MALAWI COLLEGE OF ACCOUNTANCY

SCHOOL OF COMMERCE – BLANTYRE CENTRE

JANUARY - JUNE 2016 SEMESTER

SECOND YEAR SECOND SEMESTER

BACHELOR OF APPLIED ACCOUNTING: AUDITING AND INFORMATION

SYSTEMS & BACHELOR OF BUSINESS MANAGEMENT AND
ENTREPRENEURSHIP

TAX200 – TAXATION

MID SEMESTER EXAMINATIONS – Answers

The following tax rates and are to be used when answering the questions

A. Malawi Monthly Income Tax Rates

Tax Rate
First K20,000 0%
Next K5,000 15%
Excess over K25,000 30%ext

B. Company
Locally incorporated 30%
Externally incorporated 35%

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Question 1
Malawi Taxation Act has laid rules that assist both taxpayer and tax collector. Examples of
such rules relate to ‘allowable deductions’ and ‘exemptions’.
Required:
(a) Define the terms: “allowable deductions” and “exemptions”.
“For the purpose of determining the taxable income of any taxpayer, there shall be deducted from the
assessable income of such taxpayer the amounts of any expenditure... wholly, exclusively and
necessarily incurred by the taxpayer... in the production of income.”

The phrase “wholly, exclusively and necessarily” in the context of allowable expenditure is borrowed
from UK Tax Law.

Necessarily implies that the expenditure was somehow unavoidable, without which the trade would
have been damaged or income reduced.

(Two tests are related with “wholly and exclusively”, “remoteness” and “duality”)?

Expenditure is too remote when it is incurred for purposes peripheral or too loosely connected to the
trade - i.e. not exclusively for the trade.

Duality of purpose related to the word “wholly”. Expenditure which is in part not related to the
business has a dual (double) purpose. Whilst specific rules (e.g. apportionment of capital allowances.
Fringe Benefits Tax) deal with specific types of ‘dual’ expenditure, normally if there is any benefit,
the whole expenditure is disallowed. 2 marks

Exemptions
Are sources of income which are not taxable. 2 marks

(b) What term describes the process of using allowable deductions and exemptions to reduce
tax liability?
Tax avoidance 2 marks
(c) Mention any six allowable deductions and any six exemptions
Allowable deductions:
 Travel expenses
 Professional subscriptions
 Donations to charitable organisations
 Donations to non-profitmaking organisations
 Capital allowances

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  Repairs

Exemptions
a. The revenues of local authorities:-

b. 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;

c. The receipts and accruals of A registered trade union;

d. The receipts and accruals of 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;

e. The receipts and accruals of Pension and provident funds

f. The receipts and accruals of 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)

g. The receipts and accruals of any amount received as a war disability pension paid out of public
funds;

h. 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.

0.5 mark per valid point x 12 = 6 marks

(d) Explain the difference between ‘assessable income’ and ‘taxable income’
Assessable income is 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.”

Taxable income is the amount of income which is subject to tax rates for the purpose of calculating
tax liability. 4 marks

(e) Justify whether the use of allowable deductions and exemptions support any three
canons of taxation that you know are applicable to Malawi Tax system.
The canons are:
 Equity because a taxpayer with a lot of allowable deductions gets less tax liability
 Certainty because a taxpayer can know in advance how much tax is payable
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  Economy because their use do not result in increase in cost of collection.
9 marks
(TOTAL: 25 Marks)
Question 2

CJD Limited is a company incorporated in Malawi which is involved in the production and
distribution of plastic products mainly for use in the agricultural sector.

CJD Limited prepares its accounts to 30 June each year.

The following relate to fringe benefits which this company gives its management staff.

(i) The company provided furnished housing to its general manager and accountant at
rentals of K125,000 and K110,000 per month respectively. Their salaries are K600,000
and K350,000 per month respectively.

(ii) The company provides motor vehicles to its employees as follows:

 General Manager : Nissan double cab – original cost K6,800,000

 Accountant 1600cc Toyota Corolla saloon – original cost K3,000,000

(iii) The school fees paid by the company for the general manager’s children were:

April 2014 K200,000

October 2014 K250,000
January 2015 K250,000

Required:

(a) Calculate the fringe benefits tax paid and accrued by CJD Limited for the year to 30 June
2015.

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 12 marks

(b) Mention any four rules used to administer fringe benefits tax
 Every employer is required to register with the commissioner 14 days after he begins to
provide fringe benefits to employees by completing form FBT 1 (Fringe Benefits Tax
Registration Form).

 Fringe Benefits Tax is payable at a rate of 30% of the total taxable values of fringe
benefits provided
 There are rules set for determination of taxable values
 There are penalties for non-complying with the rules.
 Employers are required to keep records. 8 marks

(c) Define the term ‘fringe benefit’

Section 2 defines a Fringe Benefit as any asset, service or other benefit in kind provided to an
employee if such benefit includes an element of personal benefit to the employee. 3 marks

(d) Suggest one reason why fringe benefits tax was introduced.

To increase government revenue 2 marks

(TOTAL: 25 Marks)

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Question 3

Trending General Dealers is a firm operating in Malawi. In August 2013 the firm became
indebted to a supplier based in South Africa to the tune of R25 million on account of
merchandise supplied.

Due to foreign exchange shortages the firm managed to pay R7 million in January 2014 and
another R9 million was paid in June 2014. The balance of R9 million was included in the
accounts for 30 June 2014 at K243,000,000 using an exchange rate of R1 = 27.

Required:

(a) Using the formula specified in the Taxation Act, calculate the foreign exchange gains
or losses on the transactions given above to be claimed for the year of assessment to
June 2014. Assume the following exchange rates were in use.

August 2013 : R1 = MK18

January 2014 : R1 = MK22
June 2014 : R1 = MK27

15 marks

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(b) State whether the foreign exchange loss on the outstanding R9 million which was
converted to K243 million and included in the accounts to 30 June 2014 is an allowable
deduction. Give reasons for your answer.

The loss is not deductible because it is unrealized. 2 marks

(c) Define the following terms:

(i) Foreign exchange asset 2 marks

This is an asset denominated in or the amount of which is otherwise determined by reference

to a foreign currency and includes notes and coins of such foreign currency.

(ii) Foreign exchange liability 2 marks

This is a liability denominated in or the amount of which is otherwise determined by reference

to a foreign currency and includes notes and coins of such foreign currency.

(iii) Foreign exchange gain 2 marks

This is a gain whereby the amount payable is less than the amount incurred in foreign
currency terms.

When are foreign exchange gains or losses said to be from a source within Malawi? Under
S27 (6) foreign exchange gains or losses that are realised in connection with a permanent
establishment in Malawi or arising in connection with foreign currency assets or liabilities
held in Malawi are deemed to accrue from a source in Malawi.

(iv) Foreign exchange loss 2 marks

This is a loss whereby the amount payable is greater than the amount incurred in foreign
currency terms. (TOTAL: 25 Marks)

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