FINANCIAL PLANNING
Exam Focus
(1) Tax Implications of Sources of finance
(2) Tax implications of finance options for capital assets
(3) Personal Financial Planning
(i) Whole of life insurance
(ii) Family income
(iii) Term Assurance
(iv) Permanent health insurance
(v) Critical illness covers
(4) Personal Investment planning
(i) Collective Investment Scheme
(ii) Certificates of Deposits
(iii) GRZ Bonds
(iv) Ordinary Shares
Sources of Finance
(a) Short-term sources of finance
Examples include bank overdrafts, short term loans etc
(b) Long-term Sources of finance
Examples include:
(i)
(ii)
Equity (through issue of ordinary shares or using retained earnings)
Debt (through issue of different types of bonds) and other long -term borrowings
Taxation Implications of equity finance
Tax implications for the company
The following are the taxation implications of using equity as a source of finance from the
company's point of view:
(1)
(2)
(3)
Fees incurred in issuing ordinary share capital are not allowable for tax purposes.
Dividends paid are not allowable for tax purposes.
The cost of making distributions to shareholders is not allowable for tax purposes.
Tax implications for investors
The taxation implications for potential investors will be
(1) The dividends receivable by the investors are subject to withholding tax at the rate of 0%,
for both individuals and companies if the company is listed on LuSE
(2) The dividends receivable by the investors are subject to withholding tax at the rate of
15%, for both individuals and companies if the company is not listed on LuSE
(3) Property transfer tax will not arise on any transfer of shares by the investors if the
company is listed on the Lusaka Securities Exchange.
(4) Property transfer tax will arise on any transfer of shares by the investors if the company
is not listed on the Lusaka Securities Exchange.
The taxation implications of debt finance:
Tax implications for the company
(1) Interest payable on the bond will be deductible in arriving at taxable business profits
provided the finance is not for capital purposes subject to the 30% Tax EBITDA
restrictions
(2) Issue of costs of bonds are allowable when computing taxable business profits subject to
the 30% Tax EBITDA restrictions.
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Tax implications for investors
(1) Interest received will be subject to a withholding tax which is a final tax for individuals and
not final for companies
(2) There will be No property transfer tax implications on the transfer of bonds between
investors.
Convertible Debt
➢ Convertible bonds are bonds that give the holder the right (but not an obligation) to
convert their bonds at a specified future date into other securities, normally ordinary
shares, at a pre-determined price and a conversion rate that is also specified when the
bonds are issued.
➢ Convertible bonds are normally fixed rate bonds and carry a coupon rate of interest that
is lower than on similar conventional bonds.
➢ The lower coupon rate allows for a low stress on liquidity and are seen as a way of issuing
deferred equity.
➢ Before conversion, the security will represent debt finance and thus increase gearing and
on conversion will reduce the level of gearing.
Taxation implications
While convertibles remain debt, the interest is tax deductible. As the convertible stock carries
the right of conversion into the underlying ordinary shares, its price will be directly linked to
that of the equity for as long as the conversion option exists.
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Example
The directors of Tandem Plc a Value Added Tax registered manufacturing company
listed on the Lusaka Securities Exchange recently held a board meeting where they
discussed the purchase of new manufacturing equipment at a VAT exclusive cost of
K5,000,000. The directors proposed that the purchase of the equipment should be
financed using any one of the following two sources of finance:
Issue of loan notes
The company can issue loan notes of K5,000,000 carrying a coupon rate of 17% per annum to
purchase the required equipment. Issue costs under this option are expected to be K15,000.
Issue of ordinary shares
The company can issue 1,000,000 equity shares each with a nominal value of K1. The issue price
would be set at K5 per share and the company expects to incur share issue costs of K30,000 under
this option.
Required
(a) Advise the directors of Tandem Plc of the taxation implications of the above two financing
options for the company. Your advice should be supported by appropriate computations as far
as the information provided permits.
(6 marks)
(b) Advise the directors of Tandem Plc of the taxation implications of the above two financing
options for their potential investors
(6 marks)
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SOLUTION
(a) Below are the taxation implications of the financing options
Issue of loan notes
(1) Interest will be allowable for tax purposes, Subject to the 30% Tax EBITDA restrictions and
this will amount to:
K5,000, 0000 x 17% = K850,000
(2)
The issues costs of K15,000 be allowable for tax purposes Subject to the 30% Tax EBITDA
restrictions
(3)
Input VAT on the cost of the asset will be recoverable as the asset will be owned by
the business.
