ICAZ CTA TAXATION TUTORIAL 105: PRESENTED BY CAA 2016 · 2016-08-12 · ICAZ CTA TAXATION TUTORIAL 105: PRESENTED BY CAA 2016 Page 6 of 121 FOR ICAZ 2016 CTA EXAMS Property of CAA

ICAZ CTA TAXATION TUTORIAL 105: PRESENTED BY CAA 2016

Page 1 of 121 FOR ICAZ 2016 CTA EXAMS Property of CAA Learning Media

Personnel Telephone Number

Lecturers

Elliot Wonenyika +263 4 702532/5

Zvinotendesa Mapetere +263 4 702532/5

Sufficient Muwandi +263 4 702532/5



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.



SELF ASSESSMENT INTEGRATED QUESTIONS

Question

Number

Topics Covered

1 Mock Exam 1

2 Mock Exam 2

3 Mock Exam 3

4 Mock Exam 4

5 Mock Exam 5

6 Mock Exam 6

7 Mock Exam 7

8 Mock Exam 8



Mock Exam 1

Paul Magaisa is a Zimbabwean resident and has been in the employment of Ecomade (Pvt)

Limited (Ecomade) for the past 20 years. Paul started working for Ecomade when he was 37 years

of age and over the years he has managed to move up the ranks within the employment

structures of Ecomade. Since 2010 Paul has been running his own small business to supplement

his employment income given the fact that he had not received a salary increment from Ecomade

since dollarization in 2009.

You father has been friends with Paul since they met at a work function in 2008 at the height of

the Zimbabwean economic crisis. In one of their many conversations your father indicated to

Paul that you are currently undergoing your CTA studies and that one of the core courses you are

studying is Zimbabwean tax. Paul therefore approached you for assistance in respect of his tax

affairs for the 2015 year as he has to submit tax returns to the Zimbabwe Revenue Authority

(ZIMRA).

Paul provided you with the following information in respect of his economic affairs for the 2015

tax year of assessment:

Part A

Ecomade:

Detailed below are Paul’s receipts and expenses in respect of his employment with Ecomade for the period

January 2015 to December 2015.

Notes $

Salary 14,400

Bonus 1 -

Long service award 2 3,600

Compensation 3 2,300

Fuel Allowance 4 600

Loan 5 2,400

Refund from Baku 3 900

Loan Repayments 5 (1,600)

NSSA contributions (294)

Ecomade Pension Fund Contributions 6 (720)

Medical Expenses 3 (2,140)

Purchase of shares in Ecomade 7 (3,200)

Notes



1. Given the liquidity challenges which were prevailing during 2015, Ecomade decided to give

its staff grocery vouchers worth $400 each to be redeemed at any OK Zimbabwe shop. Paul

received 3 of these vouchers in lieu of his bonus for the 2015 year.

2. In February 2015 Paul attained 20 years of service with Ecomade. In recognition of Paul’s long

service he received cash amounting to $3,600 which is equivalent to his three months’ salary

and a holiday voucher to Victoria Falls. Ecomade incurred a total cost of $600 in respect of

the holiday voucher.

3. In June Paul had an accident whilst travelling from Bulawayo to Harare and was hospitalized

for a period of 5 days due to the injuries he suffered as a result of the accident. Paul lodged

a claim with the workers’ insurance compensation fund (WCIF) and he received $2,300 as

compensation for the injuries suffered from the accident. In July Paul received a bill of $2,140

from Avenues Clinic in respect of medical expenses he incurred during his hospitalization.

Paul paid the full amount of $2,140 in September and managed to receive a reimbursement

of $900 from Baku Medical aid fund with whom he holds a medical insurance policy.

4. Paul receives a monthly fuel allowance of $50 which he uses at his sole discretion. 5. In August 2015 Paul received an interest free loan of $2,400 from Ecomade which he used to

pay for his two daughters 3rd term school fees at Dominican Convent in Harare. The loan was repayable in 6 equal monthly installments with the first installment due on the 30th September 2015.

6. Paul contributes $60 per month to Ecomade Pension fund and Ecomade also contributes $60

per month for the benefit of Paul.

7. On 1 April 2012 Paul received 1,000 share options from Ecomade (Pvt) Limited. The scheme

was in line with an employee share incentive scheme implemented inorder for Ecomade to

comply with the Indigenization and Empowerment Act. The market price for each share in

Ecomade at 1 April 2012 was $0.90. The terms of the share options granted to Paul were as

follows:

The share options have a vesting period of 3 years commencing 1 April 2012.

Each option gives Paul the right to buy 5 shares in Ecomade (Pvt) Limited.

The strike price per share amounts to $0.80.

Any options which would not have been exercised by 31 December 2016 will

automatically lapse.



Paul exercised 800 of his share options on 1 September 2015 and paid the purchase

consideration under the share option scheme on the same date. On the date that Paul

exercised his share options the market price for each share in Ecomade was $1.60. However

in November 2015 Paul sold 2,000 of the shares acquired under the share option scheme for

an amount of $2.30/share.

Other Information

Consumer price indices that may be relevant were as follows:

April 2012 1.40%

2012 Average 1.20%

2013 Average 1.20%

2014 Average 1.50%

September 2015 1.83%

November 2015 1.85%

2015 Average 1.75%



Required

1

Part A

a. With reference to the information in note 7 Paul has requested your advice on the tax implications of the share option scheme in terms of the Income Tax Act. You should provide supporting calculations where applicable.

b. Calculate the income tax payable in respect of Paul’s taxable income from employment for the 2015 tax year of assessment. For items which are neither taxable nor deductible provide a brief explanation and indicate by the use of a zero in your tax computation.

10

25

2

Provide the dates for which the following should be done:

a) Registration for PAYE purposes b) Submission of PAYE monthly return c) Submission of PAYE annual return d) Payment of monthly PAYE due

1

1

2

1

TOTAL 40



Solution

Part A

a) With reference to the information in note 7 Paul has requested your advice on the tax implications of

the share option scheme in terms of the Income Tax Act. You should provide supporting calculations

where applicable. 10 marks

Income Tax Act

On the grant date of the share options in 2012 there is no income tax implications. 2

Paul will only be taxed upon exercising his right to purchase shares under this scheme, which in

this case was on 1 September 2015. 1

A taxable benefit is calculated on this date in terms of sect 8 (1) (t) of the income tax act and this

benefit is subject to PAYE. 2

The amount of the benefit is calculated by applying the following formula:

A-(B+C).

A: market value at time of exercise: $1.60 * 800 * 5 = $6,400. 1

B: exercise price : $0.80*800*5 = $3,200 1

C: Inflation allowance: (D-E)*B

E

D: CPI at date of exercise

E: CPI on grant date

Inflation Allowance : (1.83 – 1.4) *$3,200 2

1.4

: $983

Benefit = $6,400 – ($3,200+983) = $2,217 1



b) Calculate the income tax payable in respect of Paul’s taxable income from employment for the 2015

tax year of assessment. For items which are neither taxable nor deductible provide a brief explanation

and indicate by the use of a zero in your tax computation. 20 marks

$ Marks

Salary – sect 8 (1) (b) 14,400 ½

Bonus – sect 8 (1) (b) - $400*3 1,200 ½

Less exemption 3rd schedule par 4 (1,000) 200 1

Long service award : cash 3,600 2

: holiday voucher 600 2

Compensation: Exempt 3rd schedule par 6 (e) 0 2

Fuel allowance – sect 8 (1) (f) 600 1

Loan: used to pay for education related costs hence interest benefit is

not taxable – sect 8 (1) (f) 0 2

Refund from Baku – capital in nature 0 2

Loan repayments : capital in nature 0 2

NSSA Contributions (294) ½

Ecomade Pension fund contributions – ( (720) 1

Purchase of share in Ecomade – capital in nature 0 1

Share option benefit – sect 8(1) (t) 2,217 ½

Taxable Income 20,603

Apply tax tables

On the 1st $12,000 1,800 1

($20,603-$12,000)*25% 2,151 1

3,951



Less Credits

Medical expenses ($2,140 - $900) * 50% (620) 1

Elderly person’s credit (900) 1

2,431

Add 3% AIDS Levy 73 1

Total tax payable 2,504

Total

23

Presentation 2

2.

Marks

e) Registration for PAYE purposes Within 14 days of becoming an

employer

1

f) Submission of PAYE monthly return

Within 10 days of the end of the

every month

1

g) Submission of PAYE annual return

Within 30 days after the end of

the tax year

2

h) Payment of monthly PAYE due Within 10 days of the end of

every month

1

Total 5



Mock 2

You are a second year trainee accountant in the tax department of ETW Chartered Accountants,

a medium sized firm with operations in Harare. Mike Tom the manager in the tax department

was recently informed that you were now undergoing you ZCTA studies and he was also made

aware that one of your core courses is taxation. Upon hearing this Mike gave you two files that

he had been working on in respect of queries that he got from his clients. He has therefore tasked

you to come up with appropriate responses to the clients’ queries.

Part A

Mashco (Pvt) Ltd (Mashco) is a company incorporated in Zimbabwe and is listed on the Zimbabwe

Stock Exchange. The company owns properties which it leases out to domestic and commercial

tenants under operating lease agreements. Over the years due to economic decline Mascho has

seen its property occupancy levels fall from highs of 90% seen soon after dollarization to the

current levels of 30%. Mashco’s finance manager Denford Mambo requested your firm assistance

with the following queries:

Query 1

During the 2015 tax year one of Mashco’s tenants Tatenda Venture Capital (Tatenda) decided to

cancel their lease agreement they had with Mashco as they were facing viability challenges. After

intensive negotiations between the two parties an agreement for the cancellation of the lease

was agreed with the following terms:

1. Tatenda to pay Mashco an amount of $15 000 which is equivalent to 3 month’s rentals. The

amount was to compensate Mashco for the failure by Tatenda to give 3 months’ notice as

required by the terms of the lease agreement.

2. Tatenda to pay Mashco an amount of $25 000 in respect of rentals outstanding from the past

year of occupation.

3. Tatenda forfeited their rights to a refundable deposit of $10 000 that they had paid to Mashco

on inception of the lease.

Mashco received the full amount of $40 000 in respect of the agreement above on the 31st of

July 2015. Denford is requested your advice on whether they should include the above amounts

as stipulated in the cancellation agreement as part of their gross income for tax purposes.

Query 2

Due to the persistent low occupancy levels a decision was made in May 2015 to dispose of one

of the properties used by Mashco for letting out, to alleviate cash flow problems which were now



crippling the company. A buyer for the property was duly found in August and the property was

sold for an amount of $80 000. Mashco made a profit of $20 000 on the sale. Denford is again

requesting your advice on whether either the $80 000 or the $20 000 constitute gross income in

terms of the income tax act.

Part B

Tapiwa Makosa is a 45 year old qualified mechanical engineer and had been working for

NewDawn Engineers (NewDawn) for the past 15 years. Over the years Tapiwa had managed to

rise to the positions of operations director, a post he held for the past 2 years. In August 2015

Tapiwa decided to resign from NewDawn in order to pursue his dream of starting his own

engineering company. Tapiwa’s last working day for NewDawn was the 31st of August 2015.

You were provided with the following information in respect of Tawanda’s employment income

for the year of assessment ended 31 December 2015:

Notes $

Gross Basic Salary 1 45 000

Bonus 900

Cash in lieu of leave 1 500

Gratuity 2 5 000

Fuel allowance 3 1 200

Loan 4 6 000

NSSA contribution 5 (294)

Pension fund contributions 6 (3 200)

Notes:

1. During the 2015 tax year Tapiwa received his full gross salary of $45 000 as cash, with Makuti

remitting the monthly Pay As You Earn (PAYE) to the tax authorities at the company’s cost.

The total PAYE as you earn remitted during the year amounted to $4 800.

2. When Tapiwa resigned from NewDawn, the company paid him an amount of $5 000 as a

thank you for all the years of service he had dedicated to the company.

3. As part of his employment terms Tapiwa received a monthly fuel allowance of $150. Tapiwa

also had usage of a company allocated vehicle a Toyota corolla sedan, engine capacity 2

300ccs. When he resigned, Tapiwa bought the corolla that he had been using for an amount

of $1 500 and at that date of purchase the vehicle had a market value of $2 000. During the



period January to August 2015 Tapiwa kept a log book of his mileage which indicated the

following:

Km

Business travel 24 000

Personal travel 16 000

40 000

4. Tapiwa was advanced the loan amount to $6 000 interest free on 1 January 2015. He used $1

000 of the loan to pay for his fees with the University of Zimbabwe (he is studying towards a

post graduate diploma in mechanical engineering) and the balance he used to acquire a pick

up truck for his personal use. On his retirement NewDawn waived the repayment of the full

$6 000.

5. The NSSA contribution was deducted from Tapiwa’s salary and remitted to NSSA. New Dawn

also contributed an equivalent amount to NSSA for the benefit of Tawanda.

6. The pension fund contributions are to a registered pension fund. In September 2015 Tawanda

decided to cash out from the fund and he received a lump sum of $45 000 plus a monthly

annuity of $300 commencing 1 September 2015. At the time of exiting the pension fund,

Tapiwa’s pension entitlement was $90 000.

7. From January to August 2015 NewDawn paid a total of $1 500 in respect of Tapiwa’s

contributions to a medical aid.

8. During the 2015 tax year Tapiwa paid for the following medical expenses which were not

refunded by the medical aid fund:

$

Hospital bills for Tapiwa’s mother 2 300

Wheel chair for Tapiwa’s 30 year old son who is disabled 600



Required

Part A

1. With reference to the Income Tax Act and applicable case law write an email to respond to

the queries from Mashco. 20 marks

Part B

2. Calculate the income tax payable by Tapiwa for the tax year ended 31 December 2015. For

items which are neither taxable nor deductible indicate by the use of a zero and provide a

brief explanation. 20 marks



Solution

PART A

Solution 1

To: Denford Mambo

From: Me

Date: 18 Feb 2016

Subject: Tax Queries – Mashco

Dear Denford,

I hope I find you well. Further to your queries in your email below please find our responses to matters

raised.

