Taxation (Zimbabwe) Tuesday December 2011 Time allowed Reading and planning: Writing: 15 minutes hours 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 The Association of Chartered Certified Accountants Paper F6 (ZWE) Fundamentals Level – Skills Module SUPPLEMENTARY INSTRUCTIONS Calculations and workings need only be made to the nearest US$1, unless directed otherwise All apportionments should be made to the nearest month All workings should be shown TAX RATES AND ALLOWANCES The following tax rates and allowances are to be used when answering the questions: Rates – Individuals Year ended 31 December 2010 Taxable income band US$ Up to 980 981 to 000 001 to 12 000 12 001 to 18 000 18 001 and over Rate of tax % 20 25 30 35 Amount within band US$ 980 020 000 000 Cumulative income tax liability US$ 804 304 104 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 400 (b) In relation to employees: by each member of a pension fund 400 (c) In relation to each contributor to a retirement annuity fund or funds 400 (d) National Social Security: 3% of gross salary Aggregate maximum contributions to all above per employee per year 400 Credits year ended 31 December 2010 2010 US$ 900* 900* 50% 50% Disabled/blind person Elderly person (55 years and over) Medical aid society contributions Medical expenses * 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$ 800 400 600 800 Up to 1500cc 1501 to 2000cc 2001 to 3000cc 3001 and above Loans The deemed benefit per annum is calculated at a rate of LIBOR +5% of the loan amount advanced Value added tax (VAT) Standard rate 15% Capital allowances % 25 25 Special initial allowance (SIA) Accelerated wear and tear Wear and tear: Industrial buildings Farm buildings Commercial buildings 5 2·5 Motor vehicles Movable assets in general 20 10 Tax rates Year ended 31 December 2010 % Companies Income Tax Basic rate AIDS levy 25 Individuals Income Tax Income from trade or investment AIDS levy 25 3 [P.T.O Capital gains tax % On marketable securities 20 Disposal of listed marketable securities acquired after February 2009 1% of gross proceeds Disposal of specified assets acquired prior to February 2009 – Sold prior to February 2009 20% of gain – Sold after February 2009 5% of gross proceeds On principal private residence where the seller is over 55 years On other immovable property acquired on or after February 2009 20% of gain Inflation allowance 2·5 Capital gains withholding tax on sale proceeds Immovable property Marketable securities (Listed) before February 2009 Marketable securities (Unlisted) Note: the withholding tax is not final on the seller Actual liability is assessed in terms of the Capital Gains Tax Act 15 5 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 By any other company Informal traders Foreign dividends 10 15 10 20 Non-residents’ tax On interest On certain fees and remittances On royalties nil 15 15 Residents’ tax on interest From building societies From other financial institutions (including discounted securities) 20 20 Elderly taxpayers (55 years and over) The exemptions from income tax are as follows: Rental income Interest on deposits with a financial institution Interest on discounted instruments Income from the sale or disposal of marketable securities Pension Year ended 31 December 2010 US$ 000 000 000 800 No limit Income from the sale or disposal of a principal private residence is also exempted This is a blank page Question begins on page [P.T.O ALL FIVE questions are compulsory and MUST be attempted 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$60 000 at the completion of the engagement as well as reimbursement of the monthly operational expenses incurred based on submission of the relevant invoice on or before the 25th of the month Gwen Brown was provided with the required human capital, office space and any other necessary resource to ensure the successful execution of the engagement Gwen Brown’s only entitlements from the PSSB were the following monthly allowances: US$ 300 200 Fuel coupons Overtime 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$ 46 000 (15 000) 000 750 500 (72) (4 528) (2 500) Salary PAYE Bonus Fuel allowance Entertainment allowance (75% used for IIA’s business) NSSA contributions Pension fund contributions by employee Medical aid contributions (contributed by employee) 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 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 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 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 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$5 000 The amount was received gross as the private college is not registered with ZIMRA Gwen Brown’s other non employment related income received during the year ended 31 December 2010 US$ 30 000 13 000 10 000 ––––––– 53 000 ––––––– ––––––– Gross royalties received for her Auditing text book Gross local company dividends (Unquoted shares) Interest from local financial institutions 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 additional information (5) (1 mark) (b) (i) State the Public Services Salaries Bureau’s tax obligation when making the disbursement of US$60 000 to the Institute of Internal