Examination No.

_____________________ THE PUBLIC ACCOUNTANTS EXAMINATION COUNCIL OF MALAWI 2006 EXAMINATIONS ACCOUNTING TECHNICIAN PROGRAMME PAPER TC10(B): TAXATION
FRIDAY 1 DECEMBER 2006 INSTRUCTIONS: 1. 2. 3. 4. 5. Number of questions on paper 7. The paper is divided into TWO Sections, A and B. BOTH questions to be answered in Section A and ANY THREE from Section B. Each question carries 20 marks. Use of non-programmable calculators is allowed. You are provided with the following: (i) (ii) 6. 7. 8. A set of tables containing rates on taxable income (Table 1). Rates of capital allowances (Table 2). TIME ALLOWED: 3 HOURS 9.00 AM - 12.00 NOON

Begin each answer on a fresh page. This examination is based on tax legislation in force in the year ended 30 June 2006. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE INVIGILATOR. This question paper contains 13 pages

This question paper must not be removed from the examination hall. SECTION A ANSWER BOTH QUESTIONS IN THIS SECTION 1. An individual taxpayer, Mr Kanyoza, who is a general trader, produced his profit and loss account for the accounting period to 30 June 2006 which is as follows: Note Sales Less: Cost of sales Add : Sundry income Less: Salaries & wages Depreciation General expenses Legal costs Vehicle maintenance Road permits & licences Advertising Rent payable Fringe benefit tax Penalties & fines Travel costs Water Electricity Profit before tax (1) 1,800 2,000 520 180 170 80 200 780 80 225 420 125 90 K000 K000 405,555 380,200 25,355 445 25,800

(2) (3) (4) (4)

(5) (6)

6,670 19,130

The seven notes below give additional detail which may be required to complete the requirements of the question. Note 1 Sundry income : K445,000 Bank interest recorded net of tax at 20% Raffle draw proceeds Note 2 General expenses : K520,000 Donations to local church Donations to Save the Children Fund Malawi Office expenses K 75,000 280,000 165,000 520,000 K 360,000 85,000 445,000

3 Continued/ Note 3 Legal costs : K180,000 Debt collection Preparation of debentures Note 4 - Vehicle maintenance and permit & licences: 30% of all motor vehicle expenses are agreed with the Commissioner as non business expenditure. Note 5 - Penalties and fines: K225,000 Late submission of tax return Interest on underpayment of VAT Traffic fines for overspeeding Note 6 - Travel costs : K420,000 K150,000 was used to pay for an air ticket for Mrs Kanyoza (wife) to attend a wedding of a friend in South Africa. Note 7 - Capital allowances agreed to by the Malawi Revenue Authority was K1,500,000. Required: (a) Compute Mr Kanyozas taxable income for the tax year to 30 June 2006. 10 Marks (b) State, with a brief explanation, whether the following would be allowable deductions in Mr Kanyozas computation of taxable income: (i) (ii) (c) Delivery costs charged by a courier service for goods sold by Mr Kanyoza prior to 30 June 2006. Costs provided for the terminal dues of his book-keeper who retires in 2009. 2 Marks K 30,000 110,000 85,000 225,000 K 65,000 115,000 180,000

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 wifes earned income. 5 Marks Explain what withholding tax is and state its benefits to tax authorities and to the taxpayer. 3 Marks

(d)

4 (TOTAL: 20 MARKS) 2. Continued/ Moses Manga is employed as Finance Manager by Chikumbu Mines Ltd. He is employed on a 36 months contract starting 1 July 2003. His earnings for his previous contract which was completed on 30 June 2006 were as follows: K 1 July 2003 30 June 2005 750,000 1 July 2004 30 June 2005 810,000 1 July 2005 30 June 2006 900,000 Moses signed a new 36 months contract on 1 July 2006 at a salary of K100,000 per month. Under the terms of both contracts, he is entitled to a 25% gratuity at the end of the contract. The following additional information is available in connection with Mr Mangas affairs for the tax year to 30 June 2006. 1. During the month of December 2005, he received a Christmas bonus from his employers amounting to K80,000. This is in addition to his normal monthly salary. He also received other incomes from the following: K NBS Bank interest 50,000 Dividends from Malawi listed companies 35,000 Rent from house in Mchesi 90,000 Interest from loan to a friend 5,000

2.

Interest from the bank and rent from the house is stated gross. The appropriate withholding tax was deducted on payment. 3. The following expenses were incurred on the house he lets out K City rates Mortgage repayment (K4,000 is interest) Repairs & maintenance 4. 5,500 16,000 24,000

The employer provided the following benefits to Mr Manga in the year to 30 June 2006. (i) A fully furnished house for which the employer pays K25,000 per month as rent.

