Fundamentals Level Skills Module Taxation (Zimbabwe) Monday 6 June 2011 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 pages 2 4. 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 (ZWE) The Association of Chartered Certified Accountants
SUPPLEMENTARY INSTRUCTIONS 1. Calculations and workings need only be made to the nearest 1, unless directed otherwise. 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: Rates Individuals Year ended 31 December 2010 Taxable Rate Amount Cumulative income income band of tax within band tax liability % Up to 1 980 0 1 980 0 1 981 to 6 000 20 4 020 804 6 001 to 12 000 25 6 000 2 304 12 001 to 18 000 30 6 000 4 104 18 001 and over 35 NB. The AIDS levy of 3% of income tax payable, less credits remains in place. Allowable deductions year ended 31 December 2010 Pension fund contribution ceilings 2010 (a) In relation to employers: in respect of each member 5 400 (b) In relation to employees: by each member of a pension fund 5 400 (c) In relation to each contributor to a retirement annuity fund or funds 5 400 (d) National Social Security: 3% of gross salary Aggregate maximum contributions to all above per employee per year 5 400 Credits year ended 31 December 2010 2010 Disabled/blind person 900* Elderly person (55 years and over) 900* Medical aid society contributions 50% Medical expenses 50% * The amount is reduced proportionately, if the period of assessment is less than a full tax year. Deemed benefits year ended 31 December 2010 Motor vehicles 2010 Up to 1500cc 1 800 1501 to 2000cc 2 400 2001 to 3000cc 3 600 3001cc and above 4 800 2
Loans The deemed benefit per annum is calculated at a rate of LIBOR +5% of the loan amount advanced. Value added tax (VAT) Standard rate 15% Capital allowances % Special initial allowance (SIA) 25 Accelerated wear and tear 25 Wear and tear: Industrial buildings 5 Farm buildings 5 Commercial buildings 2 5 Motor vehicles 20 Movable assets in general 10 Tax rates Year ended 31 December 2010 % Companies Income Tax Basic rate 25 AIDS levy 3 Individuals Income Tax Income from trade or investment 25 AIDS levy 3 3 [P.T.O.
Capital gains tax % On marketable securities 20 Disposal of listed marketable securities acquired after 1 February 2009 1% of gross proceeds Disposal of specified assets acquired prior to 1 February 2009 Sold prior to 1 February 2009 20% of gain Sold after 1 February 2009 5% of gross proceeds On principal private residence where the seller is over 55 years 0 On other immovable property acquired on or after 1 February 2009 20% of gain Inflation allowance 2 5 Capital gains withholding tax on sale proceeds Immovable property 15 Marketable securities (Listed) before 1 February 2009 5 Marketable securities (Unlisted) 5 Note: the withholding tax is not final on the seller. Actual liability is assessed in terms of the Capital Gains Tax Act. Withholding taxes On dividends distributed by a Zimbabwean resident company to resident shareholders other than companies and to non-resident shareholders: By a company listed on the Zimbabwe Stock Exchange 10 By any other company 15 Informal traders 10 Foreign dividends 20 Non-residents tax On interest nil On certain fees and remittances 15 On royalties 15 Residents tax on interest From building societies 20 From other financial institutions (including discounted securities) 20 Elderly taxpayers (55 years and over) The exemptions from income tax are as follows: Year ended 31 December 2010 Rental income 3 000 Interest on deposits with a financial institution 3 000 Interest on discounted instruments 3 000 Income from the sale or disposal of marketable securities 1 800 Pension No limit Income from the sale or disposal of a principal private residence is also exempted. 4
