CHARTERED GOVERNANCE AND ACCOUNTANCY INSTITUTE IN ZIMBABWE

EXAMINATION QUESTION

SUBJECT: TAX LAW AND PRACTICE

PART: B
DATE: NOVEMBER 2021 TIME: 09:00 to 12:00 HOURS
DURATION: 3 hours; plus 15 minutes reading time

INSTRUCTIONS TO CANDIDATES
This paper is based on the legislation applicable to the year of assessment ended 31
December 2020 unless stated otherwise. All FIVE questions must be attempted. Marks
will be awarded for all workings.

This is an open book examination. Candidates may bring into the examination room
UNMARKED copies of the Income Tax Act Chapter (23:06), Value Added Tax Act
Chapter (23:12), Finance Act Chapter (23:04) and Capital Gains Tax Act Chapter (23.01).
PAYE Tables are attached.

MARK ALLOCATION
Question 1 - 17½ marks
Question 2 - 30½ marks
Question 3 - 21 marks
Question 4 - 13 marks
Question 5 - 18 marks
Total - 100 marks

The examination script is the property of CGI Zimbabwe and is not to be removed from the
examination venue.
QUESTION 1

Ntolwane Group
Ntolwane Group is a computer chip manufacturing company in Zimbabwe. The group is
comprised of Ntolwane Ltd and Zuluka Ltd. Ntolwane Ltd has 60% voting rights in Zuluka Ltd.
Zuluka Ltd generated a loss of $75 000 (net of deductible expenses, but before recoupment) in
the year ended 31 December 2020. Ntolwane Ltd generated a profit of $105 000 for the same
period. On 29 December 2020 the board of Ntolwane Ltd made a resolution to rationalize its
operations, accordingly it made an agreement to dispose all Zuluka Ltd assets to Ntolwane Ltd.

The following was extracted from the books of Zuluka for the year of assessment 2019:

Acquired in the year Qualifying Cost ITV Market Value

Industrial Building (Constructed 2018) 2 000 000 1 000 000 2 300 000
Production Plant 450 000 0 564 000
Computers 15 000 0 16 500
Commercial Vehicles 2019 120 000 90 000 102 000

The following expenses were deductible in arriving at Ntolwane Ltd profits.

1. The company had a cash loss of $45 000 as a result of embezzlement by a shop assistant.
The MD reported a loss of $25 000 to a snatch thief during her trip back from the bank,
having withdrawn $25 000 comprising $15 000 wages to pay her staff and $10 000 for her
personal expenditure.
2. Ntolwane Ltd removal costs include the following:
 Transport cost to relocate Zuluka fixed assets (see below) $7 500
 Removal of rubbish from Ntolwane Ltd premises $3 000
 The transport cost to relocate the Zuluka assets to the new premises was paid on 1 June
2020.
3. The following legal and miscellaneous expenses were incurred and deductible in arriving at
Ntolwane Ltd profits:
$
Site investigation for new building 12 700
Drafting and registering a mortgage on the new building 1 500
Drafting purchase agreement for the new building 3 000
Filling a lawsuit against a supplier for breach of contract 3 500
Annual audit fee 9 000
Lease of Isuzu Double cab used by Finance Manager (ignore VAT) 22 500
Amortization 43 000
Golf club membership dues for the MD to entertain suppliers 2 000

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REQUIRED:
a) Explain the group relationship that must exist in order for two or more
companies to form a group for capital gains purposes. (1 mark)
b) State the time limit for transferor and transferee to make a joint election
to transfer the capital gain on disposal of specified assets and explain why
such an election will be beneficial. (1 mark)
c) Briefly explain how taxes can be avoided on sale of assets by Zuluka Ltd to
Ntolwane Ltd. (1 mark)
d) Compute Zuluka Ltd’s income tax and capital gains tax as if measures to
avoid tax has not been made. (9 marks)
e) Briefly explain the income tax provisions relating to trafficking of shares
with assessed loss, the loss expiry provisions and whether Ntolwane Ltd
can utilize Zuluka Ltd’s assessed loss. (2 marks)
f) State with brief explanations, whether or not the loss of cash under each
of the circumstances outlined above is an allowable deduction in
computing the adjusted income of the business. (1 ½ marks)
g) Under what other circumstances is loss resulting from theft disallowed. (1 mark)
h) State, with brief explanations whether or not the removal costs under
each of the circumstances outlined above is an allowable deduction in
computing the adjusted income of the business. (1 marks)
[Total: 17 ½ marks]

QUESTION 2

NM Venture

Nyasha and Nancy commenced partnership, trading as NM Venture, on 1 June 2019. Nancy has
vast experience in HR issues having been employed by various companies as a human resources
practitioner home and abroad. Nyasha is a former trade unionist and has a Bachelor of
Administration degree. When they formed the partnership, it was agreed that Nyasha will take
a third of the partnership profits, while Nancy will take the remainder. For extra roles as an
administrator Nyasha will be paid an annual salary of $12 000, Nancy takes no salary but enjoys
unlimited use of the partnership vehicle whose cost of maintenance and fuel to the partnership
is $9 000 p.a. The vehicle whose engine capacity is 2700 cc, is used 20% for partnership
business by Nancy.