The amount of the recoverable VAT will be: K5,000,000 x 16% = K800,000
(4)
The company will be able claim capital allowances at the rate of 50% as the
equipment will be owned by company.
The amount of the capital allowances will be:
K5,000,000 x50% = K2,500,000
Issue of ordinary shares
(1) Input VAT on the cost of the asset will be recoverable as the asset will be owned by the
business.
The amount of the recoverable VAT will be:
K5,000,000 x 16% = K800,000
(2) The company will be able claim capital allowances at the rate of 50% as the equipment will
be owned by company. The amount of the capital allowances will be:
K5,000,000 x50% = K2,500,000
(3) The issue costs of K30,000 will not allowable deductions when arriving at taxable business
profit.
(4) Dividends subsequently payable to providers of the finance will not be allowable.
(5) Costs that will be subsequently incurred in making dividend distributions will not be
allowable
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(b) Tax implications for potential investors
Issue of bonds
(1) Interest received will be subject to a withholding tax which is a final tax for individuals and not
final for companies.
(2) There will be no property transfer tax implications on the transfer of loan notes between
investors.
Issue of ordinary shares
(1)
The dividends receivable by the investors will be subject to withholding tax at the rate
of 0%, for both individuals and companies because Tandem plc is listed on the LusE.
(2)
Property transfer tax will not arise on any transfer of shares by the investors because
Tandem plc is listed on the Lusaka Securities Exchange.
TAXATION IMPLICATIONS OF FINANCE OPTIONS FOR ASSETS
A business wishing to purchase capital assets may finance the purchase of
such assets using any of the following methods:
(1) Outright purchase using internally generated or borrowed funds
(2) Hire Purchase
(3) Finance lease
(4) Operating lease
(5) Sale and lease back
Outright purchase using internally generated funds or borrowings
If a business acquires capital assets using internally generated funds such as
retained earnings or finances the purchase using borrowed funds then the
asset will be owned by the business and as the result, the taxation
implications will be as follows:
(a) Outright purchase using internally generated funds
(1) Any input VAT on the cost of the asset will be recoverable, provided the VAT is the
type that is recoverable and the business is registered for VAT.
(2) The company will be able to claim capital allowances on the cost of the asset
which will be allowable when computing taxable business profits.
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(b) Outright purchase using borrowed funds
(1) Any input VAT on the cost of the asset will be recoverable, provided the VAT is
the type that is recoverable and the business is registered for VAT.
(2) The company will be able to claim capital allowances on the cost of the asset which
will be allowable when computing taxable business profits.
(3) Any issue costs associated with arranging the borrowings such as issue costs for
the bonds or bank fees, will not be allowable when computing taxable business
profits, as the borrowings will be for capital purposes
(4) Interest on the borrowings will not be allowable when computing taxable business
profits, as the borrowings will be for capital purposes
Hire Purchase
Acquisitions of assets under a hire purchase agreement is treated as outright purchases
since the hire purchase company will effectively provide the finance. The asset will be
capitalised. The amount outstanding after making an initial deposit towards the
purchase price of the asset will be accounted for as a payable. Each instalment paid for
the asset by the company will comprise two components, a capital repayment towards the
cost of the asset and a hire purchase finance charge. Title to the asset will passes to the
purchaser payment of the final instalment.
Taxation implications:
(1) The interest element is tax deductible, in the computation of taxable business profits
(2) The purchaser will be able to claim input VAT on the asset provided the VAT is the type
which is recoverable.
(3) There will be no VAT on the instalments as they effectively relate to financing which is
an exempt activity
(4) The purchaser will claim capital allowances on the cost of the asset (excluding
interest), which will be allowable deductions when computing the taxable business
profits.
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Finance leasing
Tax implications:
(1) The lessee is entitled to claim capital allowances on the cost of the leased asset despite
not being the legal owner of the leased asset.
