L1 TAX EOY EXAM PAPER 2 – SOLUTION

A. Write an email, to Taylor Mason letting her know of any ethical Script Script Script
concerns with reference to the ICAZ CPC, you might have from the 1 2 3
contents of the email she sent you.
Communication Skills – Presentation.
1 From: CTA Graduate
To:
Date: October 2022 1
Subject: Ethical Concerns
ATTACHMENT: Ethical Concerns
2 Good day Taylor Manson
Trusting you are well.
Thank you for affording me the opportunity to advise on the ethical
concerns emanating from the contents of the email sent. Please find
1
attached the requested ethical concerns.
Do not hesitate to contact me if you have any queries.
Kind regards,
CTA Graduate
Attachment
3 Taylor Mason is CA(Z), and the CTA graduate are both governed by the
1
ICAZ CPC and should comply with the fundamental principles of CPC.
4 Taylor Mason stated he is out of touch with some tax legislation
provisions
This poses a self-interest threat to professional competence and due
1
care as he is supposed to be providing the company with competent
professional service, yet he is out of touch of the tax provisions but is
acting otherwise for financial gain.
 L1 TAX EOY EXAM PAPER 2 – SOLUTION

5 Taylor Mason stated that the CTA was a Tax expert, yet he is just a
recent CTA graduate
This poses a self-interest threat to the fundamental principle of integrity
1
as Taylor Mason was not being honest and straightforward as he was
providing false information to the employing organization, for her own
financial gain.
Payment from the engagement was regarded as free money and
included Taylor Mason cut of the amount
This poses a self-interest threat to the fundamental principle of
professional behavior as this might bring the profession into disrepute
1
as his actions might lead to the organization being charged fines and
penalties if the CTA graduate fails to perform the job effectively.
This poses a self-interest threat to the fundamental principle of
1
objectivity as Taylor has a conflict of interest in the transaction as he is
benefiting financially as well as providing free money to his niece.
Available 5
Email Format 1
Maximum 5
 L1 TAX EOY EXAM PAPER 2 – SOLUTION

B. Discuss the VAT and Income Tax Treatment of AXE Card Loyalty
Script Script Script
Programme, in the hands of AXE.
1 2 3
Communication Skills – Clarity of Expression
VAT Treatment
Allocation of Loyalty Point
1 VAT shall be levied on the supply of services for furtherance of trade 1
3. AXE supplies a right to purchase at a discount to customer which is
1
a service.
4. The service is granted in the furtherance of trade as customers of
AXE are lured to come back and give the business more trade upon 1
redemption. Therefore, there is a supply.
5. The service is standard rated and a VAT rate of 14.5% will be used 1
6. Value of supply is consideration less VAT 1
7 The value of supply shall be the value of points granted to customer. 1
8. Time of supply is the earlier of receipt ,invoice or when services are 1
rendered
9. The receipt constitutes of an earlier event when the loyalty points 1
are allocated
10. Characteristics of a loyalty programme includes that loyalty points 1
must be allocated to customers for no additional consideration
11. Definition of an “invoice" refers to a document which notifies the 1
recipient thereof of an obligation to make payment.
12. Since AXE will not receive any payment for the loyalty points 1
allocated, there should generally not be an invoice issued for the
loyalty points allocated.
13. Therefore, it is unlikely that the allocation of the loyalty points 1
triggers the time of supply rules as per Sec 8.
14. Therefore, the allocation has no VAT implications. 1
Redemption period/ expiry
 L1 TAX EOY EXAM PAPER 2 – SOLUTION

15 The definition of trade includes availability of consideration on the 1

transaction
16 On redemption/ expiry AXE is not receiving anything therefore no 1
Consideration. Section 9(17)
17 Therefore, no VAT implications on the redemption or expiry of the 1
points.

