Botswana Institute of Chartered Accountants
Business Planning: Taxation
Examination Paper
Date:08December 2015
Time: 13:30am -16.00am
Time allowed: 2 hour 30 minutes
Instructions to Candidates
This paper consists of THREE written test questions (100 marks).
1. Ensure your candidate details are on the front of your answer booklet.
2. Answer each question in black ball point pen only.
3. Answers to each written test question must begin on a new page and must be clearly numbered. Use both sides of the paper in your answer booklet.
4. The examiner will take account of the way in which answers are presented.
Assume that the Finance Act 2014/15 rates and allowances will continue to apply in future years unless you are specifically instructed otherwise.
IMPORTANT
Question papers contain confidential information and must NOT be removed
from the examination hall.
DO NOT TURN OVER UNTIL YOU ARE INSTRUCTED TO BEGIN WORK
You MUST enter your candidate number in this box.
Tax Tables
Use the following tax tables to answer your questions, where necessary.
Rates of tax from 2014/2015 tax years
Resident companies On taxable income
Standard rate 22%
Manufacturing company rate 15%
Non-resident companies
Standard rate30%
Resident individuals
P0 – P36,000 Nil
P36,001 – P72,000 Nil + 5% of excess over 36 000
P72,001 – P108,000P1,800 + 12·5% of excess over 72 000
P108,001 –P144,000 P6,300 + 18·75% of excess over 108 000
Over P144,000 P13,050 + 25% of excess over 144000
Non-resident individuals, trusts and estates
P0 – P72,0005% of every pula
P72,001 – P108,000 P3,600 + 12·5% of excess over 72 000
P108,001 – P144,000 P8,100 + 18·75% of excess over 108 000
Over P144,000P14,850 + 25% of excess over 144000
Capital gains – individuals
P0 – P18,000 Nil
P18,001 – P72,000 P0 + 5% of excess over 18 000
P72,000 – P108,000P2,700 + 12.5% of excess over 72 000
P108,000 – P144,000P7,200 + 18.75% of excess over 108 000
Over P144,000P13,950 + 25% of excess over 120 000
Capital gains – companies
Net aggregate gains are taxable at the company rates of tax.
Tax on Foreign dividend15%
Basis of valuation of benefits
Individuals’ vehicle benefit
Vehicle cost / Employee benefit / Fuel cost adjustmentP1 - P50 000 / P2 500 / P1 000
P50 001 - P100 000 / P5 000 / P2 000
P100 001 - P150 000 / P7 500 / P3 000
P150 000 - P200 000 / P10 000 / P4 000
Benefit on the excess of P200 000 is 15% thereof with a maximum fuel cost adjustment of P5 000.
Individual’s housing benefit:
If rated:
10% of the property’s rateable value prorated by occupation and reduced by any contribution made by the employee.
If not rated:
Gross floor area x P250 per sq metre x 8% for a standard building
The benefit is prorated by period of use and reduced by any contribution made by the employee.
Individual’s furniture benefit
10% of furniture cost in excess of P15, 000 pro - rated by usage.
CAPITAL TRANSFER TAX RATES
Aggregate Taxable Value Rate of Tax per cent
1. Person (other company) First P100 000 2 per cent
Next P200 000 3 per cent
Next P200 000 4 per cent
Balance 5 per cent
2. Resident company 12.5 per cent
3. Non-resident company 12.5 per cent
Capital value of an annuity
Capital value = A x 1 – (1/(1 + r)ᶰ / r
Where - A is the annuity payable
r = rate of return
N = number of years over which the annuity is payable.
