1. EXAMINATION No._______________________
THE PUBLIC ACCOUNTANTS EXAMINATION
COUNCIL OF MALAWI
2011 EXAMINATIONS
ACCOUNTING TECHNICIAN PROGRAMME
PAPER TC 10(B): TAXATION
MONDAY 6 JUNE 2011 TIME ALLOWED: 3 HOURS
9.00 AM - 12.00 NOON
INSTRUCTIONS:
1. You are allowed 15 minutes reading time before the examination begins during
which you should read the question paper and, if you wish, make annotations on the
question paper. However, you are not allowed, under any circumstances, to
open the answer book and start writing or use your calculator during this reading
time.
2. Number of questions on paper – 7.
3. The paper is divided into TWO Sections, A and B. BOTH questions to be
answered in Section A and ANY THREE from Section B.
4. Each question carries 20 marks.
5. Use of non-programmable calculators is allowed.
6. You are provided with the following:
(i) A set of tables containing rates of tax on taxable income (Table 1).
(ii) Rates of capital allowances (Table 2).
(iii) Penalty rates for underpaid provisional tax (Table 3).
7. Begin each answer on a fresh page.
8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY
THE INVIGILATOR.
This question paper contains 10 pages
This question paper must not be removed from the examination hall.
2. 1
SECTION A
ANSWER BOTH QUESTIONS IN THIS SECTION
1. Mr Khangamwa runs a transport business and produced the following information for
the tax year to 30 June 2010:
Mr Khangamwa – Income and Expenditure Account
Year Ended 30 June 2010
Transport revenue
Add: Sundry income
Less: Salaries and wages
Depreciation
General expenses
Fuel and lubricants
Electricity and water
Road permit and licences
Vehicle maintenance
Repairs to equipment
Advertising
Rent payable
Penalties and fines
Legal expenses
Fringe Benefits Tax
Profit before tax
Notes
(1)
(2)
(3)
(3)
(3)
(4)
(5)
K’000
1,100
560
455
920
150
75
1,250
125
420
320
70
120
60
K’000
12,700
425
13,125
5,625
18,750
Notes
1. Sundry income: K425,000
This is made up of the following: K’000
(a) Bank interest recorded net of 20% withholding tax 250
(b) Gross rental for subletting office space 175
425
2. General expenses: K455,000 K,000
Donation to local church 75
Office refreshments 125
Transport licence 15
Donation to University appeal fund 240
455
3. Private Motoring
In addition to vehicles specifically designated for private use, Mr Khangamwa
and his family made use of business vehicles for private purposes. Because of
practical difficulties in tracking such private use, it was agreed by the Revenue
Authorities to estimate such private use at 30% and therefore disallow relevant
expenses to that extent.
3. 2
4. Penalties and fines : K70,000
These were as follows: K’000
Late submission of tax return 37
Traffic offence fines 33
70
5. Legal Expenses: K120,000
These were incurred as follows: K’000
Debt collection 55
Transport contracts documentation 45
Defending a case against Mr Khangamwa’s traffic offence 20
120
6. Capital allowances of K625,000 were to be allowed as a deduction by the
Revenue Authorities instead of depreciation.
Required:
(a) (i) Compute Mr Khangamwa’s taxable income for the tax year to
30 June 2010. 14 Marks
(ii) Compute the amount of net tax payable assuming that:
(1) Withholding tax was already deducted from the bank interest at
the rate of 20% as stated.
(2) Withholding tax was deducted from the rentals receivable at
20% (see note 1).
(3) Provisional tax of K1,450,000 was paid within the tax year
under review.
(4) Computed taxable income was K19,636,000. 3 Marks
(b) The breakdown of general expenses in note 2 above shows that a donation of
K75,000 was made to a local church.
Required:
State how you have dealt with this expenditure in the tax computation. Give
reasons for such treatment. 1 Mark
(c) A return of income of a limited company requires that a declaration is made
as to the company’s country of incorporation.
Required:
State the significance of this declaration? 2 Marks
(TOTAL: 20 MARKS)
Continued/……
4. 3
2. The tax written down value of business assets of a manufacturer as at 30 June
2009, together with the agreed rates for annual allowances, are given as
follows:
Item
Factory building
Plant and machinery
Motor vehicles
Furniture and fittings
Tax written down value
K’000
7,600
5,200
2,700
940
Rate of annual allowance
5%
10%
20%
10%
During the financial year to 30 June 2010, the following transactions were
recorded:
(1) Fencing
A fence to protect the factory building was erected at a cost of
K1,400,000.
(2) Offices
Two new offices were added to the factory building at a cost of
K1,500,000.
(3) Plant and Machinery
Some machinery, whose tax written down value as at 30 June 2009
was K420,000, was scrapped as the machinery was obsolete. No sale
proceeds were received.
