Examination No._____________________

THE PUBLIC ACCOUNTANTS EXAMINATIONCOUNCIL OF MALAWI

2006 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC10(B): TAXATION

FRIDAY 1 DECEMBER 2006 TIME ALLOWED: 3 HOURS 9.00 AM - 12.00 NOON

INSTRUCTIONS:

1. Number of questions on paper – 7.

2. The paper is divided into TWO Sections, A and B. BOTH questions to be answered in Section A and ANY THREE from Section B.

3. Each question carries 20 marks.

4. Use of non-programmable calculators is allowed.

5. You are provided with the following:

(i) A set of tables containing rates on taxable income (Table 1).(ii) Rates of capital allowances (Table 2).

6. Begin each answer on a fresh page.

7. This examination is based on tax legislation in force in the year ended 30 June 2006.

8. 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:

SalesLess: 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

Note

(1)

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

(5)(6)

K’000

1,8002,000 520 180 170 80 200 780 80 225 420 125 90

K’000405,555380,200 25,355 445 25,800

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 K

Bank interest recorded net of tax at 20% 360,000Raffle draw proceeds 85,000

445,000

Note 2 - General expenses : K520,000 K

Donations to local church 75,000Donations to Save the Children Fund – Malawi 280,000Office expenses 165,000

520,000

Continued/……

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Note 3 - Legal costs : K180,000 K

Debt collection 65,000Preparation of debentures 115,000

180,000

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 K

Late submission of tax return 30,000 Interest on underpayment of VAT 110,000

Traffic fines for overspeeding 85,000 225,000

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 Kanyoza’s 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 Kanyoza’s computation of taxable income:

(i) Delivery costs charged by a courier service for goods sold by Mr Kanyoza prior to 30 June 2006.

(ii) Costs provided for the terminal dues of his book-keeper who retires in 2009. 2 Marks

(c) 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

(d) Explain what ‘withholding’ tax is and state its benefits to tax authorities and to the taxpayer. 3 Marks

(TOTAL: 20 MARKS)

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Continued/……2. 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:

K1 July 2003 - 30 June 2005 750,0001 July 2004 - 30 June 2005 810,0001 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 Manga’s 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.

2. He also received other incomes from the following: K

NBS Bank interest 50,000Dividends from Malawi listed companies 35,000Rent from house in Mchesi 90,000Interest from loan to a friend 5,000

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

KCity rates 5,500Mortgage repayment (K4,000 is interest) 16,000Repairs & maintenance 24,000

4. 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.

(ii) Electricity and water are paid for by the employer at K5,000 and K3,000 per month respectively.

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Continued/……(iii) A gardener, cook and watchman who receive K4,000, K6,000 and

K2,500 per month respectively.

(iv) School fees for his two daughters is paid directly to him as part of his contractual salary amounting to K120,000 per annum.

(v) 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.

5. The employer deducts the appropriate PAYE tax from Mr Manga’s salary each month and remits this to the income tax department of the Malawi Revenue Authority.

6. Mr Manga made the following donations during the year to 30 June 2006: K

Malawi Council for the Handicapped 5,000Kalinde Church 4,000University Appeal Fund 200

9,200

Required:

(a) Compute the total income tax payable by Mr Manga for the year to 30 June 2006. 12 Marks

(b) Calculate the annual total of fringe benefit tax payable. 8 Marks(TOTAL: 20 MARKS)

Continued/……

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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) that has been sold for cash; 1 Mark(ii) that has been exchanged for another. 1 Mark

(b) 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) where a taxpayer has a realized capital loss of K40,000 and there is a realized capital gain of K60,000. 2 Marks

(ii) 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? 2½ Marks

(d) How does a foreign exchange gain or loss arise? 4 Marks

(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

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Continued/……(f) A taxpayer’s 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 taxpayer’s first year of business.

Required:

For each amount, state the tax treatment. 3½ Marks(TOTAL: 20 MARKS)

Continued/……

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4. (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 K25,000 per month payable in cash to the employee.

2. School fees of K56,000 per term of three months payable directly to the school.

3. Unrestricted use of a motor vehicle which was acquired at a cost of K1,500,000.

4. 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

(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

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Continued/……(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 are 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)

Continued/……

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5. (a) In respect of an employer’s 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 employer’s Pension Scheme funded? 1½ Marks

(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 taxpayer’s 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’. 2½ 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

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Continued/……(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? 4 Marks

(TOTAL: 20 MARKS)

Continued/……

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6. (a) (i) Describe the two types of clubs, societies or associations which are recognized under the Taxation Act.

(ii) How is the income of such clubs, societies or associations treatedby the Malawi Revenue Authority? 5

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 2005, were as follows:

Income : K980,000

This was made up as follows:

Rentals from excess accommodationGround entrance feesSale of foodSale of drinksClub membership feesVideo showsLive band performancesGambling machine

K’000 90 195 70 150 260 40 125 50 980

Expenses : K620,000

The breakdown was as follows:

Trading licenceFood licenceSalaries & wagesCost of goods soldRepairs and maintenance

K’000 15 25 250 200 130 620

Required:

(i) Compute the taxable income of Tikondwe Club for the financial year to 31 December 2005. 3½ Marks

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

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Continued/……(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)

Continued/…..

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7. (a) The imposition of penalties under the Taxation Act is meant to achieve certain objectives.

Required:

(i) State the most important objective plus any two others. 3 Marks

(ii) 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) What is the penalty reduced to if the offence was done without any intent to defraud? 1 Mark

(ii) Why might the higher rate of penalty be so rarely assessed? 1 Mark

(iii) State three specific offences that the Taxation Act in Section 112 would consider to be evidence of an intent to defraud. 3 Marks

(c) (i) When may the Commissioner accept the taxpayer’s estimate of the amount of his taxable income; 1 Mark

(ii) When may the Commissioner estimate the taxpayer’s taxable income or assessed loss? 3 Marks

(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. 2½ Marks

(ii) Indicate any five business records that a taxable person should keep. 2½ Marks

(TOTAL: 20 MARKS)

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