COST OF LIVING INDEX – JULY 1982 to AUGUST 2015
YEAR / Jan / Feb / Mar / Apr / May / Jun / Jul / Aug / Sep / Oct / Nov / Dec1982 / - / - / - / - / - / - / 100.0 / 101.2 / 101.2 / 102.1 / 103.3 / 103.8
1983 / 104.1 / 104.8 / 105.5 / 106.6 / 108.3 / 108.4 / 109.0 / 110.2 / 110.2 / 110.7 / 111.7 / 112.3
1984 / 113.5 / 114.5 / 115.2 / 116.0 / 116.9 / 118.3 / 119.1 / 120.1 / 119.8 / 120.7 / 119.7 / 119.5
1985 / 119.9 / 120.7 / 122.0 / 124.1 / 126.6 / 128.6 / 130.1 / 129.8 / 131.1 / 131.5 / 131.8 / 132.0
1986 / 133.9 / 135.5 / 135.5 / 136.8 / 138.0 / 140.9 / 141.2 / 141.8 / 142.7 / 143.4 / 144.7 / 146.3
1987 / 147.4 / 148.5 / 148.9 / 151.9 / 153.6 / 154.1 / 154.9 / 156.6 / 156.7 / 157.1 / 157.5 / 158.1
1988 / 157.8 / 158.7 / 160.8 / 163.4 / 164.1 / 165.5 / 168.0 / 169.3 / 171.0 / 172.6 / 173.9 / 174.4
1989 / 176.9 / 178.0 / 180.1 / 182.7 / 184.1 / 186.2 / 187.3 / 188.7 / 190.2 / 191.1 / 191.5 / 194.2
1990 / 196.6 / 199.0 / 200.5 / 204.1 / 205.1 / 206.0 / 207.2 / 209.2 / 210.7 / 212.6 / 216.0 / 217.6
1991 / 220.5 / 221.4 / 223.5 / 225.8 / 227.3 / 229.0 / 232.0 / 234.2 / 237.2 / 239.5 / 242.5 / 244.9
1992 / 248.3 / 251.7 / 256.3 / 262.1 / 265.5 / 269.4 / 272.3 / 275.0 / 277.6 / 280.1 / 283.0 / 285.4
1993 / 291.0 / 293.1 / 295.8 / 301.1 / 303.1 / 306.0 / 311.6 / 313.5 / 315.0 / 317.6 / 320.1 / 321.5
1994 / 324.2 / 326.8 / 328.5 / 332.7 / 337.3 / 340.2 / 343.1 / 345.3 / 347.0 / 348.4 / 351.3 / 353.0
1995 / 357.9 / 361.0 / 364.9 / 368.6 / 370.5 / 374.9 / 377.8 / 381.6 / 384.3 / 386.0 / 387.9 / 391.3
1996 / 395.5 / 398.1 / 402.2 / 405.6 / 408.8 / 413.9 / 417.0 / 419.5 / 421.6 / 423.8 / 426.0 / 428.7
1997 / 431.6 / 435.5 / 439.7 / 443.6 / 448.7 / 451.2 / 454.1 / 454.9 / 457.5 / 459.7 / 460.9 / 461.9
1998 / 464.8 / 466.0 / 469.9 / 476.0 / 477.9 / 478.9 / 481.0 / 484.0 / 484.4 / 486.9 / 489.5 / 491.2
1999 / 495.1 / 499.7 / 504.3 / 507.5 / 509.2 / 513.3 / 514.3 / 517.7 / 521.1 / 523.5 / 524.0 / 525.2
2000 / 530.8 / 536.3 / 538.8 / 545.5 / 548.9 / 552.0 / 568.6 / 569.8 / 571.4 / 576 / 577.5 / 578.7
2001 / 581.4 / 582.1 / 587.2 / 598.9 / 596.9 / 598.6 / 601.3 / 603.0 / 605.4 / 608.5 / 610.2 / 611.0
2002 / 613.1 / 613.9 / 622.1 / 629.6 / 631.3 / 634.0 / 654.4 / 662.4 / 666.7 / 670.8 / 677.6 / 679.3
2003 / 683.2 / 689.0 / 692.2 / 701.4 / 705.8 / 715.0 / 714.5 / 698.0 / 707.0 / 715.9 / 717.9 / 718.9
2004 / 721.3 / 728.6 / 735.8 / 743.6 / 754.0 / 721.3 / 758.9 / 761.3 / 765.7 / 770.7 / 772.4 / 774.9
2005 / 779.2 / 781.7 / 783.8 / 789.4 / 801.5 / 813.2 / 821.2 / 834.8 / 842.3 / 857.1 / 859.7 / 863.1
2006 / 877.4 / 884.0 / 891.5 / 901.4 / 909.6 / 915.0 / 918.6 / 924.2 / 930.8 / 936.4 / 935.4 / 936.4
2007 / 942.9 / 948.5 / 949.5 / 957.7 / 968.1 / 974.5 / 988.5 / 991.2 / 994.1 / 1004.3 / 1007.2 / 1012.8
2008 / 1022.2 / 1034.4 / 1043.1 / 1064.7 / 1085.0 / 1115.1 / 1136.7 / 1140.6 / 1133.8 / 1135.5 / 1159.0 / 1151.2
2009 / 1152.7 / 1155.1 / 1165 / 1172.8 / 1176 / 1193.4 / 1204.8 / 1209.7 / 1213 / 1213.3 / 1217.2 / 1218.4
