Unit II Forms of Taxes Administered in Malawi

DMI - ST JOHN THE BAPTIST UNIVERSITY
LILONGWE CAMPUS
TAXATION LAW AND PRACTICE
DEPARTMENT
MANAGEMENT AND COMMERCE
PROGRAMME
BACHELOR OF BUSINESS ADMINISTRATION(BBA)
BACHELOR OF COMMERCE IN ACCOUNTING & FINANCE(BCOM)
COURSE TITLE
TAXATION LAW AND PRACTICE
SEMESTER
SEPTEMBER TO JANUARY 2024
UNIT II
FORMS OF TAXES – DIRECT TAXES
PREPARED AND PRESENTED BY JOSEPH KACHAPIRA

MBA, BACC, ACCA DIP, CIPFA
UNIT II: FORMS OF TAXES: DIRECT TAXES
Learning Objective
After studying this topic, learners should be able to discuss the different forms of taxes
that are administered in Malawi.
Learning Outcome
In order to meet the objective of the learning outcome, learners will be taught the
following in order to discuss the different forms of taxes administered in Malawi:
 Income Tax Act – Important definitions
 Basis of charge – Residential status
 Income exempted from income tax - Heads of income
 Computations of income under salary and house property (problem be included).
 Fringe Benefit Tax
 Estate Duty - General rules of taxation of deceased estates
 Testacy and intestacy - Domicile and residence - Dutiable amounts.
 Allowable deductions - Quick succession and relief
 Relief from double duty and marginal relief.
 Computation of income under profits and gains of business
 Profession - Capital gains – Income from other sources.
 Deductions in the computation of total income - Income tax authorities and their
power. (problems be included)
Forms of Taxes – Direct Taxes 1

INCOME TAXES: TAXATION OF INDIVIDUALS
Introduction
Section 71 of the Taxation Act gives authority for the levying of income tax on the total
taxable income of any individual received or accrued from a source within or deemed to
be within Malawi. This section must be read together with the First Schedule to the
Taxation Act. Income: Some incomes are assessed to tax others are exempt. Income that
qualifies to be assessed for tax purposes is called assessable income. The Taxation Act
provides criteria/guidance on what income is assessable. Further to this the Act provides
allowances in form of various deductions to assessable income to determine the income
that will ultimately be taxed. This is called taxable income. This can be presented as
follows: Income less exempt income (income that does not qualify for tax) = assessable
income. Assessable income less allowable deductions = taxable income
Assessable Income
Section 11 of the Taxation Act defines Assessable Income as the total amount in cash or
otherwise, including any capital gain received by or accrued to or in favour of a person
in any year or period of assessment from a source within or deemed to be within Malawi
and the person’s assessable income will be that excluding any amount exempt under the
Act. Income is assessable to tax regardless of whether it has been received or not. For
example, income that has just been accrued to or in favour of a person is still assessable
even though the amount is not yet received. It is important to remember that only
income for the period of assessment should be included in assessable income. Where a
question includes income relating to more than one period of assessment, a careful split
must be made.
Source: Income is assessable to tax, if it is from a source within Malawi or deemed to be

within Malawi regardless of where the payment takes place. For example, an amount
received by or accrued to or in favour of a person as remuneration for services rendered
in Malawi is from a source within Malawi regardless of where the payment takes place.
This is relevant for those individuals employed and working in Malawi who may be
receiving their remunerations from outside Malawi E.g. expatriates. The source of income
is determined using a general rule based on matching source with the location of the
activity giving rise to the income in question. If the income generating activity takes place
within Malawi, the income has a Malawi source. Where the activity is wholly based in
Malawi there is not likely to be any serious problem. However, where the activity which
yields the income in question is only partly carried out in Malawi, it is essential to reach
agreement with the Commissioner General. While general principles can be laid down,
the circumstances of each case of income generated partly in Malawi, give rise to the
need for the exercise of discretionary powers.
The country of payment of any income is no indicator, per se, of country of source. Since
source and settlement are quite separate issues, income paid from outside Malawi and
never remitted to Malawi may yet be deemed to have a Malawi source. An arrangement

under which Malawi source income is paid for elsewhere and not remitted to Malawi
usually requires written approval from the Reserve Bank of Malawi. If approval is not
sought or received, the taxpayer’s liability for tax on that income still exists, even where
the Commissioner is not aware of it. Exchange violations are a matter for the Reserve
Bank to handle.
Exempt Income: Certain incomes are exempt from tax and as a result no tax is supposed
to be charged on such incomes. These incomes are specified in the First Schedule to the
taxation Act and the exemptions are applicable only to the first recipient of such income.
Exemption from income does not exempt any person from furnishing any return or
information as required by the Commissioner General.
The First Schedule to the Taxation Act has a list of incomes which are exempt from tax.
See Appendix A for details. The following incomes are exempt from income tax: -
Revenues of local authorities; The receipts and accruals of land and agricultural banks
specifically established by any law of Malawi to foster or control primary production,
manufacture or marketing of any commodity or stabilizing of any price of any
commodity; A registered trade union; Clubs societies and association formed or operated
solely or principally for social welfare, civic improvement or other similar purposes, if the
receipts or accruals are not divided amongst the members; Statutory corporations, bodies
and associations as may be specified by the Minister (Statutory corporations that are
liable to tax are those in the Commercial Category e.g. ESCOM, BWB, ADMARC, LWB)
Any amount received as a war disability pension paid out of public funds; Interest
received by or accrued to or in favour of any person from any stock or bonds issued by
the Government which the Minister has directed shall be exempt from tax.
Interest up to K10,000 received by or accrued to or in favour of an individual on any

sums deposited with an institution registered under the Building Societies Act or the
Banking Act; From stock, bonds or promissory notes raised by or on behalf of the
Government; Capital gains on shares traded on the stock exchanged if the shares have
been held by the taxpayer for at least one year; Capital gains realised by an individual on
the disposal of personal and domestic assets not used in connection with any trade; The
gratuity, pension and other benefits granted by the Government to a former president or
a former vice president; The salary and emoluments of the president and vice president
received from the Government in respect of their offices as president and vice president
respectively; the former and vice president’s gratuities, pensions and other benefits; Any
scholarship, bursary or similar educational endowment paid to a person receiving full
time instruction at a university, college, school or other educational establishment
approved by the Minister; Amount up to K50, 000 of any amount paid by an employer
to an employee who has been declared redundant, not being notice pay or commutation
of leave; and Allowances given to members of national assembly.
Rates of Income Tax: The income tax liability is calculated using income tax rates. The
rates are subject to annual reviews as part of the budget process. Once the rates have
been adjusted, new rates become applicable as directed by the Minister of Finance.
Income tax rates for the year 2023/2024 tax year are as follows.

Annual Taxable Income Applicable Rate
First K1,200,000 0%
Next K4,200,000 25%
Next K24,600,000 30%
Excess of K30,000,000 35%
When calculating tax liability for a month, the following rates are applicable.
Monthly Taxable Income Applicable Rate
First K100,000 0%
Next K350,000 25%
Next K2, 050,000 30%
Next K2, 500,000 35%
Excess of K6,000,000 40%
Individual - Sample Personal Income Tax Calculation
The annual PAYE threshold is MWK 1,200,000. The monthly PAYE is taxed as follows:
First K100,000 will not be taxed (i.e. 0%).
The next K350,000 will be taxed at 25%.
The next K2, 050,000 will be taxed at 30%.
The excess of K2, 500,000 will be taxed at 35%.
Example 1: If one earns M1 million per month, then the PAYE will be as follows:
Monthly Income Tax Rate (%) PAYE (K)
First K100,000 0 0
Next K350,000 25 87,500

Next K550,000 30 165,000
Example 2: If one earns MWK 6.5 million per month, then the PAYE will be as follows:
First K100,000 0 0
Next K350,000 25 87,500
Next K2,050,000 30 615,000
Excess of K4,000,000 35 1,400,000
Total 2,102,500
AGGREGATION OF INCOME FOR TAX PURPOSES
Aggregation of Income: All the income of a taxpayer is aggregated when determining

their tax liability for a given year of assessment. Employed persons form quite a large
proportion of taxpayers in Malawi. Employment income includes salaries, wages, leave
grants, housing allowances, fees, bonuses, commissions, and fringe benefits. It also
includes pension from past employment and terminal benefits, among others.
Salaries, Wages, Bonuses, Fees, Housing Allowances: These are taxed in the year in which
they are receivable regardless of whether they have been actually received or accrued.
They are taxed using applicable income tax rates. Leave Passages: Leave passages are
travel expenses incurred by an employer on recruitment, leave and repatriation of
contract employees from countries of recruitment to Malawi and vice versa as agreed to
by the employer. Leave passages may be taxable in the hands of the employer. However,
the following leave passages are not taxable in the hands of the employer: Amounts paid
by the government to any of its employees in respect of or in connection with leave
passages to a country of origin or destination. For example, engaging an expatriate from
China to work in Malawi, China is the country of origin and sending a Malawian to an

