any value added tax chargeable on goods and services purchased in Malawi or imported into Malawi, used wholly, exclusively and necessarily in the course of business. However input tax may not be claimed: (i) where it relates to exempt supplies by the taxable person. If the taxable supplies are less than 5% of the total supplies, a taxpayer may not claim any input tax for the period. (ii) after expiration of 2 months from the date the right to claim arose. (iii) in respect of motor vehicles or motor vehicle spare parts unless the taxable person is in the business of dealing or hiring of motor vehicles or selling motor vehicle spare parts. Note: Motor vehicles and motor vehicle spare parts used wholly, exclusively and necessarily for the business qualify for input tax deduction. (iv) in respect of entertaining, including restaurant meals and hotel expenses, unless the taxable person is in the business of providing entertainment. (v) in respect of the personal portion of expenditure in cases where the expenditure/purchase is partly for business and partly for personal use. 5 6
(b) Amount Rate VAT Notes % Output tax Sales 2,556,250 Less: Sales of fresh fish (300,000) 0 Exempt Value at less than market value (25,000) Other taxable sales 2,23,250 6 5 368,56 Market value of sales to general manager 35,000 6 5 5,775 Market value Interest 45,000 Exempt Output tax 373,93 Input tax Purchases 850,000 Less: Fish purchases (65,000) 0 Exempt Taxable purchases 685,000 6 5 3,025 Rent 225,000 Less: House rent (60,000) 0 Exempt 65,000 6 5 27,225 Salaries 80,000 0 Not a supply Electricity 45,000 Less: Paid to the general manager (5,000) 0 Fringe benefit 30,000 6 5 4,950 Water charges 65,000 0 Exempt Consultancy charges 450,000 6 5 74,250 Supplier not registered but VAT payable by importer Packaging materials 65,000 6 5 0,725 Furniture and fittings 88,000 Less: Labour (2,500) Supplier not registered 85,500 6 5 4,08 Staff welfare coffin 35,000 0 Exempt 244,283 VAT payable 29,648 0 5 4 (a) In accordance with the provisions of special trades, the taxable income from the growing of timber will be determined as follows if the taxpayer so elects: (i) The cost of planting timber is carried forward until the timber reaches maturity. (ii) An amount calculated as 5% of the cost of planting the timber is added annually to the cost of planting timber until the timber reaches maturity. (iii) When the timber is sold, a proportionate amount of the total of (i) and (ii) is deducted from the sales proceeds. (iv) In each year of assessment, the amount calculated under (iii) above is treated as taxable income in the hands of the farmer. 4 (b) Calculation of taxable income from the sale of the timber for the year ended 3 December 202 Sales proceeds 500 cubic metres,062,500 Less: Proportionate cost of growing timber 0 hectares harvested out of 50 proportionate cost 0/50*,708,500 (Working ) (34,700) Taxable income 720,800 7
Working : Cost of growing timber on 50 hectares Year Cost of growing No. of Total factor Total Total years to (5% per year) growing maturity costs 850,000 6 42,500 255,000,05,000 2 200,000 5 0,000 50,000 250,000 3 50,000 4 7,500 30,000 80,000 4 75,000 3 3,750,250 86,250 5 65,000 2 3,250 6,500 7,500 6 5,000 750 750 5,750,708,500 7 (c) A farmer may not claim as deductible any expenditure which has been recovered through subsidies. In this particular case, the difference net of subsidy, which is 75,000, will be carried forward as the cost of growing the timber. A farmer may claim future crop expenditure in the year the cost is incurred. In this case, 225,000 spent on growing the tobacco will be carried forward on the balance sheet to be claimed against tobacco revenues in 203. Future crop expenditure is expenditure on crops which will produce income only in a subsequent year of assessment and which is carried forward in the balance sheet to be offset against that future income. 4 5 5 Calculation of tax under each option Sole trader Limited company Profit 2,037,500 2,037,500 Add: Items not allowed Zakeyu s salary,800,000 Depreciation 355,000 355,000 School fees 235,000 House rent 360,000 Private use of vehicle 87,500 4,875,000 2,392,500 Less: Capital allowances Annual allowance on vehicle (50,000) (300,000) 2 Exempt portion of interest (0,000) 4,75,000 2,092,500 Less: Taxation Company at 30% 627,750 Sole trader First 80,000 at 0% 0 Next 60,000 at 5% 9,000 Balance (4,75,000 240,000) at 30%,342,500,35,500 627,750 Withholding tax on interest,000,000 Total tax paid,362,500 638,750 Profits after tax 675,000,398,750 Based on the above calculation, it is advisable for Zakeyu to operate as a limited liability company. The tax payable is lower and the after tax profits are higher from the same basis profits. He can declare a dividend which will only be subject to a 0% withholding tax. 8
However, he will have to pay withholding tax which has not been paid and this will increase his taxable income. The fringe benefits tax paid will be: On car 5% of,500,000 225,000 School fees 50% of 235,000 7,500 Rental Higher of rental 360,000 360,000 0% of salary 80,000 Value for FBT 702,500 Fringe benefits tax will be (702,500 x 30%) 20,750 The effect on taxable profits will be: Taxable income per above 2,092,500 Fringe benefit tax (20,750) Revised adjusted profits 2,303,250 Tax at 30% 690,975 Revised profits after tax,346,525 Even after FBT, it is still better to operate as a limited company mainly due to the disallowed expenditure under sole proprietorship. 5 9