2010 / 1223.2 / 1225.4 / 1234.6 / 1256.2 / 1268.6 / 1285.3 / 1289.7 / 1290.6 / 1297.9 / 1300.6 / 1304.2 / 1309.1
2011 / 1320 / 1330.2 / 1338.9 / 1359.0 / 1373.6 / 1386.4 / 1380.6 / 1403.4 / 1409.0 / 1415.0 / 1424.0 / 1428.8
2012 / 1436.1 / 1440.0 / 1446.5 / 1460.4 / 1480.0 / 1487.3 / 1492.1 / 1496.7 / 1508.9 / 1515.4 / 1530.2 / 1534.8
2013 / 1544.3 / 1546.9 / 1555.4 / 1565.6 / 1570.2 / 1573.8 / 1576.7 / 1580.4 / 1584.3 / 1587.9 / 1593.5 / 1598.1
2014 / 1611.1 / 1618.6 / 1624.2 / 1637.2 / 1641.8 / 1646.5 / 1648.4 / 1653.0 / 1655.9 / 1662.4 / 1667.0 / 1663.3
2015 / 1676.4 / 1669.8 / 1675.4 / 1693.2 / 1696.0 / 1702.5 / 1704.4 / 1707.2
Question 1
Phatismo plc is a Botswana resident parent company which has a number of subsidiaries operating in the engineering and farming industry. You are a trainee BICA Chartered Accountant working at Phatismo plc as the financial controller. Your manager is the Phatismo plc finance director who is currently away on annual leave; therefore you report directly to the CEO, Ravi Kapadia.
Phatismo plc has a 70% shareholding in Phala Ltd, a Botswana resident company which is in the farming industry in the Kasane. The remaining 30% of the shares are owned by Mr Morapedi Tshenolo who is the technical director at Phala Ltd. Phala Ltd has a 30 September year end. Following a strategic review, the Phatismo plc board has decided to divest itself of its investment in Phala Ltd. The board did not conclude on how Phala Ltd should be disposed of.
Phala Ltd is a VAT registered company.
At a recent board meeting, the directors of Phala Ltd determined that a resolution would be presented to shareholders with two proposals of how Phala Ltd could be disposed of. The directors expect that the disposal would be completed by 1 February 2016 and the company will then cease to trade on 28 February 2016. Phala Ltd is sufficiently liquid to meet its debts.
Ravi Kapadia gives you the following briefing:
“Morapedi has agreed to the disposal of Phala Ltd and would like to understand the tax implications for his personal tax position. Morapedi has accepted the position as technical director at another of Phatismo plc’s subsidiaries on a salary of P480,000 pa.
“Phala Ltd’s finance director has prepared some information for the Phatismo plc board which includes information regarding the state of affairs of Phala Ltd (Exhibit 1) and the various ways in which Phala Ltd could be disposed of (Exhibit 2).
“I would like you to do the following:
Explain the possible loss reliefs for Phala Ltd’s farming losses arising in the year ended 30 September 2015 and in the period to 28 February 2016 and recommend the most tax efficient use of the losses. Your answer must include the revised taxable income for the years ended 30 September 2012 – 2015 and for the five months to 28 February 2016 for Phala Ltd as a result of your recommendation.