embassy in Brazil, Brazil is country of destination. Any comparable amounts paid by any
other employer under a contract with an employee which has been approved by the
Commissioner will not be treated as assessable in the hands of an employer.
Fringe Benefits: Fringe benefits are taxable in the hands of the employer. Lump sum
Payments: Employees may be given lump sums on cessation of employment. These may
be gratuities, pay in lieu of paid leave and terminal benefits. These are assessed to tax as
follows: Contract Gratuity: This is paid to an individual who was employed on a
contract basis. Gratuity is included in assessable income. Pay in Lieu of Paid Leave: On
cessation of employment, an employee may have accumulated leave days. The employer
may choose to pay a sum of money instead of granting him paid leave. This payment is
assessed to tax as if it relates to the period immediately following cessation of
employment. The whole amount received is taxed using income tax rates. The main
requirement is to identify the period in which the income is taxable. Section 17 of the
Taxation Act provides that a single terminal benefit in lieu of paid leave shall be assessed
to tax as if such leave had been taken by the employee immediately after cessation of
employment and he had been paid accordingly.
Example: Mr Mbewe’s employment ceased on 31 January 2023. What is the tax

position if he is paid K300,000 in lieu of paid leave and his accumulated leave was for 2
months? and 3 months?
In both cases the amount will be assessed to tax as if leave was taken from 1 February
2023. The whole K300, 000 will be assessed to tax in the year 2022/2023 because it will
be considered to relate to the months of February and March which fall in one tax year.
The amount relating to the months of February and March will be assessed to tax in the
year 2022/2023 and the payment relating to the month of April will be assessed to tax
in the year 2023/2024.
Terminal Benefits: Terminal benefits are defined in the Taxation Act to mean, in relation
to a person who was a member of a pension fund or to whom a contributory pension
law applies, any amount other than: Payment in commutation of a pension; A payment
on account of ill-health or disability, which is paid or will be payable to the beneficiary
by reason of the cessation of his employment or his withdrawal from or the winding up
of a pension fund; Employee contributions which were taxed at the time of making those
contributions. The 4th schedule to the Taxation Act gives guidance as to what type of
terminal benefits should be subject to taxation and how much should be taxed.
However, the 4th Schedule was repealed in full in the year 2012 and so too was Section
14 of the Taxation Act. Section 14 is the section that dealt with the taxation of pensions.
Therefore, both pensions and terminal benefits are not subject to taxation as from the tax
year 2012/2013. The exemption of pensions from taxation has specifically been provided
for in the exemption schedule one, under sub paragraph (v), of paragraph (b).
Redundancy Pay: If an employee who has been declared redundant receives redundancy
pay, an amount of up to K50, 000 is exempt from tax under the first schedule of the
taxation Act. The remaining amount is taxed using income tax rates. Income of

Expatriates: Emoluments from sources in Malawi are taxable on expatriates during their
stay in Malawi. This applies except for countries which have double taxation agreements
with Malawi that specifically provide an exemption. Expatriates who have been present
in Malawi for less than an aggregate of 183 days in any twelve months’ period
commencing or ending in the year of assessment concerned are taxed as non-residents
using an applicable non-resident tax rate.
Allowable Deductions: A taxpayer is allowed to deduct expenses from his assessable

income before calculating his tax liability. In principle, deductions from assessable income
are restricted to those costs incurred to generate the assessable income. Section 28 sets
the conditions which must be satisfied for an expense to be deducted from assessable
income. Section of 28 of the Taxation Act states that for the purpose of determining the
taxable income of a taxpayer, there shall be deducted from the assessable income of such
a taxpayer, the amount of any expenditure or expense not being capital in nature,
wholly, exclusively and necessarily incurred in the production of income or for the
purpose of trade.
Necessarily: Necessarily implies that the expenditure was somehow unavoidable without
which the trade would have been adversely affected or income reduced. Two tests
related with “wholly and exclusively” are “remoteness and duality”. Remoteness:
Expenditure is too remote when it is incurred for purposes peripheral or too loosely
connected to the trade i.e. not exclusively for trade. Duality: Duality of purpose relates
to the word “wholly”. Expenditure which is partly not related to the business has a dual
purpose. Normally if there is duality of purpose and the expenditure cannot be easily
allocated to the business and non-business purposes the whole expenditure is disallowed.
Specific Rules for Certain Expenditures: An expense can be deducted from assessable
income if it meets the requirements under Section 28. However, there are specific rules
which relate to deductibility of certain expenditure. Such expenditure is as follows:
Section 45 Travel expenses: Travel expenses between work locations are considered to
be business related expenses and are therefore deductible but the cost of travel between
home and the work place is considered private and therefore is not deductible.
Professional subscriptions: Subscriptions to a professional body are deductible if
membership to such a body is relevant to the employee’s job. Section 39(d) Donations to
charitable organisations: An individual donation of at least K250 to a charitable
organization approved by the minister for tax purposes are deductible. (For the list of
approved charitable organizations see appendix III). Section 39(e) Donations to non-
profit making organisations: Individual donations of not less than K500 made during
any year of assessment by a taxpayer to a non-profit making organization operated
solely or principally for social welfare, civic improvement, educational development or
other similar purposes as the minister may approve are deductible.
Income of a Married Woman: Section 12 (1) of the Taxation Act provides that income
other than earned income of a wife shall be deemed to be income of the husband. The
husband is required to include in his return of income the income that is deemed to be
his under this section. Earned income of the wife: Section 73 (4) of the Taxation Act

defines earned income of a wife as Income derived from a business carried on by the
wife in her own right and in which the husband is neither an employee nor a partner.
Emoluments from employment received by or accrued to or in favour of the wife where
the employer is not: Her husband. A partnership in which the husband is a partner; A
company in which the husband is a director who controls directly or indirectly more than
5% of the voting rights attaching to all classes of shares of the company; 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. Any income of a wife which does not meet the definition
above is unearned income which will be deemed to income of the husband and should
be included in the assessable income of the husband.
Computation of Tax Liability for a Married Couple: A husband is a taxpayer in his own
right and so is the wife. Each of them is required to submit his or her return of income.
The return of the wife will show tax liability on her earned income and the husband’s
return will show tax liability on all his income plus the wife’s unearned income. Under
Section 73(3), a married couple may elect to submit a joint return of income. If this is
done, their tax liability is the sum of (A) Tax liability on all income excluding the wife’s
earned income and (B) Tax liability on the wife’s earned income. Tax payers under the
joint return may apart from the normal tax credits claim a special tax credit that arises
when you compare the tax computed on all income and the combined sum of taxes
computed on individual incomes of the husband and wife.
Example: James and Loveness are both employed in different companies as Accountant
and Sales Executive respectively. Their monthly salaries are K600,000 and K350,000
respectively. They both get an additional 40% of their salaries as house allowance. Their
employers have deducted the necessary PAYE of (K2, 943,000 and K1,683,000
respectively) and remitted to Malawi revenue Authority as required.
Other income and information: James has a house in Namiwawa which he bought
through a mortgage from National Bank of Malawi. The mortgage repayment is K48,
000 per month of which interest is K42,000. The house is rented for K160,000 per
month to Kabula Pharmacies. Kabula Pharmacies deducts withholding tax on payment of
rent and 15% of the rental is paid to the property manager. During the year K80, 000
was spent on painting the roof and K140,000 on the new concrete drive way. Loveness
maintains a fixed deposit account with National Bank of Malawi. During the year to 31
December 2022, interest of K60,000 (Gross) was paid on the account. James is a director
at CTK Consultancy Limited. During the year he was paid directors fees amounting to
K120,000 gross from which 10% withholding tax was deducted. Loveness runs a chicken
business and for the year ended 31 December, 2022, she realized a taxable profit of K2,
000,000.
Required: Compute the income tax liability by James and Loveness respectively for the
year ended 31 December 2022 and Total tax payable by the two as at the end of the tax
year, assuming the elect to submit a joint return.

Income of Minor Children and Other Beneficiaries: A person becomes a taxpayer upon
birth. A minor child is a taxpayer in his own right. A minor child is a child who is under
21 years of age and is unmarried. Section 73(6) of the Taxation provides that every
parent is required to include in his return of income any taxable income received by or
accrued to or on favour of or deemed to have been received by or accrued to or on
favour of his minor child. Gifts from Parents: If a parent makes a gift, donation,
settlement, or other disposition on which taxable income accrues to or in favour of his
minor child (legitimate or illegitimate) the taxable income shall be deemed to be that of
the parent. For example: Mr Banda opens a savings account in favour of his 5-Year-old
daughter Monalisa; the interest accruing on the account should be included in the return
of Mr Banda since it is deemed to be his.
Reciprocal Gifts: If a person makes a gift, donation, settlement, or other disposition on

which taxable income accrues to or is paid to a minor child (legitimate or illegitimate), of
some other person and the parent or near relative of the parent of the minor child makes
a gift, donation, settlement or other disposition or given some consideration to the
person or near relative of the person who makes a disposition to a minor child, the
taxable income so accruing shall be deemed to be that of the parent of a minor child.
Example: Mr Banda makes a gift to James, Mr Bwande’s minor child and Mr Bwande’s
sister Mary makes a gift to William, Mr Banda’s Son. The taxable income arising will be
treated as follows; Mr Bwande will include in his return the income on the gift made by
Mr Banda to James and Mr Banda will include in his return the income arising from the
gift made by Mary to William.
Conditional Settlements: If any person has made in any deed of gift, donation,
settlement or other disposition a stipulation to the effect that the beneficiary of the
disposition shall not receive the income or part of it until the occurrence of some event
whether fixed or contingent such taxable income shall be treated as that of the donor
until the occurrence of that event or the death of the donor whichever occurs earlier.
Retention of Powers of Revocation: If any gift, donation, settlement or other disposition
contains a stipulation that the right to receive income under deed may be revoked under
the powers retained by the person by whom the right is conferred, the taxable income
arising on the disposition shall be deemed to be that of the person retaining the powers
or revocation for as long as the powers are retained.
FRINGE BENEFITS
It is important to note that fringe benefits arise from an employer – employee

relationship with the employer providing fringe benefits to the employee. The fringe
benefits are provided in kind and do not include cash payments by the employer to the
employee.
Definition of a Fringe Benefit: A fringe benefit is defined under Section 2 of the Taxation
Act as any asset, service or other benefit in kind provided to an employee by an
employer if such a benefit includes an element of personal benefit to the employee.