Query 1 (max 14 marks)

From the information you provided us it appears that the contentious issue is on whether the amount

received of $40 000 is revenue or capital in nature, given that the gross income definition excludes

capital receipts. 1

The $40,000 received should be assessed in its separate components as to whether or not they should

be included in gross income. 1

Item 1. $15,000 – Three months’ rentals in lieu of notice

As held in the Burmah Steamship Co Ltd case we need to determine whether the compensation

received was to fill a hole in the profits or go to fill a hole in the fixed assets. 2

If the receipt are to fill a hole in the profits then they will be revenue in nature and qualify as gross

income. 1

If the receipts are to fill a hole in the fixed assets then they will be capital in nature and therefore

not constitute gross income. 1

Since the $15 000 was received as compensation for loss of rentals for the next three months it

can be concluded that it is fill a hole in the profits of the company. 1

Therefore the $15 000 is revenue in nature and qualifies to be included as part Mascho’s gross

income. 1

Item 2. $25,000 – Outstanding rentals

The question to answer is to determine whether the receipt of $25 000 accrued during the 2015

year of assessment. 1

In terms of the gross income definition amount are taxed during the year they are received or

accrued. 1



As held in the case between lategan v CIR income is accrued when the tax payer becomes entitled

to it. 1

Since in our case the $25 000 relates to rentals for the 2014 and 2013 year it means the Mascho

became entitled to the rentals during those years and would have been taxed in those years.

1

Therefore the $25 000 will not be included in Mashco’s gross income for the 2015 year of

assessment. 1

Item 3. $10,000 – Security Deposit

The question to answer is whether the deposit of $10 00 has been received during the current of

assessment with reference to the gross income definition. 1

As held in the Geldenhuys v CIR the amount to be included as part of gross income the amount

must have been received for the tax payers’ benefit. 2

Initially when Mascho received the deposit of $10 000 from Tatenda Venture Capital, they had an

obligation to return it to the lessee since it was refundable. Therefore the deposit would not have

been included in gross income as at that date. 1

However on the date of forfeiture by Tatenda of the deposit, Mascho could now use the $10 000

for their own. Therefore since forfeiture occurred during the 2015 year, the $10 000 would be

included in Mashco’s gross income for the 2015 tax year. 1

Query 2 (max 5 marks)

Proceeds of $80 000

We need to determine whether the proceeds of $80 000 are capital or revenue in nature as the gross

income definition excludes capital receipts. 1

As held in the case between COT Southern Rhodesia v Levy 1952 the nature of the amount will be

determined with reference to the intention of the taxpayer at the time of acquisition of the property.

1

In your case Mascho had acquired the property for letting purposes, which means the property is

capital in nature used to generate rental income. 1

Also the fact that Mascho made a profit on the sale does not change anything as was again held in the

above case that the taxpayer is not required to exclude the slightest contemplation of profitable

resale. 1

Therefore the proceeds of $80 000 are capital in nature and are not included in the gross income.

1

Profit of $20 000

Issue is to determine whether Mascho actually received an amount of $20 000 as per the gross income

definition. 1

The $20 000 is calculated using accounting principles, this means no actual money or property was

received equivalent to the $20 000. 1

Total Available 25 marks



Award 1 mark for writing in email format

PART B

Solution 2

Computation of income tax payable by Tapiwa for the year ended 31 December 2015

$ $ Marks

Gross basic salary 45 000 ½

PAYE – remitted at the company’s cost 4 800 1

Bonus 900

Exemption – 1st $1,000 (900) 0 1

Cash in lieu of leave 1 500 ½

Gratuity 5 000 1

Fuel Allowance ($150 x 8) 1 200

The extent it was used for business (60% x 1 200) (720) 480 2

Motoring benefit: ($600 x 8) monthly 4 800 1

On disposal ($2,000 - $1 500) 500 1

Interest benefit:

To acquire motor vehicle : $5 000 *6% * 8/12 200 2

To pay for UZ fees: interest benefit exempt (sect 8 (1) (f) 0 1

Loan waiver:

For the purchase of motor vehicle 5 000 1

For fees @ University – exempt (used to fund

education related expenses) - 5 000 1

NSSA contribution – employer – exempt 0 ½



NSSA Contribution – employee (294) ½

Pension fund contributions (registered pension fund) (3 200) (3 294) ½

Monthly annuity ($300 x 4 months) 1 200 1

Contribution medical Aid – employer – exempt 0 1

TAXABLE INCOME 65 186

On the 1st $60 000 14 580 ½

(65 186 – 60 000)*35% 1 815 ½

16 395

Lump sum Receipt: Pension fund receipts (taxed at the

highest marginal tax rate)

$45 000 * 35% 15 750 2

32 145

Tax Credits:

Medical Expenses

Hospital bills for Tapiwa’s mother (not a dependent) - 1

Wheel chair (invalid appliance) ($600 ÷ 2) 300 (300) 1

31 845

Aids Levy @ 3% (31 845 * 3%) 955 1

Income Tax Payable 32 800

Less: PAYE Remitted (4 800) ½

Income Tax due 28 000

Total Available 23



Mock 3

Fudge Ltd is a manufacturing company listed on the Zimbabwe Stock Exchange. The company has a foreign branch. The financial manager has prepared the following draft summarised trial balance for the year ended 31 December 2015. The notes indicate how various items have been processed in the draft summarised trial balance.

DRAFT SUMMARISED TRIAL BALANCE 31 December 2015

Notes

Debit Credit

$ $

Property, plant and equipment

Owned 1 3 876 000

Leased 2 1 560 000

Investment properties 3 880 000

Goodwill 4 564 000

Intangible assets 5 594 000

Available-for-sale assets 6 350 000

Inventories 7 1 456 765

Trade and other receivables 8 2 265 987

Cash and cash equivalents 2 925 208

Share capital 9 2 823 600

Retained earnings on 1 March 2008 979 159

Available-for-sale equity reserve 10 260 696

Profit before tax 11 5 545 937

Foreign tax 11 195 000

Dividends paid 12 560 000

Deferred tax on 1 March 2008 448 991

Long-term liabilities 13 2 356 000

Short-term liabilities 14 2 812 577

15 226 960 15 226 960

Notes 1 Owned property, plant and equipment The total depreciation expense for owned property, plant and equipment for the year ended 31 December 2015 amounted to $890 400 which included an amount of $32 242 relating to office buildings and $103 394 in respect of other non-manufacturing assets. The policy of the company is to depreciate all property, plant and equipment, except land, on a straight-line basis from the date the assets became available for use by the company.



An analysis of owned property, plant and equipment at 31 December 2015 was as follows:

Cost

Accumulated Depreciation

Carrying value

$ $ $

Land 354 400 0 354 400

Office buildings 680 200 273 400 406 800

Manufacturing buildings 1 376 700 503 200 873 500

Other manufacturing plant 3 825 100 1 967 400 1 857 700

Other movable assets purchased in 2010 651 400 267 800 383 600

Balance at 31 December 2014 6 887 800 3 011 800 3 876 000

Erection of the original manufacturing buildings by Fudge Ltd commenced in September 2006 and these buildings were completed and brought into use on 31 July 2007. Improvements of $370 700 were capitalised to manufacturing buildings effective from 31 August 2013. Office buildings were constructed in 2012 Details of manufacturing plant held at 31 December 2015 were as follows:

Cost

Year of acquisition $

Year ended 31 December 2010 1 602 600

Year ended 31 December 2012 880 700

Year ended 31 December 2014 1 341 800

3 825 100

The company only acquires new and unused plant. Exchange differences recognised in profit before tax include realised exchange losses of $250 000 incurred on the acquisition of plant brought into use for the year ended 31 December 2015. 2 Leased property, plant and equipment The movement in leased property, plant and equipment was as follows:

$

Balance at the beginning of the year 2 080 000

Depreciation (520 000)

Balance at 31 December 2015 1 560 000

The leased assets consist of manufacturing plant, which is leased in terms of a finance lease. The lease liability is included in long-term and short-term liabilities (see notes 13 and 14). 3 Investment properties



It is the policy of the company to measure investment properties at fair value. The investment properties are office buildings which were acquired during 2007. The original cost of the investment properties held at 31 December 2015 was $420 100. An investment property with a cost of $234 600 was sold during the 2014 financial year for $324 600. The movement in investment properties was as follows:

$

Balance at the beginning of the year 1 006 400

Investment property sold (324 600)

Fair value adjustments 198 200

Balance at 31 December 2015 880 000

The company made a decision in 2013 to sell all of its investment properties over the course of the next three years as they were not considered to be core to operations. 4 Goodwill

The goodwill arose on the acquisition of the assets and liabilities of two businesses on 1 March 2012. One of the businesses was not as profitable as was expected and an impairment loss was recognised in terms of IAS 36, Impairment of assets. The movement in goodwill was as follows:

$

Balance at the beginning of the year 727 000

Impairment (163 000)

Balance at 31 December 2015 564 000

5 Intangible assets The movement in intangible assets was as follows:

Design Assets

Other intangible

assets Total

$ $ $

Balance at the beginning of the year 219 000 701 000 920 000

Amortisation (14 000) (202 000) (216 000)

Impairment 0 (110 000) (110 000)

Balance at 31 December 2015 205 000 389 000 594 000

The intangible assets include a design which was purchased by the company at a cost of $280 000. The design was brought into use during the financial year ended 28 February 2013.



All the other intangible assets arose on the acquisition of the two businesses effective from 1 March 2012 and are not subject to any allowances for tax purposes (see note 4).



6 Available-for-sale assets Available-for-sale assets consist of shares in listed companies. It is the policy of the company to invest surplus funds in listed shares. The company is not regarded as a share dealer for income tax purposes. For financial reporting purposes the shares are classified as available for sale in terms of IAS 39, financial instruments: Recognition and measurement. The movement in the available-for-sale assets was as follows:

$

Balance at the beginning of the year 250 000

Acquisitions at cost 45 000

Fair value adjustment for the year 120 000

Sold during the year (65 000)

Fair value balance at 31 December 2015 350 000

In the accounting records the total proceeds of $65 000 on the sale of the shares were credited to the available-for-sale asset account. No other entries were processed in respect of the sales. The cost of the shares sold during the year amounted to $10 000. 7 Inventories In terms of IAS 2, Inventory, the company measures inventory at the lower of cost or net realisable value.

31 December 2014

31 December 2015

$ $

Cost 1 283 875 1 716 765

Provision for write down to net asset value (156 000) (260 000)

Balance 1 127 875 1 456 765

8 Trade and other receivables Trade and other receivables were as follows:

31 December 2014

31 December 2015

$ $

Trade receivables 2 102 225 2 395 600

Provision for doubtful debts (240 600) (350 600)

Other receivables 181 100 220 987

Balance 2 042 725 2 265 987



9 Share capital Share capital increased by $276 000 during the financial year ended 31 December 2015. The increase relates to shares issued to directors in terms of a bonus scheme. The decision was made not to pay any cash bonuses to the directors of the company for the financial year ended 31 December 2015. Instead of a cash bonus, 138 000 shares were granted to the directors at an issue price of $2 per share on 1 October 2015. The fair value of the shares of Fudge Ltd was $3 per share on 1 October 2015. The only journal entry processed in respect of this transaction was the following:

Dr Cr

Bank 276 000

Share capital 276 000

Shares granted to directors on 1 October 2015

10 Available-for-sale equity reserve This consists of the fair value adjustments on the available-for-sale investments. The movement in this reserve was as follows:

$

Balance at the beginning of the year (net of deferred tax of $22 904) 140 696

Fair value adjustment for the year 120 000

Balance as at 31 December 2015 260 696

11 Profit before tax The profit before tax includes the profits of $650 000 of the foreign branch which are not taxable in Zimbabwe. Income tax of $195 000 is due and payable to the foreign country for the year ended 31 December 2015. The profit before tax also includes local dividends received on the available-for-sale investments of $128 000. $12 000 of the dividends were received during October 2015 and the balance before 15 September 2015. The dividends received before 15 September 2015 were the only dividends received during the dividend cycle ending on 15 September 2015 . Expenses deducted in determining profit before tax for the financial year ended 31 December 2015 include –

interest recognised on the lease liability of $362 000; and

interest recognised on other liabilities of $298 600. The Zimbabwe taxation expense for 2014 has not yet been calculated or provided for. 12 Dividends paid The company declared a dividend of $560 000 on 15 September 2015. Local dividends amounting to $16 000 were received in the previous year.



13 Long-term liabilities The long-term liabilities were as follows:

31 December 2014

31 December 2015

$ $

Lease liabilities 1 632 400 1 209 800

Other liabilities 1 362 327 1 146 200

Balance 2 994 727 2 356 000

The lease liability arose on the acquisition of manufacturing plant by means of a finance lease (see note 2). Instalments paid on the lease liability during the financial year ended 31 December 2015 amounted to $693 450 (including VAT). VAT on the original transaction amounted to $468 000 while the lease payments up to 31 December 2015 amounted to $3 015 001 and the future lease payments amount to $2 285 353. Instalments paid during the financial year ended 31 December 2015 in respect of the other liabilities amounted to $425 480. 14 Short-term liabilities The short-term liabilities were as follows:

31 December 2014

31 December 2015

$ $

Trade payables 1 420 100 1 324 450

Other payables 159 460 186 200

Current portion of lease liabilities 596 300 693 480

Current portion of other liabilities 519 200 608 447

Balance 2 695 060 2 812 577

Other payables include a provision for leave pay of $88 200 (2012: $42 600). All other items have been correctly accounted for in the draft summarised trial balance and all VAT entries have been processed appropriately.



Required

1.

Calculate the profit before tax of Fudge Ltd for the financial year ended 31

December 2015 in accordance with International Financial Reporting Standards. 3

2.

Calculate the normal tax payable in Zimbabwe by Fudge Ltd for the 31 December

2015 year of assessment. Begin your calculation with the profit before tax as

calculated in (1) above.

