APPLIED TAXATION ICAZ CTA TAXATION: TUTORIAL 105 TAX 402 CTA TAXATION TUT 105.pdf · APPLIED TAXATION – ICAZ CTA TAXATION: TUTORIAL 105 TAX 402 6 | P a g e F O R I C A Z 2 0 1 9

APPLIED TAXATION – ICAZ CTA TAXATION: TUTORIAL 105 TAX 402

1 | P a g e

F O R I C A Z 2 0 1 9 C T A E X A M S P r o p e r t y o f C A A L e a r n i n g M e d i a

CONTENTS

TUTORIALS STRUCTURE……………………………………………………………………………………………………2

PRESCRIBED METHOD OF STUDY……………………………………………………………….……………………2

SELF ASSESSMENT QUESTIONS……………………………………………………………….……………………… 3


2 | P a g e


TUTORIAL 105:

Personnel Telephone Number Email

Lecturers

Zvinotendesa Mapetere CA(Z) RPA +263 4 702 532-5 [email protected]

Fungai Charumbira +263 4 702 532-5 [email protected]

Philip Chambati +263 4 702 532-5 [email protected]

Kundai Mugwiji +263 4 702 532-5 [email protected]

mailto:[email protected]





3 | P a g e


PRESCRIBED METHOD OF STUDY

1. Please read the prescribed study material for every study unit thoroughly before you

study the additional information in section A of every study unit.

2. Do the other questions (section B) in the study unit and make sure you understand

the principles contained in the questions.

3. Consider whether you have achieved the specific outcomes of the study unit.

4. After completion of all the study units - attempt the self-assessment questions to test

whether you have mastered the contents of this tutorial letter.


4 | P a g e


SELF ASSESSMENT QUESTIONS

Tutorial

Question

Number

Topics Covered

Source

Marks

Page

1

VAT

Gross Income

Capital gains Tax

UNISA CTA

LEVEL 2 PAPER

2 EOY 2018

100 6

2

Income Tax

Capital Gains Tax

VAT

UNISA CTA

LEVEL 2

PAPER 1 EOY

2018

100 22

3

Income Tax

Capital Gains Tax

VAT

Withholding Tax

UNISA CTA

LEVEL 1

PAPER 1 EOY

2018

100 39

4

Income Tax

Capital Gains Tax

VAT

Withholding Tax

UNISA CTA

LEVEL 1

PAPER 2 EOY

2018

100 52

5

Income Tax

Capital Gains Tax

VAT

UNISA CTA

LEVEL 1 PAPER

1 EOY 2017

100 66

6

Income Tax

Capital Gains Tax

VAT

UNISA CTA

LEVEL 1 PAPER

2 EOY 2017

100 76


5 | P a g e


7

Income Tax

Capital Gains Tax

VAT

UNISA CTA

LEVEL 2 PAPER

1 SUPP 2017

100 77

8

Income Tax

Capital Gains Tax

VAT

UNISA CTA

LEVEL 2 PAPER

2 SUPP 2017

100 100


6 | P a g e


All amounts are in United States Dollars and exclude VAT unless otherwise stated.

PART 1

DRM (Pvt) Ltd is a category B VAT registered operator, a light manufacturer of Fast Moving Consumer

Goods (FMCG) domiciled and incorporated in Zimbabwe since 1934.

You are a CTA graduate in DRM’s Finance department and have been tasked by the Finance Manager

Ms Helga Steinhoff to relook into a number of transactions that were flagged during a tax health

check that was done by Transaction Advisory Services (Pvt) Ltd (TAS). DRM was using another

consultant for tax computations and filing of returns and they have approached you for a second

opinion and below is a detailed email from Helga to you.

From: [email protected]

To: [email protected]

Date: 05 March 2018

Subject: Tax Health Check issues

Hie

I have received the TAS Tax health check report and would like you to go over the transactions below

and advise on the tax consequences of these transactions.

DRM entered into the following transactions in the month of September 2017 with most of them

related to employee benefits:

• DRM incurred a medical aid bill of $35,700 being contributions to medical aid for its staff for

the month of September 2017 but only paid this amount on the 23rd of December 2017. The

same bill accrued for each of the remaining months until the end of the year.

• DRM purchased from a registered operator, over-the-counter drugs for its first aid boxes for

$5,200 on the 3rd of September 2017.

• DRM paid $24,500 3rd term tuition fees to 4 Trust schools (which are all VAT registered

operators and also registered with the relevant Ministry of Education) for Executive Directors’

children on the 3rd of September 2017.




7 | P a g e


• DRM paid $7,800 to different state universities and Polytechnic colleges for tertiary education

of staff, which education is in line with the staff members’ line of work on the 3rd of September

2017. On the same day, DRM also paid CAA (a VAT registered operator) $9,000 to train its

staff on IFRS 9, IFRS 16 and IFRS 16 implementation with the trainings being only done in

January 2018.

• DRM leases a CBD building from Stannic Lease (a VAT registered operator) under a finance

lease arrangement for which DRM paid a September instalment of $3,000 made up of $2,600

principal and $400 interest. The lease arrangement has clear payment terms made up of the

principal and the finance charges. The cash price of the building was $450,000 and the total

lease payments exceed the cost by $150,000 being the finance charges. The agreement was

entered on 01 July 2017 and is for 4 years.

• DRM paid in advance, a VAT registered operator $2,000 in residential accommodation rentals

to provide accommodation to 4 of its managers for the month of September 2017. DRM also

paid $500 refundable security deposit which shall cover potential liabilities that may arise out

of breakages etc during DRM’s (tenant) stay. This amount is for one of the 4 managers since

they were moving into that residence in the month of September 2017 and the rental

amounts remained the same throughout the rest of the year.

• DRM paid $3,500 in fuel coupons and oils for use by staff for the vehicles that they use for

personal business for the month of September and the same amount for the rest of the year.

• DRM advanced 3 executive directors, loans of $20,000 each in the month of September 2017

and the loans are to attract interest of 3% per annum, non-compounding payable monthly in

arrears starting 30 September 2017. The principal amounts are to be paid as a bullet payment

after three years.

• DRM imported an SUV Landrover Discovery (v6, 4500cc, diesel) motor vehicle for use by Helen

from Thailand for $36,000, the freight and insurance charge was $1,500 and import duty was

96% effectively. The vehicle shall be used by Helga for her private use and business as well

with no restrictions.

On 15 September 2017, DRM decided to unlock shareholder value by unbundling some of its

operations into standalone entities. The transport and logistics division’s assets i.e. Motor vehicle

fleet ($1.5 million), office buildings (market value $300,000, cost 20,000 Zimbabwean Dollars in


8 | P a g e


1986), staff ($200,000), workshops (market value $1.2 million, cost $800,000 in 2010), machinery

(market value $1.8 million, cost $2,million in 2014), goodwill ($2.3million) and inventory ($700,000)

were valued at a total of $8 million and transferred to GR Haulage (Pvt) Ltd (GR). GR is 65% owned

by DRM, 22% was offered to former transport and logistics division management and 13% to a newly

formed GR employee share trust whose beneficiaries are the employees. Since management and the

trust both did not have the capital to pay for their shares (35% of $8 million = $2,8 million), it was

agreed that GR shall pay an annual dividend of $280,000 per annum to these shareholders but being

paid directly to DRM over ten years. DRM and GR entered into an agreement for right of first refusal

to GR of all transport and logistical requirements for DRM to guarantee GR business. In turn GR shall

charge discounted prices to DRM.

I would like to impress upon you the need for strict confidentiality as discussed earlier with you and

hope that you shall complete this exercise by Thursday next week.

Kind Regards

PART 2

Tongai Mupeta was employed by DRM as a health and safety officer and had been with the company

for 25 years. In February 2017 he turned 58 years of age but was diagnosed with colon cancer and

retired on 30 March 2017 before passing-on on the 26th of April 2017. Tongai was married out of

community of property and left behind 3 children, two of them being minors. Mrs Mupeta has

approached Helen to assist with the tax computations for Tongai for the 2017 year of assessment

since part of the income is employment income. Helen has agreed to assist on compassionate

grounds and has given you the following information:

$

- Salary January to March 2017 @$1,700 per month 5,100

- Performance bonus declared on the 1st of May 2017 for all employees who

were employed by DRM as at 31 December 2016. 1,700


9 | P a g e


- Tongai had lent Tendai (a co-worker) $1,000 on 01 December 2016 and this

was due to be repaid on the 31st of March 2017. The loan attracted interest

of 24% per annum non-compounding but was payable monthly. Tendai only

managed to repay the loan on 31 May 2017.

- On 01 May 2017, Tongai’s registered pension fund paid out a lumpsum of

$45,000 from a fund amount of $120,000 as Tongai had opted to commute is

pension before he died.

- On 8 June Tongai received a dividend of 11,500 Rand in an offshore account

from a listed investment in South Africa. The exchange rate applicable was

USD 1: 11.5 Rand.

- During Tongai’s retirement party on the 10th of April DRM committed to pay

a once-off gratuity lumpsum of $7,000 and a monthly annuity of $75 for five

years.

- In February 2017, DRM paid for a shortfall of $365 on Tongai’s medical aid for

a special scan. They also paid $70 for crutches for his son who injured his

tendons while participating in sports at school.

- Tongai contributed $195 towards his medical aid fund during the 2017 year

of assessment.

- Tongai had prepared a will and his wife Jeanie was to take their house which

had a market value of $85,000 at the time of his death and $92,000 at the

end of the year.

- Tongai bequeathed his small retail business of two supermarkets to a Trust

that was created out of the will. The trustees were to be his wife (to direct

operations), an appointed lawyer (for all business secretarial work) and a

Chartered Accountant friend from CAA (for the finances). The beneficiaries of

the trust were to be his wife and three children with income going to be

distributed depending on the financial performance of the trust and the ages

of the children. The trust is to distribute to beneficiaries any profits in excess

of $50,000 per annum in the ratios of 50% to his wife and 16.67% each to his

three children. For amounts due to those children that would not have

reached 18 years of age the amounts shall accrue to their mother. The trust


10 | P a g e


made profits of $72,000 (Taxable Income being $70,000 of this) evenly

throughout the 2017 year of assessment and only one child was above the

age of 18. Of the Trust income, $5,000 of it was exempt income being

dividends from a local listed company. The trustees were each paid $750 a

month since 31 July 2017.


11 | P a g e


REQUIRED Marks

Total

1

Discuss the VAT treatments for the month of September 2017 to DRM for following

transactions: 41

a. Medical aid costs 2

b. First Aid kit drugs 2

c. School fees for employees’ children 3

d. Fees to universities, polytechnics and CAA 5

e. Rentals and security deposit 5

f. Stannic lease 5

g. Fuel and oils 5

h. Directors’ loans 2

i. Imported Landrover 6

j. Unbundling transaction 4

Communication skills – logical argument and clarity 2

2 Calculate the impact of the listed transactions in Part 1 on DRM’s Taxable income for

the year ended 31 December 2017. 12 12

3

Calculate the Income Tax Payable for the year ended 31 December 2017 for the following

taxpayers: 30

a. Tongai Mupeta 10

b. Tongai’s deceased estate 8

c. The Trust and it beneficiaries (separately) 12

4

Discuss with supporting calculations the Capital Gains Tax Consequences for the 2017 year of

assessment on the following transactions: 17

a. The CBD building leased from Stannic to DRM in the hands of both DRM and Stannic

Lease. 3

b. The unbundling of GR in the hands of DRM. 10

c. The transfer of Tongai’s house to his wife in the hands of Tongai and in the hands of

the deceased estate 2

Communication - logical argument 2

Total 100


12 | P a g e


Solution

Question 1

Discuss the VAT consequences for the month of September 2017 to DRM for following

transactions:

Marks

a. Medical Aid Costs

The medical Aid society did not charge DRM any VAT since this is a medical

service that they are providing in the form of medical assurance 1

No input tax can be claimed if VAT was not charged by the supplier section 16(1)

and section 15 1

Section 17(3) of the VAT Act states that an employer who provides fringe

benefits to employees is deemed to have supplied goods or services and

therefore incurring a medical cost on behalf of the employee was a deemed

supply to the employee.

1

However, the supply was of an exempt benefit, therefore no Output VAT

consequences. 1

Available

Max

4

2

b. First Aid Kit Drugs

Section 16(1) allows VAT Input to be claimed if:

a - the operator charged VAT per section 6 0.5

b - the taxpayer used the product or service to make taxable supplies 0.5

The drugs are over the counter drugs which are standard rated. 1

Therefore, DRM will be able to claim input tax at time of acquisition. 1

Available

Max

3

2

c. School Fees for Employees’ Children


13 | P a g e



benefits to employees is deemed to have supplied goods or services. 1

In this case the fringe benefit was for educational services which is an exempt

supply, therefore no VAT implications. 1

DRM will not be able to claim Input tax on the payment as they were not

charged by the supplier. Section 16(1) 1

The supplier did not charge VAT because the service is an educational service as

defined and therefore exempt per section 11 1

Available

Max

4

3

d. Fees to universities, polytechnics and CAA


a - the operator charged VAT per s6 0.5


DRM will not be able to claim Input tax on the payment as they were not

charged by the supplier. 1

The supplies from the universities and polytechnics are educational services as

defined and therefore exempt supplies 1

However, DRM will be able to claim input tax on the $9,000 training cost paid to

CAA, as this was a standard rated taxable supply, on which VAT was charged. 1


benefits to employees is deemed to have supplied goods or services. 1

In this case the fringe benefit was for educational services which is an exempt

supply, therefore no VAT implications on the polytechnic and university

supplies.

1

There is no fringe benefit in the hands of the employees per section 8(1)(f) of

the Income Tax Act and therefore no deemed supply to the employees for the

CAA training.

1

Available 7


14 | P a g e


Max 5

e. Rentals and security deposit

Section 17(3) states that an employer who provides fringe benefits is

deemed to have supplied goods or services on which output tax should be

accounted for.

1

DRM is deemed to have supplied residential accommodation which however is

an exempt supply, so no output VAT arises. 1




DRM cannot claim any VAT from the suppliers of the service since the supply of

residential accommodation is an exempt supply and therefore no VAT was

charged to DRM section 16(1) and section 15.

1

The security deposit paid by DRM is not for any service supplied but a

refundable amount insuring against any breakages or such contingent liabilities

hence no VAT was charged by the landlord as there is no supply.

1

Available

Max

5

5

f. Stannic lease

The lease of a fixed property cannot be an instalment credit arrangement (ICA)

since section 2 definition of an ICA applies to movable corporeal goods while

this is fixed property. The lease therefore remains a pure rental agreement.

Section 2 of VAT Act – rental agreement and instalment credit agreement

1

Stannic is therefore deemed to be successively supplying the building every

month. Section 8(3) 1

The value of supply is the consideration less VAT i.e. $2,600 and therefore

stannic charges VAT of [$2,600 x 15% = $390] which DRM is charged by Stannic. 1


15 | P a g e


The interest component of the lease is a financial services supply and therefore

exempt from VAT. 1


a - the operator charged VAT per section 6 0.5


DRM will be able to claim the $390 input VAT for the month of September 2017. 1

Stannic is also offering a financial services supply for which DRM is paying

interest. 1

No VAT can be claimed on the interest portion as it is exempt from VAT. Section

11 1

Available

Max

8

5

g. Fuel and oils




DRM will not be able to claim input VAT as no VAT was charged since fuels and

oils are exempt supplies. 1

Section 17(3) states that an employer who provides fringe benefits is

deemed to have supplied goods or services on which output tax should be

accounted for.

1

The value of the supply will be determined with reference to the value for

PAYE purposes made in section 8(1)(f) of the Income Tax Act. 1

However, no output VAT shall be charged on the fuel and oils as it is an exempt

supply. Section 11 a.r.w. the Finance Act. 1

Available

Max

5

5

h. Directors’ loans


16 | P a g e


This is the provision of a financial service as defined by DRM to directors 1

Financial services are VAT exempt; thus, no VAT shall be charged on the service. 1

Available

Max

2

2

i. Imported Landrover

Section 6(1)(b) provides for the levying of VAT on importation of goods. 1

DRM imported the Landrover and therefore the import VAT was charged and

collected at the time the goods entered into Zimbabwe for home use at the

standard rate.

1

The value of supply shall be the value for duty purposes plus duty.

[($36,000 + $1,500) + (37,500 x 96%)] x 15% = $11,025

1

1

The import vat paid can then be claimed per s16(1) if:

- The tax has been paid and

- The goods are to be used in the making of taxable supplies.

1

However, s16 prohibits the claiming of input VAT on passenger motor vehicles,

thus DRM cannot claim VAT on the Landrover. 1

Available

Max

6

6

j. Unbundling transaction

The transfer of assets to GR is a supply of a group of assets that can be used as a

business unit and therefore the disposal of a going concern 1

Disposal of a business as a going concern is a zero-rated supply per section 17 1

The receipt of shares in GR in exchange of the supplied assets is not a supply on

GR and therefore no VAT was charged to DRM and therefore no input tax can

be claimed section 16(1)

1

The immediate disposal of part of DRM’s stake in GR to management and the

trust for which periodic payments shall be made is a supply by DRM of shares in

GR.

1


17 | P a g e


The supply of shares in GR by DRM is a financial service as defined section 2 1

The supply of financial service is exempt form VAT (section 11) and therefore no

VAT shall arise from the GR dividend that shall be paid directly to DRM to pay

off the purchase consideration debt.