Income Tax Implications

Loyalty points
18 Gross income includes amount receive or accrued in favor of a
1
person
19 For value of loyalty points to be included in gross income it has to
1
have been received for own benefit.
20 AXE is not entitled to the value equivalent to loyalty points up until
1
the customer redeem the points
21 However, sec 8(3) any amount received that constitutes a
prepayment is not included as gross income until the goods is 1
delivered or services rendered.
22 The loyalty points are prepayments for the goods that will be bought
in the future from AXE for which performance has not yet been 1
rendered.
23 Therefore, value of Loyalty points shall not be included in gross
income. the amount will only be included in gross income when the 1
customer redeemed points.
Used/Unused loyalty points
24 For the amount to be included in gross income, a monetary value
1
had to be ascertainable
 L1 TAX EOY EXAM PAPER 2 – SOLUTION

25. Ten loyalty points are equivalent to a $1 hence the amount is

1
ascertainable.
26. AXE will be entitled to the revenue when the loyalty points are used
up and when the customer fails to use up the loyalty points within 6 1
months of allocation.
27. If the 6 months period after allocation lapses after the end of the
current year of assessment that will constitute revenue in advanced
1
which will only be part of gross income in subsequent years when
goods/services are delivered to customers as per Section 8 (3).
28 The date of expiry is the date performance will be said to happen if
no redemption has happened, the amount will be included in gross 2
income on the expired day
Available 25
Maximum 15
Communication 1
 L1 TAX EOY EXAM PAPER 2 – SOLUTION

C. Calculate, with brief narrations, the effect on AXE’s 2021 Taxable Income of the transactions
Script Script Script
in Note 1 – Note 6.
1 2 3
Where there is no effect indicate using a zero in your calculation.
$’000’ Marks
Taxable income given 15,604
Card minimum
deposits to be
1. Received for own benefit 1 500 1
maintained in the
cards
Deposited amounts 1
2. Revenue in advance - Section 8 (3) 0 1
to be used in 2022
3 Taxable sales Gross Income - Section 8 (1) 1 15,101.7 1
Expected credit 1
. Not incurred 0 1
losses
4. Insurance pay-out Capital in nature 1 0 1

5. Recoupment Recoupment - Section 8 (1) j 1 0 1

6. New warehouse Capital in nature 1 0 1

 L1 TAX EOY EXAM PAPER 2 – SOLUTION

Capital allowances 1
on New factory
7. SIA - Section 15(2)(c) (3,125)
building (12,500 x
25%)
Prohibited deductions - Section 16 (1) 1
8. Constructions fines 0 1
Not for trade

9. Loan received Capital in nature 1 0 1

Interest
1 418.7 x 3/3.33
10. 1 418.7 – 1 278.1 = Not deductible 1 0
140.6 is the
prohibited portion
Deemed Dividend 1
11. Not for trade 140.6 1
Payable

Development raw 1
12. Capital Nature 0
material
Cost of staff time 1
13 Capital nature 0
and overheads
 L1 TAX EOY EXAM PAPER 2 – SOLUTION

Design of Packaging 1
14. Allowable deduction - Section 15(2)(a) (57) 1
Material
Training of Sales 1
15. Allowable deduction - Section 15(2)(a) (102) 1
Representatives
Lease Improvement 1

16. [1,000,000 x 2 Lease Improvement - Section 15(2)(e) (66.6)

1 8
𝑥 12]
10

Lease Improvement 1
17. (SIA) 1 Wear and Tear - Section 15(2)(c) (12.5)
(500,000 x 2.5%)
Taxable
18. Income/(Assessed 37 038.2 1
loss)
Available Marks
7 17 13
Break down
Available 37
Maximum 35
 L1 TAX EOY EXAM PAPER 2 – SOLUTION
D. Discuss the Tax Treatment by AXE of the transaction in Note 3, for
Script Script Script
the 2021 year of assessment.
1 2 3
Communication Skills – Logical Argument
Income Tax
Damaged warehouse
1 Amounts are not included in gross income if of a capital nature 1
2 Amounts are capital in nature if they are used to fill a hole of asset. 1
3 The insurance pay-out is used to replace the asset that was
1
destroyed by fire (not of profit) therefore its of capital nature
4 Therefore, the insurance proceeds will not be included in gross
1
income
5 The warehouse qualified for capital allowances hence the payout
can be included in gross income in the form of recoupment Sec 8(1)j 1
limited to capital allowance granted.
6 The insurance payout is used to replace the warehouse within 18
1
months which will generate income for the taxpayer
7 Therefore, no recoupment shall be included in gross income. 1
New Factory building
8 Amount are allowed as a deduction if not of capital nature sec
1
15(2)a
9 The building has an enduring benefit as it will be used over a number
of years to do production as it is a factory building, therefore its 1
capital nature.
10 Therefore ZWL 12.5million will not be allowed as a deduction. 1
Capital allowance
11 Section 15(2)c allows capital allowances for expenditure incurred in
1
the construction or purchase of capital assets.
12 The manufacturing building is an industrial building as defined by
1
the 4th schedule.
 L1 TAX EOY EXAM PAPER 2 – SOLUTION
13 The building will therefore claim SIA at 25% in the first year of use
and accelerated wear and tear at 25% in the three subsequent years 1
of assessment on a straight-line basis.

