Answers
Fundamentals Level Skills Module, Paper F6 (MWI) Taxation (Malawi) December 2008 Answers 1 Malingunde Limited (a) Calculation of capital allowances for the year ended 31 December 2007 TWDV Allowances TWDV 1 January Additions Disposals Total Investment Initial Annual Annual Total 31 December 2007 rate 2007 Factory building 865,750 865,750 5 43,288 43,288 822,462 Plant and 1,125,500 1,340,100 (182,250) 2,283,350 1,061,100 10 140,825 1,201,925 1,081,425 machinery (W1) (W2) (W3) (W4) Staff housing 625,100 1,025,000 1,650,100 102,500 5 82,505 185,005 1,465,095 Motor vehicles 1,765,500 1,765,500 20 353,100 353,100 1,412,400 Tractors 975,400 675,000 1,650,400 135,000 20 330,080 465,080 1,185,320 Office equipment 415,750 415,750 10 41,575 41,575 374,175 Computers 610,000 265,000 875,000 53,000 40 350,000 403,000 472,000 6,383,000 3,305,100 (182,250) 9,505,850 1,061,100 290,500 1,341,373 2,692,973 6,812,877 Summary of allowances Investment 1,061,100 Initial 290,500 Annual 1,341,373 Balancing charge (W2) (147,870) 2,545,103 WORINGS 1. Additions to plant New sifting machine 875,100 Second hand LTP beater 465,000 1,340,100 2. Disposal of plant Cost 2004 450,000 Less Investment allowance (40%) (180,000) Annual allowance (45,000) 225,000 2005 Annual allowance (22,500) 202,500 2006 Annual allowance (20,250) Tax written down value (TWDV) 31 December 2006 182,250 Sale proceeds (330,120) Balancing charge (147,870) 3. Investment allowance New sifting machine (100%) 875,100 Secondhand LTP beater (40%) 186,000 1,061,100 4. Annual allowance on plant Total cost 2,283,350 Less: qualifying of 100% allowance (875,100) Amount qualifying for annual allowance 1,408,250 Both the 40% rate of investment allowance and the annual allowance may be claimed in the same year. 13
(b) Computation of profits chargeable to tax for the year ended 31 December 2007 Loss before taxation (132,680) Add items not allowed for taxation Depreciation 1,865,000 Provision for severance pay 1,465,250 Gratuity provision 945,000 Property valuation 363,800 Interest on delayed tax payment 260,115 Donation Malawi Red Cross 200 Donation Construction fund for Pentecostal Church 110,000 Fringe benefits tax 265,175 Penalties for late payment of withholding tax 95,600 Stock adjustment (ex working) 181,000 5,551,140 5,418,460 Less items allowed for taxation Capital allowances 2,545,103 Profit on disposal of fixed assets 15,120 Severance pay paid 365,000 Gratuity paid 625,000 Write back of general provision 175,450 Land development expenditure 645,000 Profit adjusted for taxation (4,370,673) 1,047,787 Working of value of stocks Accounts Tax Accounts Tax Coffee Coffee Tea Tea 1 January 2007 475,800 475,800 645,800 645,800 31 December 2007 365,800 546,800 575,100 575,100 Adjustment to cost of sales 110,000 (71,000) 70,700 70,700 Tax 71,000 (70,700) Net stock adjustment to tax computation 181,000 Note: for accounting purposes the lower amount is the net realisable value (NRV) except for the 31 December value for coffee, where the lower amount is the cost. (c) Calculation of tax payable for the year ended 31 December 2007 Profit adjusted for tax 1,047,787 Tax at 30% 314,336 Less withholding tax Interest (ex working) (48,880) Provisional tax (465,000) (513,880) Tax refundable (199,544) Working for withholding tax on interest Withholding tax National bank 254,400 48,880 Standard bank 6,500 Indebank 4,200 265,100 48,880 Note: the first 10,000 of interest is exempt from withholding tax. 14