The partnership has one employee, Miranda, who commenced employment with the
partnership after graduating from the University of Science and Technology (NUST). She joined
the partnership on 2 August 2019 at annual salary of $15 000.

Owing to irreconcilable differences with Nyasha, Nancy decided to quit the partnership on 1
June 2020 and Miranda was introduced as a new partner on that date. From 1 June 2020, the
profits are apportioned between Nyasha and Miranda as follows:
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Annual Salary $ Balance%
Nyasha 37 000 60
Miranda 34 000 40

On that date Nyasha gave up the car when she made the decision to take a salary.
The pre-capital allowances annual profits of the partnership amounted to $275 000. The Capital
additions and disposals in the two-year period were as follows:
$
1 May 2019 IT equipment purchased 6 000
1 June 2019 Office Furniture purchased 3 500
1 June 2019 Isuzu KB (for use by Miranda) 45 000
1 May 2020 Ford Mondeo purchased (for Nyasha) 75 000

The Isuzu used by Miranda was involved in an accident and was sold as scrap on 3 January 2020
for $38 000; the profit on its disposal amounting to $5 600 is incorporated in pre-capital
allowances profits stated above:
a) The partnership paid $2 000 to Nyasha as a voluntary payment on 31 July 2020.
b) Partnership made contributions on behalf of the Partners to a registered Pension fund i.e.
$9 800 for Nyasha and $8 800 for Miranda.
c) Partnership made contributions on behalf of the Partners to CIMAS medical aid society i.e.
$1 800 for Nyasha and $2 050 for Miranda.
d) The partnership paid $600 for Nyasha’s life policy ceded to the partnership, $780 for joint
life policy of Nyasha and Miranda, $500 for Miranda’s separate and $900 for public liability
policy.
The Partnership has no capital allowance policy.
REQUIRED:

a) Compute partnership joint taxable income for the tax year ending 31
December 2020. (9 marks)
b) Compute tax payable by Partners for the year ending 31 December 2020. (21½ marks)
[Total: 30½ marks]

QUESTION 3

Kingsley Farm (Pvt) Limited

Kingsley Farm has been farming in Mfurusi for the last couple of years. During the current year
the area was seriously affected by drought and Kingsley Farm was forced to sale 102 livestock,
being 50 cows sold for $15 000 and 52 oxen sold for $14 500. These figures are already
incorporated in the annual net profit figure of $60 000. On 30 December 2020 when the
pastures improved the Farm purchased 30 cows, 40 tollies, 34 heifers and 16 calves, for $10
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200 in order to replace those depleted by drought. The cost of these livestock was incorporated
in the profit figure stated above.

Stock on hand at the beginning of the year is as follows:

Herd Number FSV ($ each) PPV ($ each)

Heifers 200 200
Tollies 100 190
Oxen 95 180
Bulls 5 750
Cows 130 195
Calves 110 100

During the year 10 calves were born, 15 calves became heifers and 5 of them became tollies, 3
tollies became oxen.

The Average Carrying Capacity of Livestock (ACCL) of the farm is 610 livestock and the total
livestock expenses for the year amounted to $9 358.

Kingsley Farm (Pvt) Ltd claimed depreciation amounting to $5 500 in respect of the following
capital expenditure incurred during the 2018 year of assessment:
$
Standby power generator 6 500
Tractor 45 500
Dam 30 000

The cost of the foundation for the standby generator amounts to $500 and is not included in
the cost of $6 500. The foundation is regarded as being integrated with the generator and its
useful life is limited to that of the generator. The generator was purchased on 1 December 2020
and brought into use on 1 January 2021 once the foundation had been laid.
The dam was incomplete as at year end.
The company minimizes its tax benefits.

REQUIRED:
a) Prepare a livestock reconciliation account for the year end 31 December
2020. Note, stock valuation is not required. (12)
b) Calculate the taxable income by Kingsley Farm for the year ended 31
December 2020. (9 marks)
[Total: 21 marks]

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QUESTION 4

Mr. Ndhovu

Mr. Ndhovu left his employment in December 2019 to set up his own business as a computer
and IT consultant. He commenced trading in January 2020 through a limited company called
Bird Computers Ltd and he is the sole director. Mr. Ndhovu has provided you with the following
financial information about the company:

The company’s turnover in period January to November 2020 was as follows:

Jan $35 000 Jul $85 000
Feb $45 000 Aug $85 000
Mar $84 000 Sept $85 000
Apr $84 500 Oct $85 000
May $84 000 Nov $86 000
(estimate)
June $84 000

Mr. Ndhovu instructed an Accountancy practice to prepare a business plan for the Company
and the invoice for this was issued in December 2019 in the sum of $500 plus $75 VAT. Mr.
Ndhovu was subsequently reimbursed by the Company. The company purchased a computer in
January 2020 for $2 000 plus $300 VAT for use in the consultancy business.