37

TOTAL 40



Solution

Fudge Ltd

Marks

Part (a) Calculation of profit before tax

$

Profit before tax (given) 5,545,937

Less SBP expense [276,000/2x(3-2)] (138,000) 2

Profit before tax 5,407,937 1

Part (b) Calculation of normal tax payable

$

Profit before tax 5,407,937 0.5

Note 1

Depreciation 890,400 1

Capital Allowances - section 15 (2) (c) & 4th Schedule

Land - 1

Office buildings (680,200x2.5%) (17,005) 1

Manufacturing building:fully written off - 1

Improvements on manufacturing building (370,700x25%) (92,675) 1

Manufacturing plant 2010:fully written off - 1

Manufacturing plant 2012(880,700x25%) (220,175) 1

Realised Exchange Loss on acquisition of manufacturing plant : Capital nature

250,000 2

Manufacturing plant 2015

Manufacturing Plant Cost 1,341,800

Add Realised Exchange 250,000

1,591,800 1



SIA on new cost (1,591,800*25%) (397,950) 2

Other non-manufacturing assets (651,400*25%) (162,850) 1

Note 2, Note 11 & Note 13

Leased PPE:

Depreciation 520,000 1

Interest paid 362,000 1

Installment paid(693,450-((693,450/5,300,354)x468,000)) (632,221) 2

Note 3

Fair value adjustment (198,200) 2

Recoupment

Proceeds 324600

Less ITV (Purcahsed pre 2009) -

Possible Recoupment 324,600

Limited to Capital allowances previously granted - 2

Note 4

Impairment of goodwill 163,000 1

Note 5

Impairment of intangible assets 110,000 1

Amortisation of intangible assets 216,000 1

Note 6

Fair value adjustment (120,000) 1

Note 7

Provision for write down to net asset value(260,000-156,000) 104,000 2

Note 8

Provision for doubtful debts (350,600-240,600) 110,000 2

Note 9

IFRS 2 SBP expense-Prohibited deduction Sectio 16 (1) (l) - 2

Note 11



Foreign income (650,000) 1

Interest recognised on other liabilities - 1

Dividends received (128,000) 1

Note 14

Provision for leave pay (88,200-42,600) 45,600 2

Taxable Income 5,559,861

Tax @25.75% 1,431,664 1

40.5



Mock 4

Question 1 65 marks

You have recently been transferred to the tax services department of Bonde Chartered

Accountants after you had indicated your intention to specialise in tax related services. Tapiwa

Mapande a manager in the tax department was your assigned supervisor and he gave you a file

for one his clients Jonathan Pinkett. The file given to you contained the following information.

Background information.

Jonathan Pinkett died on the 31st of Mach 2015 after a long battle with prostate cancer which

had seen him hospitalised during the last weeks of March. At the time of his death, Jonathan was

survived by his wife Patricia and three children, Martin (27 years of age), Pauline (24 years of age)

and Nolan (17 years of age). Jonathan was born in 1965 in the then republic of Rhodesia which

later on became Zimbabwe after attaining independence in 1980. At the time of his death,

Jonathan was employed by the ministry of home affairs as a security adviser.

Jonathan’s widow, Patricia has approached you, that you assist her with the preparation of her

family’s income tax returns for the 2015 year. After a meeting held with Patricia, she provided

you with the following information.

Receipts and Expenses: January to December 2015:

Notes $

Salary: January to April 1 8,000

Cash in lieu of leave 2 1,500

Bonus 3 1,600

Fuel Allowance 4 300

Housing allowance 400

Funeral assistance 5 500

Pension lump sum 6 15,000

Pension annuity 6 800

Medical Expenses 7 (3,500)

NSSA Contributions – Self (72)

Executors expenses 8 (800)

Notes



1. In terms of his employment contract with the ministry of home affairs Jonathan was on

$2,000 monthly salary. When Jonathan passed on the permanent secretary in the Ministry

decided to pay Jonathan’s deceased estate the salary for the month of April and the amount

was paid to the estate on the 18th of May 2015.

2. In May 2015 the ministry of home affairs paid this amount to Jonathan’s deceased estate in

connection with the leave days he had accumulated at the time of his death.

3. The government of Zimbabwe made an announcement that they will be paying bonuses to

all civil servants in respect of the 2014 year on the 22nd of December. On the same day all

employees in the Ministry of home affairs were informed that they will only be paid their

bonuses in May of 2015. The $1,600 was paid to Jonathan’s deceased estate on the 22nd of

May 2015.

4. The fuel allowance was received during the months of January to March 2015 and Jonathan

never kept a log book of his travels.

5. The $500 was given to Jonathan’s wife from the ministry of home affairs to assist with

Jonathan’s funeral expenses.

6. In August 2015 Jonathan’s deceased estate received a lump sum of $15,000 from NSSA and

Jonathan’s pension entitlement from NSSA amounted to $30,000. With effect from

September NSSA paid a monthly annuity of $200 in respect of Jonathan’s policy.

7. In June 2015, the executors of Jonathan’s deceased estate paid the amount of $3,500 to

Avenues Clinic in respect of Jonathan’s medical bills that had been accumulated up to the

date of his death.

8. This was in connection with the fees charged by the executors in administering Jonathan’s

deceased estate.

Assets Details

At the time of his death on the 31st of March 2015, Jonathan had the following assets with

attached values for estate valuation purposes:

Notes $

Mazda 323 sedan Vehicle 3,200

3 Bedroomed flat in the Avenues area of Harare* 1 70,000

Commercial property in the Harare CBD* 2 150,000

Family house in Chisipite – co-owned with Patricia 90,000

Bank balances 30,000

Notes:

1. For the 2015 year the 3 bedroomed apartment was being leased out for a monthly rental of

$600.



2. The commercial property was also being leased out for the 2015 year for a monthly rental of

$1,800.

*Jonathan acquired both properties in 2007.

Jonathan’s will

The terms of Jonathan’s will were as follows:

The mazda 323 sedan vehicle and the 3 bedroomed apartment were bequeathed to his wife

Patricia.

The commercial property in the Harare CBD was bequeathed to the Pinkett Trust.

The residue in the estate was bequeathed to Patricia.

The affairs of Jonathan’s deceased estate were wound up on the 31st of August 2015 where the

final distribution account was filed with the master of the high court.

You were also provided with the following information in connection with the Pinkett Trust

The Pinket trust was formed by Jonathan Pinket in the early 90’s with an initial donation to the

equivalent of $100 being made. Over the years the Pinket trust has acquired assets which

generate income for distribution to the beneficiaries of the trust in terms of the trust deed. The

following is an extract from the accounting records of the Pinket Trust for the year ended 31

December 2015.

Notes $

Income

Rental Income 1 35,000

Realised exchange gain 2 500

Unrealised exchange gain 2 300

Insurance proceeds 3 1,200

Interest income 4 1,600

Annuity 5 4,500

Dividends 6 1,500

Expenditures and distributions

Deductible Repairs and maintenance costs on properties (2,000)

Properties caretakers salaries (2,500)

Trustee’s fees (5,500)

Annuity 7 (6,000)



Other distributions 8 (4,500)

Donations 9 (1,200)

Notes

1. Included in the rental income is an amount of $5,600 received in connection with a rented

property located in South Africa. The $35,000 includes rental income arising from the

commercial building received from Jonathan’s estate. At the beginning of the 2015 tax year

all the capital allowances related to the rented out properties had been fully exhausted.

2. The realised and unrealised gains were all in connection with amounts owed from the tenant

in South Africa.

3. The $1,200 insurance proceeds was received in connection with damages to one of the rented

out properties. The full costs of repairing the damages are included in the repairs and

maintenance amount.

4. The interest income of $1,600 was received net of Zambian withholding tax. The Zambian

withholding tax amounted to $160.

5. In March 2015 the trust purchased an annuity for $30,000 from New Mutual. In return for

this capital contribution the trust will be receiving a monthly amount of $500 for the next 8

years commencing 1 April 2015.

6. The dividend was received from Build a House Building society registered in terms of the

Banking Act of Zimbabwe.

7. The annuity was paid to the following beneficiaries of the Trust:

$

Martin 3,000

Pauline 2,000

Nolan 1,000

6,000

8. Over and above the annuities above the following distributions were made to the

beneficiaries:

$

Martin 2,500

Pauline 2,000

4,500

The above distributions were all made from current year profits.

9. The Pinket Trust made a cash donation of $1,200 to the buy Zimbabwe campaign.

Terms of the Pinket Trust deed:



The beneficiaries to the Pinket Trust deed are Martin, Pauline and Nolan. All the beneficiaries to

the trust receive a monthly annuity from the trust and hold an equal share in the remaining trust

income. The balance of the income to the Trust would be held in trust for any beneficiary below

the age of 21 and if any of the beneficiaries were to die before reaching the age of 21, any

accumulated income would be paid to the executors of their deceased estates. The Trustees have

discretion over the amount to be distributed to the beneficiaries with vested rights,

Question 2 35 marks

Minerals (Private) Limited is a company registered in Zimbabwe and operates a gold mine located

in Mvurwi. The company commenced its operations in 2009 after the adoption of the multi-

currency system in Zimbabwe and has over the years seen tremendous growth in its production.

In February 2016 Minerals’ finance manager sent to your office the audited financial statements

for the year ended 31 December 2015 and have requested that you prepare their annual income

tax return which was due to be submitted by the 30th of April 2016. All amounts are exclusive of

Value Added Tax unless specifically indicated otherwise.

Detailed below is an extract of statement of comprehensive income for the year ended 31

December 2015:

Note US $000

Sales 1 13,000

Cost of sales 2 (8,200)

Gross Profit 4,800

Other Income 3 500

Administration expenses 4 (900)

Selling and distribution expenses 5 (1,100)

Staff costs 6 (800)

Profit before interest and tax 2,100

Finance Charges 7 (700)

Profit before tax 1,400

Extract of the statement of financial position as at 31 December 2015:

Note US $000



Equity and Liabilities

Share Capital 10

Retained earnings 2,200

2,210

Non-Current Liabilities

Long term interest bearing loan 8,200

Deferred tax 300

8,500

Current liabilities

Trade payables 700

Deferred Revenue 1 40

Current portion of long term interest bearing loan 640

1,380

Total Equity and Liabilities 12,090

Notes

1. During the 2015 financial year Minerals exported 60% of their production output in quantity

to customers in China.

2. Included in cost of sales were the following items:

$

Depreciation 56,000

Closing stock recorded at Net Realisable Value (Cost $30,000) 24,000

3. Other income includes the following amounts amongst others:

$

Dividend from Econet Limited (Listed on the ZSE) 13,000

Unrealised exchange gain on debtors 6,700

Profit on disposal of Motor Vehicles – see note 8 5,000

Dividend for Probeats Limited (South African Company) 14,000(net)*

*Minerals received the dividend of $14,000 in August 2015 after the deduction of South

Africa Withholding tax of $800. You also incurred bank transfer charges of $200 in respect of

this dividend.



4. In June 2015 Minerals was fined $20,000 by the Environment Agency (EMA) for failing to

comply with environmental regulations in their mining process. This amount plus $2,000 in

legal fees incurred in respect of the EMA fine has been expensed in the general administration

expenses.

The company also paid insurance premiums of $9,000 in December 2015 in respect of

insurance cover for the period 1 January 2016 to 31 December 2016. This amount has been

capitalised as a prepayment in the financial statements.

5. Included in selling and distribution expenses are the following amounts:

$

Advertising costs at the Zimbabwe International Trade Fair 5,300

Depreciation 80,000

Lunches with clients 9,200

6. Included in staff costs is an amount of $2,500 paid to a former employee who was injured at

work. The employee was permanently injured when a metal casing fell on his legs and he was

forced to retire as a result of those injuries.

Also recorded under staff costs are the following donations made during the year:

$

Donation to Midlands State University: Construction of Lecture rooms 120,000

Donation to the Chief Mvurwi 3,000

123,000

7. The finance charge relate to interest paid in respect of the long term interest bearing loan.

The loan was used to finance Mineral’s working capital requirements.

8. In May 2015 the company sold two Toyota Corolla sedan vehicles for $8,000 each. These

vehicles had been initially acquired in 2012 for $18,000 each and have always been used in

Minerals trading operations.

9. Capital expenditures during the year were as follows:

$

Construction of mine hospital staff housing – (10 units @ $15,000 each) 150,000

Shaft sinking 50,000

3 Twin cabs – (@ $30,000 each) 150,000

In your discussions with the finance manager he indicated to you that Minerals uses the new

mine method for the purposes of calculating the Capital Redemption Allowance.



Required

Question 1

a) Discuss with reference to the income tax act and applicable case law, in which tax year will

the bonus of $1,600 be taxable. 7 marks

b) Calculate the taxable income and any income tax liability for Jonathan Pinkett for the period

of assessment up to the date of his death. Provide a brief reason for amounts

added/deducted in the tax computation with reference to the information as provided by

Patricia. 14 marks

c) From the available information, calculate the taxable income for Jonathan’s deceased estate

for the 2015 year of assessment. For items which are not taxable provide a brief explanation.

10 marks

d) Calculate the taxable income for the year ended 31 December 2015 in respect of the following

tax payers:

i. The Pinkett Trust - 19 marks

ii. Martin Pinkett - 3 marks

iii. Pauline Pinkett - 3 marks

iv. Nolan Pinkett - 2 marks

v. Patricia Pinket - 3 marks

Presentation and clarity of communication 3 marks

Question 2

a) Calculate Minerals (Private) Limited taxable income and tax payable for the year ended 31

December 2015. 33 marks

Presentation 3 marks



Solution

SOLUTION 1a

- The issue at hand is to determine the tax year in which the $1,600 bonus shall be

taxable. 1 mark

- The bonus is included in gross income in the year in which it accrues for tax purposes.

1 mark

- Accrual for tax purposes happens when either an amount becomes due and payable or

when a taxpayer becomes entitled to it. 1 mark

- An amount accrues in the tax year in which the taxpayer becomes entitled to it. (CIR v

People’s Stores (Walvis Bay) (Pty) Ltd 1990 or Lategan vs CIR. So it accrues despite the

fact that it may only be due and payable in the future. The entitlement principle is

affirmed by section 10 (7). 2 marks

- From the foregoing the bonus was announced in the 2014 tax year. This is the year in

which the taxpayer became entitled to the amount despite it being payable after the

last day of the 2014 year of assessment. 1 mark

- Therefore the bonus of $1,600 will be taxable in the 2014 tax year of assessment.

