DIPLOMA IN BANKING
TAXATION 1 [IOBM – D213] – November 2013 - Solution
SECTION A [60 MARKS]
SOLUTION ONE:
a) Bad debts will be allowable if;
i. They have been proved bad to the satisfaction of the
Commissioner general
[½ Mark]
ii. They have become bad during the year of assessment[½ Mark]
iii. The amount of debt must have been included in the current
year of assessment or was included in any previous year in the
taxpayer’s assessable income [trade debts] either in terms of
the Act or any previous law.
[½ Mark]
b) Doubtful debts will be allowable;
i. To the extent that they are estimated to be doubtful if the
amounts of such debts are included in the current year of
assessment or were included in any previous year of
assessment in the taxpayers income either in terms of this Act
or any previous law.
[½ Mark]
ii. They must be specific provisions/estimates – general
estimates/provisions are specifically disallowed
[½ Mark]
iii. They must be on trade debtors
[½ Mark]
c) For Individual donations to be allowable;
i. They must be donations made by the taxpayer in the tax year
to charitable organisations as the Minister from time to time by
notice published in the Gazette approve for purposes of this.
[½ Mark]
ii. They must be not less than K250 in value.
[½ Mark]
d) Employers pension contributions for employees will be allowable..
i. If contributed to an approved pension fund
[½ Mark]
ii. The allowable amount will be the lesser of [per employee]
1. The total of employers’ contribution
[½ Mark]
2. 24% of employees contribution
[½ Mark]
3. K9,000
[½ Mark]
Contract Gratuity Calculation
Amount payable
Salaries earned
Gratuity payable
= 25% of salaries earned during the
contract period.
= 30 months * K2, 300, 000
[½ Mark]
= K69, 000, 000
[½ Mark]
= 25% * K69, 000, 000
[½ Mark]
= K17, 250, 000
[½ Mark]
Salaries earned for the year ended 30 June, 2012
= 12 months * K2, 300, 000
= K27, 600, 000
House Allowance for the year
= 70% * K27, 600, 000 [½]
[½]
[½]
= K19, 320, 000 [½]
Taxable Income
Salaries
House Allowance
Contract Gratuity
Tax payable
The First
K
180, 000
The Next
K
60, 000
The Balance K63, 930, 000
= K27,
= K19,
= K17,
= K64,
600,
320,
250,
170,
000
000
000
000 [½]
0%
15%
30%
K
0
K
9, 000 [½]
K19, 179, 000 [½]
K19, 188, 000 [½]
Wife’s earned income can become unearned if emoluments from
employment received by or accrued to or in favour of the wife are from an
employer who is
i. Her husband
[½ Mark]
ii. A partnership in which the husband is a partner
[½ Mark]
iii. A company in which the husband is a director wh controls directly or
indirectly more than 5% of the voting rights attaching to all classes of
the shares of the company
[1 Mark]
iv. A company in which the wife is a director who controls directly or
indirectly more than 5% of the voting rights attaching to all classes of
shares of the company and in which the husband is employed or is
also a director
[1 Mark]
[Total 15 Marks]
SOLUTION TWO:
a) Because they are only claimable in the year an asset
procured/constructed/acquired [½] and brought into use. [½]
is
b) Initial allowance is claimable in respect of capital expenditure
incurred by the taxpayer during the year of assessment
[½],
on assets procured/acquired/constructed for the purposes of the
taxpayer’s trade [½],
it is not claimed on assets on which investment allowance has been
claimed [½],
it is not claimed on private passenger vehicles [½].
