Tc10 bad12

1. STRICTLY CONFIDENTIAL
THE PUBLIC ACCOUNTANTS EXAMINATION
COUNCIL OF MALAWI
2012 EXAMINATIONS
ACCOUNTING TECHNICIAN PROGRAMME
PAPER TC 10(B): TAXATION
(DECEMBER 2012 MAIN)
TIME ALLOWED: 3 HOURS
SUGGESTED SOLUTIONS

2. 1
SECTION A
ANSWER BOTH QUESTIONS IN THIS SECTION
1. (a) A rational tax system should contain among others three main
principles namely:
- Equity 1 Mark
- Efficiency 1 Mark
- Administrative feasibility 1 Mark
(i) Equity
- Persons who are similarly situated should be taxed
equally (horizontal equity). ½ Mark
- Those who are differently situated should be taxed
differently (vertical equity). ½ Mark
- The tax system should be impartial. ½ Mark
- The tax to be paid should be certain. ½ Mark
- The tax system should be fair (reasonable and just).
½ Mark
- The tax amount should be related to the taxpayer’s
ability to pay. ½ Mark
3 Marks
(ii) Efficiency
- Efficiency means that taxation should not impose
avoidable and unnecessary costs on the community
(the taxpayer). 1 Mark
(iii) Administrative feasibility
- The tax revenue should be collected without excessive
cost for the tax collection Agency or Government.
1 Mark
(b) Merits of a progressive tax system
- It is considered more equitable because every taxpayer is called upon
to pay according to his ability to pay. 1 Mark
- It can be used to reduce income inequality so that they gap between
the ‘rich’ and ‘poor’ is narrowed. 1 Mark

3. 2
Demerits of a progressive tax system
- It can act as a serious setback to production as workers may be
reluctant to work more as most of their income will be deducted at
higher tax rates. ½ Mark
- It may reduce people’s ability to save as it leaves them with less
disposable income and this may impair enterprise development.
½ Mark
(c) Capital Allowances for Madengu Limited Year to 30 June 2012
WDV 1/7/2011
Additions
Disposals
Investment Allowance
Initial allowance
Annual Allowance
Factory
Buildings
K’000
9,000
1,650 ½
-___
10,650
(1,660) 1
-
(532.5) ½
9,457.5
Plant &
Machinery
K’000
6,200
2,400 ½
(3,740) 1
4,860
(960) 1
-
(486) ½
3,414
Motor
Vehicles
K’000
4,100
13,200 ½
-__
17,300
-
(3,460) ½
13,840
Furniture &
Fittings
K’000
1,200
960 ½
_-___
2,160
(192) 1
(216) ½
1,752
8 Marks
Notes
(1) WDV for machinery
K
Proceeds 2,500,000 ½
Capital loss 320,000 ½
WDV 2,820,000
(2) Total cost of motor vehicles
Saloon 4,200,000 ½
Pick-up 9,000,000 ½
13,200,000
10 Marks
(TOTAL : 20 MARKS)
2. (a) (i) Withholding tax is a method of collecting tax in advance on specified
payments by the person who makes a payment. 1 Mark
(ii) Benefits to authorities
– It brings in revenue faster as tax is collected as source. ½ Mark
– Easy and cost effective to collect – use Agents for free. ½ Mark
– Discourages and check tax evasion – encourages compliance.
½ Mark
– Provides constant flow of revenue. ½ Mark

4. 3
Benefits to taxpayers
– It is convenient to pay while money is available. ½ Mark
– The taxpayer is able to settle tax liabilities in advance and in
instalments. ½ Mark
(iii) Any five of the following:
– Royalties
– Rent
– Commissions
– Payment for carriage and haulage
– Payment for any supplies to traders and institutions for foodstuff
and other
– Payment to contractors and subcontractors
– Payment for public entertainment
– Payment for services
– Fees
– Payment for tobacco sales
– Payment of over K12,000 for casual labour.
½ Mark for any five = 2½ Marks
TAXABLE INCOME OF A TAXPAYER
Profit before tax
Add back:
Depreciation
Withholding tax on rent
Legal costs
General expenses (70 + 30)
Repairs & maintenance
Bad and doubtful debts – general provision
Rent payable
Travel costs
Professional fees (45 + 20)
Fringe benefits tax
Less: Capital allowances
Bank interest
Taxable income
Proceeds from gift
K’000
460 1
15 1
30 1
100 1
150 1
150 1
75 1
90 1
65 1
315 ½
(1,900) ½
(10) ½
(35) ½
K’000
1,425 ½
1,450
2,875
(1,945)
930 ½
12 Marks
Notes
Rent 85000 = 85% ½
100% = ? more
½
Withholding tax = 100,000 – 85,000 1½
= 15,000 ½
13½ Marks
(TOTAL: 20 MARKS)