1

Available

Max

6

4

Communication and layout 2


18 | P a g e


Question 2

Calculate the Taxable income for the year ended 31 December 2017 from the listed transactions

in Part 1 for DRM.

$ Marks

Employer contribution to staff medical aid – staff cost allowable

deduction [$37,500 x 4] S15(2)(a) (150,000) 1

Over-the-counter drugs – staff cost allowable deduction S15(2)(a) (5,200) 1

School fees – staff cost allowable deduction S15(2)(a) (24,500) 1

Staff educational, grants bursaries or scholarships S15(2)(p) (7,800) 1

Staff training – allowable deduction S15(2)(a) (9,000) 1

Lease payments – allowable deduction [$3,000 x 4 months] S15(2)(d) (12,000) 1

Staff accommodation [$2,000 x 4 months] S15(2)(a) (8,000) 1

Security deposit – capital in nature S15(2)(a) - 1

Fuels and oils - staff cost allowable deductions S15(2)(a) (3,500) 1

Loan pay-outs – capital in nature S15(2)(a) - 1

Loan interest [$20,000 x 3 directors x 3% p.a. ÷ 12 months x 4 months] S8(1)(a) 600 3

Acquisition of motor vehicle – capital in nature S15(2)(a) - 1

Capital allowances – Landrover – [$10,000 x 25%] S15(2)(c) (2,500) 1

Disposal of assets to GR – capital in nature S8(1)(a) - 1

Receipt of $280,000 p.a. from GR pay-out – receipt of purchase

consideration in instalments – capital in nature S8(1)(a) - 1

Taxable Income/(Tax loss) (221,900)

Available

Max

17

12


19 | P a g e


Question 3

Calculate the Income Tax Payable for the year ended 31 December 2017 for the following

taxpayers:

$ Marks

a. Tongai Mupeta

Salary – Pre-death gross employment income S8(1)(a) 5,100 1

Lumpsum payment from pension fund – exempt (above 55 yrs) 3rd sch - 1

Gratuity – exempt (above 55yrs) 3rd sch - 1

Annuity - S8(1)(a) 75 1

Employer payments for medical expenses [$365 + $70] - exempt S8(1)(a) - 1

Contribution to medical Aid – prohibited deduction S16(1) - 1

Taxable Income 5,175

Income tax thereon - [$5,175 – $3,600] x 20% 315 1

Tax Credits

Medical expenses credit [$195 ÷ 2] (97.5) 1

Elderly persons credit [$900 x 4months / 12 months] (300) 2

Assessed loss from employment income (82.5)

Interest income [$1,000 x 2% per month x 4 months] 80 1

Dividend income [R11,500 ÷ 11.5 = $1,000] Post death income S12 - 1

80

Tax thereon from trade and investment income @ 25.75% [80 x

25%] 20.6

1

Total tax loss [20.6-82.50] (61.90) 0.5

Available

Max

13.5

10


20 | P a g e


b. Tongai’s deceased estate

Performance bonus S11(4) 1,700 1

Exempt portion 3rd sch (1,000) 1

Interest on loan to Tendai – (income from an asset not in a deceased

estate) S11(1) - 1

Pension lumpsum payment – pre-death income - 1

Taxable Income 700 1

Tax thereon from employment income - 1

Foreign Dividend -deemed from a source and post death trade and

investment income S12 1,000 1

Tax thereon from trade and investments [20% x $1,000] 200 1

Total tax payable [200 + 0] 200 1

Available

Max

9

8

c. (i) The Trust

Taxable income 70,000 0.5

Distribution to beneficiaries (definition of person) S2 (20,000) 0.5

Trust Taxable income 50,000

Tax Thereon @ 25.75% [50,000 x 25.75%] 12,875 2

(ii) Jeanie

Trust income – [$20,000 x 50%] 10,000 2

Income deemed from trust [$20,000 x 2 x 16.67%] 6,667 2

Annuity [$5,000 x 83.33%] 4,167 2

Taxable income for Jeanie 16,667

(iii) The adult child


21 | P a g e


Income from the trust [$20,000 x 16.67%] 3,333 2

Annuity [$5,000 x 16.67%] 833 2

Taxable income for adult child 4,167

Available

Max

13

12

Question 4

Discuss with supporting calculations, the Capital Gains Tax Consequences for the 2017 year of

assessment on the following transactions:

Marks

a. The CBD building leased from Stannic to DRM in the hands of

both DRM and Stannic Lease.

CGT arises where there has been a disposal or deemed disposal of a

specified asset S8(1)(a) 1

Stannic has not sold the specified asset but leased it to DRM and therefore

no CGT arises. S8(1)(a) 1

DRM has also not disposed of a specified asset but rented it out and

therefore no CGT arises S8(1)(a) 1

Available

Max

3

3

b. The unbundling of GR in the hands of DRM.

The transfer of assets from DRM to GR are disposals of asset 1

The specified assets shall be the immovable property i.e. the office

buildings and the workshops. 1

The rest of the assets transferred are not specified assets as they are

movables and therefore no CGT can arise from their disposal 1

The transfer of these assets is a disposal other than by way of sale and

therefore the Commissioner deems the assets to have been sold at their

market prices.

2


22 | P a g e


Office Buildings.

The CGT shall be calculated by applying 5% to the deemed proceeds of

$300,000 since the buildings were acquired prior to 01 February 2009.

[$300,000 x 5% = $15,000]

1

1

Workshops

The CGT shall be computed by matching the gross carrying amount to

allowable deductions after adjusting for items that are revenue in nature.

1

Recoupment is deducted from the gross carrying amount since it is

included in gross income.

Recoupment = [1,2mln – (800,000 x 85%)] = 520k limited to $120k

1

3

The cost of $800k is an allowable deduction 1

The capital allowances granted of 120k are deducted from the cost 1

Inflation allowance is granted at 2.5% per annum from year of purchase

including year of disposal on a straight-line basis.

Inflation allowance = [800k x 2.5% x 4 years] = 80k

1

1

The receipt of shares in GR is a receipt of a specified asset but does not

have CGT consequences to DRM since DRM is not disposing of the shares. 1

Available

Max

16

10

c. The transfer of Tongai’s house to his wife in the hands of Tongai

and also in the hands of the deceased estate

Upon Tongai’s death, the house was transferred to Tongai’s deceased

estate and at that stage no CGT consequences arose. Section 11(1) of the

Income Tax Act (Assets in a deceased estate) a.r.w. section 9 of the CGT

Act (deemed accruals)

1

The transfer of the house to the wife from the estate shall also not have

any CGT consequences since amounts received or accrued on distribution 1


23 | P a g e


by an executor of an estate on specified assets are exempt from CGT

section 10(b) of the CGT Act

Available

Max

2

2



24 | P a g e


Tutorial 2


Coronat, Chemist and Tichafara are shareholders in CCT (Pvt) Ltd (CCT), owning 30% shareholding

each and the remainder being owned by a minority shareholder at 6% and an employee share

ownership trust at 4%. The three formed CCT in August 1996 at the onset of Zimbabwe’s

indigenisation drive with the business growing to a net asset value of $5.5 million as at 31 December

2015. CCT main operations are based in Zimbabwe with investments in foreign subsidiaries being

made over time and is a category A VAT registered operator.

Chemist is a Zimbabwean by origin who migrated to the Cayman Islands in 2008 and occasionally

comes to Zimbabwe during the festive season in December and in some cases Easter. Chemist is a

non-executive director in CCT while Coronat is the Chief Executive Officer and Tichafara the Finance

Director, both who are resident in Zimbabwe. Chemist normally attends board meetings through

video conferencing and rarely misses any board meetings.

CCT is in the construction sector and has been going through difficult times for the past decade but

is pinning its hopes on the possible turn of the Zimbabwean economy in the foreseeable future. It

has survived on a few road projects and housing projects, and recently on the 3rd of January 2017

won a $36 million tender to participate in the dualization of the Beitbridge -Harare highway. The

terms of the contract were that CCT was to construct specified sections of the road in stages and

upon completion and certification of such stages, a portion of the $36 million would accrue. There

were 3 planned stages i.e. stage 1 which ended on 30 September 2017 and for which $12 million

accrued and was paid in part on the 15th of December 2017. Stage 2 is expected to be complete on

the 28th of January 2018 with an accrual of $12 million and the balance accruing on 31 May 2018

where stage 3 is expected to have been completed.

In May 2018 CCT subcontracted a South African company Reflections (Pty) Ltd (Reflections), to supply

imported material for road reflectors. Reflections set up an office in Zimbabwe since they were also

subcontracted by other players in the same road project and anticipate having a presence in

Zimbabwe for the next 3 years. Reflections in turn must purchase some other components of their

reflectors from another South African company (Roads (Pty) Ltd).


25 | P a g e


You are a CTA graduate working for Transaction Advisory Services (Pvt) Ltd (TAS), an advisory services

company as a Manager and CCT has been your client since 2016. CCT requires assistance with the tax

affairs of its directors and in some cases the implications to CCT itself, and CCT is bearing the cost of

$2,500 for this consultation in 2017. TAS is a VAT registered operator.

Below are details of the directors’ affairs for which CCT will require advice:

In October 2016, CCT realised a potential upswing in business and decided to re-tool by buying new

equipment which included different truck types, and builders’ tools. As part of this exercise CCT went

on a drive to improve the working conditions for its critical staff to reduce the risk of their staff

migrating to neighbouring countries such as South Africa which were offering attractive

remuneration packages to individuals with specialised skill sets. CCT acquired plant and machinery

worth $320,000. To finance this, the directors entered into a number or transactions being:

1. Share disposal and shareholders’ loans

On 02 January 2017, Coronat, Chemist and Tichafara sold 2% each of their shares to a minority

shareholder who snapped up the total 6% for $300,000 as the valuation of the company was

$5,000,000 then. The amount was paid to CCT and each director was to be repaid after three

years at $130,000 each i.e. including interest.

2. Other shareholders’ loans

The three directors also sourced funding of $50,000 each in different transactions.

• Coronat

On 10 January 2017 Coronat took out a loan of $50,000 at 10% per annum from his

bank which was paid straight to a CCT supplier of machinery against security of his

Borrowdale house valued then at $250,000. Coronat shall repay the loan over 60

months through $1,100 monthly instalments plus a bullet payment of $3,500 in the

final month. CCT shall pay Coronat interest of 12% per annum and the loan is

repayable over 60 months by way of $1,250 monthly instalments and a bullet payment

of $5,000 in the final month.


26 | P a g e


• Chemist

In January 2017 Chemist liquidated an investment of 213,636 shares in Econet a

company listed on the Zimbabwe Stock Exchange for $23,500 and he raised the other

$26,500 from exercising an option to exit early in the 6th year of a 10-year insurance

policy. Chemist had acquired the Econet shares for $15,000 in July of 2010. His

contributions to the insurance policy were not allowed as deductions in terms of the

Income Tax Act. CCT is to repay the $23,500 to Chemist by way of 256,364 Econet

shares on 08 January 2019 when the shares are expected to be worth $29,800 (the

excess being interest on the loan and shall also on the same date pay Chemist $31,800

in cash to compensate him for the $26,500 and the additional $5,300 being interest

on the loan.

• Tichafara

On the 1st of February 2017, Tichafara transferred a Gunhill house that became the

new ICT directors’ residence to CCT with the house having cost him $167,000 in April

2011. In March of 2012 Tichafara constructed a swimming pool for $10,000, extended

the house for a total cost of $15,000 and erecting a gazebo for $1,500, as additions to

the Gunhill property. Tichafara stayed in this house until date of sale when he moved

to Chishawasha Hills to his current residence. The house had a market value of

$250,000 on the date of transfer. Similar properties in the area are rented out for $750

per month. CCT paid Tichafara $200,000 for the house on the transfer date and it was

agreed that the $50,000 balance was to be taken as a shareholder’s loan to CCT

including interest to be paid on the 31st of January 2019 at $60,000. Tichafara used all

of the proceeds from the Gunhill house to acquire the Chishawasha one.

During the year 2017, CCT declared its first dividend in 6 years on the 20th of December 2017 with

Coronat, Chemist and Tichafara being entitled to $3,500 each which was paid to them on the 15th of

February 2018. Chemist also received a dividend of $4,500 from a London Stock Exchange listed

company and $2,500 from locally listed Econet both in May 2017.


27 | P a g e


CCT paid board fees of $300 per sitting per director and each of the above three directors attended

all four sittings.

Coronat and Tichafara were also entitled to the following benefits in terms of their employment

contracts with CCT:

a. Coronat benefits

In November 2017 CCT sold to Coronat a Mercedes Benz E270 saloon (2700cc) which he had

been using for both private and business purposes, for $5,500 when its carrying amount was

$14,500 and the market value was $25,000. The vehicle had cost CCT $32,000 to purchase 2.5

years before the date of sale.

On the 5th of December 2017, CCT offered three options to replace Coronat’s Mercedes Benz

and at year end they were yet to conclude the matter. In the first option, CCT was to buy a

Mercedes Benz C180 (1800cc) for $20,000 and register it under CCT, for Coronat to use for 3

years. At the end of the three years Coronat will have the right of first refusal of buying the

vehicle at one third of its valuation as at that date. In the second option CCT would buy the

vehicle for $20,000 and immediately register the vehicle in Coronat’s name. CCT will record a

receivable of $20,000 which will be paid off by Coronat serving CCT for 36 months. For each

month that Coronat serves, $555.55 is written off on the receivable. Under the third option,

CCT will buy the vehicle for $20,000 and register the vehicle immediately in Coronat’s name

and record a receivable of $20,000. This receivable shall attract interest at 4% per annum for

three years non-compounding. Coronat shall then repay CCT $622.22 per month in arrears

from the first month for 36 months. To finance this CCT offers to raise Coronat’s salary by the

same amount.

b. Tichafara’s benefits

Tichafara was using a CCT Toyota Hilux 2700cc twin cab since 01 March 2017, which cost CCT

$27,000 to acquire on that date. Tichafara had unlimited use to the vehicle for both business

and private purposes. CCT paid insurance of $1,200 per annum on the vehicle and also gave

Tichafara fuel of $300 per month and repaired the vehicle for $1,300 in the year 2017.

Tichafara used the vehicle 40% for business and 60% for private use based on the mileage


28 | P a g e


records. The Zimbabwe Revenue Authority has always accepted CCT’s use of mileage as a

basis for determining usage of its vehicles.

Tichafara took a business trip to Dubai for 5 working days and extended his stay by another 5 days

holidaying. CCT paid for the flight costs of $2,100 to Air Zimbabwe a VAT registered local airliner,

Board and accommodation of $2,000 for the 10 days to a Dubai hotel, taxi and other transport fares

for the Dubai local business trips of $600, out of town allowance to Tichafara for the 5 working days

of $750.

REQUIRED Marks

1

Discuss the income tax implications to CCT for the 2017 year of assessment of the

following transactions:

41

a. The $2,500 consultation fees. 3

b. Acquired plant and machinery. (excluding the financing) 5

c. The $150,000 from the three shareholders 9

d. Dividend declared 5

e. Directors fees paid 4

f. Motoring benefit and related insurance, fuel and repairs costs granted to

Tichafara. 9

g. Disposal of motor vehicle to Coronat. 2

h. Tichafara’s Dubai trip. 2

Communication skills – logical argument 2

2 Discuss the income tax implications of the Dubai trip in the hands of Tichafara, 3 3

3

Calculate Chemist’s Taxable income for the 2017 year of assessment from ALL the

given transactions.

Where a transaction has no income tax implications indicate by way of a zero. For

ALL transactions put a brief narration of the reason for inclusion or exclusion in

gross income and any deductions

15 15

4 Calculate Tichafara’s Capital Gains Tax for the 2017 year of assessment. 8

9 Communication skill – Presentation 1


29 | P a g e


5

Advise both Coronat and CCT on the most Income Tax efficient option in respect

of the motor vehicle transactions looking at each individual taxpayer’s

perspective.

Your advice should be based on comparative calculations for the three options.

15

6 Discuss the VAT implications to CCT of the following transactions:

a. The $2,500 consultation fees 2

17

b. The $300,000 received from shareholders in January 2017 2

c. Interest on all shareholders’ loans 2

d. The $36 million tender revenue 4

e. The fringe benefits to the executive directors 4

f. The Dubai trip for Tichafara 3

Total 100


30 | P a g e


Solution

Question 1

Discuss the income tax implications to CCT for the 2017 year of assessment of the following

transactions:

Marks

a. The $2,500 consultation fees.

Section 15(2)(a) allows for expenditure incurred for the purposes of trade. 1

CCT received tax services which are part of its trading costs hence are for the

purposes of trade. 1

Therefore, the $2,500 is allowable as a deduction in the 2017 year of assessment. 1

Available

Max

3

3

b. Acquired plant and machinery.

Section 15(2)(a) allows for expenditure incurred for trade purposes as a

deduction for the purposes calculating taxable income, which is not of a capital

nature.