2 Madalo, Limbe and Bachi Partnership (a) Computation of taxable profits of the partnership for the year ended 30 June 2007 Profit before taxation 865,000 Add: items not allowed for taxation Partners salaries Madalo 350,000 Limbe 350,000 Bachi 650,000 Depreciation 365,100 School fees 450,000 Repairs and maintenance Limbe s wife s car 20,500 2,185,600 3,050,600 Less: items allowable for taxation Capital allowances 390,555 Unrealised exchange gains 86,250 (476,805) Profits adjusted for taxation 2,573,795 Allocation of taxable profits amongst the partners Madalo Limbe Bachi Total Partners salaries 350,000 350,000 650,000 1,350,000 School fees 450,000 450,000 Repair to car 20,500 20,500 350,000 370,500 1,100,000 1,820,500 Share of profits 301,318 301,318 150,659 753,295 651,318 671,818 1,250,659 2,573,795 (b) Calculation of tax payable by each of the partners Madalo Limbe Bachi Business income (from (a)) 651,318 671,818 1,250,659 Director s fee 250,000 Interest (W1) 32,500 75,625 2,500 Warehouse rental 225,000 Wife s unearned income 125,000 Total income 1,158,818 872,443 1,253,159 Tax First 84,000 at 0% Next 36,000 at 15% 5,400 5,400 5,400 Balance over 120,000 at 30% 311,645 225,733 339,948 Total tax 317,045 231,133 345,348 Less PAYE (W2) (74,400) (74,400) (164,400) Withholding tax on sales (146,040) (146,040) (73,020) Withholding tax on rental (10%) (22,500) Withholding tax on director s fees (10%) (25,000) Provisional tax (190,000) (190,000) (95,000) Tax payable/(refundable) (140,895) (179,307) (12,928) WORINGS 1. Interest Net interest 28,000 62,500 2,500 Less first 10,000 (10,000) (10,000) Net for withholding tax 18,000 52,500 2,500 Withholding tax 4,500 13,125 Exempt amount 10,000 10,000 Gross interest 32,500 75,625 2,500 15
Madalo Limbe Bachi 2. PAYE Salary 350,000 350,000 650,000 Up to 120,000 5,400 5,400 5,400 Excess over 120,000 at 30% 69,000 69,000 159,000 Total 74,400 74,400 164,400 3 (a) The following circumstances must exist for a person to be registered as a taxable person: (i) The person must be a supplier of taxable goods or services, whose business turnover exceeds 2 million, or any revised threshold by order of the Minister published in the Gazette. (ii) The person qualifies as a taxable person, or has grounds to believe that he or she will qualify as a taxable person. (iii) The Commissioner General notifies the person in writing that that person has within a tax period specified in the notice made taxable supplies (a) in excess of the turnover figure, or (b) below the turnover figure as is registrable or not as a taxable person, and accordingly will register that person. (b) (c) (d) The VAT Act requires a taxable person to account for value added tax (VAT) each calendar month by submitting a return and to maintain a VAT account on which input and output tax will be indicated. The return which is in a prescribed form must state: (i) the amount of VAT payable for the tax period; (ii) the amount of input tax or refund claimed; and (iii) such other matters as may be prescribed. The return must be submitted to the Commissioner General not later than the 25th day of the month following the month to which the return relates. Payment must accompany the return where output tax exceeds input tax. Where input tax exceeds output tax for the tax period the excess will be given as a credit to the taxpayer. If an excess occurs for a period exceeding three months then the excess will be refunded to the taxpayer. Where a taxable person had stock of taxable supplies at the date of registration he may claim a credit or a refund of the VAT paid on such stocks only if: (i) the supply or import occurred not more than four months prior to his registration; (ii) in the case of capital goods, the goods have been held for a period not exceeding six months from the date of being registered. In addition the Commissioner General will require a completed refund or credit claim form, together with the relevant invoices, or in the case of imported goods the trader must produce the relevant customs documents, based on which VAT that was paid. A taxpayer approved to use the special retail scheme who makes both taxable and exempt supplies must either: (i) keep a separate record of exempt supplies and deduct a total of those from the daily takings in the month. The output tax will be worked out by applying the VAT fraction to the result; (ii) if this is not possible, then calculate from the purchase records the total value of all goods purchased for resale in the month and also the total value of taxable goods purchased in the month. The output tax in case of (ii) above will be worked out by: (1) Dividing the total taxable purchases for resale in the month by the total purchases for resale in the month. (2) Multiplying the result in (1) above by the total gross takings in the month. (3) The output tax will be the result in (2) above multiplied by the VAT fraction. Rate of VAT (17 5%) 100 + rate of VAT (17 5%) i.e. 17 5/117 5 16