For each of the two alternative proposals for the disposal Phala Ltd’s business(Exhibit 2):
Explain and calculate the income tax, capital gains tax and VAT implications for Phala Ltd, Phatismo plc and for Morapedi of the disposal of Phala Ltd on 1 February 2016.
Calculate the cash receivable post disposal by both Phatismo plc and Morapedi.
Recommend which option should be chosen.
“On another matter, I have heard a rumour that the Phatismo plc’s finance director has been buying and selling Phatismo plc shares without informing the board. I understand that he has given you the password for his personal email account. I want you to access his personal email account and read any emails concerning share transactions. Report your findings to me so that I, together with the Phatismo plc board, can determine our response.”
Requirements
(a) Prepare a working paper responding to the briefing from Ravi Kapadia; and
(b) Evaluate the ethical and professional issues for you arising from Ravi Kapadia’s
request for you to access the finance director’s personal email account. Determine the actions you should take.
Total: 40 marks
Exhibit 1 ─ Information for the Phatismo plc board ─ Disposal of Phala Ltd
Phala Ltd’s share capital comprises of 500,000 P1 ordinary shares. Morapedi incorporated the company in 2001 when he subscribed for 100% of the shares at par. In 2004, he sold 350,000 shares to Phatismo plc for P5 per share.
Recent tax results for Phala Ltd
Years ended 30 September 2012 2013 2014 2015
P’000 P’000 P’000 P’000
Adjusted farming profit/(loss) 585 390 248 (850)
Less capital allowances(125)(88)(67)(56)
Less allowable capital expenditure(105)(42)(23)(144)
------
Farming taxable income/(loss)355260158(1,050)
Property income 116 113 115 118
A note to the above recent tax results for Phala Ltd
A further tax adjusted farming loss of P322,000, including all closure costs is projected for the five months ending 28 February 2016 but before accounting for the items in the notes below (Notes 1- 6).
No allowable capital expenditure during this five month period will be expected.
Property income is not expected to arise in the five months ending 28 February 2016.
Phala Ltd - projected carrying amounts and amounts realisable on disposal on 1 February 2016:
Notes CarryingAmounts
Amountsrealisable on
disposal
P’000P’000
Office building (1) 5921,300
Farm residential properties(2)1,2203,200
Plant and machinery (3) 570330
Inventories 320180
Bank loan (4) (500)(500)
Bank overdraft (5) (200)(200)
Trade and other payables (300)(300)
------
1,7024,010
Notes
(1) Phala Ltd purchased the office building in January 2009 for P740,000. The office building was acquired out the proceeds of another office building that was sold for P800,000 and realised a chargeable gain of P190,000 in September 2008.
The office building that was sold in September 2008 had originally cost P600,000. Phala Ltd had made the maximum available claim for capital gains relief following the acquisition of the replacement office building in January 2009.
The office buildings have always been used as investment properties. The tax written down of the office building at 1 February 2016 would be P555,000
(2)The farm residential properties were erected on the farm on various dates. The total indexed cost for capital gains purposes has been correctly computed as P1,982,000 as at 1 February 2016. The total actual cost was P1,560,000.
(3) The farming plant and machinery had a tax written down value of P420,000 at 1 October 2015. (Changed the figure to secure balancing allowance of P90 000 as given in the answer)
(4) The bank loan is secured by a fixed charge over the office building.
(5) The bank overdraft is secured by a floating charge over the other assets.
(6)Unless otherwise specified, the income tax value for the assets and liabilities is equal to their carrying amounts.
(7) You may assume that the NCOLI for February 2016 is 1730.3.
Exhibit 2 ─Alternative proposals for the disposal of Phala Ltd
Phatismo plc has two proposals to consider both of which are with Didimela Ltd:
Proposal 1
Didimela Ltd, a VAT registered and unconnected company has made an offer to buy the whole share capital of Phala Ltd. Didimela Ltd has offered to pay P4,300,000 in cash for the shares.
It was agreed with the creditors that Didimela Ltd would take-over all the liabilities of Phala Ltd.