5. 4
SECTION B
ANSWER THREE QUESTIONS ONLY FROM THIS SECTION
3. (a) (i) Wife’s earned income is the income derived from a business carried on
by the wife in her own right in which the husband is neither an
employee nor a partner; or 1
emoluments from employment received or accrued to or in favour
of the wife where the employer is not :
- her husband 1
- a partnership in which the husband is a partner 1
- a company in which the husband is a director who controls directly
or indirectly more than 5% of the voting rights attaching to all
classes of shares of the company and in which the husband is
employed or is also a director; or
- A company on which the wife is a director who controls directly
more than 5% of the voting rights attaching to all shares of the
company and in which the husband is employed or is also a
director. ½
4 Marks
(b) Where a taxpayer makes default in furnishing any return or information or 1
(ii) the commissioner is not satisfied with the return or information
furnished by the taxpayer; or a 1
(iii) Where the commissioner has reason to believe that a taxpayer is about
to leave Malawi without furnishing a return or satisfactory return.
1
3 Marks
(c) (i) WITHHOLDING TAX
Rent payable 780,000
Amount of withholding tax 15% x 780,000 = K117,000 1
Therefore it was not correctly operated as the tenant was supposed to
deduct K117,000 but only K46,000. 1
Penalties
There are penalties applicable to the tenant and not the landlord i.e. 1
- failure to deduct tax make one personally liable to pay the tax ½
which was not withheld; plus 20% additional tax if paid late. ½
- failure to operate a withholding tax scheme makes one guilty of an
offence punishable by a fine of K1,000. 1
5 Marks

6. 5
(ii) Penalties for under-deduction of PAYE are
- 20% of the tax payable. ½
- a further additional 5% per month or part thereof. ½
1 Mark
(iii) Income tax computation
K’000
Rent 780 ½
Salary 2,300 ½
3,080
Less:
City rates 14 ½
Repairs 26 ½
Professional/subscription 59 ½
Donations 75 174 ½
2,906
Tax payable
1st
144,000 @ 0% = 0 ½
Next 36,000 @ 15% = 5,400 ½
Balance 2,726,000 @ 30% = 817,800 ½
823,200 4½
Additional tax or reduction
Tax payable K823,200 ½
Less: Withholding tax 46,000 ½
PAYE Tax 641,400 ½ 687,400
135,800
Tax on estimated assessment 755,200 ½
Tax reduction 619,400 ½_
2½
7 Marks
(TOTAL: 20 MARKS)
4. (a) The following are the four circumstances for exemption from provisional tax:
Where the taxable income for the year of assessment is estimated:
- not to exceed K144,000 1
- to exceed K144,000 but the whole of the income is from employment or
pension or from both employment and pension and in relation to which
PAYE tax is being deducted. 1
- to exceed K144,000 and to include non-employment pension income of
not more than K144,000. 1
- Registered for turnover tax. 1
4 Marks