Section 94A (1) provides that every employer, other than the government who provides
fringe benefits to employees shall be liable to fringe benefit tax on the total value of
fringe benefits provided to employees earning not less than K20,000 per month or
K240,000 per annum. Fringe benefits tax is due in cases where the employer makes
payments directly to third parties in respect of goods or services provided and not on
payments made directly to employees. The employee is liable to tax on payments made
directly to him. Any amounts paid in cash to an employee by an employer does not
constitute fringe benefits.
Registration: An employer is required to register with the commissioner within 14 days

after he begins providing fringe benefits to employees by completing form FBT 1 (Fringe
benefit tax registration form). Rate of fringe benefits Tax: Fringe benefits tax is payable
at the company Rate of 30% of the total taxable value of fringe benefits provided.
Determination of Taxable Values: Housing Accommodation: For housing

accommodation the taxable value is: For property owned by the employer: 50% of the
taxable value determined as the greater of: The open market value of use (rental) value
of such property or 10% of the employee’s salary where unfurnished housing is provided
or 12% of the employee’s salary where furnished housing is provided. For property
rented by the employer, the greater of: The rental paid by the employer for such
property or 10% of the employee’s salary where unfurnished housing is provided or 12%
of the employee’s salary where furnished housing is provided
Example: An employee is provided with furnished accommodation. The house is rented

by the employer at K50,000 per month. The employee’s salary is K960, 000 per annum.
What is the annual taxable value for the benefit?
This is calculated as follows:
Rent paid: K50,000 x 12 months = K600,000
12% of Salary: K960,000 x 12% = K115,200
Therefore, the taxable value is the greater of rent paid K600, 000 and the 12% of the
annual salary. In this case, the taxable value is K600,000. Fringe benefit: 50% of taxable
value – K600,000 x 50% = K300,000 x 30% = K90,000.
Motor Vehicles: The taxable value of motor vehicles is 15% of the original value per
annum. This is applied for each year the motor vehicle is used. School Fees and other
Related Expenses: If an employer pays school fees and related expenses directly to an
institution to enable an employee’s children or dependents obtain educational
qualifications, the taxable value of such a benefit is 50% of the total cost to the
employer. Loans to Employees: Taxable value on loans provided to employees will be
found by taking the difference between the interest charged by the employer and interest
chargeable if bank lending rates were used. However, the following listed loans will not
attract fringe benefits tax: Education loans; Emergency advances; Medical loans; Funeral
expenses loan

Other General Fringe Benefits: The taxable value of such benefits is the total cost to the
employer. These include, but are not restricted to: Cell phones; Utilities such as
electricity, water and telephone Household items of any kind; Vacations, travel and any
other provisions; Domestic servants of any kind such as gardeners, maids, security guards
and watchmen. Where the employee is accommodated in a property owned by the
employer the cost of a gardener, watchman and security guard does not constitute a
fringe benefit. In addition, where the employer meets the cost of medical care and
uniform expenses for its employees this will not constitute taxable benefits.
Reduction of Taxable Values: The taxable values of fringe benefits as determined using
the rules above should be reduced; If the employee contributes towards the provision of
the benefit. The taxable value is reduced by the amount contributed by the employee. If
the benefit is not provided for a whole year, the taxable value should be reduced in
proportion to the period the benefit is provided.
Payment of Fringe Benefit Tax: Fringe benefit tax is payable in quarterly instalments and
is due within 14 days from the end of each quarter. The quarters are: 1 April – 30 June; 1
July – 30 September; 1 October - 31 December; 1 January - 31 March. Fringe benefits tax
due must be accompanied with a duly completed form FBT 2 (Fringe benefit tax
quarterly return and remittance form)
Records to be Kept by the Employer: For the purpose of fringe benefits tax, an employer
is required to keep records showing a) Nature of fringe benefits provided. b) Names of
employees receiving fringe benefits. c) The taxable values of fringe benefits as determined
in accordance with the rules discussed above. The records must be available for
inspection at any reasonable time by the commissioner or any officer duly authorized by
him.
Offences: The following are the main offences which may be committed in relation to
fringe benefits tax. Failure to register within the required period; Failure to pay fringe
benefit tax by the due date. If these offences are committed, the employer shall be liable
to a penalty of 20% of fringe benefits tax due. The penalty must be paid together with
fringe benefits tax due.
ESTATE DUTY
Estate Duty Act: Estate duty in Malawi is administered through the Estate Duty Act
Chapter 43:02; Sections and Schedules are references as indicated in that Act.
Commissioner means the Estate Duty Commissioner in terms of Section 3. The Minister is
the Minister of Finance; Executor is the executor or administrator of a deceased person as
defined in Section 2 of the Act.
Definition of Estate Duty: Estate Duty is a form of progressive taxation on wealth,

calculated with reference to the value of property, the interest in which, or the benefit
from which, or the ownership of which is transferred because of death. Internationally,
the original concept of estate duty was probably part of the long term idea of effecting a
more even distribution of wealth in a given country. The purpose of government

revenue raising may initially have been secondary to that of wealth distribution.
Whatever the origin and objective, however, as far as Malawi is concerned, the rates of
duty and the minimum value of estate on which duty begins to be payable seem to
indicate that wealth distribution is not the primary objective.
General Deceased Estate Administration: Before considering the rules for calculating
estate duty in terms of the Act, it may be useful to note some of the general issues and
procedures involved in the administration of a deceased estate. Some expressions and
legal terms may be unfamiliar to those who have not studied inheritance law or the legal
environment of trusteeship. The property which belongs to a deceased person is referred
to as a deceased estate. The management and distribution of that property is carried out
by an executor. Those who inherit the property of a deceased person are known as
successors or beneficiaries and so the handling on of property generally, usually from
generation to generation, is often referred to as succession.
Testate Succession: Following a person’s death, property which belonged to him will
come under the ownership of another person or other persons. The way in which such
property is distributed should be according to instructions left by the deceased in the
form of a Last Will and Testament or Simply a Will drawn up by or on behalf of the
deceased. The will should have been signed by the deceased before witnesses or declared
by the deceased before witnesses in such a manner as to be recognized as valid by a court
of law in the event of an authenticity challenge. Where the deceased left a valid Will,
they are said to have died testate. Clearly, the task of distribution of a deceased’s estate is
facilitated where a valid Will exists. Ideally, the drawing up of a Will should be the work
of a legal practitioner or at least reviewed and approved by such a person.
The persons who hoped to benefit from the distribution of property in a deceased estate
and who have been ignored by the Will, or who have not benefited to the level
expected, may institute a legal challenge to the validity of the Will. Again, a Will may be
challenged on the grounds of undue coercion by a beneficiary on the deceased, especially
where the latter was old and infirm or in some other way dependent on the help of or
companionship of the former. If it can be established that the deceased was under the
influence of drugs or alcohol at the time of making a Will or that he was insane, a
challenge against the Will may succeed. For these reasons alone, it is clear that the
professional guidance of a legal practitioner is essential at the time of drawing up of the
Will. Where the affairs of the deceased are more complex, for example where transfer of
title to property requires legal expertise for success, the role of the legal practitioner
requires no lengthy case.
A person may make several Wills during their lifetime. For example, a young married
man may wish to protect the interests of his wife in the case of his untimely early death
and so may make out his Will accordingly. As children come along, he may find it
prudent to amend the Will to make provision for their education and welfare generally
until they reach an age of Self Sufficiency. In later life, the testator (a person who makes
out a Will) may wish to name other beneficiaries, perhaps a charity with whose aims he
has identified. Throughout his lifetime, the testator’s property has changed and so

