INSTITUTE OF BANKERS IN MALAWI

DIPLOMA IN BANKING EXAMINATION

SUBJECT: TAXATION 1 (IOBM – D213)

Date: Wednesday, 2nd May 2012

Time Allocated: 3 hours (13:30 – 16:30 pm)

INSTRUCTIONS TO CANDIDATES

1 This paper consists of TWO Sections, A and B.

2 Section A consists of 4 questions, each question carries 15 marks.

Answer ALL questions.

3 Section B consists of 4 questions, each question carries 20 marks. Answer ANY TWO questions.

4 You will be allowed 10 minutes to go through the paper before the start of the examination, you may write on this paper but not in the answer book.

5 Begin each answer on a new page.

6 Please write your examination number on each answer book used. Answer books without examination number will not be marked.

7 DO NOT open this question paper until instructed to do so.

SECTION A (60 MARKS)

Answer ALL questions from this section.

QUESTION 1

(a) Define the term “disposal” in relation to an asset, for purposes of the Taxation Act. (3 marks)

(b) What effect will an element of private use of an asset have on the claimability of capital allowances? (1 mark)

(c) Expenditure may only be deducted from taxable income where the expenditure is wholly and exclusively and necessarily incurred by the taxpayer for the purposes of his trade.

Required:

Explain the meaning of the phrase “wholly, exclusively and necessarily”. (3 marks)

(d) Bad debts and doubtful debts can both be allowable deductions from the taxable income provided that the related income has been declared.

Required:

(i) How do bad debts differ from doubtful debts? (2 marks)

(ii) 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.  Remains unpaid;

2.  Is recovered;

3.  Has become bad?

(6 Marks)

(Total 15 marks)

QUESTION 2

(a) Mr Chimwaza is a registered taxpayer and operates the following tax

schemes:

(1) PAYE (Pay As You Earn)

(2)  Provisional tax

(3) Fringe Benefits Tax

(4) Withholding tax

Required:

(i)  State when the tax in each of the four schemes is payable.

(2 marks)

(ii) State the rate at which a penalty for late payment is charged in respect of each of the above tax schemes. (4 marks)

(b) How does liability to non-resident tax arise and at what rate is the tax charged? (2½ marks)

(c ) Non-resident tax is not payable on certain types of income.

Required:

State those types of income. (2 marks)

(d) Define the term “person resident in Malawi” as it refers to an Individual, partnership or company. (1½ marks)

(e) Why is taxation an important instrument to governments? (3 marks)

(Total 15 marks)

QUESTION 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)

(b) Timate General Suppliers is a firm operating in Malawi. In April 2011 the firm became indebted to a supplier based in the United States of America in the sum of $5.5 million on account of merchandise supplied.

$2 million was paid in August 2011 and another $2.5 million was paid in December 2011. The balance of $1 million was included in the accounts for 31 December 2011 at K165 million using an exchange rate of $1 = K165.

Required:

(i)  Using the formula specified in the Taxation Act, calculate the foreign exchange gains or losses on the transactions given above to be claimed for the year of assessment to 31 December 2011. Assume the following exchange rates were in use:

April 2011 : $1 = Malawi Kwacha K150

August 2011 : $1 = Malawi Kwacha K160

December 2011 : $1 = Malawi Kwacha K165

(5 marks)

(ii) State whether the foreign exchange loss on the outstanding $1 million which has been converted to K165 million and included in the accounts to 31 December 2011 is an allowable deduction. Give reasons for your answer. (1 mark)

(c) Under Section 45 of the Taxation Act, the deduction of contributions to a fund providing for sickness, accident, unemployment or other benefits other than contributions to an approved pension or provident fund is prohibited.

Required:

Mention four other types of expenditure whose deduction is similarly prohibited.

(4 marks)

(Total 15 marks)

QUESTION 4

(a) The First and Second Schedules to 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 manufacturer incurred business expenditure during the year to 31 December 2011 as follows:

Nature
Telephone charges
Electricity charges
Security charges
Stationery
Rent / Cost
K
155,000
112,000
124,000
175,000
84,000 / VAT paid
K
25,575
18,480
20,460
28,875
13,680

In addition, raw materials were purchased at a cost of K1, 398,000 inclusive of VAT.

During the same year, revenue from exports of manufactured products and from local sales, exclusive of VAT, was K2.5 million and K2.2 million respectively.

Required:

(i) Calculate the amount of VAT paid on raw materials. (2 marks)

(ii) Calculate the amount of VAT chargeable on total sales. (3 marks)

(Total 15 marks)

QUESTION 5

.(a) State the circumstances under which a taxpayer is given an investment allowance. (3½ marks)

(b) For purpose of paragraph 4 of the second schedule of the Taxation Act:

(i)  State the types of motor vehicles which cannot be given investment allowance. (1 mark)

(ii)  Who is a manufacturer? (2 marks)

(c) Paragraph 9 of the second schedule to the Taxation Act, defines farm improvements. This definition excludes three types of buildings.