(2) The lessee will additionally be able to recover any input VAT on the cost of the asset
provided the input VAT is the type which is recoverable and the business is registered
for VAT.
(3) The finance cost (interest) implied in the finance lease agreement is allowable when
computing the taxable business profits
Operating leases
Taxation implications of operating leases
(1) The lessor (owner) continues to claim the capital allowances on the leased asset. The
lessee cannot claim any capital allowances in respect of the leased asset.
(2) The lessee will be able to claim lease rentals as allowable deductions when computing
taxable profits.
(3) Input VAT on lease rentals will also be recoverable provided the VAT is the type which
is recoverable and the business is registered for VAT.
Sale and Lease Back
A sale and leaseback transaction, will involve the seller selling an asset normally land or
buildings to a financial institution like a bank and leasing back the same asset sold. It is one
way of raising finance whilst retaining the use of the related assets. The lease payment and
sales price are normally interdependent because they are negotiated as part of the same
package.
Taxation implications
(1)
For tax purposes VAT will be chargeable on the sale of the asset provided the asset
is taxable for VAT purposes.
(2)
Property transfer tax will additionally arise if the asset sold is chargeable property
for property transfer tax purposes.
(3)
A balancing charge or allowance will arise on the disposal of the asset by the seller
which will be computed in the normal way.
(4)
If the asset is subsequently leased back to the original seller under a short lease (i.e.
a lease that does not exceed a period of 50 years) then:
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➢ The lease rentals will be allowable in computing the taxable business profits.
➢ Input VAT on the lease rentals will also be recoverable provided it is the type which
is recoverable.
(5) If the asset is leased back to the original seller under a lease that covers a period of more
than 50 years, then tax treatment will follow the substance of the transaction and
the seller will continue claiming any available capital allowances on the asset.
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Example
PJ Limited, a VAT registered Zambian resident manufacturing
company, is planning to install new machinery. The machine would
cost K696,000 VAT inclusive.
A decision has to be made on the method of financing the project.
The following three methods of finance are being considered:
(1) The company could purchase the machine for cash, using bank
loan facilities on which the current rate of interest is 20% per
annum.
(2) The company could lease the machine under an operating
lease agreement, which would entail payment of K100,000
VAT inclusive per year.
(3) The company could purchase the machine under a hire
purchase agreement. This would require an initial deposit of
K400,000 at the start of the year and K300,000 at the end of
tax year 2022. The last instalment will amount to K4,000.
(4)
The company could lease the machine under a finance lease
agreement. The lease rentals will be K160,000 VAT inclusive
per year payable in arrears, over a period of 5 years. The
interest rate implicit in the lease is 15% per annum.
Required
(a) Advise PJ Limited of the Income Tax and Value Added Tax
implications of each of the above financing options. Your
advice should be supported by appropriate computations as far
as the information provided permits.
(9 marks)
(b)
Explain the taxation implications for a company of raising debt
finance in the form of debentures and equity finance through
ordinary share capital.
(4 marks)
SOLUTION
(a) Tax implication of the financing options:
Bank loan
If the machinery is acquired by use of the bank loan, the
company will:
(1) Claim input VAT on the cost of the machinery which will
amount to:
K696,000 × 4/29 = K96,000
(2)Claim capital allowances at the rate of 50% on the VAT
exclusive cost for two years. The capital allowances will be:
K696,000 × 25/29 = K600,000× 50% = K300,000.
Alternatively;
VAT inclusive
Less VAT K696,00 x 4/29
CA = K600,000 x 50%
K696,000
(96,000)
600,000
300,000
(3) PJ will deduct loan interest of K139,200 (K696,000 × 20%) as
an allowable deduction when computing the taxable business
profit subject to the 30% Tax EBITDA restrictions
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Operating lease agreement
If the machinery is acquired under an operating lease
agreement, the VAT and Income Tax implications will be as
follows:
(1) PJ will not be able to claim capital allowances on the cost of
the asset as these will claimed by the owner of the asset.