1

To determine whether expenditure is of a capital nature we refer to case law,

which states that expenditure is capital in nature if it creates an enduring benefit. 1

Tree and Fruit - Visser case 1

The plant and machinery purchased is of a capital nature, therefore no deduction

is allowed. 1

Section 15(2)(c) a.r.w. 4th schedule, allows for a deduction of capital allowances

on assets used for the purposes of trade. 1

Accordingly, the plant and machinery will be able to claim S.I.A at 25%. 1

Available

Max

6

5


31 | P a g e


c. The $150,000 from the three shareholders

The $150,000 from the shareholders can be characterised as a loan received given

that its repayable to the shareholders. 1

The loan is of a capital nature hence it cannot be included in gross income. 1

Tree and Fruit - Visser case 1

However, the interest on the loan can be deducted since the principal amount

will be used for trade i.e. to buy assets to be used in business. (see definition of

trade section 2 of the Income Tax Act)

CIR v Genn 1955

2

• The 12% interest on the loan from Coronat of $30,000 is incurred over 60

months and incurred with passage of time.

• Therefore [12months/60months x $30,000 = $5,000] is incurred in the 2017

year of assessment.

1

1

• The Interest on the loan from Chemist is limited to [$31,800 - $26,500 =

$5,300].

• This interest is incurred over 2 years and therefore [$5,300/2 = $2,650] is

deductible in the 2017 year of assessment.

1

1

• The interest cost of replacement of the Econet shares over and above the

$23,500 has not been incurred yet and therefore no deduction is allowed in

the 2017 year of assessment.

1

• The interest of $10,000 on the Gunhill property loan is incurred over two years

and the allowable deduction is limited to [11mths/24mths x $10,000 = $4,583]

for the year 2017.

1

CCT shall have to consider if the total debt does not exceed the 3:1 debt to equity

threshold. Any interest cost as a result of debt in excess of this ratio is a deemed

dividend distribution. Section 16(1)(q)

1

CCT shall have to withhold on shareholders taxes if there is any deemed dividend.

Sections 28 a.r.w. 15th schedule and section 26 a.r.w. 9th schedule 1

Available 13


32 | P a g e


Max 9

d. Dividend declared

Dividend are a distribution of profits and not expenditures or losses and therefore

do not rank for deductions. 1

• CCT shall withhold 15% of the dividend upon payment as this is not being to

another corporate but to individual shareholders. Section 28 (Resident

shareholders’ tax) a.r.w. 15th schedule

• [$3,500 x 15% = $525] for each shareholder should have been withheld.

1

1

The dividends were not paid in 2017 and therefore the withholding taxes are

received in 2018 although the dividends were declared in 2017. 1

The withholding tax is CCT’s responsibility to remit within 10 days of date of the

distribution of the dividend i.e. 25 February 2018. 1

Available

Max

5

5

e. Directors fees paid

Section 15(2)(a) of the Income Tax Act allows for expenditure actually incurred

for trade purposes as a deduction for the purposes calculating taxable income.

Therefore, the director’s fees are allowable as a deduction in the 2017 year of

assessment.

1

1

The amount was incurred for the purposes of trade by CCT as it is a business

expenditure. See definition of trade section 2 of the Income Tax Act 1

The directors’ fees for Coronat and Tichafara are employment income to the

directors since section 36 J of the Income Tax Act subjects receipts of directors

subject to PAYE to be employment income.

1

For the Tichafara’s fees, 20% should be withheld from them section 36J 1

Available

Max

5

4


33 | P a g e


f. Motoring benefit and related insurance, fuel and repairs costs granted

to Coronat.

Section 15(2)(a) of the Income Tax Act allows for expenditure actually incurred

for trade purposes as a deduction for the purposes calculating taxable income. 1

These staff expenses were incurred for the purposes of trade by CCT and

therefore allowable deductions. 1

The granting of the right to use the vehicle is not cost-based but based on engine

capacity and no deduction is allowable. 1

CCT can claim capital allowances in particular S.I.A on the motor vehicle in

accordance with Section 15(2)(c) arw 4th Schedule 1

The fuel costs are all for purposes of trade i.e. the business portion and the private

portion, as the private business portion is a staff cost for the purposes of trade

and so are deductible. Section 15(2)(a)

The deductible amount is [$300/months x 10 months = $3,000]

1

1

The repairs and maintenance costs of $1,300 are also for the purposes of trade

as above and therefore deductible in full as they are a staff costs regardless of

what the employee used the vehicle for.

1

The insurance costs of [$1,200 x 10mths/12mths = $1,000] is deductible as it is

staff cost incurred for the purposes of trade. Section 15(2)(a) 2

Available

Max

9

9

g. Disposal of motor vehicle to Coronat.

Section 15(2)(a) allows for expenditure actually incurred for trade purposes but that is not

capital in nature as a deduction for the purposes calculating taxable income. 1

CCT incurred a loss by selling the vehicle at below its carrying amount but the loss is capital

in nature.

CCT is not in the business of buying and selling cars and therefore the disposal is capital in

nature.

1

1


34 | P a g e


CCT disposed of the vehicle for $5,500 when its ITV was $16,000 and therefore would have

claimed a scrapping allowance had the vehicle been disposed of by way of scrapping.

1

Available

Max

4

2

h. Tichafara’s Dubai trip. Also further discuss the income tax implications in the hands

of Tichafara

Section 15(2)(a) allows for expenditure incurred for trade purposes or in the production of

income as a deduction for the purposes calculating taxable income if it is not capital in

nature.

1

The expenses were incurred for the purposes of trade by CCT as they were for a business

trip in part but also a staff cost in part hence trade either way. 1

For Tichafara:

The flight costs of $2,100 are not included in gross income as these were not a benefit or

advantage to him and therefore excluded from gross income. Section 8(1)(g) 1

The board and accommodation for 5 days were an advantage and included in his gross

income [5days/10days x $2,000 = $1,000] section 8(1)(g) 1

The taxi fares are not an advantage to him and not included in gross income 1

The out of town allowance is remuneration per the 13th schedule and included in gross

income in full, 1

Communication and Layout 2

Available

Max

8

5


35 | P a g e


Question 2

Calculate Chemist’s Taxable income for the 2017 year of assessment from ALL the given

transactions.

$ Marks

Trade & Investment Income

Sale of shares to minority shareholder (capital in

nature Section 8(1)(a) 0 2

Gain on replacement of Econet shares (not accrued) Section 8(1)(a) 0 2

Dividend Income from CCT (exempt) 3rd Schedule 0 2

Dividend Income from Econet (exempt) 3rd schedule 0 2

Sale of Econet Shares (capital nature) Section 8(1)(a) 0 2

Interest on loan to CCT

[$31,800-26,500)/2) = $2,650] (allowable deduction) Section 8(1)(a) 2,650 3

Proceeds from conforming insurance policy

(deductions denied) Section 8(1)(a) 0 2

London company dividend (not from a source) Section 8(1)(a) 0 2

CCT Board fees ($300/sitting x 4 sittings) Section 8(1)(a) 1,200 2


Available 20

Max 15

Question 3

Calculate Tichafara’s Capital Gains Tax for the 2017 year of assessment.

$ Marks

Disposal of Gunhill House:

Proceeds 260,000 1

Recoupment (PPR no capital allowances) 0 0.5


36 | P a g e


GCA 260,000

Allowable Deductions:

Cost (167,000) 0.5

Inflation Allowance [167,000*2.5%*7] (29,225) 1.5

Swimming Pool (10,000) 0.5


House Extension (15,000) 0.5


Gazebo (1,500) 0.5

Inflation Allowance [1,500*2.5%*6] (225) 1.5

Capital Allowance (PPR no capital allowances) 0 0.5

Capital Gain 33,300

S17 Relief (33,300) 1

Disposal of 2% stake in CCT:

Marketable Securities purchased before February 2009 1

Proceeds 100,000 0.5

CGT @ 20% 20,000 1

Communication skills - Presentation 1

Available

Max

14.5

9


37 | P a g e


Question 4

Advise both Coronat and CCT on the most efficient option in respect of the motor vehicle

transactions looking at each individual taxpayer’s perspective.

Marks

Option 1

Coronat:

Coronat is receiving a benefit through the right of use of a motor vehicle, this will

be included in his gross income, calculated using the engine capacity of the vehicle.

Section 8(1)(f)

1.5

Coronat will include in his gross income $600 for the motoring benefit. 1

When Coronat purchases the vehicle, he will include in his gross income the

difference between the market value and the purchase price. 1

The disposal of the vehicle at below market price is a deemed supply by CCT to its

employee 1

The disposal of a second-hand Passenger motor vehicle by a non-car dealer will not

have output tax consequences per section 6(1)(a) of the VAT Act and also because

passenger motor vehicles are denied VAT at acquisition section 16(2) of the VAT

Act

1

CCT:

CCT can claim capital allowances in particular S.I.A on the motor vehicle in

accordance with Section 15(2)(c) arw 4th Schedule 1

The capital allowances shall be limited to $10,000 since the vehicle shall be a

passenger motor vehicle. 1

Section 15(2)(a) allows for expenditure actually incurred for trade purposes but

that is not capital in nature as a deduction for the purposes calculating taxable

income.

1

CCT will incur a loss by selling the vehicle at below its carrying amount but the loss is

capital in nature.

1


38 | P a g e


CCT is not in the business of buying and selling cars and therefore the disposal is

capital in nature.

1

On disposal, there is potential for recoupment which shall need to be calculated and

included in CCT’s gross income if any. 1

Option 2

Coronat:

The receipt of a vehicle is included in gross income as remuneration i.e. section

8(1)(f) a.r.w. the 13th schedule. 1

The amount to include in gross income is the cost to the employer section8(1)(f) 1

The benefit is for service to be rendered hence it is remuneration and revenue in

nature. 1

The fringe benefit is a deemed supply for VAT purposes but for a second-hand

motor vehicle by a non-car-dealer and therefore no output VAT arises. Section

6(1)(a) and section 16(2) [input tax denied on passenger motor vehicle acquisition]

1

CCT:



income.

The acquisition of the vehicle on behalf of Coronat is a payroll expense i.e.

remuneration and is deductible in full in the year incurred.

1

1

Option 3

Coronat:

The loan receipt in the form of a motor vehicle is of a capital nature for Coronat

and will not be included in gross income. 1

The interest on loan is less than libor plus 5% so the difference is included in gross

income. i.e.

[(6%-4%) x 20,000 = 400] per annum

1

1

The salary increment is gross income in the hands of Section 8(1)(a) 1

CCT:


39 | P a g e




income, the granting of the loan to Coronat is of a capital nature, therefore not

deductible.

1

1

The salary increment is a staff cost to CCT, therefore it’s an allowable deduction. 1

The finance income from Coronat is gross income in the hands of CCT. 1

Conclusion

Coronat should choose option 1 as this will result in the least tax liability for him.

CCT shall want option 2 as gives the highest deduction

1

1

Available

Max

25

15

Question 5

Discuss the VAT implications to CCT of the following transactions:

Marks

a. The $2,500 consultation fees

The consultation is a supply according to S6(1)(a). 1

Therefore, CCT can claim input VAT under S16 since TAS is a registered

operator. 1

Available

Max

2

2

b. The $300,000 received from the shareholder in January 2017

The $300,000 received from the shareholder does not constitute a supply. 1

Therefore, there are no VAT implications on the $300,000. 1

Available

Max

2

2

c. Interest on all shareholders’ loans


40 | P a g e


Interest in a financial service as defined. 1

Financial Services are exempt from VAT. 1

Available

Max

2

2

d. The $36 million tender revenue

S6(1)(a) requires a registered operator to charge output VAT on the supply of

goods or services in the furtherance of trade. 1

The tender is a supply therefore, output VAT should be charged by CCT. 1

The supply is a standard rated supply. 1

The time of supply is the earlier of invoice and a payment being made. 1

The scenario is not clear as to the timing of an invoice. 1

The value of supply is consideration less VAT. 1

36,000,000*15% 1

Available

Max

7

4

e. The fringe benefits to the executive directors

An employer who provides fringe benefits to employees is deemed to have

supplied goods or services on which output tax should be accounted for. 1

Value of supply will be the value determined for PAYE purposes ito section

8(1)(f) of the Income Tax Act. 1

If the fringe benefit is a supply of an exempt benefit, then the supply will be

exempt from VAT. 1

The residential accommodation given to ICT director will be exempt from VAT 1

Available

Max

4

4

f. The Dubai trip for Tichafara


41 | P a g e


An employer who provides fringe benefits to employees is deemed to have

supplied goods or services on which output tax should be accounted for. 1

Value of supply will be the value determined for PAYE purposes ito section

8(1)(f) of the Income Tax Act. 1

1

The $750 allowance is a cash allowance which doesn’t not meet the definition

of a good, therefore no VAT consequences arise. 1

Available

Max

3

3


42 | P a g e


Tutorial 3

You are a supervisor in the tax advisory department of PKC Chartered Accountants (PKC), an auditing

and advisory firm with operations across the major cities of Zimbabwe. In the past couple of years,

the Zimbabwe Revenue Authority (ZIMRA) has been on a drive to increase tax collections and has

increased tax audits of corporate companies. Given the increased scrutiny by ZIMRA one of PKC’s

audit clients, Mutual Second Properties (Private) Limited (MSP), has approached your department

for tax advice in respect of their 2017 year of assessment transactions. You then scheduled a meeting

with the MSP audit team to obtain background information on the client.

Background information

MSP is a property development company involved in the development and construction of low cost

housing. From 2009 to 2013 the company had seen tremendous growth in its operations given the

housing boom arising from the use of the multi-currency system and the general optimism that was

in the Zimbabwean economy. However, since 2014 business levels have been on a downward trend

mainly due to tough economic conditions currently prevailing in Zimbabwe. The proliferation of

bogus property developers in recent years has also compounded MSP’s woes as potential home

owners have now become more cautious with their acquisitions in the property market. At the height

of the property boom MSP had opened a retail outlet which focused on the supply of building

material amongst other construction related material. MSP is a registered operator under category

B in terms of the Value Added Tax (VAT) Act. You must presume that MSP is not an SME.

MSP’s finance manager Mr. Tapiwa Rutsito provided you with a file with detailed notes of

transactions entered into in the 2017 year of assessment. All amounts are exclusive of VAT unless

otherwise indicated.

1. The correct Net profit before tax for the year 2017 was $554,000.

2. MSP purchased second hand office furniture from ADC Auctioneers for $15,000. The second-

hand furniture belonged to a non-registered operator who was forced to sell the furniture

due to liquidity problems.

3. MSP sold 10 identical housing units with a total construction cost of $1,500,000, which was

incurred evenly over 3 years starting 2015 ending 2017 (the year of disposal). The total cash

value of the houses was $3,200,000. All the housing units sold are being used by the


43 | P a g e


customers for residential accommodation purposes. The terms of the sale were such that

each customer paid a deposit equal to 10% of the cash value and would pay an instalment of

$25,000 a year for the next 20 years. The customer would receive the title deeds to the

property on paying the deposit. The instalment payments would be made at the end of each

year in arrears and MSP had the right to repossess the units if the customers defaults on

payment of which in the past 3 years MSP has not had to repossess any properties. The

deposit was included in the net profit before tax.

4. MSP also leased out 5 commercial units in the CBD for offices that cost $160,000 each to

construct in 2016. The cash value of each unit was $300,000. The lease agreement required

the customer to pay $2,000 a month for 15 years which includes a total interest component

of $60,000. All the 5 leases were signed in January of 2016 and each lease has an option for

the customer to pay a once off bullet payment of $10,000 to gain ownership at the end of the

lease term. As at 31 December 2017 all customers expressed willingness to exercise this

clause. Any damages to the property were the responsibility of MSP. The incremental

borrowing rate for MSP is 8% p.a.

5. MSP leases construction equipment with a cash value of $110,000 from a registered operator

in the construction industry who scaled down operations. The lease agreement required MSP

to pay $1,000 a month for 10 years which includes an interest component. The lease was

signed in January of 2017 with an option for MSP to pay a once off bullet payment of $15,000

to gain ownership at the end of the lease. As at 31 December 2017 MSP expressed no

willingness to exercise this option. Any damages to the equipment are the responsibility of

MSP. The interest rate implicit in the lease is 7.6%. p. a.

6. MSP has a practice of awarding fringe benefits to its staff members. Mr. Rutsito provided you

the following figures of the amounts of the total fringe benefits awarded to employees

calculated in terms of the Income Tax Act for PAYE purposes.

Benefit Amount ($)

Fuel allowance 16,000

Housing allowance 24,000

Cell-phone allowance 4,000

Groceries 6,000


44 | P a g e


Total 50,000

7. Also, on the 14th of September 2017, MSP sold an office block for an amount of $110,000 to

an unconnected individual with no tax clearance. Before selling, MSP was leasing out the

block under a 10-year finance lease agreement commencing 01 July 2013 and MSP cancelled

the lease agreement on the 31st of March 2017. MSP initially incurred a total cost of $60,000

in constructing the office building in 2013 and the lessee effected obligatory improvements

in terms of the lease agreement amounting to $12,000. The improvements were completed

in 2014 and brought into use by the lessee in the same year.

8. To fund a construction project in Highlands MSP issued 100, $10,000, 5-year convertible

debentures with a 12% coupon and all the debentures were taken up by individual persons.

9. MSP installed new software to help value properties and the license for this software was

purchased from a Indian vendor and renewable every two years. To help their staff with this

new software, MSP hired a South African expert to come for two weeks and train their staff.

The cost of the training was $5,000, the accommodation and food for the expert was $800

and $200 while the 2-year license cost for the software was $1,500. Accommodation and food

were supplied by a VAT registered vendor with their ITF263.