Required:

Mention the three types of buildings. (3 marks)

(d) The tax written down value of business assets of a manufacturer as at 31 December 2011 was as follows:

Item
Factory building
Plant & machinery
Motor vehicles
Furniture & fittings / Tax written down value
K’000
12,500
8,300
5,400
3,700 / Rate of Annual Allowance
5%
10%
20%
10%

During the financial year to 31 December 2011 the following transactions took place:

1.  Asset Disposals

Net book value 31/12/10
TWDV 31/12/10
Proceeds / Plant & Machinery
K’000
360
240
450 / Motor
Vehicles
K’000
-
340
300 / Office
Furniture
K’000
200
120
350

2.  Asset added during the year

Date
1/3/2011
19/5/2011
1/12/2011 /
Item
New machinery
Saloon motor vehicle
New office furniture /
Cost
K’000
850
4,500
950

Required:

(i) Calculate the capital allowances initial, or investment as the case may be, and annual allowances on the business assets outlined above for the financial year to 31 December 2011. (6 marks)

(ii) Calculate the capital gains or capital losses resulting from the asset disposals stated above. (4½ marks)

(Total 20 marks)

QUESTION 6

(a) Define the term “capital gain” or “loss”. (2 marks)

(b) State instances where no gain nor loss shall be recognized for the purposes of the Taxation Act on the transfer or disposal of any capital asset. (4 marks)

(c) Assuming the individual business person has a taxable income of K55,250,000 for the tax year to 30 June 2011, how much tax would be payable by him? (2½ marks)

(d) State any five types of expenditure which a farmer is allowed to claim as a deduction, under Section 58 of the Taxation Act, in determining the taxable income from pastoral, agricultural or other farming operations. (5 marks)

(e)  Under what circumstances will a taxpayer make an appeal to the Commissioner

General under the Taxation Act? (3 marks)

(f)  Where a taxpayer is not satisfied with the determination of the Commissioner

General, he has an option to appeal to the Special Arbitrator. What procedure doe the

Special Arbitrator follows? (3½ marks)

(Total 20 marks)

QUESTION 7

(a) (i) What is a “fringe benefit” as defined by the Taxation Act? (2 marks)

(ii) How does the liability to fringe benefit tax arise? (1 mark)

(iii)  Who is liable to pay fringe benefits tax? (1 mark)

(iv)  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. A housing allowance of K65,000 per month payable in cash to the employee.

2. School fees of K156,000 per term of three months payable directly to the school.

3. Unrestricted use of a motor vehicle which was acquired at a cost of K4,500,000.

4. Vehicle insurance and vehicle running costs estimated at K170,000 and K275,000 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 K24,000 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)

(ii)  Calculate the fringe benefit tax payable on the school fees. (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 a house owned by the employer. State why this represents an equitable and fair part of the tax legislation. (2 marks)

(c) 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 also bought air tickets for a mid-term 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)

QUESTION 8

(a) (i) Describe the two types of clubs, societies or associations which are

recognized under the Taxation Act. (2 marks)

(ii) How is the income of such clubs, societies or associations treated by the Malawi Revenue Authority? (3 marks)

(b) Where a club or association is subject to tax, state how the taxable income is computed. (2½ marks)

(c) The transactions of Tikondwe Club, which is a taxable club, for the financial year ended 31 December 2011, were as follows:

Income : K1,880,000

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 / K’000
190
295
370
250
160
140
225
250
1,880

Expenses : K1, 620,000

The breakdown was as follows:

Trading licence
Food licence
Salaries & wages
Cost of goods sold
Repairs and maintenance / K’000
415
125
450
500
130
1,620

Required:

(i) Compute the taxable income of Tikondwe Club for the financial year to 31 December 2011. (3½ marks)

(ii) Calculate the amount of tax payable on the taxable income computed in (i) above. (1½ marks)

(iii) State the tax year in which the taxable income computed in (i) above will be assessed. (1 mark)

(d) Under what circumstances is a club registrable for purposes of the Value Added Tax (VAT) Act? (3 marks)

(e) 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. (3½ marks)

(Total 20 marks)

END OF EXAMINATION PAPER

APPENDIX I

TAX RATES TO BE USED

INDIVIDUALS

ANNUAL TAXABLE INCOME RATE OF TAX

First K144, 000 0%

Next K36, 000 15%

Excess over Mk180, 000 30%

COMPANIES

On taxable income 30%

INITIAL AND ANNUAL ALLOWANCES

Initial Allowance Annual Allowance

Group 1 10% 5%

Farm improvements

Industrial Buildings

Railway lines

Group 2

Farm fencing 33¹/³ 10%

Group 3 20% As agreed with the

Commissioner of taxes

Articles

Utensils

Implements

Machinery

Plant

Equipment

Motor Vehicles

Investment Allowance

Where this allowance is applicable, the rate is 100% on new and unused items and 40% on used items.

4

A qualification examined by the Institute of Bankers in Malawi