Fine
14 Amounts are prohibited as a deduction if incurred in a course of law
1
breaking S16(1)
15 AXE was fined $100,000 for attempt to speed up the building
process thus contravened building regulations and therefore broke 1
the law
16 Therefore, the fined amount is a prohibited deduction and should
1
not be allowed a deduction

VAT
17 Section 7(7) deems indemnity payment under a contract of
1
insurance as supply
18 AXE is a deemed to have supplied the building since they received
1
insurance payout
19 To the extent that the insured indemnity payment relates to a total
re-instatement of the destroyed warehouse, then no VAT output tax 1
will be payable on such insurance proceeds. Sec 7(7)b
20 Therefore, no VAT shall be charged on the total amount used for
1
restatement of the destroyed factory which is $12.5 million.
21 TOS is when the insurance payout was received which is 1 June 2021 1
22 The value of supply is the insurance payout exceed the
reinstatement of goods value
23 The value of supply is ($14.95-12.5-0.1).
1

Fines
24 Input tax is claimed if ;
 L1 TAX EOY EXAM PAPER 2 – SOLUTION
• VAT was charged
• Is making Taxable Supplies
• Valid invoice is issued
25 Vat was not charged on the fine charged
26 No valid invoice was issued, therefore no vat implications.

CGT
27 CGT is levied on the capital gain arising from the disposal of a
specified asset 1
• specified asset means—immovable property, or any
marketable security
The insurance proceeds qualify as a deemed sale of a immovable 1
property as per Section 13.
28 CGT shall be charged on the amount above the amount used to
1
replace the asset within a stipulated time. (Sec 13).
29 The replacement asset was purchased within twelve months (1 June
1
2021-1 November 2021).
30 Therefore, capital gain shall be charged on 14.95million – 13.3
1
million = 1.65million

Communication 1
Available 30
Maximum 14
 L1 TAX EOY EXAM PAPER 2 – SOLUTION
E. What are the requirements by the commissioner for claiming a bad
Script Script Script
debt in terms of the Income Tax Act.
1 2 3
Include the administrative process
Section 15 (2)g states the conditions to be met before a debt is declared
a bad debt for Income Tax purposes:
• The debt must be proved to the satisfaction of the
Commissioner General to be irrecoverable: 1
• It must be due and payable to the taxpayer
• The debt must have been included in the taxpayer’s taxable 1
income in the current year or in any previous year of 1
assessment
• It must also be clear from the circumstances that there is no 1
possibility of its recovery
AXE as the taxpayer is responsible for proving that a debt is bad, and
the following information may be submitted to support a bad debt
claim as deduction:
• Name of the debtor and amount
• Date when debt was established
• Nature of debt
• The reason it was considered to have become bad during the 1
period covered by FS.
• The year of assessment in which the debt was included in the
taxpayer’s income
• Any correspondence to the debtor including responses,
reminder notices, formal demand notices, service summons
and any proof of debt collection efforts
AXE should have exhausted all appropriate measures to recover the
1
debt, without success for it to be proven as bad debt.
Where a taxpayer recovers a debt, which had previously been deemed
1
a bad debt and allowed as a deduction for tax purposes, the taxpayer
 L1 TAX EOY EXAM PAPER 2 – SOLUTION
will be required to disclosed this and include the whole amount
recovered in the taxable income in the year of recovery
Available 7
Maximum 5
 L1 TAX EOY EXAM PAPER 2 – SOLUTION
F. Discuss the VAT and Income Tax Treatment of the transaction in Note 5,
in the hands of AXE. Script Script Script
Include withholding tax implications were necessary. 1 2 3
Communication Skills – Logical Argument
Income Tax
1. Section 15(2)(a) allows a deduction on the expenditure incurred for purpose
of trade not of capital nature.
2 Raw Material
Raw material costs are closely linked to a formula development which is an 1
income generating asset (project)
Therefore, cost of raw material is of capital nature and will not be allowed 1
as deduction.
3. Cost of Staff and Allocation of Laboratory overheads
These costs were incurred to enhance the income generating project of AXE
1
as the formula shall be used for number of years, therefore it is of capital
nature
1

