ACCA f6 taxation zimbabwe 2011 dec question

Value added tax VAT Capital allowances % Wear and tear: Tax rates Year ended 31 December 2010 % Companies Income Tax Individuals Income Tax... Withholding taxes On dividends distributed

Fundamentals Level – Skills Module

Time allowed

Reading and planning: 15 minutes

ALL FIVE questions are compulsory and MUST be attempted

Tax rates and allowances are on pages 2–4

Do NOT open this paper until instructed by the supervisor.

During reading and planning time only the question paper may

be annotated You must NOT write in your answer booklet until

instructed by the supervisor.

This question paper must not be removed from the examination hall.

Taxation

(Zimbabwe)

Tuesday 6 December 2011

SUPPLEMENTARY INSTRUCTIONS

1 Calculations and workings need only be made to the nearest US$1, unless directed otherwise

2 All apportionments should be made to the nearest month

3 All workings should be shown

TAX RATES AND ALLOWANCES

The following tax rates and allowances are to be used when answering the questions:

Rates – Individuals

Year ended 31 December 2010

NB The AIDS levy of 3% of income tax payable, less credits remains in place

Allowable deductions year ended 31 December 2010

Pension fund contribution ceilings

2010 US$

(a) In relation to employers: in respect of each member 5 400

(b) In relation to employees: by each member of a pension fund 5 400

(c) In relation to each contributor to a retirement annuity fund or funds 5 400

(d) National Social Security: 3% of gross salary

Aggregate maximum contributions to all above per employee per year 5 400

Credits year ended 31 December 2010

2010 US$

* The amount is reduced proportionately, if the period of assessment is less than a full tax year

Deemed benefits year ended 31 December 2010

Motor vehicles

2010 US$

The deemed benefit per annum is calculated at a rate of LIBOR +5% of the loan amount

advanced

Value added tax (VAT)

Capital allowances

%

Wear and tear:

Tax rates

Year ended 31 December 2010

%

Companies

Income Tax

Individuals

Income Tax

Capital gains tax

%

Disposal of listed marketable securities acquired after 1 February 2009 1% of gross proceeds

Disposal of specified assets acquired prior to 1 February 2009

– Sold after 1 February 2009 5% of gross proceeds

On principal private residence where the seller is over 55 years 0

On other immovable property acquired on or after 1 February 2009 20% of gain

Capital gains withholding tax on sale proceeds

Marketable securities (Listed) before 1 February 2009 5

Note: the withholding tax is not final on the seller Actual liability is assessed

in terms of the Capital Gains Tax Act

Withholding taxes

On dividends distributed by a Zimbabwean resident company to resident shareholders

other than companies and to non-resident shareholders:

By a company listed on the Zimbabwe Stock Exchange 10

Non-residents’ tax

Residents’ tax on interest

From other financial institutions (including discounted securities) 20

Elderly taxpayers (55 years and over)

The exemptions from income tax are as follows:

Year ended 31 December 2010

US$

Interest on deposits with a financial institution 3 000

Income from the sale or disposal of marketable securities 1 800

Income from the sale or disposal of a principal private residence is also exempted

This is a blank page.

Question 1 begins on page 6.

ALL FIVE questions are compulsory and MUST be attempted

1 Gwen Brown has been working for the Institute of Internal Auditors (IIA) since its inception At the beginning of January 2010, she was seconded to the Public Services Salaries Bureau (PSSB) for a period of six months to spearhead the restructuring exercise and the review of the system of internal control in that government department Terms of the PSSB engagement:

The IIA was to be paid a one off settlement of US$60 000 at the completion of the engagement as well as reimbursement of the monthly operational expenses incurred based on submission of the relevant invoice on or before the 25th of the month

Gwen Brown was provided with the required human capital, office space and any other necessary resource to ensure the successful execution of the engagement

Gwen Brown’s only entitlements from the PSSB were the following monthly allowances:

US$

Gwen Brown’s secondment to the PSSB did not in any way affect her salary and other entitlements from her employer, the IIA, as these continued to accrue to her during the period of the secondment

Gwen Brown’s earnings, entitlements and deductions from the IIA for the year ended 31 December 2010

US$

Entertainment allowance (75% used for IIA’s business) 7 500

Medical aid contributions (contributed by employee) (2 500)

Additional information

(1) Gwen Brown stays in a fully furnished company house in Lakeview park which is located just outside the Municipality of Harare The cost of the furnishing in the house amounted to US$22 000 The IIA charges her a nominal rent of US$150 per month

(2) Gwen Brown makes use of a fully expensed company vehicle, an Isuzu double cab, engine capacity 3 300cc Her total mileage for the period to 31 October 2010 aggregated to 45 000 km, of which 25 000 km was attributed to private use In accordance with the policy on motor vehicles used by executive staff members, the IIA offered Gwen Brown an opportunity to acquire the vehicle for US$5 200 on 1 November 2010 Gwen Brown accepted the offer The vehicle was purchased by the IIA four years previously for US$15 000 and the income tax value at the date of sale was nil The market value of the vehicle according to the Automobile Association of Zimbabwe was US$10 000

