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Fundamentals Level Skills Module, Paper F6 (ZWE) June 2010 Answers

Taxation (Zimbabwe) and Marking Scheme

Marks

1 Nigel Nadat

(a) Taxability views

Nigel Nadats views are not correct due to the following reasons: 1

He is ordinarily resident in Zimbabwe 1 The arrangement between his employer and himself regarding unpaid leave and pay does not affect the

terms of his employment contract 1

For failing to remit PAYE, ZIMRA will most likely penalise Nadat and Sons P/L 100% of the PAYE due andcharge interest in terms of the market rates for the period the amount is outstanding. 2

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(b) (i) Calculation of taxable income and tax payable for the year ended 31 December 2009 in respect ofemployment

US$Salary 15 000

Telephone allowance 1 000 Fuel coupons 500 Education allowance 1 700 Grocery allowance 1 200 Entertainment allowance 700 Pension contributions (1 125) NSSA contributions (600) Bonus allowance 400 Accommodation benefit (US$500 x 12) 6 000 1Motor vehicle benefit 1 200 1

Taxable income 25 975

US$

Tax on sliding scale:Up to $18 000 4 140 ($25 975 $18 000) x 35% 2 791

Gross tax 6 931Less credits:Medical aid (50% x 800) (400) 1Elderly persons credit (900) 1

5 631

Add 3% AIDS levy 169

Tax payable 5 800

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(ii) Taxation of other income

Compensation from wifes employer is not taxable 1

NSSA death benefit is not taxable 1

Retirement annuity fund receipt is exempt 1

US$Gross dividends(3 000 x 15%) 450 Gross dividends from Old Mutual are taxed at a special rate of 15% andordinarily taxed at source. Rental income (5 000 3 000) x 309% (30% + 3% AIDS levy) 618 1BAs interest (6 000 3 000) x 309% 927 1

The elderly tax payers exemption of US$ 3 000 is applicable on the rental income and interest onBankers Acceptance (BAs). 1

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The tax on the excess of the income from rental income and interest from BAs over the exemption shouldbe remitted to ZIMRA as follows:

10% on 25 March 2009 25% on 25 June 2009 30% on 25 September 2009 35% on 20 December 2009 The interest from ZB is not taxable in Nigels hands as it is taxed at source. 1

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2 Professional Women Wear P/L

(a) Treatment of the assessed losses

The assessed losses are allowed as a deduction to the taxable income and carried forward for a maximumperiod of six years. 2

The loss incurred in 2006 is carried forward to 2007 resulting in the aggregate loss of US$18 000 for yearended 31 December 2007. 1

The cumulative loss for the year ended 31 December is further carried forward to 2008 resulting in the totalloss of US$ 21 000 for year ended 31 December 2008. 1

The restriction is that the losses incurred in the individual years cannot be carried forward for more than aperiod of six years hence the loss incurred in 2006 cannot be carried forward beyond the year ending31 December 2012 assuming that the respective loss is not set off by the taxable income before that date. 1

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(b) Calculation of the provisional taxable income and corporate tax payable for the year ended 31 December 2009

US$Net profit per income statement 117 000 Add:

VAT penalty 5 000 Recoupment on sale of office equipment 17 000 1Entertainment expenses (20% x 10 000) 2 000 1Trade convention excess over limit (15 000 5 000) 10 000 1Additional commercial vehicle 56 000 Painting of the factory building extension 41 000 Depreciation 61 000 Provision for bad debts 8 000 1NSSA contributions 10 000 Finance costs 39 000 Less:

Purchases returns (15 000) 1Sale of shares (12 000) 1Sale of office equipment (20 000) Bank interest (5 000) 1Company dividends (10 000) 1Industrial research (double deduction) (14 000) 1NSSA contributions (4% x 90 000) (3 600) Capital allowances:Administration building (25% x 280 000) (7 000) 1Factory building extension (50% x 240 000) (120 000) 1Additional commercial vehicle (50% X 56 000) (28 000) 1Painting of the factory building extension (50% x 41 000) (20 500) 1Commercial vehicles (25% x 90 000) (22 500) 1Passenger vehicles (50% x 60 000) (30 000) 1Showroom (25% x 120 000) (3 000) 1

55 400

Less assessed loss b/f (11 000 + 7 000 + 3 000) (21 000) 1

Taxable income 34 400

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US$Taxable at 30% 10 320 1

Add 3% AIDS levy 310

Tax payable 10 630

Tax due as follows:

10% on 25 March 2009 1 063 25% on 25 June 2009 2 658

30% on 25 September 2009 3 189

35% on 20 December 2009 3 720 10 630 25

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3 Ian and Ruth Smit

(a) (i) Treatment of the assessed loss

The 1999 assessed capital loss is carried forward and allowed as a deduction to the future capital gain.

Unlike the assessed loss from trading operations, there is no limit to the period in which the capital losscan be carried forward. 2

(ii) Calculation of the capital gains withholding tax.