Proposal 2
Phala Ltd could sell off its individual assets to Didimela Ltd at the realisable amounts for P5,010,000 and then settle all its liabilities, including tax liabilities. The balance of cash proceeds received would then be distributed to the shareholders and the company would be would up on 28 February 2016.
Question 2
Assume it is now October 2015. You are Bontsi Letshabo and you work in the tax department of Dube chartered accountants. Dube provides tax advisory services to Kukama plc (Kukama). You receive the following instructions from your tax partner:
“I have forwarded you an email from Kitso Monare which requires your attention today (Exhibit). Please prepare a draft reply to this email.”
Background information
Kukama is a company based in Serowe which deals in high tech products. Kukama has invested 70% in Kgabo Ltd and 50% in Lesie Ltd. Lesie Ltd is accounted for as a joint venture while Kgabo Ltd as a subsidiary. Kukama has a 30 September year end.
Kgabo Ltd is a non-trading company which owns and manages a number of commercial properties. Kgabo Ltd’s company tax return has already been submitted and shows a tax loss of P520,000 for the year ended 30 June 2015. Kgabo Ltd is in the process of being merged with another company, Spin Ltd.
Lesie Ltd is a trading company and is jointly owned by Kukama and a third party. It has a 30 September year end.
Dube’s engagement letter with Kukama requires Kukama to be responsible for filing all returns and to communicate directly with BURS. Under the terms of engagement, Dube chartered accountants has agreed to review and adjust if necessary, Kukama’s company tax return and those of Kgabo Ltd and Lesie Ltd, but it has no authority to communicate with BURS on behalf of the clients.
The tax compliance matters of Kukama and its group members are handled by the internal tax department. The department is head by the Kitso Monare who is the head of internal tax department.
Kukama plc – adjustment to profit computation for the year ended 30 September 2015 prepared by the Kukama internal tax department
NotesP’000P’000
Profit before taxation 12,892
Add back disallowable expenses
Impairment of goodwill2500
Foreign exchange losses3230
Software support charges470
Legal fees in respect of sale of
Loapi House545
Chargeable gain – Loapi House5506
Depreciation and other
disallowable expenses222
Inventory write off6801,653
------
4,545
Less non-taxable items
Profit on sale of Loapi House5650
Dividend from Kgabo Ltd75
Capital allowances on plant & machinery90(815)
------
Total taxable income3,730
Company tax at 22%820.6
Notes:
1)Profit for the year
The profit for the year is stated after accounting for the following:
- Share of income from the joint venture, Lesie Ltd, of P182,000
- An expense of P84,000 paid to an employee who had retired in the year ended 30 September 2014. The employee had worked for many years but had not contributed to the company pension fund. The directors decided to award her with P84,000 in recognition of her loyal services in prior years.
- Tax repayment of P53,000 relating to overpayment of tax in the previous year.
- During the year, the internal tax department decided to change how gratuities for employees were accounted for. Previously, only the actual gratuities paid during the year were charged in the accounts. The policy was changed to charge the accrued gratuities instead of the actual gratuities paid. During the year ended 30 September 2015 the following details were relevant:
- Actual gratuities paid were P344,000, and
- Accrued gratuities were P514,000.
2)Impairment of goodwill
Goodwill arose on the acquisition of an unincorporated business. Due to fierce competition in the industry, the goodwill was impaired by P500,000.
3)Foreign exchange losses
Kukama has suffered foreign exchange losses on settled trading transactions totalling P230,000. I was not sure what to do with them and therefore added I have added back this expense.
4)Software support services
A new computer network was set up in January 2015 by Mpho, a friend to the managing director. Mpho worked full time as an IT specialist in Diamonds Ltd. Mpho asked for P70,000 for the work done but would not supply an invoice. Kukama paid him in full but I was not sure whether we can claim the expense without an invoice. Therefore I decided to add back the expense in the profit adjustment.
5)Sale of Loapi House
Kukama bought Loapi House in January 2007 for P400,000. The building was revalued on 1 July 2012 to P800,000. It was used exclusively by Kukama as an investment property (renting out offices). It was sold to a third party for P1,450,000 net of legal expenses in January 2015. The calculation of the chargeable gain was based on the re-valued amount of P800,000 as the allowable cost.