7. 6
(b) (i) Amount of taxable income in the original assessment.
Tax charged at 30% = K3,600,000 ½
Taxable income = 3,600,000 x 100
30 1
= K12,000,000 ½
2 Marks
(ii) Amount of tax paid
Penalty charged at 30% = K720,000 ½
of underpaid provisional tax
Underpaid provisional tax = 720,000 x 100
30 1
= K2,400,000 ½
Total tax charged = 3,600,000 ½
Less underpaid provisional tax 2,400,000 ½
Provisional tax paid = 1,200,000 ½
3½ Marks
(iii) Calculation of penalty for underpaid provisional tax in the amended
assessment.
Tax charged in the original assessment
Less: Tax discharged
Tax in the amended assessment
Less provisional tax paid
Underpaid provisional tax
% of unpaid tax on total tax
 rate to be used for penalty
Amount of penalty
K
3,600,000
620,000
2,980,000
1,200,000
1,780,000
1,780,000 x 100
2,980,000
= 60%
= 30%
= 1,780,000 x 30%
= 534,000
½
½
½
½
½
1
½
½
1
½
6 Marks____
(c) Foreign exchange gain or loss computation
Formula a x r1 – a x r2 1
Where a is the amount of the asset or liability on the day of
establishing the transaction. ½
r1 is the rate of exchange on the date of establishing the asset
or liability ½
r2 is the rate of exchange on the date of settlement of the asset
or liability ½
Therefore ($10,000 x 165) – ($10,000 x 158) 1
= 1,650,000 – 1,580,000 ½
= K70,000 gain ½
4½ Marks
(TOTAL: 20 MARKS)

8. 7
5. (a) (i) Determination of taxable values for housing accommodation.
(1) For property owned by the employer
- the open market value for the use (rental value) of such
Property; or 1
- 12% of the employee’s salary where furnished ½
accommodation is provided and 10% for unfurnished ½
whichever is greater ½
- provided that the taxable values so determined under this
subparagraph may be reduced by 50%. 1
(2) For property rented by the employer, the taxable value shall be:
- The rental paid by the employer or, 1
- 10% of the employee’s salary where ½
Unfurnished housing accommodation is provided; or ½
- 12% of employees salary where furnished housing is
provided, whichever is greater. ½
6 Marks
(ii) Any employer who fails to register or delays or fails to pay fringe
benefits tax due in accordance with the regulations is liable to a
penalty of 20% of the fringe benefits tax due. 1 Mark
(iii) Fringe benefits tax is due 14 days after the end of every quarter.
1 Mark
(iv) Fringe Benefits Tax Calculation
Taxable value
Motor vehicle 7,900,000 x 15% = 1,185,000 1
House benefit
12% of salary x 8,500,000 = 1,020,000 ½
Monthly value = 1,020,000/12 = 85,000 ½
Rent paid = 70,000 ½
 greater value 85,000 x 12 = 1,020,000 ½
School fees = No fringe benefit since paid
to Mr Chikho 1
Water and electricity = 25,000 x 12 = 300,000 1
Gardener, cook and watchman
Gardener 12,000 x 12 = 144,000 ½
Cook 15,000 x 12 = 180,000 ½
Watchman 10,000 x 12 = 120,000 ½

9. 8
Total benefits
Motor vehicle 1,185,000
Accommodation 1,020,000
Water and electricity 300,000
Cook 180,000
Gardener 144,000
Watchman 120,000
2,949,000 ½
Tax payable x 30% K884,700 1
8 Marks
(b) There are two types of clubs and these are as follows:
(i) Clubs which are formed or are operated solely or principally for:
- social welfare ½
- civic improvement; or ½
- other similar purposes and their proceeds are not distributed
among the members ½
(ii) Those which are formed or operated solely for - pleasure or ½
- recreation ½
Taxation treatment
The income of clubs, societies and associations which are formed or
operated solely or principally for social welfare or civic improvement
are exempt from taxation, while. 1
Certain types of income of clubs formed or operated solely or
principally for pleasure or recreation is subject to tax. ½
4 Marks
(TOTAL : 20 MARKS)
6. (a) Definitions
Customs duty
This is a form of tax used to collect duties only on certain imported goods. 1
Tax period
Means one calendar month i.e. from the first day to the last day of the month. 1
Input VAT (Input Tax)
This is VAT paid on goods or services imported into or supplied in Malawi. 1
Output VAT (Output Tax)
This is tax on sales. It is charged when taxable goods or services are supplied.
1
4 Marks