10. MSP had the following assets in its asset register at the end of 2017:

Asset Description Acquisition/lease date* Cost ($)

Borrowdale offices Land 1 Jan 2013 20,000

Building 1 Jan 2013 250,000

Equipment 1 August 2015 150,000

Furniture and fittings June 2009 30,000

11. All other expenses amounting to $235,000 were tax deductible.

12. Mr. Rutsito also indicated to you that MSP has always claimed the maximum possible capital

allowances where applicable and have always claimed input tax for VAT purposes were

applicable. Unless otherwise indicated MSP purchases all its supplies from VAT registered

operator.


45 | P a g e


Required

a. Calculate MSP’s taxable income for the 2017 year of assessment. Support each entry

with a brief narration on whether or not to include in taxable income.

Where no adjustment is necessary, indicate by way of a zero.

Communication skills – Presentation and layout

54

1

b. Discuss the VAT implications to MFP of the transactions in the notes 2-5 and note 9. 35

c. Calculate the Capital Gains Tax payable by MSP for the transaction in note 7 in the

2017 year of assessment


5

d. Discuss any withholding tax consequences to MSP for transaction in note 9 for the

2017 year of assessment

5

TOTAL 100


46 | P a g e


Solution

Calculate MSP’s taxable income for the 2017 year of assessment. Support each entry with a brief narration on whether or not to include in

taxable income.


Communication skills – Presentation and layout .

Total

Mark

Net Profit 554,000 0.5

Furniture purchase Capital in nature s8(1) 1 0 0.5 1.5

Construction Costs Cost of inventory S15(2) $500,000 incurred in year of assessment 1 0 0.5 1.5

Credit sales S8(1) included in full as MSP is entitled to the

amount 1 0 0.5 1.5

Finance income S8(1) accrued to MSP as it is due and payable 1 0 0.5 1.5

Deposit S8(1) beneficially received by MSP. 1 0 0.5 1.5

Commercial units cost Sec 15(2) incurred in 2016 year of assessment 1 0 0.5 1.5

Lease receivable for

commercial units

2,000*12 Sec 8(1) accrued in the year of assessment 1 24,000 2 3


47 | P a g e


Finance Income

PMT=24,000, N=14,

FV=0, i=8, comp

PV=197,862,

Armt P1=1, P2=2,

i=15,289

Sec 8(1) not received 1 (15,289) 3 4

Lease payments for

equipment

(1,000*12) Sec 15(2)(a) incurred in the year of assessment 1 (12,000) 1 2

Depreciation of Right of

use asset

PMT=12,000, N=10,

FV=15,000, i=7.6%,

comp PV=89,205

Depreciation=89,205/10

S15(2) not incurred 1 8,920 3 4

Finance cost Amrt P1 i=6,779 S15(2) not incurred 1 6,779 3 4

Fringe benefits: Fuel

allowance

Sec 15(2)(a) 1 0 0.5 1.5

Housing Allowance Sec 15(2)(a) 1 0 0.5 1.5

Cell-phone Allowance Sec 15(2)(a) 1 0 0.5 1.5

Groceries Sec 15(2)(a) – provided in lieu of salary 1 0 0.5 1.5

Recoupment [110,000-

54,000=56,000 limited Sec 8(1)(j) 1 6,000 3 4


48 | P a g e


to

60,000*2.5%*4=6,000

Profit on sale 110,000-60,000=50,000 Not received or accrued 1 (50,000) 1 2

Capital Allowance on

office block

Not granted in year of disposal 1 0 0.5 1.5

Untaxed portion of

Obligatory

improvements

12,000/9*6 Sec 8(1)(e) Obligatory Improvements under lease 0.5 8,000 1.5 2

Debenture receipt Sec 8(1) (a) Capital in nature 0.5 0 1 1.5

Debenture coupon Allowable deduction on debenture interest

Section 15(2) 0.5 0 1 1.5

Training Allowable deduction Sec15(2)(a) 0.5 0 1 1.5

Accommodation and

food

Disallowed expenditure – entertainment

Section 16(1)(m) 0.5 1,000 1 1.5


49 | P a g e


License fees (included in

expenses for 2017 is

$750)

1,500/2 Prepayment for 2018 has been incurred per section

15(2)(a) 0.5 (750) 1 1.5

Capital Allowances

Land

Office building

Equipment

Furniture and fittings

(250,000*2.5%)

(150,000*25%)

2017-2009=8

years>4years

Not a 4th sch asset

Sec 15(2)(c) a.r.w 4th sch.

Exhausted

1

1

1

0

6,250

37,500

0

0.5

1

1

0.5

1.5

1

1

1.5

Other expenses Sec 15(2) as stated 0 0.5

Communication 1

Available 54

Max 55


50 | P a g e


a. Discuss the VAT implications to MFP of the transactions in the notes 2-5 and note 9.

Note 2

MSP can only claim VAT on the furniture if it was charged VAT

In terms of section 6, VAT is levied on the supply of goods through an auctioneer by persons who are not registered operators.

MSP was therefore charged VAT.

1

1

1

The $15,000 is the value of supply as all amounts are excluding VAT

and therefore, the VAT paid by MSP was (15,000 x 15%) = 2,250.

1

1

The furniture is used in the making of taxable supplies as MSP supplies taxable supplies. 1

MSP therefore can claim input tax on the amount paid to ADC Auctioneers 1

Note 3

The supply of housing units is a taxable supply section 6(1). 1

Housing units are standard rated supplies. 1

Time of supply is the earlier of registration of transfer or any payment section 8(3)(d) 1

In this case it is the date the deposit is paid as the deposit is part of the consideration. 1

The value of supply is the total amount to be paid (24,000 x 10 x 20) $4,800,000 section 9(2) 1

Thus VAT will be 15/100 x 4,800,000 1

The interest portion is the supply of financial services per section 2 1

Financial services are exempt supplies therefore no VAT on the interest portion of the credit sale section 11(a) 1


51 | P a g e


As MSP deals only with registered VAT operators and makes taxable supplies it would have been able to claim input tax on the cost of

building the units section 16(1).

1

In 2017 MSP can claim input tax of [$500,000 x 15/100 = $75,000] 1

Note 4

The supply of a rental or leasing service is a taxable supply section 6(1) 1

Commercial units are standard rated supplies 1

The agreement is a rental agreement as per the section 2 definition because of the following:

MSP is letting out the property, and

the agreement is not a finance lease as MSP is not a required to register under the banking act

1

1

Time of supply is the date each payment is made or becomes due section 8(3a) 1

Thus, the time of supply is every month a payment is made. 1

The payment made monthly is the consideration section 9(3)

thus VAT will be [15/115 x 2,000 = 260.87

1

1

As MSP deals only with registered VAT vendors and makes taxable supplies it would have been able to claim input tax on the cost of

building the units section 16(1)

1

All claims should and were made in 2016 as per section 15(2)(a) 1

Note 5


52 | P a g e


The company MSP is leasing from is registered VAT vendor

and construction equipment is a taxable supply it therefore means MSP was charged VAT section 16 and 15

1

1

MSP makes housing units that are taxable supplies section 16(1) 1

MSP can claim the VAT it was charged section 16(1) 1

The input tax would be on the $1,000 payment which is the consideration

and thus VAT claimable will be 15/115*1,000 = $130.43

1

1

Note 9

License fees are paid to a foreign vendor and these are not imported services as defined and therefore there are no import VAT

consequences

1

The training service is being offered by a foreigner to a local to make taxable supplies and therefore is not an imported services as

defined in sections 6(1)(c) and section 13 of the VAT Act.

1

No output VAT shall arise for the training service 1

Vat was charged on the food as it is a Vatable supply from a VAT registered operator 1

MSP can claim input VAT on $200 i.e. [200 x 15% = $30] 1

MSP cant claim input tax on the accommodation bill as the provision of residential services is exempt. 1

Available

Max

39

35


53 | P a g e


c. Calculate the capital gain for the transaction in note 7.

Proceeds section 8(1) 110,000 1

Less Recoupment section 8(1) (6,000) 104,000 0.5

Allowable deductions

Cost section 11(1) 60,000 1

Less capital allowances section 8(1) (6,000) 0.5

Inflation allowance (60k * 2.5% * 5) section 11(2)(c) 7,500 1

Improvements section 11(2)(b) 12,000 1

Inflation allowance (12k * 2.5% * 4) section 11(2)(c) 1,200 (74,700) 1

Capital Gain 29,300

Available

Max

6

5

d. Discuss any withholding tax consequences for transaction in note 9 for the 2017 year of assessment

Note 7

Note 9

The training services are fees as defined as it is for technical work. 17th sch 1


54 | P a g e


Expert is a non-resident as he is from India. 1

Thus non-resident tax on fees of 15% is levied on the $5,000. Section 30 arw 17th sch 1

Withheld amount should be remitted to ZIMRA within 10 days. 1

The Accommodation and food are not paid to non-residents nor are they fees as per the 17th sch 1

Accommodation and food vendors have ITF263 certificates therefore no amount is to be withheld. 1

The license fee is for the right to use the software and is paid to a non-resident section 32 arw 19th sch 1

Therefore withholding tax on royalties of 15% is levied on the $1,500. 1

Withheld amount should be remitted to ZIMRA within 10 days. 1

Available

Max

9

5


55 | P a g e


Tutorial 4

You are a trainee with AKA Chartered Accountants (AKA) who recently passed your CTA exams, and

have been assigned to the firm’s tax service line.

One of the clients you have been assigned to is APC Feeds (APC), a partnership operated by 3 sisters

Abigail, Prisca and Conie. The partnership is involved in the production of a special type of racehorse

feed from its factory in the Stapleford area situated in the western outskirts of Harare. The

partnership commenced fully fledged business operations in 2013 after a successful pilot project in

2012. The partnership owns a piece of land on which it grows the special grass which is the main

ingredient in the production of the horse feed. The horse feed is in demand among the local horse

breeders and outside Zimbabwe where the number of customers has been steadily growing over the

years.

Partnership agreement

i) Profit is to be shared in the ratio of 1:2:3 for Abigail, Prisca and Conie respectively.

ii) The partnership pays the partners’ medical aid contributions as well as their personal life

assurance policies (whose beneficiary is the partnership).

Trial Balance

The income statement of the partnership in respect of the period 1 January 2017 to 31 December

2017 reflected a correct net profit of $126,000, (except for two errors noted below) after being

credited and debited with the following items in the trial balance:

Notes US$ US$

Credits:

Sales 1 300 000

Sundry Income 2 26 400

Insurance proceeds 3 15 000

Interest from CA Building Society

4 000

Debits:

Cost of sales (all tax deductible)

175 000

Depreciation

20 000

Insurance Premiums for:


56 | P a g e


Loss of profits

3 000

Partnership Joint policy

2 500

Medical aid (Service Provider is CIMAS) for:

Staff

5 600

Abigail

1 200

Prisca

1 800

Conie

` 1 300

Interest on Capital Accounts for:

Abigail

2 400

Prisca

1 900

Conie

2 100

Drawings for:

Abigail

13 000

Prisca

15 000

Conie

18 000

Annuity in favour of widow of deceased employee 4 5 400

Rental expense: Delivery truck 5 7 200

Bad Debts 6 1 887

Notes:

1. Sales - The accountant erroneously included in the sales figure an amount of $5,000 being

the proceeds on the disposal of partnership equipment upon which Special Initial Allowances

had been elected. The equipment was purchased during the 2015 year of assessment for

$4,500 and the rest of the sales figure in the trial balance were cash sales.

2. Sundry income - Sundry income during the period is made up of:

Dividend received from Dairy board (Pvt) Limited a local company. $10,000

Interest on staff loans $3,400

Bad debt recovered –

The amount had previously been allowed for tax purposes $5,000

Foreign Dividend from a South African Listed Company $8,000


57 | P a g e


3. In March 2017, a warehouse which was used to store feed for sale was destroyed by fire and

insurance proceeds of $15,000 were received from the insurance company. The warehouse

was originally built at a cost of $18,000 in 2014 and at the time it was destroyed, it had an ITV

of nil. The proceeds were used to construct another warehouse at a total cost of $14,000 and

this was completed in May of 2017.

4. The factory foreman died in March 2017 and the partners decided to give the widow a

monthly annuity of $1,350 for the next two years. The partners voluntarily paid the annuity.

5. The partnership was leasing one of the delivery vehicles from Prisca at a monthly rental of

$600. During the period January to December Prisca incurred running costs amounting to

$700. Prisca originally purchased the delivery vehicle in August 2016 for $18,000.

6. Bad debts consist of the following:

Mr X – a normal trade debtor that was declared insolvent during June 2017 $987

Mr Y – a 2015 trade debtor who passed away on 19 January 2016 $600

Ms Z – a loan to an employee of APC who had retired and was no longer

working and had come through to say they can’t pay $300

Additional Information:

• Conie borrowed money from PDC Bank to purchase her share in the partnership business.

Interest payable for the year ending 31 December 2017 amounted to $5,000.

• APC paid $1,200 to Conie for the use of office equipment which she had bought in 2015 for

$9,000 and was used by the partnership business. This amount was also erroneously not

accounted for in determining the net profit.


58 | P a g e


One of the partners Abigail, is also employed by Conco Ltd (a VAT registered operator) as the

marketing director. After you had finished the tax returns for the partnership Abigail approached you

seeking advice on her tax affairs and gave you the following information:

Abigail has been in the employee of Conco Ltd (Conco) for the past 25 years and has held various

positions within the organisation over the years. Detailed below is information about her

employment with Conco for the 2017 year of assessment:

a) During 2017 Abigail received a net salary of $40,800 after the deduction of Pay As You Earn

(PAYE) of $12,400 and NSSA pension contributions of $294. The total gross salary includes a

monthly transport allowance of $400, which she received for the 12 months in 2017. Due to

the cashflow challenges that Conco was facing towards the end of 2017, Abigail is yet to

receive her net salary of $3,400 for the month of December and is not sure whether her

employer was correct in deducting the PAYE relating to her December salary since it had not

been paid.

b) From 1 May to 31 August 2017, Abigail was seconded to Vee Pty Ltd (Vee) a company in South

Africa. During the secondment period Abigail received a monthly allowance of $500 from Vee,

over and above her normal salary that she continued to receive from Conco. Abigail received

her monthly allowance net of 10% South African withholding tax.

c) During 2017 Abigail had the right of use of an Isuzu KB double cab vehicle with an engine

capacity of 3,200cc which right she retained even during the period she was seconded to

South Africa. Abigail also received monthly fuel coupons of 200 litres for 12 months which

Conco had acquired in bulk for a cash consideration of $1.25 per litre. In terms of the vehicle

log book, she used the 60% of the fuel allocated to her for personal purposes over the entire

year.

d) Conco contributed $294 to NSSA pension fund for the benefit of Abigail and did not deduct it

from her salary.

e) In August 2017, Abigail bought a second-hand single cab truck from Conco for $6,000. At the

time that she purchased this vehicle it had a market value of $7,200 and Conco had initially


59 | P a g e


bought this vehicle brand-new for $45,000 from a VAT registered operator. The net book

value to Conco was $6,900 on the date of sale.

f) Abigail received board sitting fees of $4,000 from Conco for the board meeting that she

attended during 2017. She has been arguing with the payroll manager who wanted to include

these fees as part of her employment income for the purposes of calculating PAYE as in

Abigail’ s opinion, Conco is only supposed to withhold 20% from the board fees and not

subject them to PAYE.

g) Conco paid $12,000 during the year for Abigail’s daughter’s schools fees at the University of

Gondwanaland, a foreign university.

h) During the year Abigail paid medical expenses of $8,000 for her 21-year-old daughter

mentioned above, of which she was only able to recover 60% of this amount from her medical

aid society. Conco contributes $200 per month to Good Health Medical Aid Society for the

benefit of Abigail.

Abigail also owned a commercial property which she had been leasing to a local media company from

01 January 2014 and was to run for 15 years ending 2028. When the media company was liquidated

in August 2017 Abigail decided to sell the property. Abigail sold the property for a cash consideration

of $120,000 and she had initially acquired the property in 2013 for an amount of $50,000. In 2015

the media company leasing the property had effected contractual lease improvements to the tune

of $20,000 and this amount was within the range stipulated in the lease agreement. Abigail had

always claimed the maximum possible capital allowances on this property.

Required

QUESTION 1 Marks

a) Calculate, with brief notes, the Income Tax Payable by each of the partners, arising

from the partnership business and any other income from trade and investment for

the 2017 year of assessment.

Show all calculations

Communication Skills - Presentation & Layout

39

1

b) Calculate, giving reference to specific Income Tax Act Provisions, Abigail’s Pay as You

Earn for the 2017 year of assessment.

For amounts which are neither taxable nor deductible indicate by the use of a zero in the computation.

20


60 | P a g e


c) Draft a memo in which you advise Abigail, with reasons, on whether you are of the

opinion that the board sitting fees she received should or should not be subject to

20% withholding tax.

8

d) Discuss, with supporting calculations, the capital gains tax consequences to Abigail

of the sale of commercial property which was being leased to the media company

for the 2017 year of assessment.

Communication Skills - Logical Argument

10

1

e) Discuss, in terms of the Income Tax Act, whether Abigail would be taxable on the

allowance he received from Vee during the time she was seconded to Vee.

