Paper F6 (MWI)

Fundamentals Level – Skills Module

Taxation
(Malawi)
Monday 6 June 2011

Time allowed
Reading and planning: 15 minutes
Writing: 3 hours

ALL FIVE questions are compulsory and MUST be attempted.

Tax rates and allowances are on page 2.

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

The Public Accountants Examination Council of Malawi

SUPPLEMENTARY INSTRUCTIONS
1. Calculations and workings need only be made to the nearest K.
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

Income tax rates: Individuals

Cumulative
K K
72,000 – 120,000 0
120,001 – 156,000 15% 5,400
156,001+ 30% –

Company rate
Locally incorporated 30%
Externally incorporated 35%

Annual Allowance – rates

(Guidelines laid down by the Commissioner of Taxes)
5% – Industrial buildings
– Railway lines
– Farm improvements
10% – General plant and machinery
– Trailers
– Farm fencing
15% – Mobile cranes
17·5% – General plant and equipment on double shift
20% – Motor cycles
– Cars
– Pick-ups
– Light Lorries (for light work)
– Cement mixers
– Tractors
25% – Light Lorries (for heavy work)
– Tippers
– Tracked tractors
– Tree-dozers
– Scrapers
– Graders
– Bulldozers
– General plant and equipment working 24 hours a day
– Tractors (for heavy work)
– Transport services
40% – Computers

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ALL FIVE questions are compulsory and MUST be attempted

1 Maziko Tourism Limited is a company incorporated in Malawi, and has been in operation since 2003. The company
owns five hotels throughout the country. In addition it operates a tour management division, which conducts guided
tours throughout Malawi. The tour management division, which is called Warm Heart Tours and Travel has operational
offices from the hotels operated by Maziko Tourism.
The company makes up its accounts to 31 December each year.
The following are the financial results for the hotel operations for the year ended 31 December 2010.
Comprehensive Income Statement
Year ended 31 December 2010
Income K K
Accommodation 37,000,800
Restaurant and bars 45,000,000
–––––––––––
82,000,800
Cost of sales
Accommodation 19,550,500
Restaurant and bars 28,500,500 (48,051,000)
––––––––––– –––––––––––
Gross profit 33,949,800
Administration costs 18,500,000
Finance costs 8,500,600
Other expenses 4,560,800 (31,561,400)
––––––––––– –––––––––––
2,388,400
Other income 3,850,000
–––––––––––
Profit before taxation 6,238,400
–––––––––––
–––––––––––
The following information is available in connection with these financial results.
(i) Included in cost of sales are the following:
K
Accommodation:
VAT charged on staff meals and accommodation 345,000
Losses on replacements of linen 165,000
Provision for exchange losses on imports of soaps and lotions 235,800
Stock pilferage 55,000
Salaries and wages 7,550,800
Depreciation 5,560,500
Restaurant and bars:
Christmas party 245,600
Provisions for losses on glasses and bottles 512,000
Customs and excise duties on liquor 850,000
Salaries and wages 4,500,000
(ii) Included in administration costs are the following:
Legal fees for increase in share capital 322,590
Salaries and wages 6,550,100
Contract gratuity 750,000
Severance pay provision 890,100
Fringe benefits tax 355,870
Depreciation 3,200,500
During the year K650,000 was paid out in severance pay to employees whose services were terminated. This
amount was charged against amounts previously provided for.

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(iii) Finance costs include:
K
Audit fee 750,000
Provision for doubtful debts – 2% of debtors 85,800
Interest for late payment of taxes 75,000
Interest on bank overdraft 1,256,900
Exchange losses on payment of foreign creditors 640,800
Exchange losses on conversion of year end creditor balances 554,800
(iv) Other expenses include:
Donations – School for the blind 65,000
– Save the Children Fund 55,000
Subscriptions – ACCA for the company’s accounting students 165,000
– Golf club for the Managing director 880,000
– Institute of Hotel Management 90,000
Directors’ fees 345,000
Traffic fines 85,600
Medical aid contributions for hotel staff 115,000
(v) Other income is made up of:
Rental from shops in hotels 2,690,000
Capital gain from old foreign debtors 655,000
Rental of computers by Warm Heat Tours 255,000
Profit on sale of assets 250,000
––––––––––
3,850,000
––––––––––
The rental income is stated gross and withholding tax was deducted on payment.
(vi) The results for Warm Heart Tours and Travel for the year ended 31 December 2010 after depreciation charged
of K2,165,890 and before capital allowances for the year show a loss of K2,500,456. These results are not
incorporated in the results for the Hotel business above.
(vii) The buses run by Warm Heart Tours and Travel had a net tax written down value of K15,565,000, as at
1 January 2010. No additional buses were bought during the year.
The division uses computers belonging to the hotel, for which they are charged a fee of K255,000 a year. The
expense has been deducted in arriving at the division’s accounting loss of K2,500,456.
(viii) Maziko Tourism Limited’s tax written down values of property and equipment as at 1 January 2010 were:
K
Hotel buildings 25,500,000
Laundry equipment 165,000
Motor vehicles 8,500,000
Furniture and equipment 4,355,800
Computers 2,400,000
(ix) The following information is also available in connection with the movement in property and equipment during
2010:
K
Construction of additional hotel rooms 5,500,000
Purchased motor vehicle – saloon 4,500,000
Purchased new heavy duty laundry equipment 3,500,000
Purchased four new desk top computers 650,000
The company installed a computerised reservation system at a cost of K2,500,000. This software has been
capitalised and is being written off over a period of four years.