4 Macheza Limited (a) (b) (c) Capital gains and losses are accounted for in the taxable income of a company to the extent that they are realised from the sale or disposition of capital assets on or after 1 April 1992. The exact treatment will depend on whether or not capital allowances were claimed on the assets. Where capital allowances have been claimed the gain or loss equals the sale proceeds less the tax written down value. Where capital allowances have not been claimed, the gain or loss will be equal to the sales proceeds less the adjusted cost base using the 1999 inflation factor. Capital losses arising on assets on which capital allowances have been claimed will be offset against the total taxable income, but where capital allowances have not been claimed, capital losses can only be offset against the capital gains on similar assets in the same period and any excess must be carried forward. Calculation of gains/losses (i) Sale of house Purchase 1988 at cost 48,500 Adjusted basis to 1999 48,500 x 9 = 436,500 Conversion to 2007 value 436,500 x 3 164 1,381,086 Sale proceeds 2,560,000 Capital gain 1,178,914 (ii) Sale of shares in Mezani Limited 250,000 shares at 3 50 = 875,000 Conversion to 2007 value factor 2 441 Value: 875,000 * 2 441 2,135,875 Sales proceeds 250,000 at 5 1,250,000 Loss (885,875) (iii) Listed investments NICO Ltd shares no capital gain as held for more than 12 months Illovo Ltd shares no capital gain as held for more than 12 months NBM Ltd shares (held less than 12 months) Cost 800,000 at 42 00 = 33,600,000 Conversion factor 1 Converted value 33,600,000 Sale proceeds 800,000 at 56 44,800,000 Capital gain 11,200,000 If these transactions had been entered into by an individual the tax implications would be as follows: Sale of a house: if the house were considered to be the main residence then the capital gain would be not taxable, if not the gain would be taxed as per the calculation in (b) above. Sale of unlisted shares same as for a company i.e. as in (b) above. Sale of listed investment same as for a company i.e. as in (b) above. 5 Welani Limited (a) Fringe benefits tax return Quarter ending 31 December 2007 Month 1 Month 2 Month 3 Total Nature of benefits Taxable Taxable Taxable taxable value value value value 1. Housing (W1) 85,000 85,000 85,000 255,000 2. Motor vehicles (W2) 31,250 31,250 31,250 93,750 3. Other (W3) 332,500 15,000 15,000 362,500 Total 448,750 131,250 131,250 711,250 Tax at 30% 213,375 17
WORINGS Taxable value 1. Housing Managing Director furnished house Rental 35,000 or 35,000 12% of salary 200,000 = 24,000 whichever is higher Finance Manager/Marketing Manager unfurnished houses Rental 25,000 each or 50,000 10% of salary of Finance Manager 120,000 = 12,000 Marketing Manager 100,000 = 10,000 Total value 85,000 2. Motor vehicle 15% of value of 2 5 million = 375,000 per annum or 31,250 per month 31,250 3. Other Utilities Managing Director only Per month 15,000 School fees October 2007 635,000 50% of value 317,500 Other Month 1 October fees 317,500 Utilities 15,000 332,500 (b) (i) Provided the pension scheme has been approved by the Commissioner General, as qualifying for deduction, pension contributions made by the employer are deductible to the extent of the lesser of: 1 the total of the employer s contributions; 2 24% of the employees annual emoluments for the year of assessment; or 3 9,000 per annum per employee. (ii) Calculation of the amounts allowed as a deduction to the company Consultants (3) Consultants (2) Messenger Annual salary 2,160,000 960,000 120,000 Allowable deduction company contribution 6% 129,600 57,600 7,200 24% of employee salary 518,400 230,400 28,800 9,000 per employee 27,000 18,000 9,000 Allowable 27,000 18,000 7,200 18