(3) On 1 July 2010 Gwen Brown successfully applied for a US$25 000 loan from her employer, the IIA She used US$15 000 to effect improvements on her private residence and the balance to pay for her post graduate studies Her employer charged her interest of 2% per annum on the loan During this period the LIBOR was 1·5% (4) The IIA runs a scheme for its executive staff whereby it provides twice a year, free goods ranging from household effects, clothing and groceries During the year ended 31 December 2010, Gwen Brown received such goods valued at US$9 000 The IIA had paid US$6 000 to acquire these goods

(5) During the year ended 31 December 2010, Gwen Brown received a total of US$6 500 out of a matured retirement annuity fund She will receive the same amount yearly for a period of ten years ZIMRA had disallowed her a total of US$8 300 over the years as a deduction from her contributions to that fund

(6) On 1 October 2010, Gwen Brown commenced part-time lecturing in Auditing at a local private college She is paid weekly for her services and the total amount received for the three months ended 31 December 2010 was US$5 000 The amount was received gross as the private college is not registered with ZIMRA

Gwen Brown’s other non employment related income received during the year ended 31 December 2010

US$

Gross royalties received for her Auditing text book 30 000

Gross local company dividends (Unquoted shares) 13 000

–––––––

53 000 –––––––

Required:

(a) Briefly explain the tax treatment, and calculate the taxable amounts for Gwen Brown, in respect of the following:

(i) The employment benefits stated in the additional information (1) to (4); (6 marks)

(ii) The lump sum receipt of US$6 500 from the matured retirement annuity fund mentioned in the

(b) (i) State the Public Services Salaries Bureau’s tax obligation when making the disbursement of US$60 000

(ii) Outline ZIMRA’s PAYE requirements which have been breached by the private college mentioned in the additional information (6) and state the remedies at ZIMRA’s disposal. (3 marks)

(c) Calculate Gwen Brown’s taxable income and tax payable for the year ended 31 December 2010 in respect

(25 marks)

2 Solar Tech Enterprises (Private) Limited (STE) was incorporated in 2009 and commenced business operations on

1 January 2010, specialising in the manufacturing and distribution of solar panels, solar lights and solar powered related products STE’s head office and business premises are situated in Harare

On 30 June 2009, STE had successfully applied for a two-year loan of US$750 000 with an interest rate of 15% p.a from a leading local financial institution The loan was applied as follows:

US$

Showroom construction at Dande, a designated growth point 100 000

––––––––

Total amount applied during the year ended 31 December 2009 720 000

Amount applied towards 2010 consultancy fee 30 000

––––––––

––––––––

STE’s fixed asset register as at 31 December 2010 is as follows:

Cost Depreciation Net book value

Note

The fixed assets procured using the loan were not included in the fixed asset register and neither was the expenditure

on raw material procurement recorded in STE’s books These assets were first brought into use on 1 January 2010

STE’s statement of comprehensive income for the year ended 31 December 2010 is as follows:

––––––––––

Addother operating income:

–––––––– ––––––––––

4 104 162

Lessoperating expenses:

Industrial research and development 5 33 300

–––––––– ––––––––––

––––––––––

––––––––––

Notes

1 Staff welfare:

US$

NSSA and pension contributions (80 employees) 112 850

––––––––

661 200 ––––––––

The consultancy fee was paid to a Botswana company, Solar Works, which seconded an expatriate who was engaged from 2 January 2010 to 31 May 2010 on the basis of a temporary work permit The expatriate was also tasked with test running the plant and machinery The consultancy fee was funded from the loan balance

2 Advertising and marketing:

US$

Advertising and promotion of solar products in foreign markets 85 000

Local market research, advertising and trade fares 79 000

Space rental at the Harare Exhibition showground 26 000

Marketing director’s family and friends entertainment 3 800

––––––––

203 800 ––––––––

3 Utility costs:

US$

Installation of the solar panels for the Dande show room 13 640

–––––––

32 700 –––––––

4 Motor vehicle expenses:

US$

–––––––

78 600 –––––––

5 The total amount was contributed to SIRDC towards the research on solar powered cookers, heaters and refrigerators STE intends to broaden its product range by including these solar items in the near future

6 The total amount was paid to the Municipality of Harare as the initial operating licence for the factory

7 Interest:

US$

––––––––

183 750 ––––––––

8 General:

US$

Legal fees for the Harare show ground lease agreement 6 000

Architect’s fees for the factory building plan 10 000

––––––––

57 900 ––––––––

9 The amount refers to the provisional tax paid during the course of the year The accountant had projected the taxable income for the year ended 31 December 2010 as US$950 000

(a) Explain how the following should be accounted for tax purposes:

(i) The expenses incurred during the year ended 31 December 2009, prior to the commencement of

(b) (i) Calculate the maximum capital allowances claimable by Solar Tech Enterprises (Private) Limited for the

(ii) Calculate the taxable income and the tax payable by Solar Tech Enterprises (Private) Limited for the year

(30 marks)