Auditors; (2 marks) (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 of all the income streams that accrued to her (13 marks) (25 marks) [P.T.O 2 Solar Tech Enterprises (Private) Limited (STE) was incorporated in 2009 and commenced business operations on 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$750 000 with an interest rate of 15% p.a from a leading local financial institution The loan was applied as follows: US$ 100 000 250 000 300 000 70 000 –––––––– 720 000 30 000 –––––––– 750 000 –––––––– –––––––– Showroom construction at Dande, a designated growth point Procurement of the plant and machinery Procurement of raw materials Procurement of commercial vehicles Total amount applied during the year ended 31 December 2009 Amount applied towards 2010 consultancy fee Total STE’s fixed asset register as at 31 December 2010 is as follows: Head office building Factory building Furniture and fittings Passenger vehicles Total Cost US$ 150 000 120 000 65 000 80 000 –––––––– 415 000 –––––––– –––––––– Depreciation US$ 750 000 500 16 000 ––––––– 32 250 ––––––– ––––––– Net book value US$ 146 250 114 000 58 500 64 000 –––––––– 382 750 –––––––– –––––––– 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 January 2010 STE’s statement of comprehensive income for the year ended 31 December 2010 is as follows: Note US$ Turnover Cost of sales Gross profit Add other operating income: Bank interest Sales commission VAT refund Less operating expenses: Staff welfare Repairs and maintenance Insurance Depreciation Advertising and marketing Printing and stationery Utility costs Motor vehicle expenses Industrial research and development Operating licence Interest General Net profit before tax Corporate tax paid 15 000 40 000 11 000 –––––––– Net profit for the year 661 200 45 000 22 000 32 250 203 800 120 32 700 78 600 33 300 25 000 183 750 57 900 –––––––– US$ 834 500 (796 338) –––––––––– 038 162 66 000 –––––––––– 104 162 (1 382 620) –––––––––– 721 542 (244 625) –––––––––– 476 917 –––––––––– –––––––––– Notes Staff welfare: US$ 480 000 30 000 12 000 112 850 000 350 14 000 –––––––– 661 200 –––––––– –––––––– Salaries and wages Consultancy fee Staff training NSSA and pension contributions (80 employees) Penalty for late PAYE Staff end of year party Initial payroll software licence The consultancy fee was paid to a Botswana company, Solar Works, which seconded an expatriate who was engaged from 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 [P.T.O 2 Advertising and marketing: Advertising and promotion of solar products in foreign markets Local market research, advertising and trade fares Space rental at the Harare Exhibition showground Solar magazine launch Marketing director’s family and friends entertainment Utility costs: Electricity and water charges Water reconnection Installation of the solar panels for the Dande show room US$ 85 000 79 000 26 000 10 000 800 –––––––– 203 800 –––––––– –––––––– US$ 460 11 600 13 640 ––––––– 32 700 ––––––– ––––––– Motor vehicle expenses: US$ 33 000 15 600 30 000 ––––––– 78 600 ––––––– ––––––– Fuel and vehicle servicing Insurance and licences Vehicle tracking equipment 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 The total amount was paid to the Municipality of Harare as the initial operating licence for the factory Interest: US$ 15 000 56 250 112 500 –––––––– 183 750 –––––––– –––––––– 2% loan establishment fee 2009 interest paid 2010 interest paid General: Legal fees for the Harare show ground lease agreement Architect’s fees for the factory building plan Staff teas and refreshments Office cleaning Donation to a political party US$ 000 10 000 28 600 10 300 000 –––––––– 57 900 –––––––– –––––––– 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 10 Required: (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 trading; (2 marks) (ii) The consultancy fee detailed in note 1; (2 marks) (iii) The interest paid detailed in note (6 marks) (b) (i) Calculate the maximum capital allowances claimable by Solar Tech Enterprises (Private) Limited for the year ended 31 December 2010; (9 marks) (ii) Calculate the taxable income and the tax payable by Solar Tech Enterprises (Private) Limited for the year ended 31 December 2010 (11 marks) (30 marks) 11 [P.T.O 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 March 2009 On 30 September 2010, Chipo Chitanda accepted an offer of US$1 310 000 for her farm, broken down as follows: US$ 150 000 380 000 130 000 102 000 98 000 43 000 59 000 17 000 209 000 –––––––––– 188 000 –––––––––– –––––––––– Land Farmhouse Staff houses Tobacco barns Irrigation equipment Water pumps Tractors Grinding mill Storage building 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$500 000 She signed the sale agreement for her new home on 15 December 2010 Chipo Chitanda’s extract from her farm fixed asset register is as follows: Cost US$ 100 000 200 000 90 000 50 000 45 000 20 000 23 000 10 000 111 000 Land Farmhouse Staff houses Tobacco barns Irrigation equipment Water pumps Tractors Grinding mill Storage building Income tax value US$ 100 000 200 000 45 000 25 000 22 500 10 000 11 500 000 55 500 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 answer (3 marks) (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) 