(2)The VAT implications will be that the company will be able to
claim input VAT on the lease rentals and this will amount to:
K100,000 × 4/29 = K13,793
(3) The VAT exclusive lease rentals will be allowable deductions
when computing taxable business profits. The allowable
lease rental will be:
K100,000 × 25/29 = K86,207
Alternatively
The allowable lease rentals will be K100,000- K13,793 =
K86,207
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Hire purchase agreement
If the machinery is acquired under a hire purchase agreement,
the VAT and Income Tax implications will be as follows:
(1) The company will be able to claim input VAT on the VAT
inclusive cost of the machinery and this will amount to:
K696,000 × 4/29 = K96,000
(2)The company will be able to claim capital allowances at the
rate of 50% of the VAT exclusive cost of the asset and these
will amount to:
(K696,000 × 25/29)= K600,000 × 50% = K300,000
Alternatively;
VAT inclusive
K696,000
Less VAT K696,000 x 4/29
(96,000)
600,000
CA = K600,000 x 50%
300,000
(3) Hire purchase interest will be an allowable deduction when
computing the taxable business profits for the company. This
will amount to:
(K400,000 + K300,000 + K4,000) – K696,000 = K8,000
ALTERNATIVELY
K
Initial deposit
Instalments
K300,000 +4,000
Total payments
Cash Price
Interest
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400,000
304,000
704,000
(696,000)
8,000
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Finance Lease agreement
If the machinery is acquired under a finance lease agreement,
the VAT and Income Tax implications will be as follows:
(1) The company will be able to claim input VAT on the VAT
inclusive cost of the machinery and this will amount to:
K696,000 × 4/29 = K96,000
(2) The company will be able to claim capital allowances at the
rate of 50% of the VAT exclusive cost of the asset and these
will amount to:
(K696,000 × 25/29)= K600,000 × 50% = K300,000
Alternatively;
VAT inclusive
K696,000
Less VAT K696,000 x 4/29
(96,000)
600,000
CA = K600,000 x 50%
(3)
(b)
300,000
Finance charge implied in the lease arrangement will be
allowable
The taxation implications of debt finance:
•
Interest payable on the debentures will be deductible in arriving at taxable business
profits provided the finance is not for capital purposes.
•
Issue of costs of debentures are allowable when computing taxable business profits.
The tax implications of equity finance through the issue of ordinary shares are that:
•
Dividends paid to shareholders are not allowable deductions when computing taxable
profits.
•
Issue costs will be disallowed and costs of making distributions to shareholders will also
not be allowable when computing taxable profits.
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PERSONAL FINANCIAL PLANNING
Personal Financial Planning can be defined as the establishment and development of a
comprehensive financial plan that is tailored to an individual's needs and which
maximises and protects financial resources, and is adapted to meet that individual's
changing circumstances during the various stages of their life.
Protection Products and Savings Products
Protection products are those which provide protection for individuals or businesses
against the Adverse financial effects of death or illness.
Savings products on the other hand are forms of endowment assurance which are regular
savings schemes that pay out a lump sum at the end of specified term.
Financial Planning Protection Products
Types of Financial Planning Protection Products
(1) Whole of life Assurance
(2) Term Assurance
(3) Family income benefit
(4) Permanent health insurance
(5) Critical illness Cover
Whole of life assurance
➢ A whole life assurance policy pays out the sum assured as a lump sum on the death of
the life or lives assured to the grantee whenever the death occurs.
➢ The policy may be written on a single or joint lives and on first death or last survivor
basis.
A single life insurance policy covers one person only and pays out the chosen amount of
cover if that person dies during the length of the policy.
Joint life insurance policy covers two lives. It means that the person taking out the
policy can be covered along with their spouse under one contract. A joint life cover will
insure both the spouses on the same terms and conditions
A joint life first-death policy pays out on the first death of one of the lives assured.
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A joint life last-survivor policy pays out on the death of the last of the lives
➢ This type of policy may be used on a last survivor basis to provide funds to meet the
taxation liability of the deceased's estate.
Tax Implications
The taxation implications are that there is no tax relief on the premiums (the premiums are
not allowable when computing taxable income) and the policy proceeds are tax free.
Term assurance
➢ Term insurance provides protection for the life (s) assured for a given or specified
period of time known as the policy term.
➢ The policy only pays out the lump sum death benefit where the life/lives assured die
within the policy term.
➢ The policy can be written on a decreasing sum assured basis and used to redeem a
repayment mortgage or other loan which would otherwise be outstanding on the
deceased's death.