10. 9
(b) (i) (1) A supply of goods or services occurs:
- where goods or services are appreciated to own use, on the date
which the goods or services are first applied to own use; ½
- where the goods or services are supplied by way of gift, on the date on
which ownership in the goods passes or the performance of the
services is completed, as the case may be; ½
- in any other case, the earliest of the date in which:
(i) the goods are removed, from the premises or from other
premises of the taxable person where the goods are under the
control of the taxable person; or ½
(ii) the services are supplied or rendered, or; ½
(iii) the payment is received for all or part of the supply; or ½
(iv) the goods are made available to the person to whom they are
supplied; ½
(v) a tax invoice is issued. ½
(2) Where supplies are made on a continuous basis or by metered
supplies, the time of supply shall be the determination of the
supply or the first meter reading following the introduction of VAT
and subsequently at the time of each determination or meter
reading. ½
(3) The supply of goods under a hire purchase agreement or finance
lease occurs on the date the goods are made available under the
hire purchase or lease finance as the case may be. ½
(4) Where :
(a) Goods are supplied under a rental agreement; or
(b) Goods or services are supplied under an agreement or
written law which provides for periodic payment, the goods
or services shall be treated as successively supplied for
successive parts of the period of agreement or as determined
by law. ½
(5) Where the supply of goods or services is ancillary to another
supply, the time of supply of the ancillary supply shall be deemed
to be the same as the time of supply of the main goods or services.
½
Any eight points, ½ Mark each = 8 Marks

11. 10
(ii) Every taxable person shall
(a) Keep such records and books of accounts as the minister may
prescribe or as the Commissioner General may direct; and
1 Mark
(b) Produce such records and books at such place and time as the
Commissioner General may by general notice publish in the
gazette, any newspaper in general circulation, or in writing to
taxable person, 1 Mark
Any three, 1 Mark each = 3 Marks
(c) (i) Cost of consignment
Value in £ = 2500 ½
Rate of exchange £1 = 270 ½
Cost in Malawi Kwacha = 2500 x 270 ½
= 675,000 ½
Add duty @ 35% = 236,250 ½
911,250
VAT @ 16.5% = 150,356.3 ½
Duty + VAT = 236250 + 150356.3 ½
= K386,606.3 ½
4 Marks
(iii) Selling price for consignment at 50% markup
K
Total cost 911250 + 150,356.3 = 1,061,606.3 1
50% mark up 1,061,606.3 x 50% = 530,803.2 1
1,592,409.50 1
3 Marks
(d) Liability to non-resident tax arises where:
(i) Income is payable to a person, not being a person resident in Malawi.1
(ii) The income is from a source in Malawi. ½
(iii) The income is not attributable to a permanent establishment belonging
to the recipient of the income. 1
(iv) The tax is calculated at the rate of 15% of the gross amount of the
income. ½
3
(TOTAL: 20 MARKS)
7. (a) (i) Fine of K1,000 and to imprisonment of 2 years. 2
(ii) The three situations where information can be disclosed are
- it is required for double taxation agreements with another country
so that the implementation of relief is possible. 1

12. 11
- where the Auditor general or any officer duly authorized by him
needs the information for purposes of performance of their duties.
1
- where it is necessary to carry the Taxation Act into effect or for
the purpose of any prosecution of an offence committed in relation
to the tax on income. 1
- taxpayers request or authority. 1
6 Marks
(b)
Net profit as per accounts
Add back: Depreciation
Salaries
Interest on capital
K
125,000 ½
770,000 ½
110,000 ½
K
1,450,000 ½
1,005,000
2,455,000
DISTRIBUTION OF PROFITS
Salary
Interest on capital
Balance
Total
K
770,000
110,000
1,575,000
2,455,000
Petro
K
450,000 ½
65,000 ½
787,500 ½
1,302,500
Ludia
K
320,000 ½
45,000 ½
787,500 ½
1,152,500
5 Marks
(i) LUDIA
Total income 1,152,500 + 260,000 = K1,412,500 1
1st
144,000 @ 0% = 0 ½
Next 36,000 @ 15% = 5,400 ½
Balance 1,232,500 @ 30% = 369,550 ½
375,150 1 3½ Marks
(ii) Total income K2,455,000 ½
1st
144,000 @ 0% = 0 ½
Next 36,000 @ 15% = 5,400 ½
Balance 2,275,000 = 622,500 ½
687,900 1 3 Marks
(c) The three foreign exchange gain or loss arise:
- when one has a foreign asset or liability in the course of business. 1
- which arose in a specific date but is settled on a different date. 1
- the exchange rate at the time of satisfying the transaction might not be
the same as when the transaction was established. 1
3 Marks
(TOTAL: 20 MARKS)
E N D