c) Staff housing means any dwelling house erected for occupation by an
employee engaged in the business or farming operations of a taxpayer
[½] who is a manufacturer or farmer [½];
Railway lines means slippers and equipment pertaining thereto of any
railway track [½] but does not include ballast, embankments,
bridges, culverts [½] and other railway constructions [½]
d) Capital Allowances
Item
Opening
TWDV
Additions
Disposals
Closing
TWDV
Investment
Allowance
Initial
Allowance
Annual
Allowance
Factory
Building
10, 200
10, 200
Plant and
Machinery
Motor
Furniture
Vehicles
& Fittings
K’000
8, 400
11, 700
5, 300
8, 600[½]
1, 500[½]
15, 500
7, 500[½]
867[½]
18, 333
1, 100[½]
450[½]
5, 950
1, 500[½]
220[½]
3, 667[½]
595[½]
8, 600[½]
510[½]
690[½]
Profit or loss on disposal
Item
Plant and Machinery
Motor Vehicles
Furniture and Fittings
Sale
TWDV
Profit/
Proceeds
[Loss]
1, 800
1, 500[½]
300[½]
550
867[½]
[317] [½]
425
450[½]
[25] [½]
[Total 15 Marks]
SOLUTION THREE:
Zanga Phe Limited
Computation of taxable income
K’000
Profit before tax
Add: Depreciation
Depreciation
Doubtful debts prov – general
Realised exchange gain
Fringe benefits tax
8, 000 [1]
7, 200 [1]
100 [1]
1, 200 [1]
120 [1]
Less: Net exchange gain
400 [1]
Realised exchange loss [500-300]
200 [1]
Capital allowances
12, 000 [1]
Taxable Income
K’000
17, 965
16, 620
[12, 600]
21, 985 [1]
Note that k300 exchange loss will be carried forward to be offset
against future assessable income
Computation of tax payable
= 30% * k21, 985, 000 [1]
= k6, 595, 500 [1]
If it was a cell phone operator company
Tax payable should have been
= 33% * k21, 985, 000 [1]
= k7, 255, 050 [1]
If it was a foreign company
Tax payable should have been
= 35% * K21, 985, 000 [1]
=k7, 694, 750 [1]
[Total 15 Marks]
SOLUTION FOUR:
a) List any five general conditions that all traders dealing with goods
and services that attract Excise tax must comply with according to
the customs and excise tax law
i. No other business should be conducted on the entered
premises except with the permission of the Controller[½]
ii. No other excisable goods may be kept on the entered premises
except those manufactured on the premises
[½]
iii. All rooms, stores, plant, equipment and warehouses must be
given distinguishing marks and numbers
[½]
iv. The licensee must provide office, sanitary or living
accommodation for an officer or facilities for proper excise of
the officers functions as the Commissioner require [½]
v.
The name of the licensee must be exhibited on a conspicuous
place outside the entered premises.
[½]
b) name any five reasons/circumstances that may necessitate the
Commissioner general of the Malawi Revenue Authority to allow an
importer to clear their goods at the inland port.
i. Finance institutions are not available at the border [½]
ii. Need to facilitate trade
[½]
iii. Carriers are not the owners of the goods and may not possess
all the necessary documents for clearance at the border[½]
iv. No customs clearing agents at the border
[½]
v.
Security reasons
[½]
c) Explain briefly
i. C.I.F = Cost [½] Insurance [½] and Freight [½] of the imported
goods
ii.