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 The old laundry equipment was scrapped. This was sold to a local dry cleaner at a price of K500,000. The
equipment had a tax written down value of K125,000. However, this equipment had a nil book value.
(x) Provisional tax paid during the year amounted to K895,500.

Required:
(a) Calculate the capital allowances that will be claimed by Maziko Tourism Limited for the year ending
31 December 2010. The capital allowance schedule should clearly indicate the applicable capital allowance
rates used. (16 marks)

(b) Compute the profits or losses for tax purposes of Maziko Tourism Limited for the year ended 31 December
2010. (12 marks)

(c) If Maziko Tourism Limited has a tax loss for the year, state how the losses would be treated for tax purposes,
assuming that they have paid amounts of withholding tax and provisional tax during the year. (2 marks)

(30 marks)

5 [P.T.O.
2 Peter Mazombwe is a freelance general management consultant. In addition, he runs a produce business. He buys
produce, mainly rice, pigeon peas and sunflower seeds, and exports these to South Africa.
He is married to Miriam. Miriam is employed as a personal assistant to the Managing Director of an engineering firm.
During the year to 30 June 2010, Peter worked on three consultancies and his earnings from these consultancies
were as follows:
K
August 2009 675,500
January 2010 800,000
March 2010 911,080
The total expenses incurred in carrying out these consultancies were:
Printing and stationery 56,900
Telephones 22,000
Travelling 282,500
The following results are from the produce business, for the year ended 30 June 2010.
K
Export sales 10,500,500
Less:
cost of produce 5,678,000
Transport – local 325,000
Transport – exports 1,256,890
Insurance 657,000 (7,916,890)
––––––––– –––––––––––
2,583,610
Less expenditure
Wages 875,000
Rental for warehouse 720,000
Telephones and faxes 45,000 (1,640,000)
––––––––– –––––––––––
Profit from trading 943,610
–––––––––––
Included in wages is drawings of K250,000 made by Peter during the year.
Other than for the drawings, no other expenses were paid by the business on behalf of Peter.
The following are the other earnings of Peter and his wife Miriam for the year to 30 June 2010.
K K
Peter Miriam
Earnings
Salary 3,550,500
Directors’ fee 450,000 –
Board sitting allowances 125,000
Bank interest 35,000
Rental 420,000
Dividend from a listed company 15,000 22,000
Expenses:
Donations – MACOHA 125 850
Subscriptions – Institute of directors 35,000
Houses on rent:
Repairs and painting 75,550
New driveway 250,000
City rates 65,000
Except for export income, the relevant taxes applicable on the other income were duly deducted on payment and were
received net by Peter and Miriam.

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Bank interest relates to interest earned on a treasury bill.
Peter and Miriam have three houses; two were being rented out and the third one they live in.
One of the houses which was rented out was sold during the year. The cost of the new driveway relates to that
property.
The house which was sold was purchased in 2000 at a cost of K650,000 and it was sold during the year for
K3,650,500. The Mazombwes, however, intend to use the proceeds from the sale to purchase another house also
for rental purposes. Negotiations for the purchase are at an advanced stage. The new house is to cost them
K4,550,000.
The 2010 conversion factors are as follows:
Year Factor
2000 3·439
2002 2·654
2005 1·3337
2010 1

Required:
(a) Calculate the capital gain, if any, on the house which was sold and state how this gain will be dealt with for
the purposes of arriving at the taxable income of Mr and Mrs Mazombwe. (5 marks)

(b) Compute the taxable income of Mr and Mrs Mazombwe for the year ended 30 June 2010. (13 marks)

(c) Calculate the tax payable or refundable by or to Mr and Mrs Mazombwe for the year ended 30 June 2010.
(7 marks)

(25 marks)

7 [P.T.O.
3 (a) Value Added Tax (VAT) is chargeable on taxable supplies and services that are provided by tax payers who are
registered for VAT.