➢ Decreasing sum assured basis means that any benefit to paid reduces over time.
Tax Implications
Where the term is not beyond a specified number of years and the insurance is for trade
purposes (e.g. insuring the life of a key employee in respect of loss of profits) the premiums
will be a tax deductible expense but the proceeds would be taxed as trading receipts.
Family Income Benefit
➢ Policies run for a set period of time known as "the term
➢ This policy pays out where the life/lives assured die within the policy term,
➢ The benefits are paid as instalments of capital over the remaining policy term and not
as a lump sum. For example, if a 20 year policy is taken out and the individual dies five
years into this, then the policy will pay out a regular income for the remaining 15 years.
➢ Such a policy might be used where there is a need to keep premiums low or where
budgeting for lump sum proceeds would present a problem
100,000/15yrs
Permanent Health Insurance
➢ This provides for income replacement which is payable in the event of the person's
inability to perform own, suited or any occupation or activities of daily living following
the expiration or predetermined deferral period due to illness or disability.
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It is usually written to retirement age and payable until retirement or until full or partial
recovery. The premiums and benefits payable can be indexed.
Tax implications:
➢ The premiums do not receive any tax relief when paid personally and the benefits are
not taxable.
➢ Where the employer insures the cost of his employees, the premium is allowable for tax
purposes but the policy proceeds are taxable trading receipts.
Critical illness Insurance
➢ This provides for a lump sum payment on the diagnosis of one of the seven core life
threatening conditions, which are cancer, coronary artery bypass surgery, heart
attack, kidney failure, major organ transplant, multiple sclerosis and stroke.
➢ The policy may also cover other serious conditions as well as including permanent or
total disability.
Tax Implications
➢ The premiums do not receive any tax relief when paid personally and the benefits are
not taxable.
➢ Where the employer insures the cost of his employees, the premium is allowable for tax
purposes but the policy proceeds are taxable trading receipts.
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Personal Investment planning
Types of investment products
(1) Government bonds
(2) Certificates of deposits
(3) Collective investment schemes
Government Bonds (GRZ Bonds)
Government Bonds (GRZ bonds) are marketable Zambian Government securities. The
Government issues the bonds (also known as gilts) to finance its spending, but also uses
them to control the money supply. GRZ bonds can also be traded on the stock market,
where their price can go up or down, depending on what people think will happen with
interest rates.
Tax implications
(1) For an individual, any interest receivable from these investments is subject to
withholding tax at the rate of 15% which is a final tax.
(2) There is no property transfer tax on the transfer of government bond as they do not fall
under for the scope of property transfer tax.
Certificates of deposit (CDs)
➢ Certificates of deposit (CDs) are negotiable instruments in bearer form. Title belongs to
the holder and can be transferred by delivering the certificate to the buyer.
➢ Banks and building societies issue these CDs, which will state on them the amount of
the deposit and the date of repayment.
➢ The deposit amount will usually be quite large and the repayment date will be anything
from one week to five years.
➢ Repayment is obtained by presenting the CD to the issuer on the designated date.
➢ Alternatively, since CDs are negotiable, they can be sold at any time by the holder.
➢ CDs usually offer an attractive rate of interest and a low credit risk. They are useful for
investing funds in the short term since they can be sold at any time on the secondary
market.
Tax Implications
(1) For an individual any interest receivable on these investments is subject to withholding
tax at the rate of 15% which is a final tax.
(2) There are no property transfer tax on the on the transfer of CDs as they do not fall
under for the scope property transfer tax.
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Collective Investment Schemes
➢ A Collective Investment Scheme is an arrangement that enables a number of investors
to pool their assets and have these professionally managed by an independent
professional investment manager (fund manager) or a management company.
Investments may typically include deposits, bonds and equities, but depending on the
type of scheme may go wider.
➢ A Collective Investment Scheme is defined by Securities Act of 2016 as a scheme in
whatever form, including an open-ended investment company, where members of the
public are invited or permitted to invest money or other assets in a portfolio and in
terms of which:
(1) Two or more investors contribute money or other assets to, and hold a participatory
interest in, a portfolio of the scheme through shares, units or other form of
participatory interest; and
(2) the investors share the risk and the benefit of investment in proportion to their
participatory interest in the portfolio of the scheme or as determined in the trust
deed;”
The total value of the pool of invested money is split into equal portions called
participatory interests or units. An investor will need to buy a portion of the
participatory interests or units for him to invest in the scheme.