updating of the Will may be required for that reason. Where more than one Will has
been made out by the deceased, the latest Will, in chronological order, is in principle the
Will which is regarded as valid.
Intestate Succession: Where the deceased has not left a Will, or if any Will made out is
successfully challenged as invalid in court, the deceased is said to have died intestate. In
such cases, the distribution of the deceased’s property would be carried out according to
the laws of intestate succession. Custom and tradition may play a major role here and
practice may vary in different parts of the country. The views of local elders and leaders
would be taken into account in the case of dispute. The issues involved in intestate
succession are beyond the Scope of this course are they are clearly the province of the
legal practitioner rather than the accountant. An executor finding himself handling a case
of intestate succession should lose no time in engaging the services of a legal practitioner.
Executor: The executor is the person named in the Will as having the responsibility of
carrying out the deceased’s wishes after their death. More than one executor may be
named in the Will. It is the task of the executor to identify all property belonging to the
estate and to ascertain liabilities of the estate and charges against it. After securing
probate (i.e. establishing the validity of a will) and arranging settlement of Estate Duty
and other liabilities, the executor may proceed to distribute the estate to beneficiaries
named in the Will. If the executor named in the Will is unable to take up the
appointment, or if no executor was named or if the deceased died intestate, the principal
beneficiaries, who would normally be close relatives of the deceased, would appoint one
or more persons, perhaps from their own ranks, to act as executor. This matter may be a
source of dispute between beneficiaries or creditors, so that a competent court of law
may be asked to intervene in the appointment. Where the executor is appointed
following such a dispute, it is more than usually imperative for him to exercise vigilance
in the distribution of the estate since their actions would be under close scrutiny.
The task of identifying and tabulating property in a deceased estate may be quite
daunting. Many individuals do not keep accurate records of personal possessions.
Ownership may be in dispute: this may apply to property in use by the deceased at time
of death but belonging to another or property of the deceased under the care or control
of another at time of death. The executor has to exercise great care in these matters.
Beneficiaries and creditors may have a right of action in law against the executor for
alleged loss arising from their actions or omissions. In many cases, it is advisable for the
executor to consult a legal practitioner regularly. In cases where complications could
arise, the executor may consider taking out some form of insurance policy to cover
themselves in the event of a successful claim against them.
Trustee: The Will of the deceased may contain provision for the setting up of a fund or
trust or for the continued administration of such a trust set up by the deceased in their
lifetime. Typically, this situation may arise where there are children for whom a parent or
parents have made provision or wish to make provision in case of the parent’s death
before the children reach an age of Self Sufficiency. A trust may be set up in terms of the
Will for other purposes than the welfare and education of minor children, for example

where the deceased wishes to endow some charitable objective. In all cases, the
administration of the trust is a process which will continue for some time, perhaps
indefinitely. Since the task of the executor is to gather together the estate, settle debts
and distribute remaining assets to beneficiaries the management of a trust set up by the
deceased is outside the scope of the duties of the executor.
Ideally, the deceased would have named a person or persons as trustee or trustees in
their Will to be responsible for the administration of the trustee. The executor in their
personal capacity may be a trustee. Where the appointment of a trustee is not expressly
addressed in the Will or if for any reason a person named as trustee is unable to fulfil that
appointment, the executor should proceed with the appointment of another person to
act as trustee or perhaps take up the role himself. In selecting a trustee, the executor
should proceed with caution so as to avoid personal liability for acts or omissions. The
views and wishes of beneficiaries or close relatives would be consulted prior to
appointment of a trustee.
Probate: Before proceeding to distribute the estate to beneficiaries, the executor should
make provision for Estate Duty and all other valid liabilities. The next stage is for the
executor to seek probate of the Will. Probate is the process of proof before the High
Court that the documents comprising the Will, on which the executor proposes to act,
do in fact constitute the valid Last Will and Testament of the deceased. At this point,
objections may be made by a person who considers the Will submitted to the court to be
flawed. In the case of such an objection being made, the High Court may uphold the
objection or dismiss it. If it appears to the court that the objector has a prima facie case,
it is likely that a date would be set for a full hearing of the objection and counter
argument. Only after the High Court has granted probate Should the executor proceed
to distribute the estate to beneficiaries.
The process of drawing up the estate inventory and applying for probate can be lengthy.
In the interim, the executor would normally allow reasonable amounts to be paid out of
estate funds for the maintenance and other needs of close relatives of the deceased.
Typically, financial support would be provided for the widow and minor children of the
deceased. The executor would apply common sense here, if necessary seeking legal
advice. The process of ascertaining the property and liabilities of the deceased and
preparing the application for probate should include appropriate public advertisement.
Normally, a notice would appear in the Malawi Government Gazette and in a daily
newspaper notifying the public of the death of the deceased, the date and place of
death, particulars of the person or persons acting as executor and calling on persons
holding property of the deceased to make known the details to the executor and
advising creditors to submit claims to the executor within a stated period of time. In
addition to this being a likely source of information, it protects the executor against
personal liability for subsequent claims against the estate.
Charge to Duty: Estate Duty in terms of the Act is levied on the total value of property
belonging to a person at the date of death. The total value of all possessions and rights
belonging to the deceased at the time of death is included in the estate. As Estate Duty is

a first charge on the estate, it should be paid or provided for before any part of the
estate is distributed to beneficiaries. Failure to do so could result in the executor being
personally liable for duty. The Act distinguishes between real property and personal
property, both of which terms should be construed in a legal sense rather than according
to normal English language. Real property comprises land and buildings that is property
regarded as immovable, whereas Personal property comprise of movable assets, tangible
and intangible, such as equipment, motor vehicles, investments, shares in a company,
bank balances and So on. For Estate Duty purposes, property situated within Malawi is
dutiable whether it is real or personal. Real property situated outside Malawi is not
dutiable under the Act, although it may be dutiable under legislation obtaining in the
country in which it is situated. It may be necessary for the executor in Malawi to liaise
with a counterpart in that other country. In principle, estate duty is chargeable on: All
property within Malawi and personal property outside Malawi, in respect of persons
domiciled in Malawi at the date of death; or all property within Malawi, in respect of
persons domiciled outside Malawi at the date of death.
Domicile: The matter of the domicile of the deceased is clearly of importance to the
executor when preparing the Estate Duty Affidavit for Submission to the Estate Duty
Commissioner. A person’s country of domicile is the country of birth, permanent
residence and citizenship. For some people, however, domicile is a matter of choice
rather than birth so that a person’s country of domicile could present a problem, it is
useful to include in the Will a declaration as to the country of domicile to avoid a
possible legal dispute on the matter after death. This is another instance of the
importance of seeking competent legal advice at an early Stage.
Dutiable Property: Property liable to Estate Duty is essentially, property which vests in
the executor and property of which the deceased was legally able to dispose of at the
date of death. In most cases, these two categories of property would comprise the same
items. For estate duty purposes, a person is deemed to be competent to dispose of
property if they own such property or have an interest in it or some other general power
to dispose of the property or their interest in it. Power to dispose of property may be
exercisable by legal instrument in their life time inter vivo that is from one living person
to another, or discharged by provision in their Will, in both cases as if they were sui juris
able, that is had full legal capacity, to dispose of the property for their own benefit.
Some specific items of dutiable property are noted although these items fall into the
general categories noted above, they may be overlooked if not mentioned expressly.
The value of an interest ceded to the deceased or another person, where such an interest
ceases on the death of the deceased, in so far as any benefit accrues or arises at the
volition of the cesser on the death of the deceased is dutiable property. Excluded from
dutiable property in this context is any interest the deceased had as holder of an office,
ass the recipient of benefits of a charity or as a corporation sole. An example of dutiable
property might be the lifetime of a house to which the deceased or another person was
entitled during the lifetime of the deceased.

The term corporation sole is not common in Malawi but refers to a situation where an
individual has a separate legal persona in respect of an office held and in addition to
their legal persona as an ordinary contracting individual. Actions done by virtue of office
are contracts of the corporation sole, So the individual cannot sue or be sued in respect
of these in their personal capacity. For example, in Malawi the office of the President is a
corporation sole. In Britain, where the Church of England is an established church, a
bishop of the Church of England is a corporation sole when acting under the authority of
that office. The capital sum of an insurance policy on the life of the deceased, although
not property of which the deceased could dispose of in their lifetime, is property vested
in the executor and so is dutiable. Similarly, any benefit arising in favour of the deceased
estate or of a survivor, because of the death of the deceased, from any annuity purchased
or provided by the deceased alone or in conjunction with another person is dutiable
property. Property taken as a donation mortis causa made by the deceased, that is a gift
made when death is impending, constitutes dutiable property.
Gifts, donations and any other disposal of property for no consideration made by the
deceased during a period of three years prior to death are regarded as dutiable property
for Estate Duty purposes. Notwithstanding this provision, gifts connected with marriage,
disposals of property deemed normal expenditure of the deceased, taking into account
their life-style, and donations not exceeding K200 to any one recipient are excluded
from dutiable property. Note that if the donation exceeds K200, the whole amount of
the donation, not merely the excess, is included in the estate for duty purposes. Where
gifts made prior to death form part of the estate because they were made within the
three-year period, their inclusion in Principal Value is for the sole purpose of calculating
Estate Duty. The executor does not recall the gifts and distribute them to others. The
recipient of such gift may, however, be liable to contribute to Estate Duty if the residual
funds of the estate are insufficient to meet that duty. For Estate Duty purposes, the estate
does not include property handled by the deceased as a trustee, in terms of disposition
made by another person or property handled by the deceased as a trustee, in terms of a
disposition made by the deceased more than three years prior to their death. Likewise, a
gratuity paid by the Malawi Government in respect of a deceased public officer after
their death is not included in the deceased estate for duty purposes.
Death through War: Certain relief from the full effects of duty are available in a limited
number of circumstances where death is the result of active Service against an enemy,
from wounds inflicted during such Service or through disease contracted during active
service within three years prior to death. Death during Service of a warlike nature
involving the same risks as active Service in respect of a person under military, air force
or navy law is treated for this purpose as if it was death during active Service against an
enemy. The same relief may be available from duty of the estate of a person not in either
category above but who died within three years of being subjected to injuries caused
through the operation of war. The circumstances of death of a person under armed
forces law or of a civilian whose death may be the result of war, should be investigated
to ascertain whether or not relief from duty may be claimed.