1 mark

Total Available 7 marks



SOLUTION 1 b

COMPUTATION OF INCOME TAX LIABILITY FOR JONATHAN PINKETT FOR THE PERIOD OF

ASSESSMENT UP TO THE DATE OF HIS DEATH

EMPLOYMENT INCOME

$ Marks

Salary – (January – March) section 8 (April salary is a post death award)

6,000 1

Cash in Lieu of Leave – S 11(4) (no right to claim amount during lifetime)

- 1

Bonus – (Taxable in the 2014 year of assessment) - 1

Fuel allowance (S 8 gross income) - 1

Housing allowance (S 8 gross income) - 1

Funeral assistance (post death income s 11(4)) - ½

Pension Lump sum (post death income s 11(4)) - ½

Pension annuity (post death income s 11(4)) - ½

NSSA Contributions - self (72) 1

Executor’s expenses (post death expenses s 11(4)) - ½

TAXABLE INCOME 6,628

Tax thereon: 0-3600 = 3,600 x 0% = 0 3,601 – 6,628 = 3,028 x 20% = 605.60

605.60 2

Medical Credits (3,500÷2) (1,750) 1

ASSESSED LOSS FOR JONATHAN PINKETT (1,144.40)

TRADE AND INVESTMENT

$ Marks

Rental Income - Apartment (3months x $600) 1,800 1

Rental Income - Commercial Property (3months x $1,800) 5,400 1


TAX PAYABLE @ 25.75% 1,854 1



Total Available 14

SOLUTION 1 c

COMPUTATION OF TAXABLE INCOME FOR JONATHAN PINKETT’S DECEASED ESATE

$ Marks

Salary – April – Jonathan had no right to claim this salary as he did not work for the month of April

0 1

CILOL – sect 11 (4) (a) 1,500 2

Funeral Assistance – sect 11 (4) (b) – ex-gratia payment 0 2

Pension annuity – sect 11 (4) (a) 800 2

Executor’s expenses (800) 1

Lump sum – sect 11 (4) (a) and 8 (1) (r) 15,000 2

Taxable Income 16 500

Total Available 10

SOLUTION 1d (i)

COMPUTATION OF TAXABLE INCOME FOR THE PINKETT TRUST FOR THE YEAR ENDED 31

DECEMBER 2015

$ Marks

Rental Income – s 8 35,000 1

South African rental (foreign rentals not from source within Zim) (5,600) 1

W&T Commercial building inherited from Jonathan – 2.5% x 150k (3,750) 2

Realised exchange gains (gains on receivables not from a source within Zimbabwe)

- 1

Unrealised exchange gains (gains on receivables not from a source within Zimbabwe)

- 1

Insurance proceeds (Burmah Steamship) filling a hole in profits 1,200 1

Interest Income – Gross ($1,600 + $160) (0.5 for net, 0.5 for withholding) 1,760 1

Annuity [(($500 x 8yrs x 12months) – $30,000)÷96months] x 9months 1,688 2

Dividend from building society 1,500 2

Deductible R&M expenses (2,000) 1



Properties caretakers’ salaries (2,500) 1

Trustee’s fees (5,500) 1

Annuity paid - deductible (6,000) 2

Other distributions (4,500) 1

Cash donation (not for the purposes of trade) - 1

Total TAXABLE INCOME 11,298

Less Taxable in the hands of beneficiaries with vested rights

Martin ($11,298 * 1/3) (3,766) 1

Pauline ($11,298*1/3) (3,766) 1

Taxable income in the hands of the trust 3,766

Total Available 19

SOLUTION 1d (ii)

COMPUTATION OF TAXABLE INCOME FOR MARTIN PINKETT FOR THE YEAR ENDED 31

DECEMBER 2015

$ Marks

Annuity - Trust 3,000 1

Distributions - Trust 2,500 1

Share of trust taxable income 3,766 1


Total Available 3



SOLUTION 1d (iii)

COMPUTATION OF TAXABLE INCOME FOR PAULINE PINKETT FOR THE YEAR ENDED 31

DECEMBER 2015

$ Marks


Distributions - Trust 2,000 1

Share of trust taxable income 3,766 1


Total Available 3

SOLUTION 1 d (iv)

COMPUTATION OF TAXABLE INCOME FOR NOLAN PINKETT FOR THE YEAR ENDED 31

DECEMBER 2015

$ Marks


Total Available 2

Solution 1d (v)

COMPUTATION OF INCOME TAX LIABILITY FOR PATRCIA PINKETT FOR THE YEAR ENDED 31

DECEMBER 2015 – TRADE AND INVESTMENT INCOME

$ Marks

Rental Income - Apartment (9 months x $600) 5,400 1

Capital allowances : 3 Bedroomed flat (exhausted) - 2


Total Available 3



SOLUTION 2

COMPUTATION OF MINERALS (PVT) LTD TAXABLE INCOME AND TAX PAYABLE FOR THE YEAR

ENDED 31 DECEMBER 2015

$ Marks

Profit Before Tax 1,400,000 ½

Deferred revenue – s 8 (earlier of receipt or accrual) 40,000 1

Export sales (s8 Gross income) - 1

Cost of sales:

Depreciation (not incurred s 15(2)) 56,000 1

Closing stock (NRV not acceptable valuation method; 2nd schedule) 6,000 1

Other Income:

Local listed co dividend (exempt) (s14 and 3rd schedule) (13,000) 1

Unrealised exchange gain on debtors (not received s8 Gross Income) (6,700) 1

Profit on disposal of Motor Vehicles (not received s8 Gross Income) (5,000) ½

Foreign dividend (Probeats ltd) (taxed at a different rate of tax) (14,000) ½

Bank charges on gross income from a deemed source (foreign dividend) (prohibited)

200 1

EMA fine – (expenditure falls upon the taxpayer as a lawbreaker rather than as a businessperson.)

20,000 1

Legal expenses related to the EMA fine 2,000 1

Insurance prepayment – s15(2) deduction at the earlier of payment or accrual.

(9,000) 1

Advertising @ ZITF - 0 1

Selling and Distribution depreciation (not incurred s 15(2)) 80,000 1

Lunches with clients ( entertainment - prohibited deduction s 16 (1)(m)) 9,200 1

Voluntary payments to former employee – restricted to $500 p.a. s 15 (2)(q) 2,000 2

Donation to MSU – Approved research institution - s 15 (2)(r2) limited to $100,000

20,000 1

Donation to chief Mvurwi – (not for the purpose of trade) 3,000 1

Finance Charges – see Note 1 – (s 16 (1)(q)) 175,000 3



Capital Redemption Allowance:

Mine Hospital Staff Housing (150,000) 1

Shaft sinking (50,000) 1

Motor Vehicles – x 3 Passenger Motor Vehicles (30,000) 2

Recoupment Motor Vehicles – Deemed Proceeds ($16,000 * $20,000/$36,000)

8,889 2

1,537,400

Tax payable @ 25.75% 395,581 1

US $ ‘000

Foreign dividend – Probeats Ltd gross amount (14,000 + 800) 14,800 2

Tax Thereon (14,800 x 20%) 2,960 1

Less Double taxation relief (800) 2

Tax payable 2,160

Total Available 34

Note 1

Thin capitalization computations:

Long term Borrowings (8,200+640) 8.840

Equity 2,210

Therefore, current ratio is 4:1 and excess interest is ¼ of $700,000.

$700,000 x 25% = $175,000



Mock 5

Question 1 50 marks

Finiel (Pvt) Ltd (Finiel) is a leading manufacturer of high tech gym equipment which it sells locally

and regionally. Finiel has a research and development arm that is housed in Msasa which seeks

to stay ahead of the change curve by constantly researching on trailblazing products for effective

training. Their range of products which is manufactured at Finiel’s plant in Graniteside is diverse

ranging from digital equipment to weights. Finiel distributes its equipment via 3 outlets in Harare,

at Longchen Plaza, Joina City and Sam Levy’s village. The company has recently begun exporting

its products to Botswana as they seek to manage their business risks associated with Zimbabwe’s

declining economy. On a selected range of fitness equipment, Finiel sells these by way of hire

purchase arrangements, wherein vetted customers enter into an agreement to collect

equipment and pay in instalments.

You are a recently qualified Chartered Accountant in a consultancy firm, BAA Chartered

Accountants, which assists clients on tax matters among other issues. You have been given the

Finiel file, in order to assist with the computation of their taxable income and to address any

queries from Finiel in respect of their tax affairs. Enclosed in the Finiel file are financial statements

for the year ended 31 December 2015 and additional information.

The net profit before taxation for the year ended 31 December 2015 is $345 500.

Included in the net profit before tax figure were the following amounts:

1. Finiel sells a variety of cardiovascular equipment that include treadmills, exercise bikes,

indoor cycles, recumbent bikes and rowing machines among other things. Treadmills are

sold on suspensive sales agreements to selected corporate customers. Each treadmill

costs $500 to manufacture. In the year 2014, 200 treadmills were manufactured, 110 of

which were sold in July 2014 for $800 each to a foreign Zambian retailer. In October of

2014, Finiel sold 50 treadmills to a fitness centre in Chisipite for $800. In February of 2015

Finiel sold another 15 treadmills to a Borrowdale client for $800. All the sales mentioned

above were made under suspensive sales agreements and Finiel requires a 30% deposit

upfront on date of sale and the remaining balance is payable over 20 months in equal

instalments commencing the month following that of sale. The cash price for each

treadmill is $720

2. During the month of August, one of the warehouses in Graniteside caught fire destroying

part of the warehouse and inventory. As a result, inventory worth $30,000 was written

down to a value of $12,000 which was the Net Realisable Value (NRV) calculated as the

selling price of the stock less cost to sale. The cost to sale used in calculating the NRV

amounted to $500. The items were still in stock at the end of the year.



3. Finiel had the following other inventories as at 31 December included in closing stock

apart from the written down inventories:

Finished Goods (at cost) $450,000

Work In Progress (at cost) $135,000

4. During the year Finiel sold part of the debtor book through factoring as these debts were

difficult to collect and considered by management a time waster. Debtors worth $60,000

were sold for 70% of their value. The 30% discount was written off to the profit or loss in

the current year.

5. Also included in the profit before tax figure are the following amounts:

Profit on disposal of delivery van 2,000

Loss on scrapping of work benches (1,450)

The delivery van had originally been acquired for $45,000 in the year 2012 and was sold

for $29,000 at the beginning of the current year. The work benches were fabricated for

$5,000 in the year 2013 and were sold for $1,550 in the current year to a local high school

in Harare.

6. Included in the profit before tax figure are insurance proceeds amounting to $25,000

($15,000 for a mazda 3 vehicle and $10,000 for a Vigo single cab) in respect of Finiel’s two

vehicles which were destroyed in the fire in August 2015 i.e. a pool administration Mazda

3 saloon and Vigo single cab. The Mazda 3 was bought in January of 2013 for $27,000. The

Vigo was bought in August of 2011 for $33,000. At the time the vehicles were destroyed

they had a total book value of $20,000 which was written off to the income statement in

the current year. In December of 2015 Finiel then used the proceeds to replace the motor

vehicles i.e. a second hand mazda saloon for $8,000 and a Toyota Vigo single cab for

$9,000.

7. Finiel acquired two similar managerial vehicles (Nissan Navarra single cabs) under a hire

purchase agreement. The cash price for each vehicle was $53,000. The vehicles were

bought on the 1st of December 2015. Finiel shall pay monthly instalments of $2,000 for

each vehicle for 30 months in advance commencing 1 December 2015.

8. The following schedule of assets was enclosed for assets as at the end of the year:

# ASSET

COST $

PURHASE DATE

1 Mazda Saloon 8,000 15-Dec-15

2 Toyota – Vigo – single cab 9,000 23-Dec-15

3 Hino - Delivery truck 65,000 15-Jan-15

4 Land - Graniteside 200,000 15-Jan-15

5 Industrial building and Warehouse – Graniteside (purchased)

150,000 03-Jan-12

6 Warehouse – Improvements – used to store goods manufactured by Finiel

45,000 31-Aug-15



7 Office Block -Graniteside 30,000 15-Jan-15

8 Land - Msasa 65,000 15-Jan-15

10 Plant and Machinery 150,000 20-Jan-10

11 Nissan Navarra X2 106,000 01-Dec-15

12 R&D Equipment 15,000 20-Jan-15

13 Flats (Botswana) 100,000 13-Dec-14

9. The following educational grants awarded to the following individuals were expensed to

the P/L in the current:

The Managing Director’s daughter for an Agro degree program $12,000

The Accountant for an ACCA exam fees $2,400

10. Included in general expenses are the following donations made by Finiel as part of its

Corporate Social Responsibility:

$

Parirenyatwa Hospital for the payment of nurse’s salaries 10,000

Karanda Mission hospital for medical equipment 5,000

St Annes Private Hospital for procurement of hospital drugs 2,500

11. Included in other expenses in the net profit amount are the following expenses:

$

End of year Christmas party for all staff $2,500

Customer braais and luncheons $1,500

Dinner expenses for staff who worked overtime $2,350

12. Finiel acquired sole selling rights for its products at a complex in Francistown, Botswana

for 3,500 for the entire year. This amount was expensed to the income statement for the

current year.

13. During the year, Finiel appealed to the tax courts against an earlier judgement. The matter

is still before the courts although Finiel had incurred $3,500 on associated appeal costs

which have been expensed under general expenses

14. Included in other income are rentals of $2,500 per month received from Finiel’s cluster

development property that it owns in Botswana. For the 2015 year the properties in

Botswana were leased out for the full 12 months.

15. Finiel received $11,000 in foreign dividend net of 10% withheld tax, which has been

include in other income

You can assume that over the year’s Finiel has always claimed the maximum possible capital

allowances and taken advantage of any available income tax reliefs.



Question 2 20 marks

LuluRock (Pvt) Ltd is a mining company operating in the Great Dyke belt of Zimbabwe. The

company mainly mines platinum although it also used to mine chrome. The chrome ore industry

has been facing a growing number of challenges since the global financial crisis of 2008 that saw

the plummeting of prices of chrome ore and ferrochrome. There has been a downward trend

since then coupled with rising production costs. Most chrome ore is now mined from the

“difficult- to-mine, labor-intensive” thin seams of the Great Dyke because the large podiform-

type chrome ore deposits have been largely depleted. This significantly increases prospecting

costs.

LuluRock is owned by 4 directors who hold an equal equity stake in the company. Three of the

directors are Chinese and based in China whilst the one is Zimbabwean and locally based. In order

capitalize the business to fund its long term strategy to gradually exit the chrome arena and focus

on the platinum mining, LuluRock borrowed from a Malaysian venture capitalist in a mezzanine

debt arrangement an amount of $75 million.

The net profit before tax for the year ended 31 December 2015 reflected an amount $450,000

after the following adjustments were effected:

INCOME

Profit on disposal : Insurance Proceeds 1 35,000

Profit/(loss) on Disposals

- Trailers 2 7,100

- Excavators 2 (80,000)

- Mining Claims 2 5,000

EXPENSES

Depreciation 4,132,000

Shaft sinking 1,420,000

Development Expenditure 7,235,000

Boreholes 233,000

Prospecting expenditure 3,622,000

Interest Expenses 3 3,780,000

Administration Expenses 4 5,783,000



Capital Expenditures incurred in the year 2015 were as follows:

Construction of mining buildings 350,000

Construction of staff houses 5 1,250,000

House for the Zimbabwean Director 40,000

Other information:

1. Insurance Proceeds

Two vehicles were destroyed by a veld fire and LuluRock received compensation as follows:

- Toyota Hilux Double cab $35,000

- Isuzu Single cab bakkie $20,000

$55,000

The Toyota was bought in December of 2013 for $46,000 and the Isuzu in January of 2014 for

$30,000.