6)Inventory write-off
During the year end stock counting, certain inventory was considered to be obsolete and the stores staff estimated that their sales value was less than their cost. Consequently, P80,000 was written off the cost of these obsolete inventory. I was not sure of the appropriateness of this treatment so I have added it back.
Requirements
Prepare the draft email to Kitso Monare, the financial controller of Kukama plc, to include:
- A revised calculation of the company tax liability, correcting any errors you identify;
- Brief notes to explain the errors made by the internal tax department and your adjustments
- A note of any additional information you require to compute your review; and
- The VAT and capital gains tax (CGT) implications of the merger of Kgabo Ltd and Spin Ltd (Exhibit)
Exhibit – Email from Kitso Monare
From:Kitso Monare
To:Dube Tax partner
Date:21 October 2015
Subject:Tax computation & VAT/CGT implications for Kgabo Ltd
I looking forward to receiving a revised tax computation for Kukama plc, our team in the internal tax department are quite confident their computations. When you send that back kindly also provide some advice on the VAT/CGT implications of the following matter:
Merger of Kgabo Ltd and Spin Ltd
Our subsidiary, Kgabo Ltd has been in advanced discussions with Spin Ltd to merger. We are uncertain of the VAT and CGT implications that such a merger would have on Kgabo Ltd and us as shareholders.
A new company called Bospin Ltd would be formed. Then Bospin Ltd would issue shares to the shareholders of Kgabo Ltd and Spin Ltd based on the relative fair values of the net assets of their companies. Following the share issue, Kgabo Ltd and Spin Ltd would transfer all their assets and liabilities to Bospin Ltd. No other consideration would be given for the acquisition of the two companies apart from the share exchange.
Both Kgabo Ltd and Spin Ltd are registered for VAT. Bospin Ltd would be registered for VAT immediately upon formation.
The directors are excited about the future prospects of Bospin Ltd but would also like to understand the VAT and CGT implications as this may influence the determination of the share exchange.
Regards
Kitso Total: 23 marks
Question 3
Assume it is now November 2015. You are Tebo Paya and you work as a senior in the advisory department of Makepe and Associates (Makepe), a firm of BICA chartered accountants. Your department responds to technical and ethical queries from your firm’s offices in Botswana.
Makepe has offices in all the major towns in Botswana.
Makepe was recently engaged by a new client, Nkwe Ltd, on 1 July 2015. You have been asked to help out with a number of issues relating to Nkwe Ltd.
Background information
Nkwe Ltd is a large unquoted company based in Gaborone with an annual turnover in excess of P50 million. Your firm provides tax and accounting services to Nkwe Ltd and its directors but does not audit financial statements.
Nkwe Ltd is manufacturer of various electrical products. Nkwe Ltd also has subsidiaries outside of Botswana, including some that were acquired during the year.
Nkwe is duly registered for VAT.
The following tax issues have arisen:
Issue 1 – Nkwe’s foreign transactions
Nkwe’s taxable profits for the year ended 30 June 2015 were P1,500,000 before considering the following:
- In October 2014, Nkwe bought a 100% shareholding in Santos Ltd, a company resident in Vubwi, a small African country with a 10% rate of corporation tax. Santos is a customer of Nkwe. After acquiring the shares in Santos and as a result of group internal pricing agreement, Nkwe reduced the selling price of goods to Santos by 25%. This resulted in Nkwe’s taxable profits being reduced by P750,000 in the year ended 30 September 2015. However, Santos paid a dividend of P810,000 (after the deduction of 10% withholding tax) to Nkwe on 28 September 2015.
- In February 2015, Nkwe set up a manufacturing branch, which is a permanent establishment, in Angola. All its sales are to Angolan customers. It operates from a rented factory near Luanda. Plant and machinery used in the manufacturing process is held on operating leases. A taxable profit of P250,000 was made by the branch in the period ended 30 September 2015 and the Angolan tax on the branch’s profits was paid at 35%. If the branch proves successful, Nkwe intends to set up similar branches in other SADC countries.
Requirement