ALL FIVE questions are compulsory and MUST be attempted 1 Mark Mhizha is a neurologist of repute and the Head of Research in the Ministry of Health and Child Welfare. In early 2009 while on an employment related assignment, he was involved in an accident that led to paraplegia and him being wheelchair bound. After his return to work in late 2009, Mark Mhizha registered a not for profit Private Voluntary Organisation (PVO) to champion for the rights of the paraplegics within the country. The PVO employed Mark in a part-time role and also four other people. He also renovated and extended his private practice premises in order to make it more accessible in light of his condition and also to accommodate his PVO related work. Mark Mhizha s earnings and entitlements from employment for the year ended 31 December 2010 Salary 25 000 Accommodation allowance 3 000 Representation allowance 5 000 Clothing allowance 1 500 Bonus 2 500 Cash in lieu of leave 2 000 Holiday allowance 4 000 Entertainment allowance 3 800 On call allowance 4 500 Statutory and other deductions (paid by employee) Subscriptions to the Medical Practitioners Association 1 200 Employer pension fund contributions 1 875 Retirement annuity fund contributions 2 700 NSSA contributions 750 Other employment related information (1) Mark Mhizha makes use of a fully expensed allocated automatic vehicle, engine capacity, 3300cc. (2) During the year ended 31 December 2010, Mark Mhizha incurred the following medical expenses: Prescription medicines 2 800 Ambulance charges 700 Wheelchair upgrade expenses 1 000 4 500 60% of the medical expenses were recovered from the Medical Aid Society of which Mark Mhizha is a member. His medical aid contributions for the year amounted to 6 000 and the employer took care of the amount in full in line with the provisions of his employment contract. (3) In August 2010 Mark Mhizha was personally awarded a lump sum amount of 35 000 by the World Health Organisation (WHO) in recognition of his outstanding contribution to the modern research in neuroscience while the Ministry of Health and Child Welfare was awarded a certificate of milestone achievement in neurology. The Ministry of Health and Child Welfare also paid him 5 000 for his achievement and appointed him the chairperson of the Neuroscience Steering Committee. (4) During the year ended 31 December 2010, he received a total of 8 000 from the PVO as his part-time salary and entitlement. 5 [P.T.O.
Private Practice Income and expenses for the year ended 31 December 2010 Income Notes Fees 55 000 Dispensary sales 32 000 Royalties 15 000 102 000 Expenses Dispensary procurements 19 500 Printing and stationery 4 000 Staff costs 12 000 Motor vehicle expenses (i) 7 500 Repairs and maintenance 23 000 Provision for bad debts (iii) 11 000 77 000 Net profit 25 000 Notes (i) Mark Mhizha owns a vehicle that he purchased in 2009 for 15 000. The vehicle is used by his private practice manager. The manager uses 70% of the vehicle for business purposes and the remainder for private use. Repairs and maintenance costs are made up of the following: General repairs and maintenance 3 000 Renovations of the main practice building 8 000 Extension to the main building for PVO use 12 000 23 000 (iii) The provision for impaired debts consist of the following: 5% of the debtor s book 9 000 Ellen Cox who passed away during the course of the year 1 000 Peter Meki who relocated permanently to Australia 1 000 11 000 (iv) Mark Mhizha has always claimed the maximum capital allowances possible. An extract of his fixed assets register is as follows: Asset category Date of purchase/construction Cost () Furniture and Fittings 2006 10 000 Practice Building 2004 17 000 Motor vehicle 2009 15 000 Computer equipment 2010 5 000 6
Required: (a) Supporting your answer with reasons, state the tax treatment of the following: (i) World Health Organisation award to Mark Mhizha and the related payment by the Ministry of Health and Child Welfare; (2 marks) Provision for impaired debts as detailed under Note (iii) above. (2 marks) (b) (i) Calculate Mark Mhizha s taxable income and tax payable for the year ended 31 December 2010 clearly distinguishing the taxation of his employment income from his attributable business income; Note: you should show any non-taxable or non-deductible amounts with a zero (0). (20 marks) State by when Mark Mhizha s PAYE for the month of December 2010 should be remitted to ZIMRA. (1 mark) (25 marks) 7 [P.T.O.