2. Disposals

ASSET(S) COST PURCHASE DATE SELLING PRICE PROFIT ON DISPOSAL

Trailers x 2 150,000 June 2009 7,100 7,100

Excavators 1,200,000 Jan - 2012 400,000 (80,000)

Mining claim 500,000 Jan - 2010 255,000 5,000

3. Interest Expenses

The interest was payable to the Malaysian venture capitalist. The average debt to equity ratio

of LuluRock during the year ended 31 December 2015 was 9:2

4. Administration Expenses

Included in the administration expenses were the following:

- Entrance fees for mine engineers into their Engineering association $5,000

- Allowances to directors for client networking $4,800

- Rentals - new offices which were being refurbished for 2017 occupation $9,600

- Lease rentals for Twin cab $10,100

5. Staff Housing

LuluRock developed dwellings for its platinum mine operations during the year 2015. It has

two major cluster development sites. The one site has 30 identical housing units constructed

for a total of $660,000. The second site has 15 identical units constructed by the balance.



For the purpose of determining the Capital Redemption Allowances (CRA), the company has

made an election to use New Mines basis.

Question 3 30 marks

Nokuthula Mlambo is a keen farmer who inherited lot 9 Watershed farm 11km due south of

Gweru city centre in January 2015 following on from the death of her father in September of

2014. She rears cattle, grows crops and is into poultry as well. Nokuthula has a large dam that

she constructed and seeded fish, not as a commercial activity but as a hobby. Given that the

Gweru area is in a region not so good for a number of commercial crop varieties, Nokuthula’s

strategy is to focus on the livestock vertical. Within this portfolio she wants to grow the range to

dairy farming and as such she has begun investing in that project. She has since employed an

agronomist manager looking to complete capital investment projects to grow her business.

The inherited farm assets were as follows:

Market Value Estate Valuation

Land 2,500,000 2,400,000

Farm House – used by Nokuthula as her residence 26,000 24,000

Fowl Run 2,500 2,500

Cattle pen 5,000 5,000

Dip Tank 3,500 3,500

Irrigation Equipment 57,000 59,000

Permanent Roads 15,000 15,000

Tractor 22,000 22,000

The following is a summary of Income and expenses for the Nokuthula:

$

RECEIPTS/INCOME

Livestock sales 19,500

Maize sales 15,000

Vegetables sales 2,400

Poultry sales 1 23,500

Loan proceeds 2 25,000

EXPENSES

Livestock Purchases 75,000

Seeds 3,300

Water furrows 3,130

Boreholes 3 7,900

Temporary farm roads 1,230

Stock-feed 2,400

Fuel – Generator, delivery van 2,430



Stumping and clearing of land 980

Interest Expense 2 1,320

Other expenses 4 15,271

1. Poultry Sales

Poultry sales have significantly improved due to a rise in demand on cheaper poultry

products by the Midlands State University community and canteens. Due to Nokuthula’s low

prices against high quality, part of the receipts for poultry sales are receipts of $5,300

received in advance for orders yet to be supplied. This amount of $5,300 has not been

included in the total poultry sales figure of $23,500.

2. Loan Interest Expense

Nokuthula took out a loan from the bank in July 2015, secured against the farm, of $25,000

and applied it as follows:

$

Acquisition of farming equipment in July 2015 and brought into use in same month 8,000

Tuition for Agronomist’s Masters in Horticulture 2,000

Additional piece of land for farming 15,000

The total interest charged on the loan from August 2015 to December 2015 amounted to

$1,320

3. Boreholes

Cost incurred in respect of the sinking of the borehole was as follows:

- Borehole equipment 3,000

- Sinking of the borehole 4,900

4. Other Expenses

Part of other expenses are payments to the day old chicks supplier in advance of $1,750 at

year end as there is high demand

LIVESTOCK ACTIVITIES

DESCRITPTION QUANTITY

COST OR SP OR ESTATE

VALUATION

PPV/FSV (Unit)

$ $

INH

ERIT

ED

LIV

ESTO

CK

Bulls 2 980

Dairy Cows - -

Oxen 40 12,800



Cows 75 21,750

Tollies 15 3,000

Heifers 19 3,990

Calves 33 4,950 50

PU

RC

HA

SES

Bulls - - 500

Dairy Cows 5 3,300 600

Oxen 40 12,400 320

Cows 50 14,900 300

Tollies 15 2,985 200

Heifers 10 2,120 210

SALE

S

Oxen 20 5,000

Cows 40 12,000

Tollies 5 1,000

Heifers 5 1,500

DEA

THS Oxen 1

Cow 2

During the year, 3 calves were born. Their FSV was $80.

13 calves were promoted to tollies and 20 to heifers.

7 heifers were donated to the African Union Chairperson in recognition of his sterling

work in championing agro initiatives across the continent thereby creating a huge

single market for farming produce.

Assume that Nokuthula would want to take advantage of all available reliefs in the

determination of her income tax payable.



Required

REQUIRED MARKS

1 a. Calculate Finiel (Pvt) Ltd.’s taxable income for the year of assessment ended 31 December 2015. For items which do not require an adjustment indicate by the use of a zero and provide a brief explanation for your tax treatment

b. With regards to Finiel’s inventory, discuss the stock valuation methods permitted for income tax purposes and their implication on tax planning.

47

3

2 Calculate the taxable income and income tax liability of LuluRock (Pvt) Ltd for

the year of assessment ended 31 December 2015. Please provide reasons

where amounts do not need to be adjusted.

20

3 a. Calculate the closing stock value in respect of livestock held by Nokuthula as at 31 December 2015.

b. Calculate Nokuthula’s taxable income and income tax payable for the 2015 tax year assuming Nokuthula claims the maximum possible capital allowances and deductions.

8

20

Presentation and communication 2



Solution

Question 1

Finiel (Pvt) Ltd – Income Tax Computation for the year ended 31 December 2015

$ Marks

Net profit before tax 345,500 ½

Note 1

Sect 17 (i) – b/f – w1 32,325 4

Current year Section 17(i) allowance – w1 (20,040) 4

Note 2

Closing stock adjustment – sect 8 (1) (h) & 2nd schedule – inventory to

be valued at market value, not NRV

500 2

Note 3

Finished goods – sect 8(1) (h) 0 ½

Work in progress – sect 8 (1) (h) 0 ½

Note 4

30% discount written off – not proved to be irrecoverable – sect 15 (2)

(g) - $60,000*30%

18,000 2

Note 5

Profit on disposal of delivery van – does not meet gross income

definition – sect 8

(2,000) 1

Loss on scrapping of work benches – not incurred 1,450 1

Recoupment on disposal van - $29,000 – ($45,000*25%) 17,750 2

No scrapping allowance on the work benches since not actually sold as

scrap.

0 1



Note 6

Insurance proceeds – capital in nature (25,000) 1

Book value written off – not incurred 20,000 1

Recoupment – mazda 3 – w2 259 4

Recoupment – Vigo single cab – w2 1,000 2.5

SIA Mazda Saloon vehicle - $8,000*25% (2,000) 1

SIA Vigo Single cab - $9,000 *25% (2,250) 1

Note 7

SIA Navarra single cabs – ($2,000*30*2) * 25% - 4th schedule (30,000) 2

Note 8

SIA Hino delivery Truck - $65,000 *25% (16,250) 1

Land – does not rank for capital allowances 0 ½

Graniteside Industrial building - $150,000 * 5% - since it was purchased (7,500) 2

Warehouse – industrial building as defined - $45,000 * 25% (11,250) 1

Office block Graniteside – Commercial ($30,000 * 2.5%) (750) 1

Land – Msasa – does not rank for capital allowances 0 ½

Plant and Machinery – capital allowances exhausted 0 ½

R&D Equipment – SIA - $15,000 * 25% (3,750) 1

$ Marks

Flats (Botswana) – does not rank for capital allowances, since generating

income not taxable in Zimbabwe

0 1

Note 9

Grant to managing director’s daughter – section 15 (2) (p) 12,000 1



Accountant for ACCA fees – sect 15 (2) (a) – staff cost 0 ½

Note 10

Parirenyatwa Hospitals – not incurred for the purposes of trade 10,000 1

Karanda Mission – sect 15(2) (r1) 0 1

St Annes Private Hospital – not allowable 2,500 1

Note 11

End of year christmass party – sect 16(1) (m) 2,500 1

Customer braais and luncheons – sect 16(1) (m) 1,500 1

Dinner expenses – staff costs 0 ½

Note 12

Acquisition of sole selling rights – sect 16(1) (j) 3,500 1

Note 13

Legal appeals costs - 3,500 1

Note 14

Rentals – not from a source in Zimbabwe - $2,500*12 (30,000) 1

Note 15

Foreign dividend – taxed at a special rate (11,000) 1

Taxable Income

Tax @ 25.75% 1



Foreign dividends

Gross dividend – ($11,000 * 100/90) 12,222 2

Tax @ 20% 2,444 1

Less double taxation relief – sec 93 ($12,222-$11,000) (1,222) 1

1,222

Total Available 56

Calculations

1. Since the treadmills were sold under a suspensive sale agreement, Finiel would have claimed

a section 17 relief in the 2014 tax year and in 2015.

Gross Profit % = ($800-$500)/$800 * 100

= 37.5% 2 marks

2014 2015 marks

$ $

Balance b/f - 86,200 1/2

Sales 128,000 12,000 1/2

Receipts

Deposit (110*$800*30%), (50*$800*30%) (26,400) (3,600) 2

Installments* (15,400) (41,160) 2

Closing Debtor balance 86,200 53,440

Section 17 Allowance* @37.5% 32,325 20,040 3



2014 Installments = ((128,000-26,400)/20*5)

= $15,400

2015 Installments = 3,080*12 + ((12,000-3,600)/20*10)

= $41,160

2. Note 6 Recoupment calculations

Mazda 3 – Passenger motor vehicle

$ Marks

Deemed proceeds – ($15,000*$10,000/$27,000) 5,556 2

Less ITV ($10,000*25%) (5,000) 1

Recoupment 556

Actual Recoupment: ($7,000/$15,000*556) 259 1

Toyota Vigo

Sale proceeds 10,000 1/2

Less ITV 0 1

Potential Recoupment 10,000

Actual Recoupment ($1,000/$10,000 *10,000) 1,000 1

Question 1 required b

The stock valuation methods as permitted for the income tax purposes are as detailed in the

second schedule to the income tax act. 2 marks

In terms of the second schedule par 4 Finiel is permitted to value their closing trading stock

at cost price, cost of replacement or market value. 1 mark

For tax planning purposes Finiel will have to elect which ever option gives rise to a lower

closing stock value as this would result in a reduced taxable income. 1 mark

For any work in progress as at year-end Finiel will have to present their valuation method

subject to the approval by the commissioner. 1 mark



Question 2

$ Marks

Net profit before tax 450,000 ½

Note 1

Profit on disposal – does not meet the gross income definition (35,000) 1

Note 2

Trailers -Profit on disposal - (7,100) 1

Excavators – loss in disposals 80,000 1

Mining claim (5,000) 1

Depreciation – no expense incurred 4,132,000 ½

Shaft sinking – capital in nature 1,420,000 ½

Development expenses – capital in nature 7,235,000 ½

Boreholes – capital in nature 233,000 ½

Prospecting expenses – capital in nature 3,622,000 ½

Note 3

Interest expense – sect 16 (1) (q) - $3,780,000 – 3/4.5 *$3,780,000 1,260,000 3

Note 4

Entrance fees – capital in nature 5,000 1

Allowances for directors – prohibited – sect 16(1) (m) 4,800 1

Rentals – vacant – sect 16 (1) (i) 9,600 1

Lease rentals – limited to $10,000 p.a – sect 16(1)(k) 100 1



Capital Redemption Allowance – CRA – w1 (13,787,900) 5 ½

Taxable income 4,616,500

Tax @ 25.75% 1,188,749 1

Total Available 21 ½

Working 1 - CRA

$ Marks

Shaft sinking 1,420,000 ½.

Development expenditure 7,235,000 ½.

Boreholes 233,000 ½.

Prospecting expenses 3,622,000 ½.

Mine buildings 350,000 ½.

Construction of staff houses - 1,250,000 ½.

House for Director 40,000 ½.

Recoupment

Toyota Hilux (35,000) ½.

Isuzu Single cab bakkie (20,000) ½.

Trailers (7,100) ½.

Excavators (400,000) ½.

13,687,900



Question 3

a) Livestock closing stock as at 31 December 2015: Livestock reconciliation

Bulls Dairy

Cows

Oxen Cows Tollies Heifers Calves Total Marks

Opening stock - - - - - - - -

Inherited

livestock

2 0 40 75 15 19 33 184 2

Purchases 0 5 40 50 15 10 0 120 1

Sales 0 0 (20) (40) (5) (5) 0 (70) 1

Deaths 0 0 (1) (2) 0 0 0 (3) 1

Births 0 0 0 0 0 0 3 3 1

Promotions 13 20 (33) 0 1

Donations 0 0 0 0 0 (7) 0 (7) 1

Total 2 5 59 83 38 37 3 227

FSV/PPV ($) 500 600 320 300 200 210 50 2

Closing stock

($)

1,000 3,000 18,880 24,900 7,600 7,770 150 63,300 1

Total available 11

b) Nokuthula’s income tax computation for the year ended 31 December 2015

$ Marks

Livestock sales – sect 8(1) 19,500 ½

Maize sales – sect 8(1) 15,000 ½



Vegetable sales – sect 8(1) 2,400 ½

Poultry sales – sect 8 (1) 23,500 ½

Receipts in advance – sect 8(1) 5,300 2

Loan proceeds – capital in nature 0 ½

Livestock purchases – sect 15 (2) (a) (75,000) 1

Seeds – sect 15 (2) (a) (3,300) ½

Water furrow – farm improvement 4th schedule - SIA 25%*$3,130 (783) 2

Borehole equipment – SIA $3,000 * 25% (750) 2

Sinking of borehole – 7th schedule expense (4,900) 1

Temporary farm road – sect 15 (1,230) 1

Stock feed – sect 15 (2,400) ½

Fuel – sect 15 (2,430) ½

Stumping and clearing of land – 7th schedule (980) 1

Interest expense : allowable to the extend loan used for qualifying

expenses : ($8,000 + $2,000)/$25,000 * $1,320

(528) 2

SIA on equipment: 25% * $8,000 (2,000) 1

Tuition for agronomist – sect 15 (2,000) 1

Other expenses – sect 15 (15,271) 1

Inherited livestock – sect 15 (2) (v) (47,470) 1

Closing stock – sect 8(1) (h) 63,300 1

Donated stock – deemed sale – 7 * $210 1,470 1

Inherited assets

Land – does not rank for capital allowances 0 ½



Farm House – does not meet farm improvement definition 0 1

Fowl Run – W&T 5%*2,500 (125) 1

Dip Tank – 7TH Schedule expense therefore no deduction in current year 0 1

Irrigation Equipment – W&T 10% * $59,000 (5,900) 1

Permanent Roads – W&T 5% * $15,000 (750) 1

Tractor – W&T 20% *$22,000 (4,400) 1

Assessed loss

Total Available 28 ½



Mock Exam 6

Question 1 (25 Marks) Tadiwa Moyo (Tadiwa) retired on 31 August 2013, at the age of 58 years. Tadiwa is married and

has one son, Jeffrey, who is 23 years old and lives in South Africa. Tadiwa is married out of

community of property. During his period of employment Tadiwa resided in Harare in the leafy

suburbs of Borrowdale.