The relief referred to in the last paragraph comprises discretionary power of the
Commissioners to cancel up to fifty percent of duty on property in Such an estate where
that property is inherited by a close relative of the deceased. If duty has already been
paid in full and the commissioners agree that relief is appropriate, the executor can claim
a refund of duty on behalf of the beneficiary. If a beneficiary as described in the last
paragraph himself dies in circumstances noted earlier as ranking for relief, property in the
estate of the Second deceased is excluded from the second deceased’s estate for duty
purposes to the extent that it had been inherited from the first deceased. In this case, the
relationship of the beneficiary to the Second deceased is irrelevant.
Quick Succession: In certain cases, relief from the full effects of duty is available where a
beneficiary of a deceased estate dies within five years of inheritance, so that the same
property is again dutiable. If this quick succession relief applies, it operates as a reduction
of the duty which would otherwise be payable in respect of the estate of the second
deceased. The property ranking for quick succession relief is limited to land and a
business, provided that the business does not comprise a company. An interest in
qualifying property also ranks for quick succession relief. Note that to rank for this relief,
the second deceased must have inherited the property from the first deceased: if the
second deceased had bought the property from the estate of the first deceased or from
another seller, quick succession relief does not apply.
The table below shows the rates of reduction of duty under quick succession relief rules:
Reduction of Duty under Rules for Quick Succession Relief
Where the Second death is Within: Rate of Reduction of Duty
One year of the First death 50%
Two years of the First death 40%
Three years of the First death 30%
Four years of the First death 20%
Five years of the First death 10%
The rates in the above table represent reduction of the duty otherwise payable on that
property. Property ranking for quick succession relief is aggregated at its value at the date
of the second death with the rest of the estate of the second deceased to arrive at the
rate of duty applicable to the estate as a whole. The rate of duty on the estate of the
second deceased is then ascertained by reference to the appropriate table and duty
payable calculated accordingly. Up to this point, estate duty has been calculated without
regard for the possibility of quick succession relief. The amount of quick succession relief
is found by calculating duty on the property which ranks for that relief at the rate of duty
for the estate of the second deceased as a whole and then reducing that duty by

reference to the above table. For the purpose of calculating relief, the duty on the
relevant property is the rate of duty for the estate of the second deceased applied to the
lower of the two property values: the value at the date of death of the first deceased and
the value at the date of death of the second deceased.
Allowable or Admissible Deductions: Deduction from the total value of the property for
Estate Duty purposes may be made for: Reasonable funeral expenses of the deceased and
debts due to the deceased provided that such debts were incurred for full value to the
deceased. Full value would include cost of normal living expenses of the deceased. This
does not rule out entertaining and other expenses not necessary but would bar deduction
of debts by way of gifts other than gifts in consideration of marriage or donation made
within three years prior to death, items eligible for reimbursement and more than one
deduction for the same debt. Debts due to people resident outside Malawi may be
deducted only if one of the three conditions apply: if, by contract, the debt is payable
within Malawi; if the debt is a charge on property in Malawi; to the extent that the
personal property of the deceased in the country of residence of the creditor is
insufficient to meet the whole debt.
Relief from Double Duty: Where property subject to duty under the Act is situated in the
United Kingdom or another Commonwealth country, the duty on such property payable
in the country where it is situated may be deducted from the duty payable in Malawi in
respect of the same property on the same death. The Act empowers the Minister to make
agreements with the Governments of other countries with the view of affording relief
from double duty on the same property, on the same death. Such agreements may also
include rules for determining where property is to be treated as being situated for estate
duty purposes.
Duty Payable: Duty is payable on the principal value of the estate, that is the aggregate
value of all dutiable property of the deceased less admissible deductions for funeral
expenses and debts. The total of all dutiable property is treated as one estate regardless
of its divisions for any other reason. The amount of duty payable is calculated by
reference to the table below as adapted from the Schedule. The principal value of the
estate determines the rate of duty, which then applies to the whole of the principal
value. In principle, the method of calculating estate duty is quite unlike the procedure
used to calculate income tax. With estate duty, it is not a case of: Firs K100,000 nil; next
K350,000 25% and next K2, 050,000 30%; Excess of K2, 500,000 35%. For example,
using the table below, the amount of estate duty on an estate having a principal value of
K 100,000 would be K7,000, that is K100,000 at 7%, the rate for the band of K80,000
to K140,000.
THE ESTATE DUTY ACT, CHAPTER 43:02 Rates of Estate Duty, with effect from 1969
Where the Principal value of the Estate
Exceeds But does not exceed Rate of duty

Zero 30 000 Nil
30 000 40 000 5%
40 000 80 000 6%
80 000 140 000 7%
140 000 200 000 8%
200 000 400 000 9%
400 000 600 000 10%
600 000 no limit 11%
Marginal Relief: In principle, estate duty is a highly progressive form of taxation. There is
however, provision in the Act to reduce the effect of a sudden increase in duty as the
threshold of a band is crossed. The concession is known as marginal relief and permits an
alternative method of calculation where this would result in less duty being paid. Under
the rules of marginal relief, duty is calculated as if the principle value of the estate was
the highest amount in the band immediately below the band of duty in which the estate
falls. To the figure of duty so calculated is added the excess of the actual principal value
over the highest amount in the lower band at 100%. For example, if the principal value
is K201,000, duty is at the rate of 9%, which is K18,090. Under the provisions of
marginal relief, duty is calculated at 8% of K200,000 plus K1,000 at 100%, in total
K16,000 plus K1,000 which amounts to K17,000. The marginal relief basis would apply
here, since it results in less duty being payable.
Interest: To the total amount of duty payable is added simple interest from the date of
death of the deceased to the date of payment of duty. The rate of interest is 3.5% per
annum or such other rate as is Gazetted by the Minister and is calculated on duty
payable. If interest is of too trivial an amount to justify its collection cost, the
Commissioner has the power to remit it. Payment of Estate Duty: Estate duty is payable
either at the end of 6 months from the date of death of the deceased, or on delivery of
the original estate duty affidavit, whichever occurs first. The Commissioner may,
however, allow payment to be postponed on such terms as the Commissioner thinks fit
where they are satisfied that any duty cannot be raised at once without excessive
sacrifice. Estate Duty shall be borne by the beneficiaries of the estate in proportion to the
value of their respective interests.
Administration of Estate Duty: The responsibility for administering and implementing the
Estate Duty Act rests with the Board of Commissioners which has its own legal
personality under the name of Estate Duty Commissioners. Board membership is made
up of the Attorney General (Chairman), the Registrar General (Secretary and Executive
Officer), the Secretary to the Treasury and other members appointed by the Minister as

notified in the Malawi Government Gazette. Although duty is payable out of estate
funds, the executor is personally responsible to ensure payment, so that they could be
held liable to make good to the Commissioners any shortfall in duty paid. Prior to
distribution, a deceased estate usually consists of specific items of the deceased’s Will and
a general fund known as residue from which funeral expenses, duty and liabilities and
expenses of the executor are met. Any funds left in the residue after these disbursements
are paid over to beneficiaries according to a ratio laid down in the Will or otherwise
determined.
Estate Duty is a first charge on the estate and so is payable regardless of the provisions of
the Will regarding the distribution of the estate to beneficiaries. If there is sufficient
residue in the funds of the estate to meet expenses, estate duty and other liabilities, the
executor is able to distribute property comprising specific legacies to stated beneficiaries
intact. Where the residue is not Sufficient to meet liabilities and expenses, however, the
shortfall is borne by beneficiaries on prorata to their share of the total value of specific
property legacies according to the Will or other basis of distribution of the estate. It is
not always necessary for the executor to realize property allocated to specific
beneficiaries to raise funds to meet a shortfall or to mortgage such property as they have
powers to do. Where possible, the executor would seek to keep specific property legacies
intact by inviting the designated beneficiary to contribute their pro rata share of the
shortfall in the residue.
Although the executor should provide for estate duty before distributing the estate, it is
possible for the property to pass to a beneficiary without going through the executor, for
example, where the deceased died intestate and there was some delay in appointing an
executor. Where property has so passed to a beneficiary without reference to the
executor, duty can be recovered from the beneficiary. The executor may sell or mortgage
estate property to raise funds to settle duty. The duties, responsibilities and legal liability
of the executor have been referred to several times. To preserve their own position, the
executor is well advised to keep the estate intact until such procedures as probate and
assessment to estate duty have been finalized. In the meantime, however, the executor
may be under considerable pressure from beneficiaries to release at least part of the
property comprising the estate at an earlier date. It has already been noted that the
executor may be personally liable in law in respect of a liability, including estate duty,
not discharged as a result of the executor’s action or negligence. There are, however,
occasions when the executor should properly allow disbursements from the estate before
probate and settlement of duty and other liabilities. In the case of, for example, a widow
and minor children requiring moneys from the estate for their immediate maintenance,
education and so on, the executor cannot postpone a reasonable level of disbursement.
Since close relatives would normally be beneficiaries in terms of the Will or legal right,
the executor is to that extent protected.
Where there may be legal problems, the executor would be well advised to seek advice
from a legal practitioner and if necessary seek the sanction of the High Court to ensure
the fair treatment of the deceased’s dependents. In this and other circumstances, the