cost of candles
[150 * 10] [½]
Malawi Kwacha
[1, 500 * 50] [½]
Value for Duty Purposes [VDP]
Customs duty [25% * K75, 000] [½]
= R 1, 500.00 [½]
= K 75, 000.00[½]
=K 75, 000.00[½]
=K 18, 750.00[½]
Value for Excise Tax purposes
[75, 000+18, 750] [½]
=K 93, 750.00[½]
Excise Tax [20% * 93, 750] [½]
=K 18, 750.00[½]
Value for VAT purposes
[93, 750+18, 750] [½]
=K112, 500.00[½]
Value Added Tax
[112, 500 * 16.5%][½]
=K 18, 562.50[½]
Total payable to Malawi Revenue Authority
[18, 750.00+18, 750.00+18, 562.50] [½] =K 56, 062.50[½]
[Total 15 Marks]
SECTION B [40 Marks]
SOLUTION FIVE:
a) because benefits represent income to employees which is supposed to
be taxed according to the taxation law of Malawi, however, since it is
not paid in cash by the employer, hence the employer pays the tax in
form of fringe benefits tax [2 Marks]
b) taxable values for masenjere for FBT purposes
Nature of Benefit
computation
computation
Taxable value
Loan facility
{K20, 000, 000 * [31.25% - 4%] * 268/366} [1½] =
3, 990, 710 [½]
[15% * K68, 000, 000 * 338/366] [1½]
=
Motor vehicle
9, 419, 672[½]
less: contribution by zaithwa [11 * K5, 000]
[55, 000] [½]
9, 364, 672[½]
HI-FI system
100, 000[½]
Medical policy
0
[½]
[½]
13, 455, 382 [½]
Fringe benefit tax payable [30% * K13, 455, 382] [1]
4, 036, 615 [½]
c) paid quarterly[1]
d) within 14 days from the end of each quarter [1]
e) 20% of the fringe benefit tax payable[1]
f) Income tax payable
=
Salary
K48, 000, 000 [1]
Bonus
K 8, 000, 000 [1]
Interest
– building society
K0 [1]
- NBS bank investment account
K0 [1]
Taxable income
K56, 000, 000
First K180, 000
Next K60, 000
=
=
=
=
=
0%
15%
0
9,
000
Balance K55, 760, 000 [1]
000 [1]
Total tax payable
K16, 737, 000 [1]
30%
16,
728,
[Total 20 Marks]
SOLUTION SIX:
a) there are two types of clubs and these are as follows:
i. clubs which are formed or are operated solely or principally for
 social welfare; [½]
 civic improvement; [½]
 other similar purposes. [½]
 And which do not distribute any income[½]
ii. those which are formed or operated solely or principally for
 pleasure and [½]
 recreation[½]
b) income treatment
i the income of clubs and associations which are formed or
operated solely or principally for social welfare or civic
improvement are exempt from taxation[1 Mark]
ii certain types of income of clubs formed or operated soley or
principally for pleasure or recreation is subject to taxation [1
Mark]
c) where income is subject to taxation
the income of a taxable club or association which is subject to tax is
deemed to be an amount equivalent to 6¼% [½]of all receipts or
accruals to or in favour of the club or association from:
 sale of goods; [½]
 cinematograph performances; [½]
 stage plays; [½]
 gambling machines [½]
d) Tikumbe club
K, 000
Gambling machine
510 [½]
Live band performances
201 [½]
Sale of food
300 [½]
Video shows
90 [½]
Sale of drinks
225 [½]
Total
1, 326 [½]
Taxable income [1, 326, 000 * 6¼%] [½] =
K82, 875 [½]
Tax payable
=
K82, 875 * 30% [½]
=
K24, 862.50 [½]
Tax year will be 2012/2013 [1]
e) Turnover tax
 Payable by informal businesses and not registered with MRA
[½]
 Businesses whose turnover for the year is more than K2million
but less than K6million [½]
 Tax is payable monthly on turnover realised [½]
 Turnover tax is 2% of total monthly turnover [½]
 Withholding tax suffered by taxpayer will be credited on
assessment [½]
 This is a final tax [½]
 Turnover tax is not payable by registered companies even if
their turnover is below k6million [½]
 Partnerships are part of this arrangement if individually
partners turnover is less than K6million [½]
 If sole traders or partnerships whose turnover is less than
k6million but want to submit full accounts for assessment, they
can apply to the Commisioner to be granted this status [½]
 Turnover tax is not applicable to taxpayers who fall within s
58[2] [½]
[Maximum 4½ Marks]
f) Turnover tax was introduced
 Broaden the tax base, and therefore
 Increase revenue for the government, and therefore in
future
 A possibility of reducing tax rates
[1 Mark each Maximum 2 Marks]
[Total 20 Marks]
SOLUTION SEVEN:
a) Foreign currency liability means a liability denominated in or
amount of which is otherwise determined by reference to a