2 Payroll Services (Private) Limited ( PSL ) is a company whose main activity is the provision of executive payroll services to high profile entities based in Harare. PSL operates from commercial premises which are registered in the name of its wholly owned subsidiary, PS Properties (Private) Limited ( PPL ). On 1 January 2010 PSL had revalued its assets for both tax and accounting purposes in United States Dollars per the directive of the Zimbabwe Revenue Authority ( ZIMRA ) as follows: Income Tax value as at 1 January 2010 Goodwill 200 000 IT hardware 650 000 Furniture and fittings 400 000 Payroll software 800 000 Commercial vehicles 360 000 The company also had a portfolio of listed securities valued at 120 000 Share investment in subsidiary company PPL 500 000 The company, as well as its subsidiary, is not registered for value added tax (VAT) purposes. PSL s net profit before tax per its financial statements for the financial year ended 31 December 2010 amounted to 875 000. The debits and credits to the income statement included the following: Credits Turnover 2 450 000 Net bank interest 50 000 Profit on sale of assets 100 000 Debits Depreciation 250 000 Goodwill amortisation 20 000 Premises rental paid to subsidiary 120 000 Utility payments 60 000 Restraint of trade (note)(iii) 148 000 Notes During the 2010 financial year PSL purchased and disposed assets as follows: Disposals (i) Sold IT hardware which had an opening value of 350 000 for 400 000. Sold a portion of the listed portfolio of securities which had an opening valuation of 50 000 for 80 000. Acquisitions IT hardware 600 000 New software 200 000 Mercedes Benz for use by the Finance Director 80 000 (iii) PSL had engaged a part-time software engineer in November 2010. As part of his engagement, the software engineer was paid 148 000 upfront as restraint of trade under which the employee agreed not to work for any competitor of the company for a period of three years. PSL had not deducted any tax from the restraint of trade payout. (iv) PSL had paid 100 000 as provisional tax on 20 December 2010 but had made no other payments of corporate tax in respect of the year ended 31 December 2010. (v) PSL s policy on capital allowances is to claim the maximum capital allowances possible, subject to the directive from ZIMRA which instructed that only wear and tear could be claimed in respect of assets on hand as at 1 January 2010. 8
Additional information The board of PSL resolved to acquire from PPL the commercial premises which PSL operates from with effect from 1 January 2011. Required: (a) (i) Explain the tax implications for Payroll Services (Private) Limited of the payment of the restraint of trade; Note: You are not required to consider how the payment would be taxed in the hands of the recipient. (3 marks) Outline the value added tax registration position with respect to Payroll Services (Private) Limited as well as its subsidiary, PS Properties (Private) Limited, for the year ended 31 December 2010. Support your answer with brief calculations as appropriate; (5 marks) (iii) State the tax advantages, if any, of the decision by Payroll Services (Private) Limited to acquire from PS Properties (Private) Limited the commercial premises from which they operate. (2 marks) (b) (i) Calculate the capital gains tax payable arising from the disposal of assets by Payroll Services (Private) Limited during the year ended 31 December 2010; (3 marks) Calculate the income tax liability of Payroll Services (Private) Limited for the year ended 31 December 2010; (12 marks) (iii) Based on the available information, calculate the outstanding provisional tax that should have been paid by Payroll Services (Private) Limited during the year ended 31 December 2010, clearly indicating the respective due dates. (5 marks) (30 marks) 9 [P.T.O.
3 Phillip Cavendish is a retired 69-year-old pensioner who lives in Bulawayo. The following income accrued to him during the 2010 tax year: Pension from the National Railways of Zimbabwe 12 000 Interest income: Financial institutions (gross) 40 000 Net rental income (note)(iv) 24 000 Notes: (i) During the year he sold his matrimonial and principal private residence for 200 000 and utilised 120 000 to purchase a two bedroom flat in Belmont. The house had originally cost 20 000 in 1980. Phillip Cavendish sold some listed securities during the year and received a gross amount of 20 000. He had acquired the securities in March 2009 for 1 200. (iii) Phillip Cavendish owned a second residential property which he acquired in 2007 at a cost of 80 000. He constructed an outbuilding on the property in 2008 at a cost of 30 000. The property has always been let out to the Municipality from the date of acquisition up until 5 January 2009 when the property was sold to his son at a price of 130 000. The market value of the property on the date of sale was 180 000 and the property transfer