executor has to have qualities of sensitivity and real understanding for the position and
feelings of recently bereaved close relatives of the deceased. A certificate of discharge is
obtainable from the Commissioners on settling or making satisfactory arrangements to
settle all duty. Subsequent discovery of fraud or of failure to disclose significant
information could, however, render the certificate invalid. The document used as basis
for calculating estate duty is termed an estate duty affidavit. The affidavit is a list of
dutiable property, valued at realized or open market value and of deductible debts.
The affidavit may have to be supplemented by a further estate duty affidavit if it is found
that an error or omission was made in completing the original affidavit. Errors and
omissions can occur in good faith, since the executor may have to operate without prior
knowledge of the deceased’s private and public affairs and is dependent on records and
other materials outside their prior control. In certain circumstances, the Commissioners
may assess a composite amount of duty against property. This could happen if it is
difficult to value the property, or where the valuation process would be relatively costly.
The executor or other interested party may appeal against an assessment. Briefly, the first
step is to appeal to the Commissioners. A person aggrieved by the Commissioners’
decision may, following certain conditions, appeal to the High Court, but the duty must
first be paid into Court or appropriate security given.
INCOME FROM OTHER SOURCES: PASSIVE INCOME
Passive Income: Passive income arises from investments that generate future income.
These include rent from movable and immovable property, interest, royalties, patents,
and dividends. Rent: According to Section 23 of the Taxation Act rent includes premiums
received from another person for the right to use or occupy land and buildings, or the
right to use plant or machinery, patent, trade mark or other property which in the
opinion of the commissioner is of a similar nature. Rental income is taxable in the year it
is receivable and normally received net of withholding tax. The person making the
payment withholds a prescribed percentage of the amount due which is payable to MRA.
Rental income must be included in assessable income. Example: For a taxpayer receiving
rent of K240, 000 for a year, the person making the payment is required to withhold
K36, 000 (assuming WHT rate is 15%) and the owner of the asset will receive K204,000.
In the assessable income, the owner of the asset will include K240 000. The amount
withheld will be deducted from the tax liability for the year.
Deductible Expenses: If a person incurs any expense on the asset in relation to which they
are receiving rent, they are allowed to deduct the expense from the assessable income if
it meets the conditions under Section 28 of the Taxation Act. For the expense to be
deducted, it must not be capital in nature and must be wholly, exclusively and necessarily
incurred in the production of rental income. Examples of deductible expenses include:
Rates; Insurance; Rent (if the property is sublet); Repairs.
Interest: Interest is taxable in the year in which it is receivable. Taxable interest is received
net of withholding tax. Interest income should form part of assessable income of a
taxpayer, however the following types of interest are exempt from tax and should not

be included in the assessable income. Interest up to K10, 000 per annum from a bank or
building society from stocks, bonds, and promissory notes issued by or on behalf of the
government; Interest on certain investment accounts with the new building society
(subject to certain limits) on savings certificates issued by the government or on tax
reserve certificates; Interest on public loans raised by the government and specified as
being exempt; Interest on government stocks or bonds directed by the minister of finance
to be Exempt; and Interest on 4½% African development fund. The interest exemption
(up to K10, 000 per annum) only applies to individual tax payers not companies or other
organizations and is also per transaction. There are no deductible expenses in respect of
interest income.
Dividends: Dividend income should not be included in the assessable income. The
company paying dividends is required to withhold 10% as tax and this is a final tax.
Although the word “final” has not been defined, it is applied as meaning that dividend
withholding tax suffered cannot be offset against an income tax liability.
BUSINESS TAXATION: SOLE PROPRIETORSHIP
Introduction: A sole proprietorship is a business owned by one person. In this business,

there is no divorce of ownership between the owner and the business. Determination of
Taxable Income: In determining the taxable income of a sole proprietorship, the
following are taken into consideration: Total assessable income of the sole
proprietorship; Total allowable deductions of the sole proprietorship. The taxable profits
of the sole proprietorship business will therefore be the difference between assessable
income and allowable deductions i.e. assessable income – allowable deductions =
taxable income
Assessable Income: Section 11 of the Taxation Act defines assessable income as the total
amount in cash or otherwise including capital gains received by, accrued to or in favour
of a person in any year or period of assessment from a source within or deemed to be
within Malawi excluding amounts exempt from tax. Assessable income will include:
Operating revenue; Passive income; Capital gains; Realised Foreign exchange gains -
Section 26(1); Bad debts recovered – Section 36(2). Assessable income will exclude:
Dividends because they are subject to a final withholding tax of 10%; Profit on disposal
of non-current assets because they are calculated based on depreciation which is not an
allowable deduction for tax purposes; Exempt income as given by the first schedule to
the Taxation Act; Unrealized Foreign exchange gains.
Allowable Deductions: Not all expenses are tax allowable expenses. There are other
expenses that may be incurred by a business which will not be allowable for deduction.
Determining Allowable Deductions: General Rule: The general rule to apply for those
expenses not specifically mentioned in the Taxation Act is given by Section 28. The
section provides that in determining taxable income of a taxpayer, there shall be
deducted from the assessable income of such tax payer the amounts of any expenditure
and losses wholly, exclusively and necessarily incurred by the taxpayer for the purpose of
his trade or in the production of the income. Specific Rules: Section 32 – Repairs: Repairs

of a revenue nature are allowable; those of a capital nature are not. It is needful to know
the difference between capital and revenue expenditure. Capital expenditure is one that
results into acquisition or improvement of the earning capacity of a capital asset (non-
current asset). Revenue expenditure, on the other hand is incurred when carrying on day
to day operations.
Section 33 – Capital Allowances: Capital assets lose value during their use by a business
and the loss in value of an asset is referred to as depreciation. Depreciation is an expense
as far as accounting is concerned and businesses charge it to their trading and profit and
loss account. This reduces their profits and the amount of tax payable. However,
depreciation is not allowed as an expense as far as taxation is concerned and it is added
back to taxable income in tax computation. Taxation provides capital allowances for the
loss of value of an asset instead of depreciation. A capital allowance is an expenditure a
business can claim against its taxable profit. A certain percentage of the cost of a capital
asset is allowed as capital allowance during the accounting period in which it was
purchased.
The basic principle of allowing capital allowances in the tax incentive regime is based on
the understanding that capital items depreciate at the end of each year and the loss in
value of capital items needs to be taken into account as a business expenditure. There are
three different types of capital allowances; Initial, Investment and Annual Allowances.
Initial or Investment Allowances are only claimed once in the first year of use of the
capital asset. A taxpayer cannot claim Investment Allowance when he has also claimed
Initial Allowance. This entails that a business entity can only claim either Initial Allowance
or Investment Allowance. A taxpayer can claim Annual allowance at the end of each
year for the lifespan of the capital asset.
Section 34 –Premiums Paid: The tax deductible amount of the premium paid for the right
of use or occupation of land or buildings, plant or machinery, patent design, trade mark,
copy right or any other property of a similar nature is: The amount of premium or
consideration divided by the number of years for which the right of occupation or use is
granted; or where the period for which the right of occupation or use is granted exceeds
25 years, the deduction is one-twenty fifths of the premium or consideration.
Example: A retailer paid K2.5million for the right to use a building as a retail shop for 30
years. How much is the retailer allowed to deduct from his assessable income when
computing taxable income? Solution: The premium paid is spread over the lower of: 30
years and 25 years. Therefore, the premium allowable for deduction in each year of
assessment up 25 years will be K2.5m/25 years = K100, 000.00. The premium is tax
deductible where the asset or right in respect of which the premium or consideration is
paid is used for the generation of income. If a taxpayer acquires the ownership of the
asset or right, no further deduction of the premium or consideration is allowed from the
date ownership is acquired. Premiums or consideration paid for the right to use
somebody’s property (tangible or intangible) are allowable for deduction. Some
premiums may relate to a period of more than 25 years, in such a case, 25 years must be
the maximum period for spreading of the premium.