Communication Skills - Logical Argument

8

1

f) Calculate, with brief notes the VAT Implications to Conco for each of the benefits

given to Abigail by Conco in transactions (a – h). 12

Total 100

Solution

a) Calculate, with brief notes, the Income Tax Payable by each of the partners, arising from

the partnership business for the 2017 year of assessment.

Show all calculations

$ Marks

Net Income as per Income

statement 0.5 126,000 0.5

Proceeds from disposal 1 Capital in nature 0.5 (5,000) 1.5

Recoupment on sale of

equipment

[5,000 – 2,250] ltd to 2,250

1 Section 8 (1)(j) – gross

income 1 2,250 2

Interest on Staff on loans 0.5 Section 8 (1) – gross

income 0.5 0 1


61 | P a g e


Bad debt recovered 0.5 Section 8 (1) – gross

income 0.5 0 1

Foreign Dividend from a South

African Listed Company 1 Taxed at Separate Rate 0.5 (8,000) 1.5

Sundry Income: Dividends

received from Dairy board

(Pvt) Ltd

1 exempt (3rd schedule) 0.5 (10,000) 1.5

Insurance Proceeds 1 Capital in nature 0.5 (15,000) 1.5

Recoupment – proceeds used

to build another within 18

months.

1 Section 8 (1)(j) gross

income 0.5 0 1.5

New Warehouse [SIA] [14,000

x 25%] 1

Section 15(2)(c) – capital

allowances 1 (3,500) 2

Interest from CA Building

Society 1 exempt (3rd schedule) 0.5 (4,000) 1.5

Cost of Sales 0.5 Section 15(2)(a) –

allowable 0.5 0 1

Depreciation 0.5

Section 15(2)(a) – capital

in nature and not

incurred

0.5 20,000 1

Insurance Premiums – Loss of

Profits 0.5

Section 15(2)(a) –

allowable 0.5 0 1

Insurance Premiums:

Partnership joint policy 1 Capital in nature 0.5 2,500 1.5


62 | P a g e


Medical Aid – Staff

Partners

0.5

0.5

Section 15(2)(a) –

allowable

Distribution

0.5

0.5

0

0

1

1

Interest on Capital Accounts 0.5 Distribution 0.5 0 1

Salaries to Staff 0.5 Section 15(2)(a) –

allowable 0.5 0 1

Drawings by Partners 0.5 Distribution 0.5 0 1

Annuity in favour of widow –

restricted to 200 p.a

[5,400 -200]

1 Section 15(2)(q) –

allowable 1 5,200 2

Rental: Delivery truck 0.5 Section 15(2)(a) –

allowable 0.5 0 1

Bad Debts: (Mr X & Mr Y)

Ms Z – not previously in

income

1

Section 15(2)(g) –

allowable

0.5

300

1.5

Lease of Office Equipment 0.5 Section 15(2)(a) –

allowable 1 (1,200) 1.5

Joint Taxable Income 117,550

Separate Taxable Income for the Partners $ $ $ Marks

Abigail Prisca Conie

Share of Profit 19,592 39,183 58,775 1.5

Medical Aid 1,200 1,800 1,300 1.5

Interest on Capital Accounts 2,400 1,900 2,100 1.5


63 | P a g e


Drawings 13,000 15,000 18,000 1.5

Rental – Delivery Truck 7,200 0.5

Motor vehicle running costs (700) 0.5

Accelerated W&T on Delivery Vehicle (4,500) 0.5

Lease of office equipment 1,200 0.5

Interest Payable (5,000) 0.5

Improvements under lease (Remaining

amount not included in gross income in

previous years)

16,000 1.5

Taxable Income 52,192 59,883 76,375

Tax thereof @ 25.75% 13,439 15,420 19,667

1 for

25.75%

Less Credits: Medical aid contributions (50%) (600) (900) (650) 1.5

12,839 14,520 19,017

Foreign Dividend at 20% ($8,000* 20%)

[deemed source section 12]

(double taxation not considered not part of

CTA 1 syllabus)

267 533 800 3

Tax Liability 13,106 15,053 19,817

Presentation & Layout 1

Available

Max

47.5

40

b) Calculate, giving reference to specific Income Tax Act Provisions, Abigail’s Pay as You Earn

for the 2017 year of assessment.

$ Marks

Gross Salary [40,800 + 6,400 + 294] 0.5

Section 8, gross

income 1 47,494 1.5


64 | P a g e


Transport Allowance 0.5

Section 8, gross

income 0.5 0 1

NSSA Contributions

0.5

Section 15(2)(a),

allowable

deduction

1 (294) 1.5

Gross Monthly Allowance

[500*4*1/0.9] 0.5

Section 8, gross

income 1.5 2,222 2

Employer NSSA Contribution 0.5

Section 8, gross

income 0.5 294 1

Motor vehicle Use Benefit [800*12] 0.5

Section 8, gross

income 1 9,600 1.5

Fuel Allowance Benefit

[200*1.25*60%*12] 0.5

Section 8, gross

income 2 1,800 2.5

Purchase of Motor Vehicle Benefit

[7,200 - 6,000] 0.5

Section 8, gross

income 1 1,200 1.5

Board Sitting Fees 0.5

Section 8, gross

income 0.5 4,000 1

School Fees Benefit 0.5

Section 8, gross

income 0.5 12,000 1

Medical Expenses

0.5

Section 16,

prohibited

deduction domestic

expenses

0.5 0 1

Employer Contribution to Medical Aid 0.5

3rd Schedule

(exempt) 0.5 0 1


Tax on first 60,000 1 14,580 1

Tax on [78,022 - 60,000] * 35% 1 6,308 1


65 | P a g e


Tax Credits:

Medical Expenses [8,000*40%*50%] 2 (1,600) 2

Tax Payable 19,287

AIDS Levy @ 3% 1 578 1

19,866

PAYE Deducted 1 (12,400) 1

TAX PAYABLE/ REFUNDABLE 7,466

Available

Max

22.5

20

c) Draft a memo in which you advise Abigail, with reasons, on whether you are of the opinion

that the board sitting fees she received should be subject to 20% withholding tax.

Marks

Memo Format 1

Abigail is an employee of Conco as defined – 13th Schedule since she receives

remuneration from Conco such as a salary. 1

According to section 36J, 20% should be withheld from payments to resident and

non-resident non-executive directors who are not subject to PAYE. 2

According to the 13th schedule remuneration excludes – (b) directors fees if no

other amounts constituting remuneration have been paid. 1

With reference to the 13th schedule, Abigail’s board fees will be part of her

remuneration package since she is also receiving other remuneration from Conco. 1

This means that the board sitting fees are part of her employment income

therefore subject to PAYE. 1

Since the board sitting fees are subject to PAYE they are automatically excluded

from the provisions of section 36J, therefore no withholding taxes should be

levied.

1


66 | P a g e


Therefore, Abigail’s opinion is wrong, and the board fees are part of her

employment income and there are no withholding taxes. 1

Available

Max

9

8

d) Discuss with supporting calculations the capital gains tax consequences to Abigail of the

sale of commercial property which was being leased to the media company for the 2017

year of assessment.

Marks

Capital gains tax arises on the disposal of specified assets. Specified assets are immovable

property and marketable instruments. 1

The commercial property is an immovable property; thus, its sale would attract capital

gains tax. 1

The capital gains tax would be calculated by subtracting s11 deductions from the gross

capital amount. 1

The gross capital amount is the proceeds from the sale, less any amount included in gross

income. Section 8(1) 1

Thus, the gross capital amount would be $120,000 – $3,750 = $116,250 1

Section 11(2)(a) allows for the deduction of the cost of the acquisition of a specified

asset. 1

Thus, a deduction of $50,000 would be allowed. 1

Section 11(5) stipulates that where a taxpayer as lessor of a property had been charged

income tax under section 8(1)(e) of the income tax act, the taxpayer shall be deemed to

have incurred the amount included in their taxable income.

2

In this case Abigail would have had included in their taxable income and amount of

$20,000.

1

Inflation allowance is also deductible on this amount. [20,000*2.5%*3] 1

Thus, upon the subsequent sale of the commercial property, Abigail will be allowed a

deduction of 20,000 as per section 11 in the determination of capital gains tax payable.

1


67 | P a g e


Also allowable under section 11(2)(c) are inflation allowances at a rate of 2.5% for each

year on the cost of the specified asset and any improvements. 1

The inflation allowance in this case would amount to 2.5% x 5 x 50,000 1

Capital gains are charged at a rate of 20% on immovable property acquired after 1

February 2009, 20% tax would be charged on the disposal. 1

Communication Skills and Logical Argument 1

Available

Max

14

11

e) Discuss in terms of the Income Tax Act whether Abigail would be taxable on the allowance

she received from Vee during the time she was seconded to Vee.

Marks

The source of income from services rendered is where the services are rendered

– Shein

1

1

Therefore, the true source of the Vee income is not Zimbabwe since the services

were rendered outside Zimbabwe. 1

However, s12(c) of the income tax act stipulates that in the case where an

ordinary resident earns employment income while temporarily absent from

Zimbabwe, said income will be deemed to be from a source within Zimbabwe.

1

Temporary absence is a period of no more than 183 days in aggregate 1

Abigail was outside Zimbabwe for 123 days (30 + 31 + 31 + 31) 1

Abigail was thus temporarily absent, and the allowance would be deemed to be

from a source within Zimbabwe. 1

This constitutes gross income in the hands of Abigail and will be taxable in

Zimbabwe. 1

Communication Skills and Logical Argument 1

Available

Max

12

9


68 | P a g e


f) Calculate, with brief notes the VAT Implications to Conco for each of the benefits given to Abigail by

Conco in transactions (a – h).

$ Marks

Salary Not trade Section 2 1 0 0.5

Transport Allowance Cash is not a good/service, no supply

Section 2 1 0 0.5

Right of Use of Isuzu [15/115*9,600] Section 17(3) 2 1,252 0.5

Fuel Allowance Supply of a exempt good Section 10 1 0 0.5

Purchase of single cab

truck

Second hand Motor Vehicle Section

6(1)(a) 1 0 0.5

Board Sitting Fees Employment excluded from trade

section 2 1 0 0.5

School Fees Benefit Deemed supply is exempt 1 0 0.5

Medical expenses Supply of exempt service Section 11 1 0 0.5

Available

Max

12

12


69 | P a g e


Tutorial 5

All amounts are in United States Dollars and are exclusive of VAT unless otherwise indicated. All

purchases or supplies were from VAT registered operators unless otherwise stated.

PART A

KO group is a leading supermarket retailer whose business covers three major categories, comprising

groceries, basic clothing and textiles and houseware products. The groceries category includes dry

groceries, butchery, delicatessen, takeaway, bakery, provisions and fruit and vegetable sections.

KO Zimbabwe Limited trades under three highly recognised brand names, KO Stores, Bon Voyage'

Stores, and KO mart. The diversified distribution channel allows the Group to target all segments of

the market. In this regard, the Group has specifically profiled its stores in terms of design, product

range, services and other offerings in a way that effectively caters for the specific requirements in

the low, middle and high-income consumer categories.

KO Zimbabwe Limited has maintained its position as one of the dominant supermarket retailers in

the country's competitive retail sector, despite the effect of liquidity constraints and low disposable

incomes. The Group has developed its own brands through the KO Pot 'O' Gold, KO Value, Bon Voyage

Premier Choice and Shoppers’ Choice labels.

You are a Certificate in Theory of Accounting (CTA) student and a third-year trainee at KO and have

been assigned to work on the following tax queries of the entity in preparation of the 2016 annual

report.

1. KO has a diverse and huge source of receipts and the following need to be reviewed in terms

of VAT and Income Tax:

1.1. Deposits for returnable containers. KO sells some beverages in returnable

containers. A deposit of the container is charged depending on the size of the

container and the material. The deposits are collected together with the product

amount and banked together. The suppliers of the beverages would have charged

KO inclusive of an amount for the container at the time of acquisition.

1.2. KO has agency arrangements with some VAT registered suppliers for slow moving

products or new products, wherein suppliers are willing to allow KO to merchandise

their wares without KO paying for them. When the wares are then sold by KO, then

KO is paid a commission, which is usually a pre-agreed percentage of the selling price.

2. KO has a relatively few foreign transactions whose VAT and Income Tax Implications need to

be considered:

2.1. Foreign interest – KO received foreign interest of $538,000. This was net of transfer

charges of $2,000 and net of withholding tax in the foreign country of 10%.


70 | P a g e


2.2. Dividends – KO received foreign dividends of $176,500 net of transfer charges of

$3,500.

3. KO made the following asset disposals for which VAT and Income Tax and CGT consequences

may arise.

3.1. A delivery truck was disposed for a total of $26,000 in November 2016. It had

originally been purchased in 2014 for $70,000 from a VAT registered operator and

had a book value of $12,000. A profit on disposal of $14,000 was correctly recorded

in the books of accounts.

3.2. During the month of January one of the warehouses caught fire which destroyed

inventories which had been purchased for $33,200 from registered operators but

had been written down to a Net Realisable Value of $25,000 in the accounting

records. The fire also destroyed the warehouse building itself which had a book value

of $45,000 for accounting purposes. KO had constructed the warehouse in January

2014 for $48,000. KO received compensation of $80,000 (being $30,000 for the

inventories and $50,000 for the warehouse) KO has already applied $30,000 of the

$80,000 to replenish its inventories and will use the balance of $50,000 to

reconstruct the warehouse by June 2017.

3.3. KO acquired a house for use as offices for $145,000 from a non-registered operator

in Milton Park in May 2016. KO already has a property portfolio which it holds for

speculative purposes. As they were about to begin renovations, KO realised that the

property will not suit the ambience required since a new funeral parlour had

thereafter moved into a neighbouring property. The parlour is very busy and this

causes crowds of mourners at KO’s entrance. KO profitably sold the property for

$150,000 in December 2016.

4. KO facelifted its First Street branch in 2016. It put in ceramic tiles which cost $23,000 and

replaced the vinyl ones which are old fashioned and had begun to crack. KO also changed the

ceiling to put in one that allows better room temperature regulation for $14,500. Both

expenditures were paid to a VAT registered operator.

5. KO is leasing a property at the Chisipite shopping centre. In terms of the lease agreement KO

is obliged improve the property for up to $500,000 in January 2016. KO commenced the work

on 1 February 2016 and completed the improvements on the 31st of March 2016 for $535,000.

They immediately brought the improvements into use when the remaining lease period was

50 months.

6. KO entered into several transactions detailed below:

6.1. On the 31st of July 2016, KO disposed Investment Property being a block of flats for

$780,000 in the Avenues area. The property was acquired for ZWD 4,500,000 in 1995

when the exchange rate was ZWD 10: USD 1

6.2. On the 3rd of August 2016, KO disposed of Econet Wireless Zimbabwe (EWZ) shares

and received $99,000 being an amount net of withholding tax. EWZ shares are listed


71 | P a g e


on the Zimbabwe Stock Exchange (ZSE). They had acquired the shares for $93,000 in

July of 2014.

6.3. On the 9th of August 2016, KO also disposed of treasury bills issued by the Ministry

of Finance of Zimbabwe worth $270,000 that it had acquired for $256,000 in July

2015.

7. KO would like to review the Income tax and VAT calculations on some of its employee benefits

listed below:

7.1. Motoring benefits to its managers. 30 branch managers have the right of use of Ford

Ranger T6 twin cabs (4x4) 3.2 litre diesel cars. Two of these are being sold to the

employees at below their market values by a cumulative $15,500. Three of the

vehicles were bought in March 2016 for 3 newly promoted managers who were not

entitled to company vehicles previously. The managers were allocated the vehicles

on the 1st of April 2016. 3 Executive directors each have the right of use of an SUV

Range Rover 4.5 ltr and a Toyota Hilux Twin 4 ltr v6 Twin cab. It is estimated that on

average all these vehicles are used 40% for private use and 60% business.

7.2. Housing benefits to managers. The 30 managers all live in KO houses except for 3

managers who live in houses rented by KO. The 3 rented houses cost KO $18,000

during the year 2016 and the average rentals for the other 27 houses owned by KO

is $600 per month.

7.3. Staff was awarded cash allowances totalling $2,700,000 during the 2016 year.


72 | P a g e


QUESTION 1 REQUIRED Marks

Sub-total

Total

a) Discuss the Income Tax implications to KO of the transactions 1.1. and 1.2. for the year ended 31 December 2016.

8 8

b) Discuss the VAT implications to KO of the transactions in 1.1 and 1.2. In your discussion focus on the following:

i. Whether the supplies are for trading purposes ii. The value of the supply iii. The time of supply

8 8

c) Calculate, with supporting explanations the Income Tax implications to KO of transactions in 2.1 and 2.2. for the year ended 31 December 2016.

10 10

d) Discuss whether the disposal proceeds to KO from the Milton Park house are capital or revenue in nature.

5 5

e) Calculate the Income Tax implications to KO for the year ended 31 December 2016 to the assets disposed of in note 3.

i. Note 3.1. ii. Note 3.2. iii. Note 3.3.

4 8 4

16

f) Discuss whether the expenditures in note 4 are revenue or capital in nature.

5 5

g) Calculate the amounts allowable as a deduction in 2016 for KO on the leasing arrangement in note 5.

6 6

h) Discuss with supporting calculations the Income tax implications of transactions in note 6


2 2 2

6

i) Calculate amounts deductible for income tax purposes for KO on its employee benefit expenses in note 7. Support the calculations with brief notes.