3 Chipo Chitanda is a 58-year-old widow and resides at her farm in Mvurwi in Mashonaland Central province Due to viability challenges, Chipo Chitanda decided to dispose of her farm to pursue other business ventures in Harare The farm was acquired on 1 March 2009

On 30 September 2010, Chipo Chitanda accepted an offer of US$1 310 000 for her farm, broken down as follows:

US$

––––––––––

1 188 000 ––––––––––

The full amount was paid through her attorney on 15 October 2010 The attributable legal and all ancillary costs in connection with this transaction amounted to US$15 000 Chipo Chitanda used part of her sale proceeds to buy a townhouse to use as her new personal residence at a cost of US$500 000 She signed the sale agreement for her new home on 15 December 2010

Chipo Chitanda’s extract from her farm fixed asset register is as follows:

Cost Income tax value

Required:

(a) From the information given, list the amounts to be included in Chipo Chitanda’s gross capital amount for capital gains tax purposes, showing clearly any amounts which are exempt Give brief explanations for your

(b) (i) Calculate Chipo Chitanda’s taxable income and tax payable for the year ended 31 December 2010;

(5 marks)

(ii) Calculate Chipo Chitanda’s capital gain and tax payable for the year ended 31 December 2010;

(6 marks)

(iii) State with reasons whether roll over relief is applicable. (1 mark)

(15 marks)

This is a blank page.

Question 4 begins on page 14.

4 William Mark is an accomplished cattle rancher and dairy farmer in the Nyamandhlovu area in the Matabeleland region

William Mark has always maintained his livestock at the assessed carrying capacity of his land (ACCL) which is 500 herd but during the year ended 31 December 2010, he was forced to sell 60% of his herd due to the terrible drought that year However, he intends to restock his herd in the coming agricultural season as the Meteorological Department has forecasted a normal plus rainy season The Nyamandhlovu area was designated a drought-stricken area at the beginning of 2010 by the Minister

His livestock as at 1 January 2010 was as follows:

Quantity Approved valuation (US$) Livestock value (US$)

Livestock activities during the year ended 31 December 2010:

2 bulls were stolen

180 cows and 120 oxen were sold due to the stress of drought

20 cows and 30 oxen were sold to the Cold Storage Company (CSC)

20 heifers and 10 tollies were regraded to cows and oxen respectively

10 calves were graded to heifers and 5 to tollies

25 calves were born during the year

Fixed asset register as at 1 January 2010:

Year acquired/constructed Cost Net book value

William Mark’s policy on fixed assets has always been to claim the maximum capital allowances possible in any given year

William Mark’s income and expenditure details from his farming operations for the year ended 31 December 2010:

Income

Expenditure

1 The commercial vehicle was sold at the market value of US$15 000 during the year

2 William Mark signed an agreement with a Manicaland farmer for the purchase of 300 cattle for US$45 000 on

21 December 2010 in order to restock his herd which was depleted due to the drought-induced sales The terms

of the agreement were that the payment was due on signing the agreement but the cattle will be delivered

14 days thereafter during which time all the legal formalities would have been completed

Required:

(a) Explain and calculate the tax reliefs available to William Mark for the year ended 31 December 2010 in

(b) (i) Calculate the livestock closing stock value as at 31 December 2010; (3 marks)

(ii) Calculate the minimum taxable income and tax payable by William Mark for the year ended

(15 marks)

5 Farai Mambo, a VAT registered trader, operates his business within a department store in the CBD of Harare He specialises in the retail of a wide range of exclusive furnishings and accessories for the home

For the past two years in a row, Farai Mambo’s sales have been on the decline due to the availability of cheaper counterfeit products on the market During the year ended 31 December 2010, due to the unabated mismatch between his cash inflows and outflows, Farai Mambo decided to wind up his business operations

Included in Farai Mambo’s fixed assets are the following vehicles allocated to his three senior staff members: Toyota Corolla engine capacity, 1300cc

Toyota Harrier engine capacity, 2400cc

Nissan truck, engine capacity, 3000cc

Farai Mambo makes use of a Toyota Prado vehicle with an engine capacity of 3300cc

In view of Farai Mambo’s cash flow constraints, he negotiated with his senior employees to take over the allocated vehicles at reduced prices to compensate for unsettled salaries All the three staff vehicles were purchased in 2009 The vehicle sale agreements were signed on 31 October 2010, the date at which Farai Mambo closed his business operations

Details of the vehicle sale agreements:

Cost price Agreed selling Market value

Farai Mambo has always claimed the maximum capital allowances available for his acquired fixed assets

The credits and debits to Farai Mambo’s Income statement for the year ended 31 December 2010 are as follows:

Credits (VAT inclusive as appropriate)

Debits (VAT inclusive as appropriate)

Notes

(i) The insurance claim refers to the compensation received for Farai Mambo’s laptop which was stolen from his office during the year 30% of the laptop is used for private purposes

(ii) 20% of the amount was paid to unregistered tax operators

(iii) Included in the amount is US$1 300 which was paid for the repairs effected to Farai Mambo’s private residential property