Section 35 –Bad Debts: Debts proved bad to the satisfaction of the Commissioner
General during the year of assessment and are included in either current or previous year
of assessment are allowable for deduction. Section 36(1) - Doubtful Debts: They are
allowable only if they are specific provisions. General provisions are not allowed. Section
36A and 41B - Export Allowances: Exporters, including those manufacturing in bond, are
entitled to claim additional tax allowances for the export of non-traditional goods as
follows: 15% export allowance calculated as 15% of the taxable income derived from
the export of non-traditional products. Additional 25% tax allowance on international
transport costs for non-traditional exports Traditional exports are tea, coffee, cane sugar
and unmanufactured tobacco and tobacco refuse Export allowances may not be claimed
in respect of exports from mining operations.
Other additional benefits include: No duties on import of capital equipment used mainly
in the manufacture of exports; No VAT; No excise taxes on purchase of raw materials
and packaging materials made in Malawi; No duties of capital equipment and raw
materials. Section 37 - Pension Contribution by Employer: An employer is allowed to
deduct an amount contributed on an employee’s behalf to an approved pension fund
subject to the provisions of the 5th schedule. Allowable deduction under the 5th
schedule is the lesser of: Total contribution by employer for the year or 15% of annual
salary of employee; Amounts contributed by employees to their pension funds are no
longer allowable for deduction.
Section 39 - Research Expenditure: Revenue expenditure pertaining to research and

experimental work of taxpayer in a field relating to their trade is allowable. Sums
contributed by taxpayer, towards research and experimental work connected to
taxpayer’s job, to scientific/educational society approved by minister is allowable. Section
39 - Donations to Approved Charitable Organisations: Allowable provided it is not less
than K250; Section 39 - Donations to Not for Profit Organisations: Allowable if: The
donations are at least K500 made to not for profit organisations operated solely or
principally for: social welfare; civic improvement; educational development or similar
purposes as approved by minister. Section 39A Social Contributions: There is allowed as
a deduction 50% of any amount paid as a social contribution directly into the building
of a public hospital or school, or sponsoring of youth sporting development activities.
Section 40 – Annuity Payment: There shall be allowed any amount paid by way of
annuity, allowance or pension during the year of assessment by any taxpayer: to a
former employee who has retired on grounds of ill health, infirmity or old age, or to any
person who is dependent for his maintenance upon a former employee or was
dependent immediately prior to his death. The allowable deduction is restricted to
K1,200 per former employee per annum if amounts are paid to dependents of employee.
Section 41 - Initial Business Expenditure: Allowed as deduction provided it is incurred 18
months prior to commencement of a manufacturing business. It should be one which
would have been allowable as a deduction if incurred after commencement of business.
Section 42 - Trading Losses: They are allowable for deduction from taxable income of
future years of assessment. They can be carried forward for a maximum period of 6

years. The right to carry forward trading losses is lost by a person who: Has been
adjudged or declared bankrupt; Has made a conveyance of his property or estate for
benefit of his creditors releasing him; wholly or partially from the scheme. Where
creditors of taxpayer agree to have liabilities incurred in ordinary course of business
reduced, the amount allowable in respect of trading losses is also reduced by this
reduction.
Section 45 - Specifically Disallowable Expenses: The cost of maintaining the taxpayer and
family; Domestic/private expenses; Losses/expense recoverable under an insurance
contract or indemnity; Income tax and penalties thereon; Fringe benefits tax and
penalties thereon; Expenses relating to income not included in assessment and Employer
pension contributions to unapproved pension funds.
INCOME FROM OTHER SOURCES: FOREIGN EXCHANGE LOSSES AND GAINS
The taxation of gains and losses is provided in Section 26 of the Taxation Act. These
include gains and losses incurred on foreign currency transactions, and on disposal of
fixed assets. Foreign Exchange Gains and Losses: Foreign exchange gains and losses arise
in transactions which are denominated in foreign currency if there is a difference in the
rate of exchange for foreign currency on the date the transaction was initiated and on
the date the transaction is satisfied. Section 26 requires that foreign exchange gains and
losses that arise from a source within Malawi be included in the computation of taxable
income.
Foreign exchange gains and losses are determined using the formula ar1 –ar2 Where a is
the amount of foreign currency received, paid or otherwise computed with respect to a
foreign currency asset or liability in the transaction in which the foreign currency asset or
liability is disposed of, converted, repaid or otherwise eliminated. r1 is the official rate of
exchange for foreign currency with respect to Malawi currency at the date on which the
foreign currency asset or liability was obtained or established by the taxpayer. r2 is the
official rate of exchange for foreign currency with respect to Malawi currency at the date
of satisfying the transaction. Foreign exchange asset or liability means an asset or liability
denominated in or whose amount is otherwise determined by reference to the foreign
currency.
Example: A Malawian trader imported goods whose value was $2,000 in January when
the rate of exchange was $1 to K1200. Payment was made in March 2023 when the rate
of exchange was $1 to K1350. Calculate the foreign exchange gain or loss realized by the
trader.
Solution: gain or Loss: ar1 – ar2
$2,000 x K1,200 - $2,000 x K1,350
K2, 400,000 – K2, 700,000 = K300,000
Foreign Exchange Loss = K300,000

Treatment of Foreign Exchange Gains and Losses in the Computation of Taxable Income.
A foreign exchange gain which has been realized is included in the assessable income for
the period in which it is realized. A foreign exchange loss which has been realized is
deducted from the assessable income for the period in which it is realized. However,
Section 28(6) limits the amount of a foreign exchange loss which can be deducted from
assessable income if in the same period the taxpayer has an unrealized foreign exchange
gain. The deductible loss is the excess of realized foreign exchange loss over the
unrealized foreign exchange gain. Where the taxpayer has an unrealized foreign
exchange gain, an unrealized foreign exchange loss and a realized foreign exchange loss
in the same period, the deductible loss is the excess of the realized loss over the net of
the unrealized gain and unrealized loss.
INCOME FROM OTHER SOURCES: CAPITAL GAINS AND LOSSES
Capital Gains and Losses: Capital gains and losses realized from a Malawian source must
be included in the computation of tax liability. Capital gains and losses accrue from a
Malawi source if they are realized in respect of tangible property located in Malawi or
property representing an interest in a company incorporated in Malawi.
Definitions: Capital gain –Excess of the amount realized on the disposal of an asset over
its basis or adjusted basis. Capital loss - Excess of the basis or adjusted basis of an asset
over the amount realized on its disposal. Capital asset – All property held by a taxpayer
whether connected with any trade or not but excluding stocks in trade and accounts
receivable. Disposal - The transfer of ownership of an asset by whatever means, including
but not restricted to sale, gift, bequest, distribution or exchange. Amount realized -
Disposal proceeds of a capital asset which may be cash received or contracted to be
received if the asset is sold, the market value of the other asset if it is exchanged for
another, or its open market value if it is disposed of without consideration.
Basis of an asset. For assets on which capital allowances were being claimed, the basis is
the tax written down value. The tax written down value is the difference between the
cost of an asset and total capital allowances claimed on the asset. For assets on which no
capital allowances were being claimed, the basis is the cost of the asset adjusted by
consumer price index (CPI) published by the National Statistical Office (NSO) at the time
of disposal of an asset and applicable to the year in which the asset was purchased or
constructed. CPIs or Conversion Factors: Adjusting Basis of an Asset for disposals
occurring from Jan 1972- Dec 2018 for instance: Every year, CPIs are updated after a
consensus on workings.
Year Original CPI Rebased CPI Conversion

1970 = 100 Factor
1970 100.000 100.000 900.316981
1971 108.300 108.300 831.317619
1972 112.500 112.500 800.281761

1973 118.900 118.900 757.205199
1974 140.000 140.000 643.083558
2011 332.600 74,212.002 2.330400
2012 403.500 90,031.698 1.9209 20
2013 513.790 114,640.37 1.508575
2014 636.031 141,915.68 1.218637
2015 775.091 172,943.70 1.000000
Base Years are highlighted.
How to calculate Capital Gains using Conversion Factors: Multiply the cost price of the
asset by the conversion factor for the year in which the asset was acquired in order to
obtain the adjusted basis of the asset. Get the difference between the selling price and the
adjusted basis to get either the capital gain or capital loss. The total amount (100%) of
the capital gain is taxable. Calculate 30% provisional tax on the Capital Gain and pay to
MRA.
Example 1: A house was bought in 1971 at K50, 000 and is being sold at K44 million.
Multiply K50,000 x 831.317619 (conversion factor for 1971) =K41,565,880.95.
Capital Gain = K44, 000,000 - K41,565,880.95 = K2, 434,119.05.
Provisional Tax payable = K2, 434,119.05 x 30% = K730, 235.715
Example 2: A house that cost K20,000 to construct in 1980 is being disposed for K3.5
million. Multiply K20,000.00 x 255.626627(conversion factor for 1980) =K5,
112,532.54.
Capital Loss: K3, 500,000 - K5,112,532.54 = K1,612,532.54
Exempt Gains and Losses: Gains and losses realized from the following transfers are not
recognized: Between spouses and former spouse; To a spouse from an estate of a
deceased spouse; To a child from an estate of a deceased parent; On disposal of an
individual’s principal residence; On disposal of personal or domestic assets not used in
connection with any trade.
Treatment of Capital Gains and Losses in the Computation of Tax Liability: Realized
capital gains are included in the assessable income for the period in which it is realized.
Realized capital losses are deducted from the assessable income. However, Section 28 (4)
limits the amount of losses which can be deducted in any period to the lesser of: Realized
capital loss for the period; Realized capital gain for the period. The restriction above

does not apply: In the year in which the taxpayer dies or ceases to exist; For assets on
which capital allowances were claimed.
Involuntary Conversions: Section 2 defines involuntary conversion as conversion of an

asset by whatever means which in the opinion of the Commissioner is beyond the
taxpayer’s control including but not restricted to destruction in whole or in part, theft
seizure, requisition, condemnation or threat or imminence of destruction.
Example 1: The tax written down value of an asset involuntarily converted is K300,000
(it’s assumed that capital allowances have been claimed on this asset). Proceeds from
involuntary conversion is K1,200,000. Amount reinvested in a replacement asset
amounts to K900, 000. Calculate the capital gain to be included in assessable income.
Under normal capital gains tax principles, it will be as follows: -