5 5

j) Compute the 2016 VAT implications with brief notes on the foreign transactions in note 3, 6 and 7

i. Note 3 ii. Note 6 iii. Note 7

7 6

13

26

Lay out and Presentation 5

Total 100


73 | P a g e


Solution

Question 1 (a)

Discuss the Income Tax implications of the transactions 1.1. and 1.2.

Marks

1.1 The issue at hand is when the deposits for returnable containers has been received or accrued.

1

Since KO has already paid for the containers at the time of acquisition, the containers belong to them and are part of their inventory.

2

Income is included at the earlier of receipt or accrual. 1

When the deposit is received, it is included in KO’s gross income, in that year of assessment.

1

1.2 The issue at hand is when the commission for the slow-moving products will become part of KO’s gross income.

1

Income is included at the earlier of receipt or accrual. 1

The commission only accrues to KO when the wares are sold by KO. 2

This is when they become entitled to the commission. (Lategan) 2

Therefore, the commission is included as part of KO’s gross income when the wares are sold.

1

Question 1 (b)

Discuss the VAT implications of the transactions in 1.1 and 1.2.

Marks

1.1 S6(1) of the VAT Act stipulates that VAT is charged on the value of the supply by any registered operator of goods or services supplied by him in the course of furtherance of any trade carried on by him.

1

Given that KO is a registered operator, thus, supplies made by KO would be subject to VAT unless they are exempt supplies.

1

Since the returnable containers are neither exempt nor zero rated they will be standard rated.

1

The value of supply is the consideration less VAT. 1

The time of supply is the earlier of the invoice or payment. 1

1.2 In accordance with Section 56(1), where an agent makes a supply of goods or services on behalf of another person who is his principal, that supply shall be deemed to have been made by the principal.

1

KO is acting as an agent of the other suppliers; therefore, they don’t need to charge any output tax on this transaction.

1

The principal i.e. the suppliers will charge VAT but only if they are registered operators.

1

For KO the VAT consequences will only arise to the extent of the commission he received from the suppliers.

1


74 | P a g e


KO will charge output tax on the commission received for the services they would have rendered.

1

The value of supply is the consideration less VAT. 1

The time of supply is the earlier of the invoice or payment. 1

Question 1 (c)

Calculate, with supporting explanations the Income Tax implications of transactions in 2.1 and 2.2. Marks

$ 2.1 INCOME TAX

Foreign interest falls under S8 and will be included in KO's gross income. 1

The transfer charges are not deductible. 1

Foreign Interest [538,000 + 2,000]/90% 600,000.00 3

2.2 INCOME TAX

Foreign dividend fall under S8 and will be included in KO's gross income. 1

The transfer charges are not deductible. 1

The dividends are taxed at a special rate of 20% 1

Foreign Dividends @ 20% [1765,500+3,500]*20% 36,000.00 3

Question 1 (d)

Discuss whether the disposal proceeds from the Milton Park house are capital or revenue in nature.

Marks

When KO bought the house, their intention was to use it for office, of which the use is of a capital nature.

1

Using the tree and fruit approach, the office can be considered to be the tree being used to produce the fruit i.e. revenue making activities

1

Just because the building was sold profitably does not necessarily mean KO sold it to make profit.

1

In as much as the other properties are held for speculative purposes, meaning most probably KO enters into similar transactions often, this case is different.

1

The sale was only made for strategic business purposes and not for a profit-making scheme.

1

Therefore it can be concluded that, the proceeds from the sale are of a capital nature.

1


75 | P a g e


Question 1 (e)

Calculate the Income Tax implications to the assets disposed of in note 3. Marks


$ 3.1 Proceeds 26,000 1

ITV [70,000-35,000] (35,000) 2

Potential Scrapping Allowance (9,000) 1

No scrapping allowance - not scrapped - 1

3.2 Inventory lost in fire (33,200) 1

Prohibited deduction - s16 30,000 1

Deduction allowed (3,200) (3,200) 1

Proceeds 50,000 1

ITV (48k x 95%) (45,600) 1

Potential recoupment 4,400 1

Lim to allowances granted (48k x 2 x 2.5%) 2,400 1

Recoupment - s8(1)(h) - - 1

3.3 Proceeds 150,000 1

ITV (145,000) 2

Potential Recoupment 5,000 0.5

Lim to allowances granted (145k x 0 x 2.5%) - 1

Recoupment - - 1

Question 1 (f)

Discuss whether the expenditures in note 4 are revenue or capital in nature.

Marks

The issue at hand is whether the replacement of the tiles is an improvement or a repair.

1

An improvement will be of a capital nature and repairs of a revenue nature. 1

An improvement will increase the income earning capacity of the asset, and a repair will be restoring it to its original state.

1

In as much as the ceramic tiles improve the conditions of the building, it does not change its income earning capacity.

1


76 | P a g e


Case law also states that using different material doesn’t necessarily mean it’s now an improvement – CIR vs African Products Manufacturing Ltd.

2

Therefore, these are repairs and are of a revenue nature and can be deducted in calculating taxable income.

1

The changing of the ceiling however, is a renewal of a substantial part of the building, and is thus an improvement.

1

Thus, the ceiling is capital in nature. 1

Question 1 (g)

Calculate the amounts allowable as a deduction in 2016 for KO on the leasing arrangement in note 5. Marks

Deductions allowed over shorter of 10 years and unexpired lease term

1

10 years (120 months) vs 50 months, 50 months shorter 1

Contractual Improvements (500,000/50*9) 90,000.00 2 Voluntary Improvements (35k x 2.5%) - commercial building 875.00 2

Total Deductions 90,875.00

Question 1 (h)

Calculate with brief notes the Income tax implications of transactions in note 6 Marks


6.1 The proceeds from the disposal of the investment property are capital nature therefore will not be included in KO's taxable income. 1

In the case of this property, recoupment will be impracticable to calculate as it was purchased during the Zimbabwe Dollar era 1

6.2 The proceeds from the disposal of the Econet shares are capital nature therefore will not be included in KO's taxable income. 1

Instead the disposal will attract CGT consequences 1

6.3 The proceeds from the disposal of the treasury bills are capital nature therefore will not be included in KO's taxable income. 1

Instead the disposal will attract CGT consequences 1


77 | P a g e


Question 1 (i)

Calculate amounts deductible for income tax purposes for KO on its employee benefit expenses in note 7. Support the calculations with brief notes. Marks

7.1 Motoring Benefits

Managers ((30-2)*10k*25%) [PMVs lim to 10k] 70,000.00 2

Disposals - recoup/no scrap [not enough info for calc] - 1

Execs (3*2*10k*25%) 15,000.00 2

7.2 Housing Benefits

Rented houses 18,000.00 1

Owned houses - W&T (no values given) - 1

7.3 Cash Allowances 2,700,000.00 1

Total Employee Benefit Expense 2,803,000.00 Question 1 (j)

Compute the 2016 VAT implications with brief notes on the transactions in note 3, 6 and 7 Marks

i. Note 3 ii. Note 6 iii. Note 7

$ i. Note 3 3.1 Disposal of Delivery Truck - 2nd hand MV - 1

Taxable standard rated supply 1 3.2 Insurance Compensation [80,000*15/115] 10,435 2

Deemed Supply 1

Purchase of new inventory (30k*15%) (4,500) 1 3.3 Sale of House [150,000*15%] 22,500 1

Fixed Property Vatable 1

ii. Note 6 6.1 Sale of Investment Property [780,000*15%] 117,000 1

Fixed Property Vatable 1 6.2 Disposal of Shares is a financial services as defined. - 1

Financial services are exempt from VAT, therefore no VAT Implications on the dividends. 1

6.3 Disposal of Treasury Bills is a financial services as defined. - 1


78 | P a g e


Financial services are exempt from VAT, therefore no VAT Implications on the dividends. 1

iii. Note 7 7.1 Motoring Benefit [800*27*12]*15/115 33,809 2

Motoring Benefits [800*3*9]*15/115 2,817 2

Motoring Benefits [800*3*2*12]*15/115 - execs 7,513 2

Deemed Supply 1

Sale of motor vehicle at below market value - 1

Second hand motor vehicle specifically excluded 1

Deemed Supply 1

7.2 Housing Benefits - 1

Residential Accommodation exempt 1

7.3 Cash Allowances - 1

Cash not a good 1


79 | P a g e


Tutorial 6

Question 1 100 Marks

All amounts are in United States Dollars and are exclusive of VAT unless otherwise indicated

PART A

Ms Christina Mabwe was employed by Batvest Financial Solutions as a marketing manager and

retired on the 31st of August 2016. Christina turned 65 in July 2016. You’re a CTA level 1 student and

good friends with Christina’s daughter. Christina has approached you with a list of transactions she

entered in the year ended 31 December 2016 and needs your advice on the different tax implications.

Christina is a VAT registered operator as she about to buy a retail supermarket and so she has

voluntarily reistered.

Notes $

Salary 16,000

1st and 2nd quarter performance bonuses 1,000

Dividends from a local private company 1,500

Dividends from CBZ Building society 535

Rental Income 1 4,050

Lumpsum receipts from pension fund 2 54,000

Lumpsum receipt from a Retirement Annuity Fund (RAF) 3 98,000

Gratuity 2,500

Cash in Lieu of Leave 6,000

Medical Expenses paid for by former employer for disabled son’s wheelchair 700

Motoring Benefit 4-

Housing Benefit 5 -

Loan Benefit 6 -

Medical Aid employer contributions 480


80 | P a g e


Notes $

Repairs of principal private residence Refer to PART B

Medical Aid self-contributions 960

Pension fund self-contributions 2,800

Pension fund employer contributions 1,200

RAF self-contributions 1,000

NSSA 196

Pension annuity 7 2,000

Subscription to the Chartered Marketers’ Association 536

Paid up medical expenses for Christina not covered by medical aid 452

Interest received in savings account from a local bank 1,650

Electricity Charges 360

City Council Rates 150

Notes:

1. Rentals Received

Being rentals from a Kuwadzana house that she inherited from her late father on the 1st of

January 2015.

2. Lumpsum receipt from registered Pension Fund. Christina’s total pension entitlement is

$150,000.

3. Lumpsum receipt from RAF. His pension entitlement is $270,000. Assume that all her

contributions to the RAF were allowed as a deduction.

4. Christina had the use of a VW Amarok, Twin cab 2.4-liter petrol vehicle from the beginning of

the year to the retirement date. On retirement, Batvest sold the vehicle to her for $4,300. Its

market value then was $22,000.

5. Christina stayed in a Batvest house and moved out on the 1st of October 2016. The house cost

Batvest $165,000 to construct. Furniture also cost Batvest $23,000. Rentals in the same area

for a similar house were $600 during the 2016 year.

6. Christina had taken out an interest free loan of $5,000 on the 1st of February. On the 31st of

August, the principal amount was netted off from part of her retirement proceeds.

7. Batvest contributed 50% to Christina’s pension. Over the years Christina’s contribution

exceeded the limit by $5,000. She receives an annuity of $500 per month starting September

2016. Her life expectancy is 10 years from retirement date.


81 | P a g e


PART B

Christina also entered into the following transactions and would want you to review and advise on

the Capital Gains Tax consequences.

1. Christina acquired a house in 2014 in the Water falls area for $67,000 from a VAT non-

registered operator. She was staying in a company house ever since and moved into the

Waterfalls house on the 1st of October 2016. She however had always been looking to move

to the Northern side of town and on receiving lumpsums from pension she disposed of the

Waterfalls home for $80,000 and bought another in Borrowdale West for $120,000. She

moved into the Borrowdale home on the 23rd of December 2016. She paid $2,000 for the

conveyancing costs and $6,000 in stamp duty. During her short stay in the Waterfalls home

she had incurred the following expenditures from registered operators:

$

• Roof Repairs 1,011

• Re-painting 500

• Water drainage construction 450

• Durawall 1,500

• Drilling of borehole 3,450

2. Christina disposed of 7,000 shares in Lake Harvest (Pvt) Ltd. The shares had a market value of

$7,500. She had acquired the shares in January of 2014 for $6,780.

3. Christina disposed of the Kuwadzana house on the 28th of December 2016 to her husband for

$37,000. She had inherited the house from her deceased father at the beginning of the year

2015. The deceased estate valuation was $35,000 at that time. The fair market value of the

house now is $42,000.

4. Christina sold her Toyota wish Passenger Motor Vehicle for $3,500 to her son. The car had

cost her $5,000 in September 2015 and its fair value was $4,500 on the date of disposal.

5. Christina also disposed of a commercial property she had built for $35,000 in Marondera on

the 31st of January 2013. Christina sold the property so that she concentrates on starting a

business in Harare. She agreed on a cash selling price of $50,000 for the property. The buyer

then negotiated to pay in 4 equal instalments over 2 years of $15,000 each instalment

commencing 30 November 2016, 31 May 2017, 30 November 2017 and finally 31 May 2018.


82 | P a g e


QUESTION 1 REQUIRED Marks

Sub-total

Total

k) Calculate income tax payable by Christina from PART A transactions for the year ended 31 December 2016. Insert brief explanatory notes for each transaction

45 45

l) Calculate the Capital Gains Tax payable or refundable by or to Christina in the year ended 31 December 2016. Your answer should address the assets disposed of in Part B:

i. Water falls residence ii. Lake Harvest Shares iii. Kuwadzana house iv. Toyota Wish v. Marondera Property

14 3 8 2

11

38

m) Discuss any possible 2016 output VAT consequences of the disposals in PART B notes 1, 2, 4 and 5. In your discussion focus on the following:

i. The classification of the supply i.e. taxable or non-taxable and at what rate.

ii. The Value of Supply iii. The Time of Supply

15 15



83 | P a g e


Solution

a) Calculate income tax payable by Christina from PART A transactions. Insert brief explanatory notes for each transaction

45 45

MARKS

Christina Mabwe - Income Tax Computation for the 2016 Year of Assessment

$ Employment income

Salary - GI s8 16,000 0.50

Bonus - GI s8 1,000 0.50

- First 1k of bonus exempt - s14 + 3rd schedule (1,000) - 1.00

Lumpsum - pension fund - s8(1)r tax at highest marginal - 0.50

Lumpsum - RAF - s8(1)n tax at highest marginal - 0.50

Gratuity - s8 2,500 1.00

CILOL - s8 6,000 1.00

Medical expenses paid by employer - s8 700 1.00

- 3rd schedule exemption for expense by employer (700) - 1.00

Motoring benefit:

- Free use of vehicle - s8 - 600 x 8 (2400cc) 4,800 2.00

- Vehicle sale - s8 (22k - 4.3k) 17,700 1.00

- Elderly exemption - 3rd schedule (17,700) - 1.00

Housing benefit - s8 (9 x 600) 5,400 1.00

Furniture benefit - s8 (8% x 23k) 1,840 2.00

Loan benefit - s8 (((5% + 1%) - 0%) x 5k x 8/12) 200 2.00

Medical aid contributions by employer - s8 480 0.50

- Exempt - 3rd schedule (480) - 1.00

Medical aid contributions by self - s16 prohibited - 0.50

Pension fund contributions:

- By employer - exempt 3rd schedule - 1.00

- Self - pension s15 + 6th schedule (2,800) 1.00

- Self - RAF s15 + 6th sched (3,000) 1.00

- Limited to 5.4k total (5,400) (5,400) 1.00

- NSSA - lim to 3.5% x 700 * 8 = 196 (196) 2.00

Pension receipt - GI s8 - ((500x10x12)-5k)/500x10x12) x 2k) 1,833 1.00

- Elderly exemption (1,833) - 1.00

Professional subscriptions - s15 (536) 1.00

Medical expenses not covered - s16 prohibited - 0.50


84 | P a g e


Taxable income 30,608 Tax on first 18k 2,880 1.00

Tax on 30,608 - 18k @25% 3,152 6,032 1.00

Pension fund lumpsum - s8 54k x 25% 13,500 1.00

RAF:

- Receipt - s8 98,000 1.00

- Commutation - 270k/3 - 3rd schedule (90,000) 1.00

- Taxable RAF receipt 8,000

- Tax @ 25% 2,000 1.00

21,532

Tax credits - to be granted whether included under emploment or trade:

- Medical aid contributions (960/2) (480) 1.00

- Medical aid shortfall (452/2) (226) 1.00

- Disabled child (900) 1.00

- Elderly credit (900) 1.00

19,026 AIDS levy @ 3% 571 1.00

Tax payable from employment income 19,597

Trade and investment income

Dividends from local pvt company - 3rd schedule - 1.00

Dividends from CBZ Building Society - s8 535 1.00

Rental income - s8 4,050 1.00

- Elderly exemption on 1st 3k - 3rd schedule (3,000) 1,050 1.00

Repairs to PPR - s16 prohibited private expenditure - 1.00

Interest in savings account - 3rd schedule exempt - 1.00

Electricity charges - s16 private expenditure - 1.00

Rates - s16 private expenditure - 1.00

Taxable income 1,585 Tax @ 25.75% 408 1.00

Total tax payable 20,005

Available 47.50

Max 45.00


85 | P a g e


b) Calculate the Capital Gains Tax payable or refundable by or to Christina. Your answer should address the assets disposed of in Part B:

i. Water falls residence ii. Lake Harvest Shares iii. Kuwadzana house iv. Toyota Wish v. Marondera Property

14 3

12 2 6

38

i. Water falls residence

MARKS

Christina Mabwe - Capital Gains Tax Computation for the 2016 Year of Assessment

$ Waterfalls


Less

Cost 67,000 1.00

Inflation allowance (67k x 2.5% x 3) 5,025 1.00

Roof repairs - not improvement - 1.00

Painting - not improvement - 1.00

Drainage construction 450 1.00

Inflation allowance (450 x 2 x 2.5%) 23 1.00

Durawall 1,500 1.00

Inflation allowance (1.5k x 2.5% x 3) 113 1.00

Borehole drilling 3,450 1.00

Inflation allowance (3,450 x 2.5%) 86 1.00

Conveyancing costs 2,000 1.00

Stamp duty 6,000 (85,646) 1.00

Capital loss (5,646) Available 14

Max 14

ii. Lake Harvest Shares

Lake Harvest Shares

Proceeds 7,000 1.00

Less


86 | P a g e


Cost 6,780 1.00

Inflation allowance (2.5% x 3 x 6,780) 509 (7,289) 1.00

Capital loss (289)

iii. Kuwadzana house

MARKS

The sale is of a specified asset (immovable property), thus it attracts CGT. 1

S16 of the CGT Act deals with transfers of specified assets between companies under common control.