Employment benefits

For the period ending on 31 August 2013, Tadiwa received a number of amounts and benefits

relating to his employment:

● A salary of $3 500 a month.

● A bonus paid on 30 November each year equal to three times the monthly salary on that

date; on 31 August 2013 he was paid a pro rata bonus of $7 000.

● As from 1 March 2013 his employer contributed an amount of $600 a month to a medical

aid fund in respect of Tadiwa’s membership and Tadiwa contributed the same amount.

The employer and Tadiwa will continue to contribute this amount after his retirement.

● Tadiwa’s employer contributes 8% of his basic salary each month to a pension fund on

Tadiwa’s behalf and Tadiwa contributes the same amount.

● During the 2013 year of assessment Tadiwa had use of an ISUZU KB which he used for

both business and private purposes. In terms of his contract of employment Tadiwa

received a fuel allowance of $200 on a monthly basis. Provided below is a detail of the

mileage travelled during the period January to August.

Km

Business Travel 40 000

Personal Travel 10 000

Total 50 000

The Isuzu KB has an engine capacity of 3200ccs. On 31 August when Tadiwa retired he

bought the Isuzu KB he had been using for an amount of $5 000 and as at that date the

fair market value for the vehicle was $8 000.

● Due to the nature of the skills possessed by Tadiwa he was often subcontracted by his

employer to offer training services to other companies as determined by his employer.

During the period to August 2013 he earned a total of $10 000 from performing these

subcontracts. The amount is calculated based on 15% of the amount invoiced by Tadiwa’s

employer whenever he is subcontracted to offer training to other companies.



Retirement fund benefits

Tadiwa earned the following amounts in respect of retirement funds:

● Tadiwa was a member of his employer’s pension fund for 30 years, during which he was

employed outside Zimbabwe for certain periods:

1 September 1983 - 31 August 1999: (16 years) In Zimbabwe

1 September 1999 - 31 August 2009: (10 years) Outside Zimbabwe

1 September 2009 - 31 August 2013: (4 years) In Zimbabwe

When he retired on 31 August 2013 Tadiwa was paid a lump sum of $120 000 by the

pension fund and from 30 September 2013 he receives a monthly pension of $1 500. His

total pension entitlement amounted to $270 000. The total contributions he made over

the 30years amounted to $150 000.

Up to 31 December 2011 the following pension fund contributions made by Tadiwa had

not been allowed as a deduction:

1 September 1983 - 31 August 1999: 11 500



1 September 2012 - 28 February 2013: 750

23 400

● Tadiwa retired from a retirement annuity fund on 31 August 2013 and received a lump

sum payment of $60 000. His total entitlement from the retirement annuity fund

amounted to $150 000. From 31 August 2013 he received a monthly payment of $600

from the retirement annuity fund. All of his contributions to the fund were allowed as

deductions in the past.

Other information

● Tadiwa also earned interest amounting to $4 410 on a fixed deposit with a financial

institution which pays interest annually on 31 July.

● Tadiwa paid medical expenses of $1 700 during the year of assessment, which were not

recovered from the medical aid fund.

● On his retirement from employment Tadiwa decided to relocate to his farm in Chinhoyi

which had been allocated to him under the governments land resettlement scheme

(“Hondo Yemunda”). Due to the relocation he decided to dispose of the house he was

currently occupying with his family since he was planning on staying on the farm on a full

time basis. In October 2013 he found a buyer and he received a sum of $45 000 on the

sale of his house. The Harare house was the only property he owned



Question 2 (50 Marks)

Mvurwi Manufacturers (Pvt) Ltd (‘Mvurwi’) carries on a manufacturing process in Zimbabwe. The

following particulars relate to its year of assessment ended 30 June 2013. All amounts exclude

value-added tax (VAT), except in respect of notes 4.1 and 5 below.

Taxable income before taking into account any of the income or expenditure arising from the

Information set out below: $560 000

Further information:

1. Sale of property and relocation to new property

The company’s existing property had become too small due to the rapid expansion of the

business. The property was sold on 1 March 2013 and the company moved into new property

on that date. Particulars relating to the property sold are as follows:

Cost Tax value on Selling

1 July 2012 price

$ $ $

Land – purchased on 1 October 2011 40 000 Nil 50 000

Building – housing the factory (90% of the floor

space) and administration offices (10%) erected on

1 February 2012 100 000 50 000 100 000

An estate agent’s fee of $10 500 was paid in respect of the sale of the land and the building.

2. Lease of new property

On 1 September 2012 Mvurwi entered into a lease agreement with a property dealer to lease

property for a period of 25 years from that date. The contract provided as follows:

● Mvurwi would pay a monthly rental of $1 000 from 1 September 2012, escalating in line

with inflation.

● Mvurwi would pay a lease premium of $20 000 on 1 September 2012.

● Mvurwi would erect a factory on the property at a cost of $240 000. The factory was

completed and occupied on 1 March 2013, on which date production commenced. The

building, which was completed at a cost of $300 000, comprised:



Floor space

- the factory 60%

- the administration offices 20%

- a research and development section to be specifically equipped

and used exclusively for that purpose 20%

3. Existing furniture, plant and equipment

The furniture, plant and equipment housed in the old factory were transported to the new

factory on 1 March 2013 and brought into use on that date. Information relating to the assets

and the cost of their removal is set out below:

Cost Tax value on

Removal

1 July 2012 cost

$ $ $

Furniture and fittings (5 300 items) 23 000 Nil 2 000

Plant & equipment (all purchased on 1/09/2011) 85 000 21 250 9 000

4. Additional plant and equipment acquired

4.1 On 1 March 2013 Mvurwi entered into a finance lease agreement with a company

dealing in equipment to lease factory equipment. The lease agreement made provision

for 48 monthly lease instalments of $3 450 (Including VAT). The company from which

the equipment was leased provided the following information:

Cost of the equipment (including VAT) $91 200

Normal selling price of the equipment (including VAT) $136 800

4.2 On 1 May 2013, Mvurwi borrowed an amount of $100 000, repayable in full on 30 April

2015, together with interest of $45 000.

On that date Mvurwi also sold part of the existing plant and equipment brought from

the old factory for an amount of $60 000. The original cost amounted to $40 000 and

the tax value on 1 July 2012 was $10 000.



The proceeds of the loan were used to purchase second-hand manufacturing equipment

on 1 May 2013 from Mvurwi shareholder, Mr Nobody Muza, who holds 60% of the

shares in the company. This equipment, which had originally cost Mr Muza $60 000 and

had a tax value of $24 000 on the date of sale, was purchased at a cost of $80 000.

The balance of the loan ($20 000), together with the proceeds of the sale of the existing

plant ($60 000), was invested in new replacement plant and equipment, costing $80 000.

Mvurwi exercised the election to apply 4th schedule of the Income Tax Act and claim SIA.

5. Research and development

On 1 March 2013 Mvurwi purchased research and development equipment at a cost of $25

000 and immediately commenced research into the development of a novel component for

their products, which they plan to patent. Mvurwi received a grant of $10 000 from the

government to finance the operating expenditure for this research and incurred non-capital

development expenses of $25 000 during the period 1 March to 30 June 2013. The operating

expenditure for this research is deductible under section 15 of Income Tax Act. Equipment of

this nature is normally used for 5 years. Mvurwi expected to put the new component into use

at the end of the year but this has not yet happened at year end as their experiment indicated

a 10% chance of success.

Agricultural Equipment (Pvt) Ltd is a company registered under the Zimbabwe Companies Act

selling a wide range of agricultural equipment in Zimbabwe. It also exports some equipment to

Zambia and Malawi.

The corporation is a registered VAT vendor and has a two-month VAT tax period. It only makes

taxable supplies of goods.

An inexperienced bookkeeper is currently completing the VAT return for the tax period ended on

30 September 2013 and seeks your assistance in respect of the following transactions which may

be relevant to the tax period.

The company acquired a second-hand single cab bakkie on 1 August 2013 for use by one of

the salespersons, Richard Makomo. Richard uses the bakkie for private and business

purposes. He is expected to bear the cost of private fuel. The bakkie was acquired from a

non-vendor for a cash consideration of $18 400. The bakkie has an engine capacity of 1200ccs.

The company incurred the following expenses in respect of the bakkie in the tax period.

$

Insurance 114



Fuel 875

Repairs 1 425

2 414

On 31 August 2013 a passenger motor vehicle which had a market value of $14 000 was sold

to the sales manager on his retirement for $10 000. This motor car had previously been used

by the sales manager as his “company car”. It initially had cost $34 200 (including VAT) on 1

September 2010 and the free use thereof was granted from that date onwards to him. From

1 August to 31 August the only expenses incurred by the company on this motor car was fuel

amounting to $250. The vehicle has an engine capacity of 1600ccs

On 15 August 2013 equipment with a selling price of $20 000 (excluding VAT) was sold to a

customer in Zambia. The equipment was consigned and delivered by the company to the

customer’s factory in Lusaka.

On 1 January 2013 equipment with a selling price of $12 000 (excluding VAT) had been sold

to a customer in Malawi. The equipment had been damaged while being delivered to the

customer and after a protracted dispute the company has decided to write off 50% of the

cost as a bad debt in this tax period. The customer has settled the other 50% in this tax

period.

During the tax period the following entertainment, subsistence and related expenses were

incurred (amounts include VAT where relevant).

$

Staff teas and coffee 342

Club subscriptions for the managing director’s membership of the

local golf club

1 210

Hotel costs incurred by the managing director while away on “out

of town” business for two nights

1 938

Subsistence allowance of $303 paid to one of the salespersons

who was “out of town” on business

303

3 793

An advance payment of $22 800 was received on 28 September 2013 from a customer in

respect of a tax invoice which was only issued on 5 October 2013 (the date the goods were

delivered to the customer.)

During a heavy storm on 24 August 2013 certain of the equipment for resale (trading stock)

was damaged. In terms of the company’s insurance policy an indemnity payment of $4 560

was received on 28 September 2013 from the insurer in respect on the insurance claim.



An analysis of the bank statements for the months of August and September reflect the

following:

$

Bank charges 1 596

Interest on overdraft 784

2 380

An analysis of the amounts received from debtors reflects the following:

$

Invoices dated and issued prior to 1 August 2013 73 400

Invoices dated during August and September 2013 126 000

199 400

On 15 April 2013 a debtor overpaid his account by $4 788. Numerous attempts to contact

the debtor, so that a refund could be made, have failed. The excess amount has now been

credited by the bookkeeper to sundry income.

Goods purchased from a creditor amounting to $3 762 on 1 August 2013 remain unpaid. The

bookkeeper has transferred this amount to sundry income.

Required

Marks

Question 1

a) Calculate the taxable income arising from Income Tax Act of Tadiwa

Moyo for the 2013 year of assessment 15

b) Discuss the capital gains tax implications of the disposal of the Harare

property. Your discussion should include relevant calculations.

5

Question 2

a. Calculate the taxable income in terms of the Income tax act of Mvurwi

(Pvt) Ltd for the year of assessment ended 30 June 2013. Mvurwi did not

have an assessed loss for normal tax purposes at 30 June 2012

35

b. Discuss in terms of the capital gains tax act the tax treatment of the

information contained in note 1. 5

c. Discuss the accounting treatment of the transaction(s) in note 5 and the

related deferred tax implications thereof. You may show calculations in

your answer. Your answer should address the following areas:

I. The acquisition of the equipment.

3



II. Treatment of research and development costs.

III. Accounting treatment of the government grant.

IV. Deferred tax implications.

2

3

2

Question 3

a. Advise the bookkeeper how each of the above transactions must be

treated in the VAT return (if at all) for the tax period ended 30

September 2013. Support your advice with the necessary calculations.

All amounts include VAT where appropriate and the relevant tax invoices

have been obtained.

20

Presentation 5

Total 100

SUGGESTED SOLUTION

Required (b)

$ $ Marks

Tadiwa Moyo’s taxable Income

From Employment

Salary ($3 500*8)- sec 8 (1) (b) 28 000 ½

Bonus : sec 8 (1) (b) 7 000 ½

Less Exempt portion - 3rd Schedule (1 000) 6 000 1

Medical contributions paid by employer – Exempt fringe

benefit (from 1 March 2012 to 31 August 2012) - 3rd

Schedule

- 1

Medical Aid contributions paid by former employer – post

employment period ($600*4) – sec 8 (1) (b) 2 400 1

Pension fund contributions paid by employer – exempt( 3rd

schedule) -

Free use of motor vehicle – ($400*8) Sect 8 (f) 3 200 1

Fuel allowance ($200*8) Sect 8 (f) 1 600 2

Purchase of motor vehicle( Benefit exempt Tadiwa over

55years)- 3rd Schedule - 1

Income from subcontracts - sec 8 (1) (b) 10 000 2

Monthly pension from pension fund – exempt Tadiwa over

55years - 1



Annuity from RAF – exempt 3rd schedule (taxpayer of

55years) - 1

Taxable pension lump-sum benefit (refer to Part a) above - 1

Lump sum from RAF – Exempt - 1

76 520

Allowable deductions

Pension contributions (own) ($3 500*.08*8) – sect 15 (2)

(h) (2 240) 1

Taxable income from employment 74 280

From Trade and Investments

Interest on fixed term deposits – exempt (3rd schedule) - ½

Total Taxable Income 74 280

Notes

Medical aid contributions are allowable as a credit to

the taxpayer.