Required:
(i) State the occasions on which VAT is chargeable and the persons who are responsible for paying the tax;
(3 marks)
(ii) List ANY FOUR types of transaction, apart from a simple sale of goods or services, which are treated as
a supply of goods or services for the purposes of VAT. (2 marks)

(b) Set out the THREE types of supply for VAT purposes, stating the rate at which VAT is payable (if any) and
explaining whether or not input tax incurred on purchases relating to each type of supply is claimable.
(3 marks)

(c) XYZ Limited, a company incorporated in Malawi, is involved in manufacturing toys. The following information is
available with respect to the transactions entered into during month of April 2011, for which it wishes to submit
a VAT return.
K
Taxable supplies 3,500,200
Exempt supplies 450,000
Value of purchases on which VAT was charged 2,650,000
Capital goods purchased 1,250,000
Value of exempt purchases 75,000
Purchases from non-registered traders 125,760
Included in capital goods is the cost of a motor vehicle at K650,000.
Also included in value of purchases on which VAT was charged is the cost of motor vehicle spare parts, which
cost K115,000.
The above figures are not inclusive of VAT.
There is excess credit brought forward from the previous month of K45,650.

Required:
(i) Calculate the VAT that will be payable or claimable by XYZ Limited for the month of April 2011;
(5 marks)
(ii) If the return for the month of April 2011 resulted in VAT in credit, state how this credit would be dealt
with, and the tax position should the company continue to be in a tax credit position. (2 marks)

(15 marks)

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4 (a) Malengo Limited is a medium sized provider of ICT services, and has a total of six employees.
Its financial year ends on 31 December each year.
Malengo Limited’s remuneration also includes benefits paid. The following are the monthly figures.
General Sales Accountant Receptionist Cleaner
Manager consultants (2) Messenger
K K K K K
Salary 100,000 50,000 80,000 30,000 10,000
House rent 45,000 30,000 40,000
Water 15,000 10,000 10,000
Electricity 10,000 8,000 9,000
Telephone 10,000 8,000 10,000
Housing allowance 15,000 5,000
The house provided to the general manager is furnished.
Malengo Limited pays for electricity, water and telephone for the general manager and the accountant directly to
the utility providers. The remaining employees receive cash payments to cover these expenses.
Malengo Limited provides a company car to its general manager. The car cost K2,500,000 new four years ago.

Required:
(i) Calculate the fringe benefits tax that would be payable by Malengo Limited based on the above
information for the quarter ending 31 March 2011; (8 marks)
(ii) State TWO other benefits (apart from those dealt with in part (i) above) provided by an employer which
attract fringe benefits tax and in each case state the basis of calculation of the taxable benefit amount.
(2 marks)

(b) A taxpayer is required to deduct withholding tax from certain payments, when such payments are made.

Required:
Explain the procedures for the administration and payment of withholding tax, and exemption from
withholding tax, and list at least FOUR payments to which withholding tax should be applied in the absence
of exemption. (5 marks)

(15 marks)

9 [P.T.O.
5 Malindi is considering starting a fish farming business. He has not decided whether to register this business as a sole
trader under the Business Names Act or whether to incorporate the business into a limited liability company. The
business will prepare its financial statements to 31 December each year. The business will be located in Salima.
The turnover for the first year is expected to be K4,500,000, and the profit before tax to be K450,500.
Equipment costing K500,000 will be bought in the first year and dams will be constructed costing K600,000.
The expected profit is arrived at after charging:
K
Depreciation 122,000
Malindi’s salary 400,000
Feasibility study costs 225,000
Malindi will be entitled to a business car. The cost of this car will be K1,200,000. The running expenses incurred for
the first year will be:
K
Fuel 126,000
Repairs and maintenance 66,000
Insurance 114,000
It is anticipated that one-third of these expenses will be for private purposes.
A house will be rented for Malindi at a monthly rental of K25,000. It has been agreed with the commissioner that
this is a legitimate charge to the business.
Expenses for rent and vehicle running have already been taken into account in arriving at the expected net profit for
the first year of operations.

Required:
(a) Calculate the tax to be payable for the first year of trading:
– on the basis that Malindi registers the business as a sole trader;
– on the basis that Malindi incorporates into a limited liability company. (13 marks)

(b) Advise Malindi whether he should operate the business as a sole trader or a limited liability company.
Support your answer with the tax considerations under each option. (2 marks)

(15 marks)

End of Question Paper

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