1

S16 stipulates that, upon sale, the seller may elect to transfer the asset(s) at an amount (deemed selling price) equal to the deductions allowed under s11(2)

2

Thus, CGT would be:

Kuwadzana House

Deemed proceeds 35,875 1.00

Recoupment - 0.50

GCA 35,875 Less

Cost 35,000 1.00

Capital allowances granted - 1.00

Inflation allowance (2.5% x 35k x 1) 875 (35,875) 1.00

Capital gain - Available 8.5

Max 7

iv. Toyota Wish

MARKS

Capital gains tax arises on the disposal of specified assets 1

Specified assets are immovable property and marketable securities 1

Given that the vehicle is a movable property, its disposal does not attract any CGT.

1

Available 3

Max 2


87 | P a g e


v. Marondera Property

Marondera property


Recoupment (25k x 2.5% x 5) (3,125) 1.00

GCA 56,875 Less

Cost

- Land 10,500 1.00

- Building 25,000 1.00

Inflation allowance (2.5% x 10.5k x 7) + (2.5% x25k x 6) 5,588 2.00

Capital allowances granted (3,125) (37,963) 1.00

Potential capital gain 18,913 Suspensive sales relief - s18 (45k/60k x 18,913) (14,184) 3.00

Capital gain 4,728

CGT @ 20% 946 1.00

Available 12.00

Max 11.00


88 | P a g e


c) Discuss the VAT consequences of the 5 disposals in PART B 15 15

MARKS

Waterfalls home

VAT is charged on the value of supply by any registered operator of goods supplied by him in the course of any trade carried on by him. (s6)

1

Christina is a registered operator 0.5

The sale of the property is a supply 0.5

However, the sale is not in the course of trade as the house was used as a private residence.

1

Thus, there would be no VAT on this transaction 1

Available 4

Disposal of shares

The disposal of shares is a financial service as defined. 1

Financial services are exempt from VAT as per s11 1

Thus, there is no VAT on the sale of the shares 1

Available 3

Max

Kuwadzana house

The sale is a supply in the course of trade 1

VAT is chargeable on the sale of residential property. 1

Upon receiving the property through inheritance, no VAT input was claimed as there was no stamp duty paid and her father was not a registered operator.

1

Output tax shall be charged on the transaction.

The transaction is between connected persons. In cases where the buyer is not a registered operator (cannot claim input VAT) the value of the supply is the market value of the goods supplied.

1

Thus, the value of supply would be $42,000, and VAT would be charged at a standard rate.

1

Available 5

Max


89 | P a g e


PMV

According to s6 of the VAT Act, there shall not be charged VAT on the supply of second hand motor vehicles.

1

Thus, there shall be no VAT on this transaction 1

Available 2

Max 2

Marondera property

Upon the sale of the commercial property Christina shall charge output VAT as it is a supply in the course of trade.

1

The value of the supply is the cash price of the sale. 1

The $10,000 difference between the cash price and total instalments is interest, which is a financial service as defined and thus, is exempt from VAT.

1

The time of supply would be the earlier of the transfer of the property and the receipt of the first payment.

1

Available 4

Max


90 | P a g e


Tutorial 7


AAC (Pvt) Ltd (AAC) operates a leading business school in Zimbabwe (The Academy) and a training

and advisory services consultancy (TAS). AAC trains professional courses and the flagship course is

the Chartered Accountancy one. TAS specialise in International Financial Reporting Standards (IFRS)

and International Public-Sector Accounting Standards (IPSAS). TAS also advises on tax and audit

matters. AAC is a category C VAT registered operator. You are a trainee at AAC and are responsible

for the accounting function wherein you prepare the financial reports for both the academy and TAS

since they share the Finance and Admin function. Your job also involves preparation of tax returns.

AAC has just hired a university intern in their 3rd year of an undergraduate degree program with a

local university. You are responsible for the intern’s induction. Part of the induction is a technical

phase where you are to walk the student through technical aspects of their job using live information

i.e. a hands-on approach. You are currently handling the tax matter in preparation for VAT returns

for the month of February, the first QPD return for the year and CGT if any.

1. AAC receives tuition fees before the semester starts on the 10th of March 2016. In the month

of February 2016 AAC received a total of $1,570,000 for tuition.

2. During the year AAC received registration fees of $10,500 up to the 31st of January 2016 when

registration closed.

3. Interest income

3.1. AAC accrued interest of $450 being 10% per annum interest (accruing monthly non-

compounding) on staff debtors.

3.2. AAC also charges interest on outstanding student account balances.

4. TAS delivered IFRS 9 trainings to financial institutions and to ZIMRA worth $82,500.00 in the

month of March 2016.

5. TAS developed audit manuals for a leading audit firm. The manuals included the revised

methodology and charged $16,250. TAS has not been paid for this work.

6. TAS has been writing specific papers such as concept papers for entities who want advice on

specific matters, comment letters for regulatory bodies, publication and a range of technical

work for which it accrued $14,500.


91 | P a g e


7. In March, AAC enlisted the services of a University of Johannesburg lecturer Peter Van Vuuren

to provide the following services:

7.1. AAC dismissed two trainees for breach of ethics and the two decided to take legal

action. The one was working for the Academy and the other for TAS division. Peter

assisted the legal team to interpret the code of ethics which linked to the staff labour

rules. Peter charged R13,000 for each of the cases. The exchange rate was USD1:

R13.

7.2. Peter then went on to do two other jobs. One was to take an audit lecture for the

academy focusing on ethics for R6,500 and also attended a TAS training for a client

on the same topic. Since he was presenting on behalf of TAS, Peter charged TAS

R3,900.

8. During March 2016, TAS disposed of the following assets:

8.1. A Nissan Sunny saloon 1.5 ltr was sold for $5,600 and had a book value of $4,200.

The vehicle cost $15,000 in 2013.

8.2. AAC disposed of a property in Sunningdale. The property was used as a warehouse.

The contract was concluded on the 19th of March. The total cash price of the sale was

$150,000. The terms of the sale were that AAC would receive the amount in 3 equal

instalments of $51,500 each commencing 31 March 2016. The client was only able

to pay the first instalment on the 15th of April and the last two instalments on the

30th of April and the 31st of May respectively. The property was acquired in May 2013

for $108,000 from a non-registered operator.

9. AAC is recruiting a key staff member for TAS, a chartered accountant and is discussing with

the candidate a suitable remuneration package.

9.1. Motoring benefit –

• AAC could import a passenger motor vehicle and assign it to the candidate. The

candidate will then assume ownership of the vehicle at the end of 3 years for

free. The vehicle shall have a cost of $20,000 and engine capacity of 3000cc.

• AAC could assist the candidate with finances to import the passenger motor

vehicle for $20,000 with an engine capacity of 3000cc. The candidate shall then

have to repay the loan by serving 3 years for AAC. If the candidate decides to


92 | P a g e


terminate employment, they shall pay for the outstanding balance allocated

based on the time served.

9.2. AAC shall provide a housing allowance of $300.

9.3. AAC shall pay for the relocation expenses of up to $1,200 for the candidate to move

from Mutare where the candidate currently resides.

9.4. The candidate shall receive cash allowances of $300 per month for use as the

candidate pleases.

9.5. AAC shall pay for the candidate’s ICAZ subscriptions since they are a chartered

accountant for $600 per annum. AAC shall also pay for the candidate’s Leo’s club,

toastmasters’ club and golf club subscriptions for a total of $850 per annum.

10. Other Operating Expenses:

10.1. AAC is renting the current premise for $5,500. TAS has a staff contingent of 5 people

whereas the Academy has 25. TAS turnover is projected to be $540,000 and the

Academy at $3,450,000. TAS uses half a floor out of the four floors.

10.2. Water is acquired in bulk and stored away. At the beginning of the year, 3 months’

worth of supply was hoarded for $350. It was expected the TAS would use 70% of

the water for trainings and conferences. However, the inventory stock cards show

that TAS actually used 85% of the water up to the 31st of March 2016. The open

market value of the water over the three months is $350.

10.3. Electricity

AAC was billed $160 for electricity for the month of March. AAC only paid this

amount in June 2016.

11. Bad Debts

11.1. AAC wrote of debts for the following:

a. A former student who lost their parent to death and initially thought they could

raise the balance on their school fees of $320 for the 2015 academic year.

b. A loan of $650 was advanced to a former attachee for fees in their final year of

an undergraduate degree program, on condition that they repay it or return to

AAC to serve AAC. The attachee migrated to the United Kingdom upon

completion of their degree and has since been avoiding communication for 2

years.


93 | P a g e


11.2. A student tuition 2013 debt of $540 which had been written off in December of 2015,

was subsequently recovered. The Commissioner had granted an allowable deduction

in that year.

Required

Marks

Sub-total Total

1.

Discuss the VAT implications to AAC of each of the transactions from note 1-11. In your discussion, where AAC is the supplier, focus on the classification of the supply i.e. rate of tax and where applicable the value and time of supply. Communication and layout

50

1

51

2. Calculate the CGT consequences to AAC of the asset disposals in note 8 for the year ended 31 December 2016. Communication and layout

10 1

11

3.

Discuss the income tax implications of the following notes: i. Note 9. Your discussion should focus on the tax

implications in the hands of the candidate and in the hands of AAC.

ii. Note 11. In the hands of AAC. Communication and layout

20

6 2

28

4. Briefly discuss the requirements for a valid tax invoice for VAT purposes

5

5. Briefly discuss when a person is liable for VAT registration in Zimbabwe.

5

TOTAL 100


94 | P a g e


Solution

NOTE 1

AAC is offering an educational service 1

3

Educational services are exempt from VAT. Section 11 1

For the amounts received in February, the time of supply is February when

the amounts were received – Section 8 general rule (earlier of invoice being

issued or payment being received)

1

NOTE 2

Registration service is part of the educational services and therefore exempt.

S11 1

For the amounts received in January the time of supply is January as above. 1 2

NOTE 3 Interest income from both sources in notes 3.1. and 3.2 is exempt as it

qualifies as a financial service. 1

NOTE 4

Training services are a standard rated service as they are neither zero rated

nor exempt. 1

4

Training services are not educational services as defined. 1

The time of supply is the earlier of invoice being issued or payment being

received, which is March 2016 in this case. 1

The value of supply is the consideration less VAT which is $82,500 in this case 1

NOTE 5

Development of audit manuals and revised methodology is a standard rated

supply 1

3

The time of supply (TOS) is the earlier of invoice being issued or payment

being received. In this case the invoicing was done in March and so the TOS

is March.

1

The value of supply is the consideration less VAT and therefore $16,250. 1

NOTE 6

Technical papers and work is a standard rated supply. 1

3

The time of supply (TOS) is the earlier of invoice being issued or payment

being received. Although paid in part, it was invoiced in full in March and

therefore TOS is March.

1

The value of supply is the consideration less VAT and therefore $14,500. 1


95 | P a g e


NOTE 7

Imported services are taxable supplies by a non-resident to a resident who

then uses the supplies to make non-taxable supplies. 1

7

Imported services have output taxes on the value of supply. The recipient of

the service has an obligation to remit VAT. 1

The legal services to TAS are taxable supplies by a non-resident being used

to make taxable supplies and therefore are not imported services as defined 1

The legal services to the Academy are taxable supplies by a non-resident

being used to make non-taxable supplies (education) and therefore are

imported services as defined.

1

The value of supply is the greater of the Open Market Value or invoice value

of the service i.e. R13,000 which translates to [13,000÷13] = $1,000 and the

VAT

1

The audit lecture job is an educational service, which is exempt. No VAT

consequences. It is also excluded therefore from being an imported service

as the non-resident has to supply taxable services.

1

The Training job on behalf of TAS is a taxable supply by the non-resident but

is being used to make taxable supplies by the local recipient of the service

and therefore doesn’t qualify as an imported service.

1

NOTE 8

Disposal of the Nissan Sunny is a disposal of a second-hand motor vehicle.

The supply of second hand motor vehicle has no VAT consequences per

s6(1)(a)

1

6

The disposal of the fixed property is a standard rated supply. 1

The time of supply of a fixed property sold by way of instalment credit

arrangement shall be the earlier of the registration of transfer date or on the

date of which any payment is made in respect of the consideration. S8((3)(d)

1

The value of supply is the cash price of the property 1

The interest component i.e. $4,500 is a financial service and is therefore

exempt 1

Therefore, VAT for the month of March shall be $150,000 x 15% = $22,500 1

Option 1 – AAC owns the vehicle


96 | P a g e


NOTE 9

On importing the vehicle there shall be Output VAT at the standard rate.

S6(1)(b) 1

8

The Value of supply shall be the value for duty purposes plus duty. 1

The time of supply shall be the date the vehicles enters Zimbabwe for home

use 1

Since AAC owns the vehicle and will be using it for the purposes of making

taxable supplies he is eligible to claim input tax (s16(1) & (2) but however

VAT on Passenger Motor vehicles is a prohibited deduction and therefore no

input tax claim can be made.

2

Upon giving the motoring benefit to the employee, AAC is deemed to have

supplied and therefore output tax arises s17(3). 1

The value of supply is the amount determined for PAYE purposes. 1

The time of supply is the month or period in which the benefit is enjoyed. 1

Option 2 – employee owns the vehicle

This transaction is effectively a loan to the employee and that would be the

provision of a financial service which supply is exempt. 1

NOTE 9

Housing allowance – This is a deemed supply. The supply is however

exempt. 1

13

Passage benefit – This is a deemed supply. 1

The value of supply is the amount determined for PAYE purpose - $1,200 1

The time of supply is when the amount was paid. 1

The output VAT would be 15/115 x $1,200 1

Cash Allowances – Cash is excluded from the definition of goods/services 1

There is no supply therefore. 1

ICAZ subscriptions – There is a deemed supply to the employee 1

The value of supply is the value for PAYE purposes 1

The time of supply is the date of payment. 1

The payment to ICAZ may have input tax implications. If VAT is charged by

ICAZ i.e. where they are a registered operator, and if this cost is going to be 2


97 | P a g e


used to make taxable supplies (which it is since the employee would be a

TAS employee) then input tax can be claimed. S116(1) & (2)

Social Clubs subscriptions – as with ICAZ subscriptions 1

NOTE 10

Rentals – Input tax is claimable if the landlord is a registered operator who

should have charged VAT and to the extent that the building is being used to

make taxable supplies.

1

7

Half a floor of the 4 floors is being used to make taxable supplies and

therefore the input tax claim shall be [(0.5÷4) x 5,500] 1

Water – There was a change I use of the water from the initial 70% estimate

to 85% for taxable use. 1

An input tax adjustment should therefore be made on the Open Market

value of $350. [350 x (70% - 85%)] x 15% 1

Electricity – Non-domestic electricity is a standard rated supply and

therefore output tax would have been charged by the supplier. 1

Input tax is claimable to the extent that the electricity was used to make

taxable supplies. 1

Electricity is used for various activities (computer equipment, lighting,

heating etc) The allocation base that could be defaulted to is the turnover

basis i.e. Input tax = [160 x (540/3990)] x 15% =

1

NOTE 11

Bad Debts written off – s22 AAC is allowed to claim input tax on bad debts

written off subject to the following conditions:

• The supply is a taxable supply

• A return has been furnished with the Commissioner and VAT was accounted for on the debt.

• The debt belongs to the operator and has been written off in his books

1

4

The student $320 debt came about as a result of an educational supply which

is a non-taxable supply. No input tax can therefore be claimed on the bad

debt written off.

1

The granting a loan of $650 to former attaché is a financial service and non-

taxable. No input tax can therefore be claimed on the bad debt written off. 1

Bad debts subsequently recovered – 1


98 | P a g e


The supply was non-taxable and therefore not VAT consequences when the

debt was written off nor when it is subsequently recovered.