$ Marks

Required (b)

The disposal of the family house is taxable under the capital

gains tax since it is a disposal of a marketable security.

1

The proceeds of $45 000 will be included in the gross capital proceeds and the cost of acquiring the house will be an allowable deduction

1

The disposal of the house constitutes the disposal of a

Principal Private Residence since it is the only property

owned by Tadiwa. Therefore in terms of section 10, the

disposal is exempt from CGT as Tadiwa is over 55 years old.

3

5



Mvurwi (Pvt) Ltd -$ +$ Marks

Required 1

Net Income 560 000 1

Note 1 – Sale of property and relocation to new property

Proceeds from disposal of land – capital in nature - 1

Estate agent’s fee – not allowable (incurred for the

purposes of generating capital income

- 2

Accelerated W&T on the building- ($100 000*25%) Sect 15

2(c) and 4TH schedule

(25 000) 2

Recoupment on disposal of Property (Working 1) Sect 8 (1) j 75 000 3

Note 2 – Lease of new property

Lease Rentals ($1 000* 10) Sect 15 (10 000) 2

Lease premium ($20 000*10/120) – Sect 15 (2) (d) i.e.

allowance claimed over a period the lesser of the lease term

or 10years.

(1 667)

2

Lease Improvements – ($240 000 *1/10) – Sect 15 (2) (e) i.e

allowance claimed over a period the lesser of the lease term

or 10years.

(24 000)

2

Note 3 – Existing furniture and equipment

Removal costs ($2 000+$9 000) – Sect 15 (11 000) 2

Accelerated W&T on the Plant and equipment ($85

000*.25)

21 250 2

Note 4 – Additional plant and equipment

Lease Instalment ($3 450*15/115*4) - Sect 15 (2) (1 800) 2



Recoupment disposal of plant and equipment – W2 Sect 8

(1) (j)

40 000 3

SIA on Second Hand Machinery ($80 000*25%) 4th schedule (20 000) 1

SIA on new replacement Plant and equipment ($80

000*25%) 4th schedule

(20 000) 1

Interest on loan ($45 000*2/24) Sect 15 (2) (3 750) 2

Note 5 – Research and development

SIA on research and development equipment ($25

000*25%) – Industrial building as defined in the 4th

schedule.

(6 250)

3

Government grant – Sect 8 (1) m 10 000 2

Development expenses – Sect 15 (2)(m) (25 000) 2

Presentation Marks 3

38

Workings

W1 – Recoupment on disposal of Property

Land – No recoupment arises since there are capital allowances granted on land

Building $

Proceeds 100 000

Less Income Tax Value ($50 000- $25 000) – Section 15 2(c) 25 000

Recoupment 75 000

W2 – Recoupment on disposal of Plant and Equipment

$

Proceeds 60 000

Less Income Tax Value ($10 000 -$10 000) – Sect 15 (2) © Nil

Potential Recoupment 60 000



Actual Recoupment (Restricted to capital allowances previously granted) 40 000

Required 3

a. Purchase of Equipment [ max- 3 marks]

The purchased equipment would be property, plant and equipment (PPE) as defined

under IAS 16. (1 mark)

Property, plant and equipment are tangible items that:

(a) are held for use in the production or supply of goods or services, for rental to

others, or for administrative purposes; and

(b) are expected to be used during more than one period. (1 mark)

The equipment is of physical form (tangible) and will be used in production of a

patent. This equipment is expected to be used for more than one period as it is

customarily used for five years. (1 mark)

Since the equipment is property, plant and equipment it shall be recognised as such:

measured initially at cost- $25000 (1 mark)

Required 2 Marks

The sale of the property constitutes the disposal of a specified asset as defined in

the capital gains tax act (Sect 8 1(a)). 1

Therefore the proceeds from the disposal are gross capital amount as defined. 1

Land

On the disposal of the land the gross capital amount is $50 000 less the cost of

acquisition ($40 000). An inflation allowance on the cost is also deductible in

arriving to the taxable capital gain

2

Building

The gross capital amount will be determined as being the proceeds of $100 000

less the recoupment of $75 000 as determined in part 1 of the required above. 2

The allowable deductions (Sect 11) will be determined as being the cost of

acquisition ($100 000) less allowances granted under the income tax act ($75 000)

plus an inflation allowance on the cost.

2

8



Subsequently it shall be held at Cost less accumulated depreciation and impairment.

(1 mark)

Depreciation shall be recognised as part of the cost of the research and development

(not as a separate expense in P/L). (1 mark)

b. Research and development (R&D) costs [max – 2 marks]

The R&D costs of the patent would be regarded as an intangible asset if it were

“identifiable non-monetary asset without physical substance” (1 mark)

Mvurwi intends to patent the R&D once finalized, hence, it is separately identifiable

as an intangible asset as the patent can be sold or leased out separately.-IAS38.12 (1

mark)

The patent has not been registered as there is only 10% probability of success. This

therefore means that the asset is still under research phase. The search cost shall be

expensed in the profit and loss when they occur. IAS38.54 (2 marks)

(If a student argues for 10% of cost to be recognised as an asset/capitalized- give 1

mark)

c. Government grant [ max- 3 marks) The government grant may be accounted for as an income-based grant or asset

based grant. (1 mark)

Grants related to assets are government grants whose primary condition is that

an entity qualifying for them should purchase, construct or otherwise acquire

long-term assets. Grants related to income are government grants other than

those related to assets. (1 mark)

Since the grant ($10000) was provided to finance the operating expenditure for

this research which is expected to be patented it would qualify as grant related to

an asset. (1 mark)

Asset based grants may be set of against the carrying amount of the asset or set-

up as deferred income. IAS20.24 (1 mark)

The $10000 shall therefore be recognised as deferred income (as the probability

of the asset is still highly low) and amortised on a systematic basis to the profit

and loss account. In the current year 10% could be recognised as other income

arising from the grant. IAS20.12 (2 marks)

d. Deferred Tax Implications (2marks)



Deferred tax will arise on PPE due to timing difference. PPE has a tax base equal

to the amount deductible for tax purposes in the future, which includes 4th

schedule special initial allowance (SIA) of 75% still to be received as an allowance

(no apportionment for part of the year). IAS12.7 A deferred tax liability of 536 shall

be recognised. (see calc below) (2 marks)

Government grant deferred Income is income received in advance as per IAS12.8.

The tax base of income received in advance is its carrying amount less amount not

taxable in the future for tax purposes. Since the R&D expenditure is deductible for

tax purposes the grant is therefore all taxable immediately on receipt, hence, thus

the 9000 carrying amount will not be taxable again in the future, hence, tax base

is nil. Deferred tax asset of 2318 shall be recognised (see calc below) (2 marks)

All R&D costs have been expensed for accounting purposes under IAS38.54;

hence, there is no carrying. Sec 15(2) (m) of the Zimbabwe Income Tax Act allows

all R&D costs to be deductible for tax purposes, hence, no tax base. Thus no

deferred tax implications on R&D costs. (1 mark)

1. Calculation of Deferred Tax @ 25.75%

Carrying

Amount

(CA)

Tax

Base(TB)

Temporary

Diff

Deferred

Tax

PPE 20 833 18 750 2 083 536

R&D- all expensed for acc -ias 38.54 and

tax-sec15(2)(m) 0 0 0 0

Government grant Deferred Income (9 000) 0 (9 000) (2 318)

Calculations:

PPE- CA- 25000-(25000/5*10/12) =20833

PPE TB- 25000-25%= 18750- IAS12.

Government grant deferred Income- CA- 10000-10%=9000 TB= 9000-9000=0

Single cab bakkie Marks

The ‘bakkie’ is not a passenger motor vehicle as defined and therefore an input

tax deduction is not denied.

1



No VAT was paid on the purchase as the seller is not a vendor. However as the

‘bakkie’ qualifies as second-hand goods which have been paid for and which are

being used to make taxable supplies a notional input tax deduction is available.

The notional input tax deduction is calculated by multiplying the tax fraction

(15/115) by the lesser of the consideration for the supply and open market

value (the same in this case).

2

15/115 x $18 400 = (Sect 17) (4) (c) (2 400) 1

An input tax deduction can be claimed on the insurance and

repairs

15/115 x ($114 + $1 425) = Sect (16) (201) 1

Petrol is exempt, so no VAT is paid and therefore no input tax

deduction is available (sect 11) - 1

The right of use of the ‘bakkie’ is a taxable fringe benefit and in

terms of section 17(2) deemed output tax must be accounted

for as follows:

1

Determined value of benefit in terms of Income

tax act ($150*2) =$300

Therefore output tax = 15/115 * $300 = $39

1

Motor car

The sales manager will have a taxable fringe benefit of $4 000

(acquisition of an asset at less than actual value).

1

However as Agricultural Equipment CC was denied an input tax

deduction on the acquisition of the motor car section 16 (2)

deems the supply to be otherwise than in the course or

furtherance of the vendor’s enterprise. Therefore no output tax

or deemed output tax arises.

1



However the free use of the motor car for the month of August

2012 results in the following deemed output tax

15/115*200 = 26 2

There is no VAT on fuel therefore no input tax deduction is

available

- 1

Export to Zambia

The export will meet the criteria for zero-rating

Therefore output tax at 0% is accounted for - 1

Bad debt

No input tax deduction can be claimed as the original debt was

zero-rated (export)

- 1

The 50% proceeds from the debtor has no VAT consequences as

the output tax (0% in this case) would have been accounted for

in a prior tax period.

- 1

Entertainment and subsistence Marks

Input tax deductions are denied on “entertainment” as defined

unless an exception applies.

Thus an input tax deduction will be denied on the staff teas and

coffee

- 1

The club subscriptions are specifically not allowed as an input tax

deduction (see section 16(2)

-

1

The hotel costs were incurred by the managing director in the

furtherance of Agricultural CC;s trade hence input tax can be

deductible

1



Therefore claim 15/115 x $1 938 as an input tax deduction (253) 1

The subsistence allowance of $303 has no VAT implications as

there is no supply of goods or service (the recipient is not a

vendor). It is also not a taxable fringe benefit in terms of

paragraph (i) of gross income and therefore no deemed output tax

arises.

-

1

Advance payment

The time of supply is the earlier of any consideration received for

the supply and the date the invoice is issued.

1

Thus, in this case, the receipt of $22 800 results in output tax of $2

974

(15 x 115 x $22 800) being accounted for in this tax period

2 974

1

(It is assumed that the advance payment is not a deposit)

Indemnity payment

In terms of section 7 output tax must be accounted for on receipt

of the indemnity payment.

15/115 x $4 560 595 1

Bank statement

There is no VAT on bank charges as it represents in exempt

financial service

1

There is no VAT on interest as it represents in exempt financial

service

- 1

Debtor receipts

Receipts from debtors in respect of invoices relating to prior tax

periods has no VAT implications as the VAT would have been

accounted for in a previous VAT period

- 1



Invoices issued during the tax period would have resulted in

output tax of

15/115 x $126 000

16 435 1

The subsequent payment by the debtor has no VAT consequences.

It is assumed that no discounts or overpayments occurred

Overpayment

A deemed supply arises as a result of this overpayment which has

not been refunded within four months of receipt therefore (see

section 7).

1

Therefore output tax must be accounted for 15/115 x $4 788 625 1

Outstanding creditor

Originally an input tax deduction of 15/115 x 3 762 = $491 was

claimed

1

As the creditor has not been settled within a twelve month period

deemed output tax arises (see section 7)

491

1

33



Mock Exam 7

Question 1

Joseph Marange is currently employed with Musasa Limited. He has reached his maximum

earning capacity at Musasa Limited. He currently earns a salary of $4 500 per month with a

guaranteed bonus the equivalent of $4 500 (i.e. annual income of $58 500). He has decided to

test the market place to see if he can find employment with another company that is prepared

to pay him a higher salary. He has received an offer from Newdawn (Pvt) Limited. Newdawn (Pvt)

Limited are prepared to pay him a salary of $5,200 per month plus a travel allowance of $500 per

month (i.e. $68 400 per annum). Joseph is excited about the prospect of earning an additional $9

900 per annum ($825 per month). However, he has been warned to take advice before accepting

the new offer as Musasa Limited offers a number of non-cash benefits that Newdawn (Pvt)

Limited does not.

Joseph Marange has approached you for assistance in establishing his after-tax income for both

his current package and that of the new offers from Newdawn (Pvt) Limited. Details of each

package follow below:

Musasa Limited $

Cash salary $4 500 per month 54 000

Annual bonus (payable in December each year) 4 500

Membership of a non-contributory medical aid scheme –

employer

contributes the equivalent of $400 per month. 4 800

Pension fund membership own-contributions (10% of salary including bonus) 5 850

Pension fund membership – employer contributions (10% of salary including bonus) 5 850

Newdawn (Pvt) Limited

Cash salary $5 200 per month 62 400

Travel allowance $500 per month 6 000

Employer contribution to retirement annuity fund $300 per month 3 600

You have further established:

Joseph is 42 years of age and married with two minor children. Membership of a medical aid

is important to him. To join a medical aid in his private capacity will cost him $420 per month

(or $5 040 per annum) to cover himself and his family.

At Musasa Limited Joseph has the free use of a motor vehicle which has an engine capacity of

2200ccs. He uses the motor vehicle for both private and business purposes. If he decides to

take up Newdawn (Pvt) Ltd.’s offer he will be given an interest free loan of $25,000 to acquire



a vehicle of his choice. The condition for the interest free loan is that the motor vehicle will

also be used for the business of Newdawn (Pvt) Limited

Newdawn (Pvt) Limited does not have an approved pension fund but encourages its

employees to join a retirement annuity fund (RAF) and contributes 50% of any amount payable

to the fund by the employee. Should Joseph decide to join a RAF his monthly contribution will

be $600, his 50% share being $300.

Question 2 (52 Marks)

Takura, John and Faith have been trading in partnership as TKF Feeds for the past 4 years. The

partnership is involved in the production of a special type of racehorse feed from its factory in

the Stapleford area situated on the western outskirts of Harare. The partnership commenced

fully fledged business operations in 2010 after a successful pilot project in 2009. The partnership

owns a piece of land in 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

also outside Zimbabwe where the number of farmers has been steadily growing over the years.