US$Sale of principal private residence

(250 000 x 15%) 37 500 1

Sale of Listed shares

(50 000 x 5%) 2 500 1

Donation of unlisted shares

(17 000 x 10%) 1 700 1

Total capital gains withholding tax 41 700 3

(iii) Tax effect of the donated shares

The donated shares are treated as a deemed sale and therefore subject to capital gains tax. 1

(b) Calculation of the capital gain and tax payable

US$ US$Disposal of principal private residence:

Proceeds 250 000

Less cost:

Residence 120 000

Swimming pool 2 000

Lock-up garage 5 000

Security wall 7 000

Inflation allowance:

Residence (25% x 11 x 120 000) 33 000

Swimming pool (25% x 9 x 2 000) 450

Lock-up garage (25% x 10 x 5 000) 1 250

Security wall (25% x 10 x 7 000) 1 750

Selling expenses:

Commission (10% x 250 000) 25 000

Transfer fees 500

Legal charges 500 (196 450)

53 550

Less assessed loss b/f (1 500)

Capital gain 52 050

Capital gains tax at 20% 10 410

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US$ US$Sale of shares:Proceeds from listed shares 50 000 Proceeds from unlisted shares 17 000Less cost: Listed shares 35 000Unlisted shares 14 000

Inflation allowance:Listed shares (25% x 3 x 35 000) 2 625 Unlisted shares (25% x 4 x 14 000) 1 400 Selling expenses:Commission (50 000 + 17 000) x 10% 6 700 (59 725)

Capital gain 7 275

Capital gains tax at 20% 1 455

Tutorial note: the houseboat, car and furniture are movable assets, and not specified assets, and hence are

not subject to capital gains tax.

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4 Miriro Vengeso

(a) (i) Reasons why Miriro should have registered for value added tax (VAT)

Miriro should have registered for VAT since her annual turnover exceeds the prescribed annual limit ofUS$60 000. 2

The minimum monthly turnover threshold required for VAT registration is therefore US$5 000(60 000/12). This amount was achieved in the month of February 2009 and therefore Miriro Vengesoshould have compulsorily applied for VAT registration by 30 March. 2

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(ii) Calculation of output tax exposure

US$February 5 000March 5 000April 6 000May 6 000June 7 500July 8 500August 9 000September 9 000October 6 000November 6 000

December 5 00073 000

VAT at 15% 10 950

ZIMRAs remedies

ZIMRA can impose a penalty of 100% of the outstanding output tax of US$ 10 950 1They can also charge interest in accordance with prevailing bank rates on the outstanding amount. 1

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(iii) VAT implication

When registered operators source procurements from unregistered operators, they are unable to offset theinput VAT on these purchases against their output VAT. The input VAT becomes a cost to the businessrather than purely a matter of cash flow. 1

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(b) Computation of the VAT payable for the year ended 31 December 2009

US$Output tax:

Sales (77 000 x 15%) 11 550 1

Less:

Input tax:

Purchases (not allowable)

Electricity and water (1 800 x 15/115) (235)

Rent (6 000 x 15/115) (783)

Printing and stationery (700 x 15/115) (91)

Salaries and wages

Repairs and maintenance (2 200 x 15/115) (287)

Motor vehicle expenses (5 000 x 15/115) (652)

Depreciation

Value added tax payable 9 502

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(c) VAT registration can be cancelled if:

The annual taxable turnover falls below the turnover for operators that were registered compulsorily. One ceases trading.

One was registered voluntarily but no longer meets the voluntary registration conditions.

(1 mark for each point) MAXIMUM 215

5 DD Engineering P/L

(a) (i) Tax relief

A special rate of tax of 15% on taxable income from the year of commencement of business

operations and the following four years. 2

Growth point investment allowance of 15% on the cost of qualifying business assets. The allowance

is not recoupable on any subsequent disposal. 2

An option to elect to claim SIA on the construction of a Commercial building used for business

purposes. 1

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(ii) Computation of the growth point investment allowance

US$Cranes and heavy duty machinery (150 000 x 15%) 22 500

Tractors (do not qualify) 1

4 passenger vehicles (do not qualify) 1

Chalets and lodges (450 000 x 15%) 67 500

Administration block (60 000 x 15%) 9 000 Furniture, fittings and equipment (180 000 x 15%) 27 000 126 000 4

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(b) Calculation of the taxable income/(loss) for the year ended 31 December 2009

US$Net profit 323 000

Add:

Depreciation 114 000

Less capital allowances:

Growth point investment allowance (as above) (126 000) 1

Cranes and machinery (150 000 x 50%) (75 000)

Tractors (100 000 x 50%) (50 000)

Passenger vehicles restricted cost 10 000 per car (40 000 x 50%) (20 000) 1

Chalets and lodges (450 000 x 50%) (225 000)

Administration block (60 000 x 50%) (30 000)

Furniture, fittings and equipment (180 000 x 50%) (90 000)

Assessed loss (179 000)

There is no tax to be paid since there is an assessed loss

615

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