12 This is a blank page Question begins on page 14 13 [P.T.O 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 January 2010 was as follows: Bulls Cows Oxen Heifers Tollies Calves Quantity 10 230 170 45 30 15 –––– 500 –––– –––– Approved valuation (US$) PPV 200 FSV 100 FSV 80 FSV 50 FSV 40 FSV 20 Livestock value (US$) 000 23 000 13 600 250 200 300 ––––––– 42 350 ––––––– ––––––– Livestock activities during the year ended 31 December 2010: 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 to tollies 25 calves were born during the year Fixed asset register as at January 2010: Year acquired/constructed Security fence Farmhouse Staff housing (3 units) Tractor Boreholes Deep tanks Commercial vehicle Passenger vehicle wells 2002 2002 2010 2005 2002 2009 2002 2007 2010 Cost US$ 10 000 120 000 60 000 18 000 000 32 000 13 000 20 000 000 Net book value US$ 10 000 120 000 60 000 nil 000 30 400 nil 12 000 000 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 Drought induced sales CSC sales Profit on sale of the commercial vehicle Expenditure Stock feed Deeping chemicals and vaccines Wages Livestock purchases Note US$ 129 000 87 000 15 000 14 19 12 22 45 000 500 700 000 Notes The commercial vehicle was sold at the market value of US$15 000 during the year William Mark signed an agreement with a Manicaland farmer for the purchase of 300 cattle for US$45 000 on 21 December 2010 in order to restock his herd which was depleted due to the drought-induced sales The terms of the agreement were that the payment was due on signing the agreement but the cattle will be delivered 14 days thereafter during which time all the legal formalities would have been completed Required: (a) Explain and calculate the tax reliefs available to William Mark for the year ended 31 December 2010 in connection with the drought (4 marks) (b) (i) Calculate the livestock closing stock value as at 31 December 2010; (3 marks) (ii) Calculate the minimum taxable income and tax payable by William Mark for the year ended 31 December 2010 (8 marks) (15 marks) 15 [P.T.O 5 Farai Mambo, a VAT registered trader, operates his business within a department store in the CBD of Harare He specialises in the retail of a wide range of exclusive furnishings and accessories for the home For the past two years in a row, Farai Mambo’s sales have been on the decline due to the availability of cheaper counterfeit products on the market During the year ended 31 December 2010, due to the unabated mismatch between his cash inflows and outflows, Farai Mambo decided to wind up his business operations Included in Farai Mambo’s fixed assets are the following vehicles allocated to his three senior staff members: Toyota Corolla engine capacity, 1300cc Toyota Harrier engine capacity, 2400cc Nissan truck, engine capacity, 3000cc Farai Mambo makes use of a Toyota Prado vehicle with an engine capacity of 3300cc In view of Farai Mambo’s cash flow constraints, he negotiated with his senior employees to take over the allocated vehicles at reduced prices to compensate for unsettled salaries All the three staff vehicles were purchased in 2009 The vehicle sale agreements were signed on 31 October 2010, the date at which Farai Mambo closed his business operations Details of the vehicle sale agreements: Toyota Corolla Toyota Harrier Nissan truck Cost price (US$) 000 13 000 16 500 Agreed selling price (US$) 500 800 200 Market value (US$) 500 12 000 14 300 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: Notes Credits (VAT inclusive as appropriate) Sales Commission received on consignment stock Purchases returns Insurance claim received Debits (VAT inclusive as appropriate) Purchases Rent Motor vehicle expenses General office expenses Staff expenses Repairs and maintenance Interest paid on bank overdraft (i) (ii) (iii) US$ 53 10 700 000 500 000 24 15 35 900 000 300 700 000 000 200 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$1 300 which was paid for the repairs effected to Farai Mambo’s private residential property 16 Required: (a) (i) List ANY THREE of Farai Mambo’s general obligations to ZIMRA as a registered operator; (ii) List the TWO specific obligations of Farai to ZIMRA as a result of his cessation of trade; (3 marks) (2 marks) (iii) Explain the tax implications of the negotiated settlement between Farai Mambo and his senior employees Note: calculations are NOT required in part (a) (b) (i) (2 marks) Calculate the output tax in connection with the motoring benefits for the year ended 31 December 2010; (1 mark) (ii) Calculate Farai Mambo’s VAT position for the year ended 31 December 2010 Where VAT is not chargeable or claimable, indicate this by the use of a zero (0) (7 marks) (15 marks) End of Question Paper 17 ... 31 December 2010 US$ 000 000 000 800 No limit Income from the sale or disposal of a principal private residence is also exempted This is a blank page Question begins on page [P.T.O ALL FIVE questions... 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 By any... The following tax rates and allowances are to be used when answering the questions: Rates – Individuals Year ended 31 December 2010 Taxable income band US$ Up to 980 981 to 000 001 to 12 000