➢ The price of a unit is based on the value of the investments the scheme has invested in.
➢ The investor can be making regular payments e.g. monthly, quarterly towards the
acquisition of these units.
➢ Once an investment is made, it is expected that at the end of the year, the investor will
register growth on his investments through capital appreciation and income in the form
of dividends and interest income.
Tax treatment of collective investment schemes
(a) Tax implications for the Fund Manager
➢ For taxation purposes income of a Collective Investment Schemes is exempt from
income tax to the extent to which the income is distributed to participants in the
collective investment scheme.
➢ This means that income generated from such a scheme by the fund manager is
exempt from income tax on condition that the income is paid out to the investors.
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➢ Any income not paid out to the investors will be subject to normal company
income tax at the rate of 30%.
(b) Tax implications for investors
➢ The participating investors are however liable to pay tax on the income received on
distribution.
➢ Since the funds contributed into the fund are invested in various types of
investments such as deposits, bonds, equities and so on, they generate income,
for participating investors, which is generally subjected to withholding tax. The
withholding tax is deducted at source at the applicable rates.
Types of Collective Investment Schemes
Collective investments schemes take various forms such as Unit Trusts, Investment
companies (or trust), Open ended Investment companies (OEICs) and Exchange Traded
Funds (ETFs).
Unit Trusts
A unit trust is an investment fund shared by lots of different investors. It is defined in the
act as any scheme or arrangement in the nature of a trust where members of the public are
invited or permitted, as beneficiaries under the trust, to acquire an interest or undivided
share in one or more groups or blocks of specified securities and to participate
proportionately in the income or profits derived under the trust.
Investment Trusts
An investment trust or company is a company whose line of business is investing in other
companies. It is a company having, as its purpose, the investment of its funds with the aim
of spreading investment risk and giving its members the benefit of the results of the
management of those funds by or on behalf of the company.
The investment trust company has shares and is quoted on the stock market. Investors
obtain a stake in such a fund by buying the shares of the company. Investment trusts often
issue different types ('classes') of shares to suit different types of investor.
Open Ended Investment Companies (OEIC)
An OEIC is a company whose business is managing an investment fund. Investors obtain a
stake in this type of fund by buying the shares of the OEIC. An OEIC is defined in the act as
a company whose articles of association authorise the acquisition of its own shares
structured in such a manner that it provides for the issuing of different classes of shares to
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investors, with each class of shares representing a separate portfolio having a distinct
investment policy;
The price of the shares is based on the value of the investments the company has invested
in. An initial charge is normally charged when investors buy and sell OEIC shares, but
otherwise there is no difference between the buying and selling price of shares. Because of
this OEICs are referred to as being 'single priced'. Some OEICs have no initial charge sometimes there is an 'exit charge' instead when you withdraw your money. The company
takes a yearly management fee direct from the investment fund.
Exchange Traded Funds (ETF)
An ETF is an investment fund, usually designed to track a particular index. This could be a
stock market index, or an index for a particular sector. Investors obtain a stake in the fund
by buying shares in the ETF which are quoted on the stock exchange. The ETF share price
just reflects the value of the investments in the fund. In other words, ETF shares do not
trade at a premium or discount. The return from the fund takes form of dividends and
capital gains (or loss) made on the sale of shares.
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EXAM PRACTICE QUESTIONS
Question 1
You are a tax senior in Chiwama Musonda Chartered Accountants. One of your firm’s client
Kasengu plc, wishes to raise capital to finance the acquisition of capital assets, as well as
finance the companies ambitious expansion programme to other parts of Zambia. The
company’s directors wish to know the nature of each one of the following financing
methods and the taxation implications for the company arising from each method:
(i)
(ii)
(iii)
(iv)
Sale and lease back
Hire Purchase
Convertible debt
Equity through issue of ordinary shares
(5 marks)
(5 marks)
(5 marks)
(5 marks)
Required:
Prepare brief notes to be used in a meeting with the directors of Kasengu Plc describing
the nature of each one of the above financing methods and the taxation implications for
Kasengu plc of using each option.(Total: 20 marks)
Question 2
Waterproof Ltd is a VAT registered Zambian resident company which
manufactures plastic water tanks. The directors of the company intend to buy
manufacturing equipment on 1 January 2020 at a cost of K458,200 (VAT
inclusive). The directors now wish to know the taxation implications of the
following finance options:
(i)
Obtain a loan of K458,200 at an interest rate of 22% per annum from a Zambian bank.