Other machinery which had to be replaced was sold for K1,700,000
resulting into capital gain of K250,000. New replacement machinery
was acquired at a cost of K2,200,000.
(4) Motor vehicles
Two motor vehicles were acquired. One saloon and a double cabin
pick up costing K2,200,000 and K4,200,000 respectively.
(5) Furniture and fittings
Additional furniture was acquired at a cost of K750,000.
Required:
(a) Calculate the capital allowances available to the manufacturer for the tax year
to 30 June 2010. 9 Marks
Continued/……
5. 4
(b) Why has the capital allowance been claimed or not claimed, as the case may
be, in respect of the cost of erecting a fence around the factory building and
constructing two offices which were attached to the factory building?
(Support your answer by a calculation assuming the original cost of the
factory building was K12,000,000). 6 Marks
(c) To what extent can a capital loss be deducted in arriving at the taxable
income of a business in relation to assets on which capital allowances are
claimable? 2 Marks
(d) Define the term ‘disposal’ in relation to an asset, for purposes of the Taxation
Act. 3 Marks
(TOTAL: 20 MARKS)
SECTION B
ANSWER THREE QUESTIONS ONLY FROM THIS SECTION
3. (a) (i) What term is used to describe the levying of income tax by more than
one country on the same income of a taxpayer? 1 Mark
(ii) How does this arise and how can it be mitigated or prevented in
Malawi? 4 Marks
(iii) State the circumstances under which emoluments received by or
accrued to a wife in respect of services rendered or to be rendered may
not qualify to be wife’s earned income. 5 Marks
(b) Kayuni General Suppliers is a firm operating in Malawi. In January 2010 the
firm became indebted to a supplier Tom and Associates based in Australia in
the sum of $650,000 on account of merchandise supplied.
$25,000 was paid in April 2010 and another $125,000 in October 2010 and a
further $200,000 in December 2010. The balance of $300,000 was included
in the accounts for 31 December 2010 at K46,500,000 using an exchange rate
of $1 = K155.
Required:
(i) Using the formula specified in the Taxation Act, calculate the foreign
exchange gains or losses on the transactions given the above to be
claimed for the year of assessment to 30 June 2011. Assume the
following exchange rates were in use.
Jan 2010 : $ = K145
April 2010 : $ = K150
Oct 2010 : $ = K152
Dec 2010 : $ = K155
6½ Marks
6. 5
(ii) State whether the foreign exchange loss on the outstanding $300,000
which has been converted to K46,500,000 and included in the accounts
to 31 December 2010 is an allowable deduction. Give reasons for
your answer. 1½ Marks
(d) How are annuities taxable according to Section 14 of the Taxation Act.
2 Marks
(TOTAL: 20 MARKS)
4. (a) Chiphazi and Chimwendo are partners in an unincorporated timber business
operating in Malawi. Their partnership accounts for the year to 30 June 2010
showed the following:
(1) Profits were shared 2:1 respectively between the partners and these
amounted to K777,000.
(2) The share of profits in (1) above was calculated after Chiphazi and
Chimwendo had drawn salaries of K450,000 and K270,000
respectively during the year under review.
(3) The share of profits in (1) above was also net of interest on capital of
K85,000 for Chiphazi and K42,000 for Chimwendo and also a total
depreciation of K143,000.
(4) Chimwendo received a rental income of K240,000 and Chiphazi a
dividend of K15,000 from a Malawian company in the year under
review.
All other expenses were allowable for tax purposes.
Required:
(i) Briefly explain how partnership income is assessed for purposes of the
Taxation Act. 2½ Marks
(ii) Calculate Chimwendo’s taxable income and the income tax thereon.
8½ Marks
(b) (i) Describe the two types of clubs or associations which are recognized
under the Taxation Act. 3 Marks
Continued/……
7. 6
(ii) Chikolo Sports Club, which is a taxable club, carried out the following
transactions in the year ended 31 December 2009:
Income : K2,375,000
This is made up as follows: K’000
Ground entrance fees 350
Sale of food 125
Sale of drinks 80
Club membership fees 120
TV shows 140
Live band performances 600
Gambling machine 960
2,375
Expenses : K1,250,000
The breakdown was as follows: K’000
Trading licence 55
Food licence 45
Salaries and wages 650
Cost of goods sold 275
Repairs and maintenance 225
1,250
Required:
(i) Compute the taxable income of Chikolo Sports Club for the financial
year to 31 December 2009. 3½ Marks
(ii) Calculate the amount of tax payable on the taxable income computed
in (i) above assuming that the taxable income was K119,062.50.