5 (ii) Electricity and water are paid for by the employer at K5,000 and K3,000 per month respectively. Continued/ A gardener, cook and watchman who receive K4,000, K6,000 and K2,500 per month respectively. School fees for his two daughters is paid directly to him as part of his contractual salary amounting to K120,000 per annum. A new Nissan Double Cab with an engine capacity of 3200cc which cost K3,800,000 and is used for both business and personal purposes.

(iii) (iv) (v)

5.

The employer deducts the appropriate PAYE tax from Mr Mangas salary each month and remits this to the income tax department of the Malawi Revenue Authority. Mr Manga made the following donations during the year to 30 June 2006: K Malawi Council for the Handicapped 5,000 Kalinde Church 4,000 University Appeal Fund 200 9,200 Required: (a) (b) Compute the total income tax payable by Mr Manga for the year to 30 June 2006. 12 Marks Calculate the annual total of fringe benefit tax payable. 8 Marks (TOTAL: 20 MARKS)

6.

6 Continued/

SECTION B ANSWER ANY THREE QUESTIONS FROM THIS SECTION 3. (a) For purposes of the Taxation Act, define the term amount realized in relation to an asset (i) (ii) (b) that has been sold for cash; that has been exchanged for another. 1 Mark 1 Mark

Calculate the amount of realized capital loss which is deductible from assessable income in the following circumstances. Assume that the capital loss arises from the disposal of assets in respect of which no capital allowances were given: (i) (ii) where a taxpayer has a realized capital loss of K40,000 and there is a realized capital gain of K60,000. 2 Marks Where a taxpayer has a realized capital loss of K20,000 and there is a realized capital gain of K10,000. 2 Marks

(c)

How would you answer part (b) above, if the capital losses and gains related wholly to the disposal of assets on which allowances had been given? 2 Marks How does a foreign exchange gain or loss arise? 4 Marks

(d) (e)

In January 2006, a Malawian businessman imported trade goods whose cost was 5,000. On the day of the transaction, the rate of exchange was 1 to K200. Payment of these goods was made in mid June 2006 and on the day of settlement, the rate of exchange was 1 to K242. Required: Using the formula given below, calculate the foreign exchange loss or gain realized on the day of the payment for the goods. a x r1 - a x r2 where: a = amount of foreign currency involved. r1 = official rate of exchange of the pound sterling with respect to the Malawi Kwacha in Mid June 2006. r2 = official rate of exchange of the pound sterling with respect to the Malawi Kwacha in January 2006. 4 Marks

(f)

Continued/ A taxpayers records for the year of assessment to 30 June 2006 had the following information on foreign exchange transactions in relation to his business: Realised foreign exchange losses amounted to K75,000. Realised foreign exchange gains amounted to K130,000 and unrealized foreign exchange gains amounted to K40,000. It is the taxpayers first year of business. Required: For each amount, state the tax treatment. 3 Marks (TOTAL: 20 MARKS)

Continued/ 4. (a) (i) (ii) (iii) (iv) What is a fringe benefit as defined by the Taxation Act? 2 Marks How does the liability to fringe benefit tax arise? Who is liable to pay fringe benefits tax? 1 Mark 1 Mark

When is fringe benefits tax due for payment to the Commissioner General? 1 Mark

(b)

An employer has proposed to provide employment benefits to an employee as follows : 1. 2. 3. 4. A housing allowance of K25,000 per month payable in cash to the employee. School fees of K56,000 per term of three months payable directly to the school. Unrestricted use of a motor vehicle which was acquired at a cost of K1,500,000. Vehicle insurance and vehicle running costs estimated at K70,000 and K120,000 per annum respectively. The insurance premium is payable to the insurance company while the amount meant for the vehicle running costs will be payable to the employee in cash. 5. A cook will be provided as at a salary of K12,000 per month.

Required: (i) Explain whether the employer or the employee will bear the tax burden of each employment benefit listed in 1 5, above. 6 Marks Calculate the fringe benefit tax payable on the school fees. 2 Marks 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 a house owned by the employer.