Fundamentals Level Skills Module, Paper F6 (MWI) Taxation (Malawi) December 2008 Marking Scheme Marks 1 (a) Calculation of capital allowances Additions ( mark each) 2 Disposals Plant qualifying for annual allowance (TWDV) 1 Investment allowance (1 mark each) 2 Initial allowances (1 mark each) 3 Annual allowances ( mark each) 3 Tax written down values at the end of the year 1 Calculation of TWDV: Investment allowance 1 Annual allowances ( each) 1 Balancing charge 1 Summary of allowances 18 (b) (c) Computation of taxable profits: Items not allowed for taxation ( mark each) 5 Items allowable ( mark each) 3 Calculation of stock adjustments ( mark each for cost and NRV) 1 9 Tax payable by Malingunde Limited Tax at 30% Deduction of withholding tax on interest Provisional tax Identify tax as refundable Calculation of interest withholding tax 1 3 30 19
Marks 2 (a) Computation of taxable profits of the partnership Items not allowed: Partners salaries ( mark each) 1 Depreciation School fees 1 Repair to car 1 No adjustment for rent Items allowable: Capital allowances Exchange gains 1 Allocation of profits to partners Allocation of profits: Partners salaries School fees Repairs to car Share of profits 1 9 (b) Calculation of tax payable by the individual partners: Business income (from (a)) Director s fee Interest income ( mark each) 1 Warehouse rental 1 Wife s unearned income 1 Excluding wife s earned income Calculation of tax ( mark each) 1 Deductions: PAYE (ex working) Withholding tax on sales ( mark each) 1 Withholding tax on rental 1 Withholding tax on director s fees 1 Provisional tax ( mark each) 1 Identifying tax payable/as refundable (all three partners) Grossing up of interest for Madelo and Limbe (1 mark each) 2 Calculation of PAYE ( mark each) 1 16 25 20
Marks 3 (a) Requirement to register for VAT Supplier of taxable goods/services Turnover over 2 million Taxpayer believes will qualify 1 Commissioner notifies in writing 1 3 (b) (c) (d) Procedures for accounting for VAT. Monthly return VAT account to be maintained What return must state ( mark each item) 1 Return no later than 25th Payment to accompany return Input exceeding output Refund after credit for three months 1 5 Claim of VAT on stocks held on registration Point (i) 1 Point (ii) 1 Completed refund form Evidence of VAT paid (invoice/customs documents) 3 Special retail schemes Separate reward of exempt supplies 1 VAT fraction on net takings Use of purchase records to determine value of taxable goods 1 Working out of output tax Point (1) Point (2) Point (3) 4 15 21
Marks 4 (a) Accounting of capital gain Sales of capital assets on or after 1 April 1992 1 Calculation of gain when capital allowances claimed 1 Calculation when allowances not claimed 1 Losses where capital allowances claimed 1 Losses where allowances not claimed 1 5 (b) Calculation of gains/losses (i) Adjusted basis to 1999 1 Conversion to 2007 1 Capital gain 1 (ii) Conversion to 2007 1 Capital loss 1 (iii) Nico shares Illovo shares NBM shares Converted value equivalent to cost 1 Capital gain 1 8 (c) Treatment of gains for individuals Sale of house main residence Sale of house not main residence Sale of unlisted shares Sale of listed investments 2 15 22
Marks 5 (a) Fringe benefits Workings Housing Managing director 1 Finance/marketing managers 1 Motor vehicle 1 Utilities School fees 1 Return Total housing Total motor vehicles Total other Total fringe benefits for quarter Tax payable For showing monthly figures in return 1 8 (b) (i) Deductibility of pension contributions Each point raised (i) to (iii) Approved by commissioner (ii) 1 2 Amount allowable Annual salary Company contributions actual 1 24% of employees salary 1 9000 1 Allowable contributions ( mark each) 1 5 15 23