62

SOLUTION b

Calculate the CGT consequences to AAC of the asset disposals in note 8 for the year ended 31

December 2016.

i. Disposal of Nissan Sunny

CGT is only levied where the asset disposed is a specified asset. 1mark

Motor vehicles (movables) are not specified assets as defined. 1mark

ii. Disposal of Sunningdale property

Proceeds (51,500 x 3) Section 8 154,500

Recoupment (8,100)

146,400

Cost 108,000

Capital allowances granted (2.5 x 108,000 x 3) (8,100)

Inflation allowance (2.5% x 108,000 x 4) 10,800 110,700

35,700

Tax thereon @20% 5,140


99 | P a g e


Discuss the income tax implications of the following notes:

i. Note 9. Your discussion should focus on the tax implications in the hands of the

candidate and in the hands of AAC.

ii. Note 11. In the hands of AAC.

Acquisition of Motor vehicle for use by employee

AAC Perspective

• The motor vehicle will be expenditure of a capital nature. S15(2) general deduction formula

1mark

• AAC will be allowed to deduct capital allowances per s15(2)(c) 1mark

• AAC will be allowed to elect between Special Initial Allowance (SIA) of 25% p.a. with

accelerated W&T at the same rate subsequently on a straight-line basis for the succeeding 4

years; or W&T on a reducing balance basis at 20% per annum. 1mark

• After three years when the asset is given to the employee, it is deemed to be disposed at its

fair value and recoupment, if any is brought into gross income. 1mark

Candidate’s Perspective

• The right to use the motor vehicle is a fringe benefit and brought into income per s8(1)(f).

1mark

• The value of the benefit is based on the engine capacity and since it is a 3000cc engine in

question, then it is going to be $600 per month. 1mark

Acquisition of the Motor Vehicle by Candidate via a loan arrangement

AAC Perspective

• The loan to the candidate is going to be expenditure that shall be repaid by service over the

three years. This is a prepayment of services to be rendered over the three years and

therefore has already been incurred. 1mark

• The amount shall therefore be allowed as a deduction. 1mark

Candidate’s Perspective

• The receipt of the loan is an advance for services to be rendered by the employee. 1mark

• The receipt is for his own benefit and own behalf. 1mark

• The receipt is remuneration and therefore revenue in nature 1mark


100 | P a g e


• The entire loan amount should therefore be included in gross income in the current tax year.

1mark

Housing allowance

• The housing allowance is a fringe benefit to the candidate and is included in the gross income

of the candidate per s8(1)(f). 1mark

• It valued at the value to employee but since it is being awarded as an allowance it shall be at

the cost the employer which is $300 per month in this case. 1mark

• The housing allowance is a staff cost to AAC and an allowable deduction per s15(2) general

deduction formula at $300 per month. 1mark

Relocation Costs

• The relocation cost is a fringe benefit to the candidate but is not however included in gross

income since the employee’s journey is going to be undertaken to take up employment.

1mark

• The relocation cost is a staff cost and is an allowable deduction per s15(2) general deduction

formula. 1mark

Cash Allowances

• The cash allowances are a fringe benefit to the candidate and included in gross income of the

candidate. 1mark

• The cash allowance is a staff cost and an allowable deduction per s15(2). 1mark

Subscriptions

• The payments for the ICAZ subscriptions are gross income to the candidate. 1mark

• The $600 payment shall be an allowable deduction as they are for the purposes of trade.

1mark

• The $850 payment to the social clubs are fringe benefits to the candidate and will be included

in his gross income. 1mark

• The amount is a staff cost to AAC but for his entertainment. This make the amount a

prohibited deduction. Per s16 1mark

Bad Debts Written off

• Bad debts are written off only if they meet the following criteria


101 | P a g e


- The amount must have been included gross income. 1mark

- The Commissioner must satisfy himself that all efforts to recover the debt have been

exhausted. 1mark

- The debt must belong to the taxpayer. 1mark

• For the $320 debt written off, more information is required as whether all efforts to recover

the debt had been taken to the satisfaction of the Commissioner. For example, was there a

guarantor on enrolment and have the guarantor failed to pay? Where the Commissioner is

satisfied then a deduction will be allowed. 1mark

• For the $650 debt, the amount had not been included in the gross income of AAC previously

and therefore no deduction is allowable. 1mark

• For the bad debt subsequently recovered, it shall be included in gross income 1mark

Briefly discuss the requirements for a valid tax invoice for VAT purposes 5marks

• Must be issued within 30 days from date of supply. 1mark

• Must have the following details:

- The words TAX INVOICE ina prominent place. 1mark

- Name address and VAT registration number of the supplier 1mark

- Name address and VAT registration number of the recipient 1mark

- Individual serialised number and date of issue 1mark

- Description of goods and /or services 1mark

- Quantity or volume of goods or services supplied 1mark

- Price and VAT 1mark

Briefly discuss when a person is liable for VAT registration in Zimbabwe

Registration for VAT – Section 23

▪ Any person who on or after the “fixed date” (effective date of the VAT Act) carries on or intends to carry on any trade (s) and whose taxable value of supplies exceed or is likely to exceed $60,000 or the prescribed amount is

1


102 | P a g e


required to register for VAT in terms of section 23 of the Act.

Liability for Registration

A person is liable to register if: - ▪ At the end of any month, the total value of supplies of

goods or services (turnover) has exceeded $60,000 or the prescribed amount in the preceding period of 12 months, or

▪ There are reasonable grounds for believing that the total value of supplies of goods and services, which will be made in the following 12 months, will exceed the prescribed amount.

Unless it can be shown that the prescribed amount was exceeded as a consequence of: -

▪ The sale of stock or other assets due to any cessation of or substantial and permanent reduction in the size or scale of any trade.

▪ The replacement of plant and machinery or other capital assets used in the trade Abnormal circumstances of a temporary nature

1

1

1

1

3


103 | P a g e


Tutorial 8


Billy Hove, aged 50, was employed by United Refineries (Pvt) Ltd [UR] up to the 30th of April 2016.

He was the Managing Director since 1998. He retired on ill health grounds. On the 3rd of June 2016,

Billy Hove passed on leaving behind a wife and two sons, (Jill, Bobby and Billy Junior respectively).

Billy had created a trust in 2006 called Hove Trust. Hove Trust operates a chain of retail stores mostly

in the high-density suburbs of Harare, through a 100% owned company called Fish (Pvt) Ltd [Fish].

$

1. Monthly salary 4,500

2. Monthly cash allowance for entertainment 600

3. Right of use of a Jeep Cherokee SUV (4.6ltr) – Had the vehicle since September 2015. 60% of

his mileage in 2016 was used for business purposes.

4. Fuel – 200ltr per month. Bulk coupons were bought at 1.25/ltr at the beginning of the year to

cover fuel supply up to June 2016.

5. UR carried the cost of repairing the vehicle. The repairs amounted to: $798

6. On retirement Billy bought the vehicle for $7,800. Its book value was $45,000 and its market

value was $52,000.

7. On retirement, Billy immediately relocated to Nyanga were the climate was much preferred,

to Harare. UR paid $1,350 for his relocation costs, this is the first time he is receiving such a

benefit.

8. UR provided a fully furnished house for Billy in Borrowdale West and UR was paying rent of

$950 per month. Similar houses without furniture are rented out for $870 in the same area.

The furniture cost UR $17,800.

9. Billy had taken a loan of $15,000 at 2,5% per annum interest which he was paying monthly.

On retirement, the loan was written off by UR. He used this loan to pay off some of his medical

bills.

10. In March 2016, based on the 2015 company performance, UR awarded Billy 1,000 share

options in UR’s share option scheme. The exercise price was $10 and the market price on the

grant date was $10,50. The vesting period was 3 years. On retirement, Billy was allowed to


104 | P a g e


exercise and he did so. The market value on retirement was $10,65. The consumer price index

on the exercise date was 96.3 up from 96.1 on grant date.

11. UR is paying for school fees for Billy’s youngest son Bobby who was in upper six in 2016 at

Peterhouse. UR paid the fees of $9,500 which were for the year.

12. Billy received rentals of $15,000 per month from a block of flats in the CBD.

13. In May 2016, Billy sold a house in Westlea to his wife for $53,000.

14. Billy accrued a fixed interest of $500 per month on cash balances in a savings account. The

interest is then immediately paid out to his wife for her subsistence.

15. Billy made the following bequests in terms of his will:

15.1. To his two sons, joint ownership of a block of flats that cost $500,000 in 2015.

15.2. To his wife, Bridgette, their family home, an investment in a savings account of

$300,000.

16. The residue of the estate would be equally divided between the wife and the two sons.

17. Medical bills of $3,200 had to be paid out of the estate after Billy’s death.

18. A friend of Billy (Mr. Thomas Makwasha) owed Billy $20,000 including interest for an amount

he borrowed on the 15th of October 2015. This amount was due on the 15th of April 2016. The

loan accrued interest at 2.5% per month (non-compounding). Thomas repaid the loan on the

31st of July 2016 before the deceased estate was wound up on the 1st of September 2016.

19. On 30 June 2016, UR’s board of directors decided to pay out a performance bonus to all

employees that were in employment on the 31st of December 2015. Billy posthumously

received $2,500. On the 7th of July 2016.

Hove Trust is managed by a board of 5 Trustees who are independent from the beneficiaries. The

trust deed provides for the following:

20. That the Billy’s two sons are each entitled to $1,000 every month from the month that Billy

passes on. Billy’s sons are yet to be paid this amount by the end of 2016.

21. That the Trustees decide based on Fish’s performance how much to award to Bridgette every

year up to a maximum of 2.5% of the net profits of Fish. Based on the management accounts,

the trustees awarded Bridgette $5,500.

22. The Trust also donates to a community scholarship program wherein it identifies needy grade

seven and form four children and pays for their school and examination fees for one year. The


105 | P a g e


trustees decide which children to support based on availability of funds, potential of the

children and economic need from applications availed in any year of assessment. In the

current year no donation has been made yet.

23. Fish posted taxable income of $290,500 for the year ended 31 December 2016. Fish declared

a dividend of $250,000 to the sole shareholder, being the Hove Trust.

PART B

Jay Okocha is a sole trader operating a fruit and veg shop in front of his market gardening project in

Greendale Msasa. You are Jay’s son and recently passed your CTA exams. Jay has asked you to look

into the following transactions to determine the Capital Gains Tax consequences:

24. Jay has a portfolio of financial assets and transacted as follows:

24.1. Jay sold 1,000 Barclays shares that he bought in January 1994. He sold each of the

ZSE listed shares for a gross amount of $10.20. He had bought them for ZWD 30 when

the exchange rate was ZWD 3: USD 1.

24.2. Jay disposed of Debenture stock for a gross $5,000. It had be acquired for $4,300 in

September 2015.

24.3. Jay had 10,000 share options whose strike price was $20 each and the market value

at grant date was $21.05. The shares have vested and Jay has not exercised yet. The

market value at the end of the year was $23.00 and the average market value since

the shares vested was $22.75

25. Jay also has a property portfolio which he re-arranged in 2016 by way of the following

transactions:

25.1. Jay disposed of the Mandara house he was living in for $195,000. He bought a smaller

one on Greendale and much closer to the shop for $165,000. He had acquired the

Mandara house in 1985 for ZWD 15,000. He now lives in the Greendale house.

25.2. Jay disposed of a bottle store in Beatrice growth point for $40,000 which he had

constructed in 2011 for $25,000. He has always rented the bottle store out since its

construction. He incurred selling costs of $1,050.

25.3. Jay sold an investment property i.e. a house in Westgate for $150,000 to his wife. He

had bought the house in 2012 for $125,000. In 2013, he erected a wall for $2,000

and sunk a borehole for $3,500.


106 | P a g e


25.4. Jay also sold a block of flats in the avenues area on 01 June 2016. The terms of the

sales were that he received 25% deposit upfront of $200,000. Thereafter he was to

receive the balance in 60 monthly instalments of $10,000 each commencing 30 June

2016. By 31 December 2016 he had received $55,000 instead of $60,000. He

acquired this block in January 2014 for $500,000.

Required

Marks

Sub-total

Total

1. Calculate Billy’s Income Tax payable for the year ended 31 December

2016. Provide brief narrations for each entry in your computation.

30

2. Calculate Jay’s Capital Gains Tax for the year ended 31 December

2016.

40

3. Calculate the income tax payable by the Trust for the year ended 31

December 2016. Provide brief narrations to each entry.

15

4. Calculate the income tax payable by Billy’s deceased estate. Provide

brief narrations for each entry.

15

TOTAL 100

Solution

Calculate Billy’s Income Tax payable for the year ended 31 December 2016. Provide brief narrations for each entry in your computation.

Computation of Billy’s Income Tax payable for the year ended 31 December 2016.

$ $

Monthly salary (s8, gross income) [4,500*4]

18,000.00 2

Monthly cash allowance for entertainment (s8, gross income)[600*4]

2,400.00 2

Right of use of a Jeep Cherokee [4*800](s8, gross income)

3,200.00 2

Fuel (s8, gross income) [200*4*1.25*40%] 400.00 2

Repairs [no benefit] - 1


107 | P a g e


Purchase of Motor Vehicle (s8, gross income) [52,000 - 7,800]

44,200.00 2

Relocation Costs (passage benefit) (first time, exempt) - 1

Loan Benefit [for medical expenses, exempt] - 1

Housing Benefit [950*4] (s8, gross income) 3,800.00 2

Furniture benefit (s8, gross income) [17,800*8%] 1,424.00 2

Share Option Scheme [10.65- (10+{96.1-96.3}*10/96.3)]*1,000

630.00 3

School Fees Benefit (s8, gross income) 9,500.00 1

Taxable Income 83,554.00 Tax thereon:

On first 60,000 35,580.00 1

[83,554-60,000] * 35% 8,243.90 1

Trade & Investments Income

Rentals [15,000*5] (s8, gross income) 75,000.00 2

Sale of House [transfer @ ITV] - 2

Fixed Interest [500*5] (s8, gross income) 2,500.00 2

Tax on Trade and Investments Income 19,956.25 1

63,780.15 Add 3% AIDS Levy 1,913.40 1

TOTAL TAX PAYABLE BY BILLY 65,693.55

31


108 | P a g e


2. Calculate Jay’s Capital Gains Tax for the year ended 31 December 2016.

Computation of Jay’s Capital Gains Tax for the year ended 31 December 2016 Marks

$ $ Barclays Shares

Exempt from CGT

-

2

Debentures

Proceeds 5,000.00 1

Cost (4,300.00) 1

Inflation Allowance [4,300*2.5%*2] (215.00) 3

Capital Gain

485.00

1

Share Options

No disposal - 1

Mandara House

Disposal Proceeds 195,000.00 1

Capital Gains Tax on property acquired prior to 01 Feb 2009 [5% x 195,000] 9,750.00 2

Roll over relief on PPR - [165/195 x 9750] (8250.00) 2

CGT Payable

1,500.00

Bottle Store

Proceeds 40,000.00 1

Selling Costs (1,050.00) 1

Recoupment [40,000-0] ltd to 25,000 (25,000.00) 3

Cost (25,000.00) 1

Capital Allowances 25,000.00 1

Inflation Allowance [25,000*2.5%*6] (3,750.00) 3

Capital Gain

10,200.00

1

Investment Property

Election to transfer at amount equal to deductions available (S16)

2


109 | P a g e


Therefore nil CGT

-

Block Of Flats

Proceeds [200,000 + (60*10,000)] 800,000.00 2

Recoupment [800,000 - 475000] ltd to 25,000 (25,000.00) 3

Cost (500,000.00) 1

Capital Allowances 25,000.00 1

Inflation Allowance [500,000*2.5%*3] (37,500.00) 3

Capital Gain

262,500.00

1

Total Capital Gain

471,185.00

CGT @ 20%

94,237.00

0


40


110 | P a g e


3. Calculate the income tax payable by the Trust for the year ended 31 December 2016. Provide

brief narrations to each entry.

Computation of Income Tax Payable by Hove Trust for the year ended 31 December 2016

$

Dividend Income [Exempt income] - 2

Community scholarship program [no expenditure or loss yet per s15(2)] - 2

Annuity to Billy's Sons [1,000*2*7] (allowable deduction) (14,000.00) 3

Amounts not yet paid but incurred - Inescapable obligation 1

Award to Bridgette (allowable deduction) (5,500.00) 2

Dividend Declared (This is a distribution and not expenditure/loss per s15) - 2

Taxable Income (19,500.00)

Tax Payable @25.75% (5,021.25) 1


15

4. Calculate the income tax payable by Billy’s deceased estate. Provide brief narrations for each entry.

Computation of Income Tax Payable by Billy's Deceased Estate for the year ended 31 December 2016 Marks

$ School fees (Included in pre-death income) - 2

Medical Bills (deducted as a pre-death expense and therefore not in the estate's hands)

- 2

Rentals (Ascertained Beneficiary are sons [7 months x 15,000] - 2

Interest Income - Ascertained beneficiary on the bank balances [7mths x $500/mth]

- 2

Loan Interest - Makwasha - (Receivable not an asset in a deceased estate) 0.00

2

Performance Bonus (s8, gross income)s11(4)(a)(b)(c ) 2,500.00 2

2,500.00

Distribution to: Wife (833.33) 1

Distribution to: Sons (1,666.67) 2

Deceased Estate Taxable Income 0.00


17

Documents

APPLIED TAXATION ICAZ CTA TAXATION: TUTORIAL 105 TAX 402 CTA TAXATION TUT 105.pdf · APPLIED TAXATION – ICAZ CTA TAXATION: TUTORIAL 105 TAX 402 6 | P a g e F O R I C A Z 2 0 1 9