$789,547 shall not be allowed as a deduction

4. Design of Packaging Material
The cost was incurred for purpose of trade as packaging will attract 1
customer (marketing related expense)
Therefore, $57,250 shall be allowed as deduction. 1

5. Training costs
Training expenses are purpose of trade expenses as it will enhance the flow 1
of operation and increase efficiency of employees.
Therefore, $102,153 shall be allowed as deduction. 1

VAT
 L1 TAX EOY EXAM PAPER 2 – SOLUTION
6. VAT input deduction is claimed when:
• VAT was charged
1
• Making taxable supply
• Valid documentation is provided
Raw materials
7. Purchase of the raw material from India constitutes an importation of goods in 1
terms of Section 6(1) b.
8 Therefore, import VAT shall be levied on the importation of Raw Material 1

9. The raw materials are standard rated supplies, therefore import VAT shall be 1
charged at 14.5%
10. Time of supply is the date the raw material enter the port of entry for home
1
consumption.
The value of supply is the value for duty purposes plus import duty.
1
11.
12. AXE shall claim input VAT: 1
• Import VAT was charged when on importation
• AXE is making taxable supplies (lubricants which are standard rated)

Therefore, AXE can claim input tax on raw materials 1

Training of sales representatives
13. VAT shall be levied on the imported services as per Section 6c.
14. Imported services are supply of services that is made by a supplier who is
not resident in Zimbabwe to the extent that such services are utilized or 1
consumed in Zimbabwe.
15. Training services were offered by Billions Consulting a company which is
resident in SA and the services are consumed by AXE a company 1
incorporated in Zimbabwe, therefore are imported services
16. Imported services shall be levied at the standard rate of 14.5%. 1
17 The TOS shall be deemed to be the earlier of invoice, payment or receipt of
1
the service section 13(3)
18 The value of supply shall be the value of consideration of supply or open
1
market value whichever is greater.
 L1 TAX EOY EXAM PAPER 2 – SOLUTION
19. AXE will be able to claim input VAT since it was charged and it is making a
1
taxable supply (i.e., lubricant).
19. AXE is responsible to remit the VAT to ZIMRA.
Salaries
20. Salaries constitute remuneration as per the 13th Schedule of the Income Tax
1
Act.
21. Employment is excluded from the definition of trade, and therefore AXE was
1
not charged VAT.
22. Therefore, no VAT implications. 1
23 Overheads- laboratory
Lubricants are standards rated, therefore AXE is making taxable supply
1
Therefore, AXE can claim input tax laboratory overheads.

Available
Communication 1
Maximum
 L1 TAX EOY EXAM PAPER 2 – SOLUTION
G. Discuss the VAT and Income Tax Treatment of the transaction in Note
Script Script Script
6, in the hands of AXE.
1 2 3
Communication Skills – Logical Argument
Income Tax
Renovations within the contract
1 According S15(2)e(i) the lessee can claim a deduction on lease
1
improvements that are in terms of the contract.
2 The lease improvements are in terms of the lease contract. 1
3 The lessee can claim the allowance over the lesser of 10 years or life of
1
lease (12 years). Therefore, 10 years is the lesser.
4 Therefore, the lease allowance of $1,000,000/10 = $100,000 per year will
1
be allowed as deduction.

Renovations outside the contract

5 According S15(2)e(i) the lessee can claim a lease allowance or capital
1
allowance on voluntary improvements
6 The lessee can claim the allowance over the lesser of 10 years or life of
1
lease or can elect capital allowances
7 AXE is eligible to claim SIA of 25% on the $500,000 1

VAT
8 AXE can claim output VAT if:
• VAT was charged 1
• Making taxable supplies
VAT was charged
9 A deemed supply is triggered in terms of section 7, which deems the
lessee to supply goods (that is, the building improvement to lessor) thus 1
resulting in a deemed output.
10 The time of supply is when the improvements are completed. 1
 L1 TAX EOY EXAM PAPER 2 – SOLUTION
11 However, value of the supply is nil. On the basis that the lessee is deemed
to have made a supply of goods when the improvement is undertaken. 1

Making taxable supplies

12 AXE is using the lease property in the making of taxable supplies supply
1
of petroleum products and services and exempt supplies (Fuel)
13 AXE needs to claim input tax related to taxable supplies only and not
1
input tax related to Fuel products.

Available 14
Maximum 10