(ii) (iii)

9 State why this represents an equitable and fair part of the tax legislation. 2 Marks (c) Continued/ An expatriate employee is refunded for the costs of flying to Malawi with his family and personal effects at the beginning of his contract and for repatriation at the end. The family are also bought air tickets for a midterm leave. Describe the tax treatment applicable in terms of Fringe Benefits Tax (only). 3 Marks (d) Explain how an employer can avoid becoming liable for the payment of fringe benefits tax. 2 Marks (TOTAL: 20 MARKS)

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Continued/ 5. (a) In respect of an employers Pension Scheme, state the following: (i) Establishment What motivates an employer into establishing a Pension Scheme for employees? 4 Marks (ii) Funding How is an employers Pension Scheme funded? (iii) Approval What benefit is derived from a Pension Scheme which has been approved for taxation purposes. 2 Marks (b) Section 6 of the Taxation Act imposes a requirement for the officers of the Malawi Revenue Authority to observe secrecy in relation to the income tax affairs of a taxpayer. Required: Describe briefly when the law allows or requires an officer to divulge information about a taxpayers affairs other than to the taxpayer concerned. 4 Marks (c) Expenditure may only be deducted from taxable income of a taxpayer where the expenditure is wholly and exclusively and necessarily incurred for the purposes of his trade. Required: Explain the meaning of wholly, exclusively and necessarily. 2 Marks (d) Bad debts and doubtful debts can both be allowable deductions from the taxable income of a taxpayer provided that the related income has been declared. Required: (i) In terms of the standard of proof which is required by the Commissioner, how do bad debts differ from those which are merely regarded as doubtful? 2 Marks 1 Marks

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(ii)

Continued/ Where a specific debt has been provided for and the provision has been allowed as a deduction, what adjustment, if any, should be made to the income of the taxpayer for the following year of assessment, and to what extent is such adjustment affected if the debt: (1) (2) (3) remains unpaid; is recovered; has become bad?

4 Marks (TOTAL: 20 MARKS)

12 Continued/ 6. (a) (i) (ii) Marks (b) (c) Where a club or association is subject to tax, state how the taxable income is computed. 2 Marks The transactions of Tikondwe Club, which is a taxable club, for the financial year ended 31 December 2005, were as follows: Income : K980,000 K000 90 195 70 150 260 40 125 50 980 Describe the two types of clubs, societies or associations which are recognized under the Taxation Act. How is the income of such clubs, societies or associations treated by the Malawi Revenue Authority? 5

This was made up as follows: Rentals from excess accommodation Ground entrance fees Sale of food Sale of drinks Club membership fees Video shows Live band performances Gambling machine Expenses : K620,000 K000 15 25 250 200 130 620

The breakdown was as follows: Trading licence Food licence Salaries & wages Cost of goods sold Repairs and maintenance Required: (i) Compute the taxable income of Tikondwe Club for the financial year to 31 December 2005. 3 Marks

13 (ii) Calculate the amount of tax payable on the taxable income computed in (i) above. 1 Marks Continued/ State the tax year in which the taxable income computed in (i) above will be assessed. 1 Mark

(iii) (d) (e)

Under what circumstances is a club registrable for purposes of the Value Added Tax (VAT) Act? 3 Marks A Malawi company, Bwana Limited, has a wholly owned subsidiary, Toto Limited, also incorporated in Malawi. Explain the circumstances (if any) whereby the holding company, Bwana Limited, can apply for group registration for Income Tax and for Value Added Tax purposes, so that only one tax return is required for the group in each case. 3 Marks (TOTAL: 20 MARKS)

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Continued/.. 7. (a) The imposition of penalties under the Taxation Act is meant to achieve certain objectives. Required: (i) (ii) State the most important objective plus any two others. 3 Marks

Discuss the circumstances under which the imposition of penalties may not achieve the intended objectives. 3 Marks

(b)

The Taxation Act provides for a penalty of up to twice the difference between the tax which should have been charged and the tax that was charged if there was any intent to defraud. (i) (ii) (iii) What is the penalty reduced to if the offence was done without any intent to defraud? 1 Mark Why might the higher rate of penalty be so rarely assessed? 1 Mark State three specific offences that the Taxation Act in Section 112 would consider to be evidence of an intent to defraud. 3 Marks When may the Commissioner accept the taxpayers estimate of the amount of his taxable income; 1 Mark When may the Commissioner estimate the taxpayers taxable income or assessed loss? 3 Marks

(c)

(i) (ii)

(d)

In relation to Value Added Tax (VAT): (i) The time of supply of goods and services for normal Value Added Tax purposes is when the earliest of five events occurs. Mention the five events which may define the tax point. 2 Marks (ii) Indicate any five business records that a taxable person should keep. 2 Marks (TOTAL: 20 MARKS)

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END