1½ Marks
(iii) State the tax year in which the taxable income computed in (i) above
will be assessed. 1 Mark
(TOTAL: 20 MARKS)
Continued/……
8. 7
5. (a) (i) What is a ‘fringe benefit’, as defined by the Taxation Act? 2 Marks
(ii) How does the liability to fringe benefits tax arise? 1 Mark
(iii) Who is liable to pay fringe benefits tax? 1 Mark
(iii) When is fringe benefits tax due for payment to the Commissioner
General? 1 Mark
(b) An employer has proposed to provide to an employee the following:
(1) A housing allowance of K62,500 per month payable to the landlord by
the employer.
(2) School fees of K120,000 per term of three months payable directly to
the employee.
(3) Unrestricted use of a motor vehicle which was acquired at a cost of
K5,500,000.
(4) Vehicle insurance and vehicle running costs estimated at K55,000 and
K72,000 per annum respectively. The insurance premium is payable to
the insurance company while the amount meant for vehicle running of
costs will be payable to the employee in cash.
(5) A cook will be provided at a cost of K30,000 per month.
Required:
(i) State who, between the employer and the employee, will bear the tax
burden of each of the employment benefits listed in 1 – 5 above.
6 Marks
(ii) Calculate the fringe benefits tax payable on the use of motor vehicle
for a period of three months. 2 Marks
(iii) The cost of watchman is a fringe benefit if the employer rents a house
for an employee, but not if the employer allows the employee use of
the house owned by the employer.
Required:
Why is this apparent fringe benefit ignored and can this approach be
said to be equitable? 2 Marks
Continued/……
9. 8
(c) The imposition of penalties under the Taxation Act is meant to achieve
certain objectives.
Required:
(i) State the most important objectives. 3 Marks
(ii) State the circumstances under which imposition of penalties may not
achieve the intended objectives. 2 Marks
(TOTAL : 20 MARKS)
Continued/……
10. 9
6. (a) The first and second schedules of the VAT Act specify the goods and services
which are exempt and zero rated, respectively.
Required:
(i) State one common feature between exempt and zero rated supplies
with reference to liability to VAT. 1 Mark
(ii) State the main differences between exempt and zero rated supplies.
2 Marks
(b) When does a taxable supply become a relief supply and what advantage, if
any, is enjoyed by the user of the goods and services that qualify as relief
supplies? 3 Marks
(c) Under what circumstances does a taxable person qualify for input tax
deduction in respect of taxable supply of motor vehicles or motor vehicle
spare parts? 4 Marks
(d) A taxpayer had the following transactions during the year to 31 December
2010.
Nature
Telephone
Electricity
Security charges
Stationery
Rent
Cost
225,000
75,000
340,000
85,000
450,000
VAT Paid
37,125
12,375
56,100
14,025
74,250
In addition, raw materials were purchased at a cost of K1,980,500 inclusive of
VAT.
During the same year, he sold his produce both locally and internationally, the
value of local sales were K3,400,000 and K1,400,000 respectively exclusive
of VAT.
Required:
(i) Calculate the amount of VAT paid on raw materials. 2 Marks
(ii) Calculate the amount of output VAT on total sales. 3 Marks
(iii) Calculate the amount of VAT (output tax payable) or recoverable, as
the case may be, taking into account the input tax paid. 5 Marks
(TOTAL: 20 MARKS)
Continued/……
11. 10
7. (a) A taxpayer has received an estimated assessment from the Tax Authorities
showing that he has been assessed for the year of assessment to 30 June 2010
in the absence of his return of income. Tax amounting to K725,240 is shown
to be due and payable. As no information has been provided, no credit for
advance taxes paid has been given.
The taxpayer has asked for your assistance and has given you the following
information as he wants your advice on how he can contest this assessment:
1. A statement that during the year under review the taxpayer received gross
rent amounting to K655,500. City rates of K45,000 were paid within the
year and mortgage interest of K140,000 and capital repayment of
K200,000 in relation to the property from which rental income was
received.
2. Withholding tax amounting to K55,000 was recovered from the rental in
(1) above. Assume the withholding tax rate on rents was 10%.
3. A payee certificate showing K7,200,000 as total salary and K2,000,000 as
PAYE deducted for the year under review.
Required:
(i) Advise the taxpayer whether or not withholding tax on rentals was
correctly operated by the taxpayer’s tenant. If not, what consequences
are likely to follow on both the operator and the taxpayer. 5 Marks
(ii) State the disadvantages resulting from an under deduction of PAYE by
an employer. 2 Marks
(iii) Assuming the tax payable amounted to K2,234,100, calculate and
advise the taxpayer, the net amount of tax payable by him. Indicate by
what amount the estimated assessment will be reduced or how much
additional tax will need to be paid. 6 Marks
(b) Explain the circumstances under which the following may be allowed as a
deduction from a taxpayer’s assessable income.
(i) Research and experiments 1 Mark
(ii) Bad debts 3 Marks
(iii) Doubtful debts 3 Marks
7 Marks
(TOTAL: 20 MARKS)
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