foreign currency and includes notes and coins of such foreign
currency
 Calculations
Foreign currency
Exchange rate at the time
Total amount
=
=
=
$155, 000 [½]
K320/1us$ [½]
K49, 600, 000 [½]
 Calculations
February 2013 payment
Amount
Exchange rate at establishment
Exchange rate at settlement
Value at establishment
[105,
33, 600, 000 [½]
Value at settlement
[105,
36, 750, 000 [½]
Loss
150, 000 [½]
=
$105, 000
=
K320/1us$
=
K350/1us$ [½]
000 * 320] [½]
=
000 * 350] [½]
=
=
3,
April 2013 payment
Amount
=
$50, 000
Exchange rate at establishment
=
K320/1us$
Exchange rate at settlement
=
K362/1us$ [½]
Value at establishment
[50, 000 * 320] [½] =
16,
000, 000 [½]
Value at settlement
[50, 000 * 362] [½] =
18,
100, 000 [½]
Loss
=
2,
100, 000 [½]
Total loss
[2, 100, 000 + 3, 150, 000] [½] =
250, 000 [½]
 Calculations
Whole amount settled in February 2013
Amount
=
$155, 000
Exchange rate at establishment
=
K320/1us$
Exchange rate at settlement
=
K350/1us$
Value at establishment
[155, 000 * 320] [½]
49, 600, 000 [½]
Value at settlement
[155, 000 * 350] [½]
54, 250, 000 [½]
Loss
=
650, 000 [½]
Saving
600, 000 [½]
[5, 250, 000 – 4, 650, 000] [½]
5,
=
=
4,
=
 Restricted to the actual realised capital loss [1] and the
lower of the realised capital loss and the realised capital
gain[1]
b) Exemptions of capital gains arising from
 Transfers of assets between spouses or former spouses;
 Transfers of assets to a spouse from the estate of a
deceased spouse
 Transfers of assets from a deceased parent to a child;
 Disposal of an individual’s principal residence
 Disposal of personal and domestic assets not used in
connection with any trade
[1 mark each up to 4 Marks]
[Total 20 Marks]
SOLUTION EIGHT:
a) Tax payer may appeal to the commissioner if he is aggrieved by:
Any assessment made upon him by the commissioner under this Act
Any decision of the commissioner in relation to an assessment
The determination of a reduction of tax under section 123
[1 Mark for each total 3]
b) Penalties under s 112
i. Fails to comply with any notice served on him by the
commissioner under this act or any rules made thereunder
ii. Gives any incorrect information or omits any relevant
information from any statement required to be made to the
commissioner under s 20
iii. Fails to keep records, books or accounts required to be kept
under s 54
iv. Being a public officer of a company; fails to furnish to the
commissioner documents and particulars relating to the
notification of dividend declared as required under s 69
v.
Fails to furnish to the commissioner returns or particulars
relating to persons employed by him as required under s 85
vi. Fails to furnish with any other person with a certificate as
required under s 87
vii. Fails to deduct the tax due or to remit to the commissioner tax
deducted under s76
[1 Mark for each total 5]
c) Residence refers to
Any individual present in Malawi for an aggregate of 183 days or
more in the year of assessment [1 Mark]
A partnership established under any written law of Malawi[1 Mark]
A company which is incorporated in Malawi [1 Mark]
d) Thabwa limited
Penalty for provisional tax liability for 2011/2012
Actual tax
= 30% * K13, 900, 000 [½]
= K4, 170, 000 [½]
Provisional tax liability
= 90% * K4, 170, 000 [½]
= K3, 753, 000[½]
Provisional tax unpaid as a percentage of tax liability
= K3, 753, 000/K4, 170, 000 *
100 [½]
= 90% [½]
The amount of provisional tax unpaid as a percentage of total tax
liability exceeds 50%[½] therefore the company is liable to a penalty
of 30% of the unpaid provisional tax [½]
= 30% * K3, 753, 000[½]
= K1, 125, 900 [½]
e) Estimation of taxable income
i. A taxpayer makes a default in furnishing of any return or
information
ii. The commissioner is not satisfied with the return or
information furnished by the tax payer
iii. The commissioner has reason to believe that the taxpayer is
about to leave Malawi without furnishing any return or
satisfactory information
[1 Mark for each total 3]
f) Sending additional assessment
i. If the commissioner discovers or is of the opinion at any time
that any taxpayer has not been assessed or has been assessed
at a less amount than that which ought to have been charged
[Total 20 Marks]