related costs amounted to 15 000. (iv) Phillip Cavendish had incurred the following expenses to arrive at the net rental income received: Donations to the local church 1 000 Rates and security costs 2 200 Phillip Cavendish has always used 50% of the building as his private storage space and the remainder used by tenants as office space. The building was erected in 2005. Required: (a) State with reasons whether or not the building being let out by Phillip Cavendish qualifies for capital allowances. Outline the qualifying criteria. (3 marks) (b) (i) Compute the capital gains withholding tax on the disposal of Phillip Cavendish s second residential property. State by when capital gains tax should be remitted to ZIMRA; (2 marks) Compute the minimum tax liability of Phillip Cavendish, granting him all available statutory dispensations to minimise his tax liability. (10 marks) (15 marks) 10
4 Organic Farm Products (Private) Limited (OFP) was registered in 2008 but commenced business operations on 1 January 2010. OFP specialises in poultry rearing and horticulture using organic farming methods. Based on the cash flow projections and general viability of the business, OFP registered for all the tax heads within the first month of trading. OFP s Sales and Purchases journal for the year ended 31 December 2010 (value added tax (VAT) inclusive where appropriate) Sales Poultry 70 000 Eggs 50 000 Vegetables 35 000 Poultry manure 15 000 170 000 Purchases Day old chicks 16 000 Poultry feed and vaccines 24 000 Wood shavings 5 000 Gas heaters and lamps 10 000 Sun dried vegetable seeds 7 000 62 000 OFP s operating expenses for the year ended 31 December 2010 (VAT inclusive as appropriate) Staff costs 15 000 Repairs and maintenance 8 000 Stationery 2 000 Communication expenses 4 500 Amortisation of intangible assets 14 000 Motor vehicle expenses 13 000 Traffic fines 500 Depreciation 21 000 Computer maintenance costs 5 000 83 000 Required: (a) (i) Compare and contrast the attributes of a zero-rated supplier and an exempt supplier; (4 marks) List ANY TWO documents that might be considered useful by ZIMRA in claiming right to zero rate; (2 marks) (iii) Explain THREE circumstances in which input VAT is non-deductible. (3 marks) (b) Calculate the VAT position of Organic Farm Products for the year ended 31 December 2010. Where VAT is not chargeable or claimable, indicate this by the use of a zero (0). (6 marks) (15 marks) 11 [P.T.O.
5 Ed and Meg Mabasa are married and both are civil engineers and equal partners in their Civil Engineering firm, Mabasa and Associates. Ed and Meg Mabasa have been contemplating the admission of a new partner as they urgently require funding for expansion purposes. It is likely that a new partner will be admitted on 31 March 2011 and that from that date, the profits will be shared equally between the three partners. The net profit of Mabasa and Associates as shown in the Statement of Comprehensive Income for the year ended 31 December 2010 is 342 000 after taking into account the following: Notes Credits Interest income (i) 9 000 Profit on sale of computer equipment 2 500 Company dividends (net) 7 200 Debits Staff costs (iii) 141 000 Office rent 12 000 Motor vehicle expenses (iv) 15 000 Office sundry expenses 1 000 Depreciation 12 000 Other operating expenses (v) 64 000 Notes (i) Interest income is made up of the following: Bank interest partnership account 4 000 Interest on partners capital accounts Ed 3 000 Meg 2 000 9 000 The computer equipment was sold for 6 000 and the original cost was 3 500. The income tax value on disposal was 875. (iii) Staff costs consist of the following: Staff salaries (ten employees) 60 000 Ed s salary 30 000 Meg s salary 25 000 Staff pension contributions 12 000 Ed s pension contribution 7 000 Meg s pension contribution 7 000 141 000 (iv) Motor vehicle expenses refer to the partners personal vehicle running expenses. Both partners use 80% of the vehicles for business purposes and 20% for private use. 12
(v) Other operating expenses: Staff medical aid contributions 10 000 Ed s medical aid contributions 5 000 Meg s medical aid contributions 5 000 Insurance premium (joint life policy) 8 000 Meg s grocery allowance 20 000 Ed s school fees allowance 16 000 64 000 (vi) All the other partnership fixed assets are fully depreciated for tax purposes except for the two passenger motor vehicles which were procured on 5 February 2010 for the partners use at a cost of 35 000 for Ed and 25 000 for Meg. Required: (a) (i) State how the profits for the year ended 31 December 2011 will be shared out for tax purposes between Ed and Meg Mabasa and the new partner; (2 marks) Briefly outline how partners income is taxed and state when the tax should be remitted to ZIMRA. (3 marks) (b) Calculate the minimum taxable income and tax payable by Ed and Meg Mabasa for the year ended 31 December 2010. (10 marks) (15 marks) End of Question Paper 13