The loan will then be used to purchase the equipment outright.
(5 marks)
(ii)
Purchase the equipment under a finance lease whose terms requires Waterproof Ltd
to pay a deposit of K100,000 followed by five annual lease rentals of K82,386. The
implicit interest is 15% per annum.
(iii)
Purchase the equipment under an operating lease. The terms of the lease are that
Waterproof Ltd will be required to pay annual lease rentals of K69,600 (VAT inclusive)
for five years.
(iv)
Issue of 2000 K1 ordinary shares for K229.1 each. The proceeds of the issue will then
be used to purchase the equipment outright. The share issue costs are expected to be
K15,000.
Required:
Advise the directors of Waterproof Ltd, using appropriate calculations, of the
income tax and value added tax implications of each of the above options.
(13 marks)
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Question 3
For this part of the question, you should assume that today's date is 15 December 2019.
Elizabeth Newa is planning to start an unquoted trading company known as Eline Limited
on 1 January 2020. She will finance the business using her personal savings and a loan to be
obtained from the bank. She has already obtained Value Added Tax registration under the
intending trader provisions and is now thinking of acquiring a motor vehicle, for use, both
for business and private purposes. She is considering whether the vehicle should be a motor
car or a motor van.
Irrespective of whether the motor vehicle acquired is a motor van or a motor car, the
vehicle will be purchased at a cost of K255,200 inclusive of Value Added Tax and she is
considering financing the purchase using any one of the following options:
(i)
Borrowing K255,200 from a bank at an interest rate of 18% per annum. The loan will
be repayable in monthly instalments over a period of three years. The loan facility will
be granted on 1 January 2020.
(ii)
Purchase the vehicle under a 15% hire purchase finance agreement. The monthly
instalments will be K12,228 payable in advance over a period of 24 months, starting
on 1 January 2020.
(iii)
Obtain the vehicle under an operating lease agreement over a period of two years.
The annual lease payments will be K39,000 payable in advance commencing on 1
January 2020.
Elizabeth has no form of insurance and is also considering arranging for insurance cover to
protect herself and her family from any potential loss of income that may occur through her
ill health or death.
Required
(a)
Assuming the vehicle acquired is a motor car, advise Elizabeth of the Income Tax and
VAT implications of each one of the above financing options she is considering.
(9 Marks)
(b)
Advise Elizabeth of how your answer to (a) above, would be different if the vehicle
acquired was a motor van.
(5 Marks)
(c)
Describe three types of personal financial products that would be of use to Elizabeth.
(6 Marks)
(Total= 20 Marks)
©MWAPE
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Question 4
You are a Tax senior in a Tax Practice. The Tax Manager has presented to you the following
information about two of the clients of your firm in respect of which you should prepare
appropriate responses in the form of explanations and computations as required:
(a)
Foloko Phiri
Foloko Phiri was recently retrenched from KPM Minining Corporation where he was
employed as a Human Resources Manager. Having received a hefty retrenchment
package, Foloko is looking for profitable investments in which he can invest some of
his money. He has heard that a reasonable amount of return can be made by
investing funds in a Collective Investment Scheme. Foloko does not know what a
Collective Investment Scheme is and has approached your firm for information and
advice.
Required:
Provide an explanation to Foloko, of what a Collective Investment Scheme is and
describe the main forms that such a scheme may take.
(10 marks)
Question 5
(a)
Discuss the taxation implications for a business of using each one of the following
finance options to finance the acquisition of capital assets.
(i)
(ii)
(iii)
©MWAPE
Hire purchase
Finance leases
Operating leases
(3 marks)
(3 marks)
(3 marks)
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