Proceeds K1,200,000
Less TWDV of converted asset 300, 000
Capital gain 900, 000
Under involuntary conversion principles: -

Proceeds K1,200,000
Cost of replacement asset 900, 000
Restricted Capital gain 300, 000
There is a deferred gain of K600, 000 i.e. K900,000 less K600,000. (K600,000 deferred
gain is relief for involuntary conversion). Under Section 15A, where an asset has been
converted into: An asset similar to it or which is related in use to it, no capital gain is
recognized; A different asset or money, a capital gain or loss realized will be recognized
except where the taxpayer acquires or takes a valid election to acquire a qualifying
replacement asset. In this case, the gain to be recognized is the excess of the amount
realized over the cost of the replacement asset. Qualifying Replacement Asset - an asset
similar to or related in use to the asset converted. Valid Election – An election made in a
timely filed return of income for the tax year in which the conversion takes place which:
Briefly describes the type of the conversion; Identifies the asset converted; Indicates the
adjusted basis of the asset converted; States the intention to acquire a qualifying
replacement asset. If the taxpayer does not acquire a qualifying replacement asset in the
year in which the conversion takes place but makes a valid election to acquire the asset, it
must be acquired within 2 years from the end of the year in which the conversion takes
place. Provisions relating to involuntary conversion do not apply in respect of motor
vehicles except those used in the business of transporting goods and passengers

Capital Gains on Disposal of Business Assets (Roll Over Relief): Rollover relief is given
where the taxpayer has disposed an asset to acquire a qualifying replacement asset. This
means that the taxpayer does not pay tax on the gain immediately. Instead, the cost of
the replacement asset is reduced by the amount of the gain. The taxpayer must declare
this in the tax return. Under Section15B (1), subject to subsection 2, no capital gain shall
be recognized on the disposal of an asset if the gain has been used to acquire a qualifying
replacement asset.
Example: Assuming a company received an insurance compensation of K200,000 and

used K170,000 to purchase another machine similar in use to the first one within the
qualifying period. Calculate the basis of the replacement machine.
Solution: The amount of gain realised on the conversion:
Amount realised K200,000
Adjusted Basis 100,000
Gain realised 100,000
Only K30, 000 of this gain will be recognised (the excess of the amount realised over the
cost of the qualifying replacement asset i.e. K200, 000 less K170,000)
Gain not recognised:
Gain realised 100,000
Gain recognised (30,000) Gain not recognised (deferred) K70,000
The basis of the new machine
Cost of the machine 170,000
Gain not recognised (70,000) 100,000
Subsection 2 provides a condition for the roll over relief to be available. Under this
subsection, the qualifying replacement asset should be acquired within 18 months from
the date the disposal occurred and should be declared on the income tax return.
No Gain No Loss on Certain Contribution to Capital: No gain or loss is recognized upon

the contribution of assets to capital of a company where the person making the
contribution own at least 80% of shares in the company. In such a case, the basis of the
asset contributed in the hands of the company shall be the adjusted basis in the hands of
the person immediately prior to the contribution. Distribution of Property with Respect
to Shares: According to Section 70B, if a company distributes property to a shareholder
in respect of their shares, there will be either a gain or a loss recognized in the same
manner as if the property was sold to the shareholder at its open market value.

Bonus Shares: These are free shares issued to shareholders in proportion to their existing
number of shares held. A company may decide to distribute further shares as an
alternative to increasing the dividend payout. A company’s reserves are used to issue out
such shares. Under Section 70C, when the shares are issued, the distribution shall not be
included in the income of a taxpayer and shall not be treated as a dividend. The
shareholding following such an issue shall remain unchanged. The basis of the old shares
shall be allocated between the old and new shares in proportion to their respective
values. Distribution in Complete Liquidation of the Company: Under Section 70d, if a
company makes a distribution of assets when it is being liquidated, the shareholders will
be treated as if they have sold their shares in exchange for the property or cash received
and gains or losses will be recognized.
Reorganisation: According to the taxation Act reorganization means: A mere change in

the form of the company; A recapitalization of a company; A combination of two or
more companies into a single company; A division of a company into two or more
companies; The acquisition of at least 80% of the equity interests in a company in
exchange solely for equity interest in the acquiring company; The acquisition of at least
80% by value, of the assets of a company in exchange solely for equity interests in the
acquiring company.
Qualified Reorganization: A qualified reorganization means reorganization pursuant to

written plan undertaken for valid business purposes and not for avoidance by any person
involved in the reorganization. If the reorganization is qualified no capital gain or loss is
recognized. The basis of asset acquired shall be determined with reference to the adjusted
basis of the asset immediately before reorganization. The acquiring company shall take
into account the tax attributes of the acquired company unless otherwise provided.
Distribution of equity shares between parties to reorganization shall not be taxable but
any other distributions of cash or other property shall be taxable in the hands of the
recipient as consideration received in a sale or exchange. Any reorganization which is not
qualified shall be treated as a sale of the company and all its assets.
Tax Clearance Certificate on transfer of Capital Assets: Any person transferring land and
buildings is required to obtain a tax clearance certificate. Any person concluding the
transfer of land before obtaining the certificate shall be liable to a penalty of K50, 000.
The certificate can be issued upon application to the commissioner. For the certificate to
be issued, the commissioner must be satisfied that: The applicant is a registered tax payer
and is not exempt from income tax; He has filed all income tax returns due; He has no
outstanding tax liability.
Other Transactions which require a Tax Clearance Certificate: Renewal of business

resident permit; Renewal of certificate of fitness for commercial vehicles; Renewal of
certificate of registration under the National Construction Industry Act; Renewal of
professional business licenses and permits of medical practitioners, or dentists, legal
practitioners engineers and architects who are engaged in private practice on his or her
own or in partnership with another private practitioner.

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Unit II Forms of Taxes Administered in Malawi

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DMI - ST JOHN THE BAPTIST UNIVERSITY

TAXATION LAW AND PRACTICE

PREPARED AND PRESENTED BY JOSEPH KACHAPIRA

 Income Tax Act – Important definitions

 Basis of charge – Residential status

 Income exempted from income tax - Heads of income

 Computations of income under salary and house property (problem be included).

 Fringe Benefit Tax

 Estate Duty - General rules of taxation of deceased estates

 Testacy and intestacy - Domicile and residence - Dutiable amounts.

 Allowable deductions - Quick succession and relief

 Relief from double duty and marginal relief.

 Computation of income under profits and gains of business

 Profession - Capital gains – Income from other sources.

Forms of Taxes – Direct Taxes 1

Source: Income is assessable to tax, if it is from a source within Malawi or deemed to be

Forms of Taxes – Direct Taxes 2

Interest up to K10,000 received by or accrued to or in favour of an individual on any

Forms of Taxes – Direct Taxes 3

Next K4,200,000 25%

Next K24,600,000 30%

Excess of K30,000,000 35%

Monthly Taxable Income Applicable Rate

Next K350,000 25%

Next K2, 050,000 30%

Next K2, 500,000 35%

Excess of K6,000,000 40%

Individual - Sample Personal Income Tax Calculation

First K100,000 will not be taxed (i.e. 0%).

The next K350,000 will be taxed at 25%.

The next K2, 050,000 will be taxed at 30%.

The excess of K2, 500,000 will be taxed at 35%.

Monthly Income Tax Rate (%) PAYE (K)

Next K350,000 25 87,500

Forms of Taxes – Direct Taxes 4

Next K550,000 30 165,000

Monthly Income Tax Rate (%) PAYE (K)

Next K350,000 25 87,500

Next K2,050,000 30 615,000

Excess of K4,000,000 35 1,400,000

AGGREGATION OF INCOME FOR TAX PURPOSES

Aggregation of Income: All the income of a taxpayer is aggregated when determining

Forms of Taxes – Direct Taxes 5

Example: Mr Mbewe’s employment ceased on 31 January 2023. What is the tax

Forms of Taxes – Direct Taxes 6

Allowable Deductions: A taxpayer is allowed to deduct expenses from his assessable

Forms of Taxes – Direct Taxes 7

Forms of Taxes – Direct Taxes 8

Reciprocal Gifts: If a person makes a gift, donation, settlement, or other disposition on

It is important to note that fringe benefits arise from an employer – employee

Forms of Taxes – Direct Taxes 9

Registration: An employer is required to register with the commissioner within 14 days

Determination of Taxable Values: Housing Accommodation: For housing

Example: An employee is provided with furnished accommodation. The house is rented

This is calculated as follows:

Rent paid: K50,000 x 12 months = K600,000

12% of Salary: K960,000 x 12% = K115,200