Question 1 (25 Marks)

Chommie (Pvt) Ltd is motor cars dealer. During the year ended 31 December 2020, Chommie
(Pvt) Ltd entered into a 15-year lease agreement with a commercial property owner for the
construction of a motor vehicles showroom. The terms of the lease agreement are as follows:
a) Chommie (Pvt) Ltd to construct a showroom at an undeveloped commercial stand situated at
Sam Levy’s village at a total cost of ZWL$5 000 000. Chommie (Pvt) Ltd to further pave the
whole area around the showroom with specified brickwork at a cost of ZWL$800 000. All
the work must be completed within six months from the date of the lease agreement, which
was signed on 1 February 2020.
b) Chommie (Pvt) Ltd to pay a once-off premium of ZWL$900 000 and a monthly rent of
ZWL$100 000 from the lease commencement date. The rent to be reviewed at the beginning
of each calendar year in line with the market rentals for similar properties.
c) The lease agreement to be open to renewal after the expiry of the initial agreed period.
d) Chommie (Pvt) Ltd completed the construction of the warehouse and the pavement on 30
June 2020 at a total cost of ZWL$9 500 000 and ZWL$900 000 respectively and
immediately transferred their inventories to the newly constructed showroom.
Chommie (Pvt) Ltd’s statement of profit or loss and other comprehensive income for the year
ended 31 December 2020 is as follows:
Note ZWL$

Revenue 16 000 000

Cost of sales (10 600 000)

Gross profit 5 400 000

Other income 1 8 000 000

Distribution costs 2 (700 000)

Administrative expenses 3 (3 600 000)

Other expenses 4 (1 000 000)

Finance costs 5 (800 000)

Profit before tax 7 300 000

 Income tax expense 6 (444 972)

Profit for the period 6 855 028

Notes:
1) Other income comprises:
ZWL$

Rental income 5 000 000

Profit on the sale of commercial vehicles (see below) 3 000 000

Total 8 000 000

The commercial vehicles had been purchased in 2019 for ZWL$2 000 000 and were sold
during the year for ZWL$5 000 000.
2) Distribution costs comprise:
ZWL$

Repairs and maintenance 400 000

Fuel and licensing 300 000

Total 700 000

3) Administrative expenses comprise:

ZWL$

Salaries and wages 1 120 000

Lease premium and warehouse rent 930 000

Donations (see below) 300 000

Value added tax (VAT) late payment penalty 50 000

Depreciation 400 000

 Provision for directors’ fees 300 000

Protective clothing 200 000

Staff canteen provisions 100 000

Entertainment 200 000

Total 3 600 000

As part of Chommie (Pvt) Ltd’s corporate social responsibility commitment, the following
amounts were donated during the year:
ZWL$

Harare Central hospital (for the procurement of critical drugs) 200 000

Social club (for recurrent expenses) 100 000

4) Other expenses comprise:

ZWL$

Property repairs and maintenance (see below) 600 000

Legal fees (preparation of the shareholder’s agreement) 50 000

New business licences 80 000

Renewal of business licences 270 000

Total 1 000 000

Property repairs and maintenance were as follows:

 On leased commercial properties (the rental income from these properties is as detailed in
note 1 above) ZWL$480 000
 On an unoccupied commercial building ZWL$120 000
5) Finance costs comprise:
ZWL$

Overdraft facility for recurrent expenditure 300 000

Loan for the construction of the warehouse and paving 500 000

Total 800 000

6) Income tax expense:

This amount relates to the first and second provisional corporate tax payments made by
Chommie (Pvt) Ltd in respect of the year ended 31 December 2020. The payments were
based on a projected taxable income of ZWL$5 143 000. No further provisional corporate tax
payments were made in the year. Due to favourable business circumstances in the second
half of the year, Chommie (Pvt) Ltd revised their 2020 budget on 1 July 2020 and the
projected taxable income for the year ended 31 December 2020 was recalculated as ZWL$8
150 000.

Additional information
Chommie (Pvt) Ltd owned the following fixed assets as at 31 December 2020:
Date acquired Cost/valuation
(ZWL$)

Commercial properties 2019 3 000 000

Furniture and equipment 2019 1 500 000

Commercial vehicles 2019 1 800 000

Chommie (Pvt) Ltd has always claimed the maximum capital allowances possible in any given
year.
Required:
a) (i) State how the commercial property owner should treat the amounts specified in the signed
lease agreement with Chommie (Pvt) Ltd for tax purposes. (4 marks)
(ii) As a tax law and practice student advise the actions Chommie (Pvt) Ltd should have
taken whilst implementing the provisions of the lease agreement to minimise their tax
liability. (4 marks)
b) Calculate the taxable income of and corporate tax payable by Chommie (Pvt) Ltd for the year
ended 31 December 2020. (12 marks)
c) Calculate the provisional tax which should have been paid by Chommie (Pvt) Ltd based on
the revised budget for the year ended 31 December 2020, clearly indicating the due dates and
the respective tax amounts. (5 marks)