Mr. Ndhovu advised ZIMRA in January 2020 that the Company had commenced trading but has
not registered for VAT, believing that this will be dealt with at the end of the first year’s trading.
The Company works mainly for private individuals and small businesses, which may pay on
completion of the work. A couple of larger clients have requested VAT invoices. The company
has therefore issued two invoices in August showing VAT amounts of $750 and $900, although
these do not show any VAT number. The company intends to pay this VAT to ZIMRA once the
company’s VAT position is settled.

One of these customers has advised Mr. Ndhovu that the company’s procedures in relation to
VAT are incorrect and Mr. Ndhovu has asked for a meeting with you to discuss the company’s
VAT position.

REQUIRED:
a) Briefly explain how VAT incurred prior to incorporation and prior to
registering is treated. (3 marks)
b) Explain the basis of determination of the Company’s effective date of VAT
registration. (3½ marks)
c) Calculate the estimated amount of any potential VAT in relation to the
failure to register for VAT, on the assumption that the company notifies
ZIMRA of its liability to register at the end of April 20. (4½ marks)

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d) Explain what penalties may be levied on Mr. Ndlovu as a result of failure
to register for VAT and charging VAT when he is not registered for VAT. (2 marks)
[Total: 13 marks]

QUESTION 5

Lumntwana (Pvt) Limited

Lumntwana (Pvt) Ltd Manufactures toys and computer games for children. Its profit and loss
account for the year ended 31 December 2020 is as follows:
Note $000 $000
Sales 42 900
Less: Cost of sales 1 (36 753)
6 147
Add other income 2 40
6 187
Less: Expenses:
Remuneration 3 1 970
Professional fees 4 32
Entertainment expenses 5 66
Bad debts 6 170
Lease rental 7 16
Repairs and maintenance 8 108
Foreign exchange 9 (95)
Fines 10 18
Donations 11 336
Miscellaneous losses 12 10
Depreciation 156 (2 787)
Net profit before tax 3 400

Notes:
1. Cost of Sales includes toys costing $38 000 donated to an approved orphanage on
13 September 2020. The normal selling price was $42 000.
2. Other income is in respect of rent derived from a property in Namibia and received in
Zimbabwe in July 2020.
3. Remuneration includes:
 Entertainment allowance of $3 500 paid to the managing director and the general
manager.
 Employees Pension Fund (EPF) contributions of $75 500 made by the company in
respect of its 10 employees.
 Cost of maintaining a holiday bungalow in Nyanga used by senior executives of the
company $45 000.

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4. Professional fees comprise:
$
Registration of the company’s new trademark 5 500
Legal fees on compensation claim by a dismissed employee 3 600
Non-trade debt collection expenses 1 700
Accounting and auditing fees 8 200
Income tax appeal (case lost) 9 000
Feasibility study for expansion of operations in Japan 4 000
32 000

5. Entertainment expenses compromise:

$
Entertainment of suppliers 40 000
Staff lunches and refreshments 8 000
Promotional gifts (own product i.e. computer games) 6 000
Subsidy for customer purchase* 12 000
66 000

*During the year, the company implemented a promotional campaign whereby customers
are allowed to buy an electric toy at $1 for every computer purchased. The actual cost to
the company was $5.

6. Provision for doubtful debts (trade)

$
Balance as at 1 January 2020 220 000
Add: Provision for the year 40 000
Less: Amount written off (90 000)
Balance as at 31 December 2020 170 000

7. Lease rental comprises the rental paid for three motor vehicles for use by the salesmen. The
salesmen are allowed to take the cars home. The lease rentals were as follows:
Year 2018 2019 2020
Honda CVR 2 000 2 000 7 000
Toyota Ipsum 1 000 2 000 6 000
Nissan Sunny 2 000 6 000 3 000
Total 5 000 10 000 16 000

8. Repairs and maintenance expenses comprise:

$
Replacement of office glass doors 26 000
Replacement of component parts of machinery 4 000
Cleaning and repainting of factory premises 30 000
Cost of office computers 48 000
108 000
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9. Foreign exchange comprises:
$
Realized gain on payments made to trade creditors (140 000)
Unrealized loss on trade creditors 55 000
(85 000)

10. Fines for late payment submission of VAT returns $18 000

11. During the year, Lumntwana Ltd. made the following donations:
$
Provision of a wheelchair to a disabled employee. 8 500
Sponsoring a local cultural show approved by the Minister of Youth and Sport. 28 000
Cash donation to NUST for research contribution approved by Minister of
Higher & Tertiary Education. 124 000
Donation of a painting to the National Art Gallery (market value). 65 000
Cash donation to a Public Private Partnership Fund. 110 500

REQUIRED:
a) Compute the tax payable of Lumntwana (Pvt) Ltd for the tax year
ended 31 December 2020.
(18 marks)

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 “End of Examination Question Paper”

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