On 1 July 2013 due to the anticipated growth in demand for the horse feed, the partners decided

to incorporate a company TKF Feeds (Pvt) Limited. The three partners will have a shareholding in

the new company which mirrored their present profit sharing ratios in the partnership. After the

incorporation of the new company they entered into lease agreements with neighbouring

farmers for the year ended 31 December 2013 for the hire of farming land in order to increase

the production of the special grass.

Part A: TKF Partnership

Partnership agreement

i) Profit was to be shared in the ratio of 1:2:3 for Takura, John and Faith respectively.

ii) The partnership would pay the partners medical aid contributions as well as their personal

life insurance policies.

Income statement

The income statement of the partnership in respect of the period 1 January 2013 to 30 June 2013

reflected a net profit of $126 000 after being credited and debited with the following items:

Notes US$ US$

Credits:

Sales 300 000

Sundry Income 1 26 400

Insurance proceeds 2 15 000

Interest from CABS 4 000



Profit from sale of assets to TKF Feeds (Pvt) Ltd 3 80 000

425 400

Debits:

Cost of sales 202 600

Depreciation 4 20 000

Insurance Premiums:

Loss of profits 3 000

Partnership Joint survivorship policy 2 500

Medical aid:

Staff 5 600

Partners: Takura 1 200

John 1 800

Faith ` 1 300

Interest on Capital Accounts:

Takura 2 400

John 1 900

Faith 2 100

Salaries:

Takura 13 000

John 15 000

Faith 18 000

Annuity in favour of widow of deceased employee 5 5 400

Rental: Delivery truck 6 3 600 299 400

Net Income 126 000

Notes:

1. Sundry income during the period is made up of:

US$

Dividend received from Dairyboard (Pvt) Limited 10 000

Interest on staff loans 3 400

Bad debt recovered – 5 000

The amount had previously been claimed for tax purposes

Interest on loan to a South African Company 8 000

26 400



2. In March 2013, 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 2009 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 2013.

3. On the transfer of assets to the new company TKF Feeds, an accounting profit of $80 000

was realised. Partnership assets transferred to the new company were as follows:

ASSET COST Tax Year ITV Transfer

Acquired 1 Jan 2012 Price

Computer Equipment 10 000 January 2012 7 500 8 000

Furniture and Fittings 15 000 December 2011 7 500 10 000

Warehouse 14 000 May 2013 10 500 18 000

Nissan Primera sedan 23 000 March 2010 Nil 7 500

Delivery Trucks 55 000 February 2011 27 500 32 000

Staff housing (5 units) 150 000 March 2010 Nil 85 000

Plant and Machinery 40 000 February 2011 20 000 32 000

4. The depreciation expense for the year was related to the assets identified in Note 3 above.

5. The factory foreman died in March 2013 and the partners decided to give the widow a

monthly annuity of $1 350 for the next two years. The partners did not have a contractual

obligation to pay the annuity.

6. The partnership was leasing one of the delivery vehicles from John at a monthly rental of

$600. During the period January to June John incurred running costs amounting to $700.

John originally purchased the delivery vehicle in August 2012 for $18 000.

7. Takura borrowed money to purchase his share in the partnership business. Interest

payable during the period to June amounted to $5 000.

8. On 28 February 2013 Takura turned 55years old.

Part B: TKF (Pvt) Limited

TKF’s projected taxable income for the year ended 31 December 2013 is US$145 500 and the

actual net profit for the year is US$169 100 after taking into account the following credits and

debits to the statement of profit or loss:

Note US$ US$

Credits

Gross profit 264 120

Interest receivable 1 12 280



Compensation from insurance 2 1 500

Other taxable income 24 300

302 200

Debits

Interest payable 3 5 800

Staff costs 4 57 100

Distribution costs 5 37 500

Depreciation 6 000

Impaired debts provision 6 15 300

Legal fees 7 1 500

Other administrative costs 8 9 900 133 100

169 100

Notes

1. Interest:

US$

From financial institutions 1 230

On overdue credit customers 11 050

––––––––

12 280

––––––––

2. Compensation from insurance:

The amount was paid to replace the two office computers which were damaged by lightning in

November 2013. The computer equipment was acquired when the assets of the old partnership

TKF Feeds was bought and the transfer value was $2 000 as determined on 30 June 2013.

3. Interest:

The loan of US$ 29 000 was advanced by a local financial institution during the year ended 31

December 2013 and applied as follows:

US$

Purchase of shares 15 000

Fencing of leased farms 7 000

Sinking of boreholes on leased farms 3 000

Procurement of the quality controller’s vehicle 4 000

(The vehicle is used equally for both business and non-business

related issues and was purchased outright)

––––––––

29 000

––––––––



Total interest paid for the period August to December 2013 – US$5 800.

4. Staff costs:

US$

Salaries and wages 25 300

Canteen expenses – general staff 2 500

Canteen expenses – executive staff 4 100

Provision for directors’ fees (detailed below) 16 000

Lump sum payment (detailed below) 7 230

Penalty for late PAYE 630

Employees’ end of year party 1 340

57 100

The directors’ fees were approved in January 2014 at the Annual General Meeting.

The lump sum payment was made to the former production manager as settlement for him not

to engage in similar business to that of TKF for the next three years.

5. Distribution costs:

US$

Transportation 13 500

Vehicle hire (2 vehicles) 22 000

Repairs and maintenance of leased vehicles 2 000

37 500

The hired vehicles are used by management staff equally for business purposes as well as non-

business related purposes. The vehicles are passenger motor vehicles as defined in the Income

Tax Act.

6. Impaired debts provision:

US$

1% of the debtors book 10 500

Purchased as a condition of the land lease agreement 3 700

Insolvent debtor 1 100

15 300

7. Legal fees:

US$

Preparation of the memorandum of understanding with former production mgr. 300

Preparation of the casual workers’ contracts 1 200

1 500

8. Other administrative costs:

US$

Rental of farming land 2 800



Advertisement and promotion outside the country 3 500

Trademark registration 2 000

Entertainment of prospective clients 1 600

9 900

Additional information

During the year ended 31 December 2013, TKF leased a total of two neighboring farms.

Honeyberry (Pvt) Limited is a company engaged in retail operations in Gweru. It is a VAT

registered vendor with a two month tax period. The company has prior to this tax period only

made taxable supplies. The bookkeeper has requested your assistance in respect of the VAT

implications for the following transactions which took place during the tax period ended 30 April

2013.

■ On 1 March 2013 the company acquired the assets of a small retailing business as a going

concern from Downmarket (Pvt) Ltd (a VAT vendor) for $1 500 000. The purchase and sale

agreement provided in writing that the sale was zero-rated. All other requirements of the VAT

Act for zero-rating have been complied with. Downmarket (Pvt) Ltd is not a connected person

in relation to the company.

The purchase price comprises (all assets were disposed of for their arm’s length market value).

US$

Fixed assets (note) 450 000

Trading stock 600 000

Debtors 120 000

Goodwill 330 000

1 500 000

Note

Included in the fixed assets were three ‘passenger motor vehicles’ as defined each with a

market value of $15 000. These will be used to provide fringe benefits to three sales persons

(see below):

Also included in the assets was a computer with a market value of $20 000 which is to be used

exclusively in a new finance division which the company started up with effect from 1 April

2013. This new finance division offers financial services to clients in the form of interest-

bearing loans.

■ Trading stock which had cost the company $9 120 (including VAT) was taken on 15 March 2013

by the sole shareholder and managing director Munashe Chikomo for his private use. The

open market value of the stock on this date was $13 680. Munashe has stated that his loan

account must be debited with the cost to the company of the trading stock.



■ The three ‘passenger motor vehicles’ acquired from Downmarket (Pvt) Ltd were provided as

‘company cars’ to three senior salesman with effect from 1 April 2013. Honeyberry would

bear all the costs associated with running the vehicles.

■ On 5 April 2013 the company sold an old computer to Munashe’s sister Veronica for $1 026

(including VAT). Veronica is not a VAT vendor or an employee of the company. The computer

had originally cost the company $2 734 (including VAT) and had a nil tax and book value. The

open market value of the computer is $1 596 and it has been used exclusively to make taxable

supplies.



Required

Marks

Question 1

To advise Joseph whether he should accept the offer of employment from

Newdawn (Pvt) Limited. Base your answer on the following assumptions:

his choice will be influenced only by his after-tax income;

he will take up employment on 1 January 2012;

the full $6 000 travel allowance will be utilized for business purposes;

he joins both the medical aid and RAF as described above.

18

Question 2

a. i. With reference to Part A of the scenario calculate the minimum tax

payable in respect of the period ended 30 June 2013 for: Takura,

John and Faith.

ii. Discuss the capital gains implications related to the transfer of the

assets from the partnership to the new company, TKF (Pvt)

Limited.

25

5

b. Calculate the minimum taxable income of TKF (Pvt) Ltd for the period of

assessment ended 21 December 2013.

22

Question 3

Advise the bookkeeper of the VAT implications of the abovementioned

transactions. Support your advice with relevant calculations.

15

Presentation 5

Total 100

Solution

$ Marks After tax income for package from Musasa Limited: Salary 54 000 ½ Bonus 4 500 ½ Less Exempt portion (1 000) 3 500 1 Medical contributions paid by employer – Exempt fringe benefit

- 1

Pension contribution paid by employer Pension contributions paid by employer – not a defined benefit, no receipt or accrual under gross income definition

- 1 Free use of motor vehicle – ($300*12) 3 600 1



Allowable deductions Pension contributions (own) $5 850 limited to lower of: 1 Amount paid and $5 400 (5 400) 1 Taxable income 55 700 Tax thereon Tax on the first $24 000 4 800 ½ Tax on ($55 700- $24 001) * 30% 9 510 14 310 ½ ADD 3% Aids Levy ($14 310*0.03) 429 ½ Normal tax liability 14 739 After tax income Annual salary + bonus ($54 000 + $4 500) 58 500 1 Less normal tax liability (14 739) 1 Pension fund contributions (own share) (5 850) ½ After tax income from Musasa Limited 37 911 After tax income for package from New Dawn (Pvt) Limited:

Cash salary (5 200 x 12) 62 400 ½ Employer contribution to RAF – Exempt - 1 Add travel allowance ($500 x 12) 6 000 1 Less cost of business travel given) (6 000) - 1 Fringe benefit – (Interest free loan) –(25 000* 6%) 1 500 1

$ Marks 63 900 Allowable deductions Contributions to RAF ($300 * 12) (3 600) 1 60 300 Tax thereon Tax on first $60 000 15 600 ½ Tax on ($60 300- $60 001) * 35% 105 15 705 ½ Less Credits ½ Contributions to medical aid ($5 040 * 50%) (2 520) 13 185 Add 3% Aids Levy ($13 185*0.03) 396 Normal tax liabilty 13 581 After Tax Income Annual salary + travel allowance ($62 400 + $6 000) 68 400 1 Less normal tax liability (13 581) ½



RAF contributions ($300 x 12) (3 600) ½ Medical aid contributions ($420 x 12) (5 040) ½ 46 179 The cash offer from New Dawn (Pvt) Limited is more favourable to the extent of $9 900 per annum, the after tax income is also favourable at $8 268 ($46 179 – $37 911) less than his present situation.

1 However the estimates assume the travel allowance will be fully utilized for business purposes and not taxable. Should the full travel allowance not be expended for business purposes the taxable income and normal tax liability will increase, thereby reducing his after-tax income from employment with Newdawn (Pvt) Limited.

1 It is suggested that the offer be accepted as there are tax benefits in doing so.

1

24



SUGGESTED SOLUTION

Part A : TKF Partnership -$ +$ Marks Net Income as per Income statement 126 000 Less: 1 Sundry Income: Dividends received from Dairy board (Pvt) Ltd – exempt (3rd schedule)

10 000 1

Insurance Proceeds – Capital in nature 15 000 1 SIA – Warehouse (W3) 3 500 2 W&T (W3) 30 000 3 Interest from CABD – exempt (par 10 3rd schedule)

4 000 ½

Profit from sale of assets to TKF Feeds (Pvt) Ltd – k in nature

80 000 (142 500) 1

(16 500) Add Back Depreciation 20 000 ½ Insurance Premiums : Partnership joint survivorship policy – K in nature

2 500 1

Annuity in favour of widow – restricted to $200 p.a Sect 15 (2) q ($5 400-$200)

5 200 1

Recoupments: Insurance proceeds (W1) 1 000 3 Transfer of assets to new company (W2) 72 093 4 Joint Taxable Income 84 293 Separate Taxable Income for the Partners – 30 June 2012

$ $ $ Marks

Takura John Faith 1

Share of Profit

14 049

28 098 42 147 ½

Medical Aid

1 200

1 800 1 300 ½ Interest on Capital Accounts 2 400 1 900 2 100 ½ Salaries 13 000 15 000 18 000 ½ Rental – Delivery Truck 3 600 1 Less Interest on loan to South African Company – taxed at 20%

(1 333) (2 667) (4 000) 1

29 316 47 731 59 547 Less Deductions Motor vehicle running costs (700) 1 Accelerated w&t on motor vehicle (4 500) 1 Interest (5 000) 1 Taxable Income 24 316 42 531 59 547



SUGGESTED SOLUTION

$ $ $ Marks Takura John Faith

Tax thereof @ 25%

6 079

10 633 14 887 ½

Less Credits: Medical aid contributions (50%)

(600)

(900) (650) 1

: Elderly persons( $75*4)

(300)

1

5 179

9 733 14 237

Add Aids levy 3%

155

292 427 ½

Tax Liability

5 601

10 558 15 464 31

Workings

1. Insurance proceeds $

Total proceeds 15 000

Less ITV -


However, proceeds have been expended within 18 months to replace destroyed warehouse

therefore recoupment limited to proceeds not expended (Sect 8 (1) j.


Less Amount expended to construct new warehouse (14 000)

Recoupment 1 000

2. ASSETS PROCEEDS ITV POTENTIAL ACTUAL

RECOUPMENT RECOUPMENT

Computer Equipment 8 000 5 000 3 000 3 000

Furniture & Fittings 10 000 3 750 3 750 3 750

Warehouse 18 000 10 500 7 500 3 500*

Nissan Primera 7 500 Nil 7 500 3 261*

Delivery Trucks 32 000 13 750 18 250 18 250

Staff housing 85 000 Nil 85 000 28 333*

Plant & Machinery 32 000 10 000 12 000 12 000

Total 72 093



*Warehouse – Recoupment restricted to allowances previously granted

*Nissan Primera – Actual recoupment ($10 000/$23 000* $7 500) – The cost of passenger motor

vehicle restricted to $10 000 hence same restriction applied to recoupment.

*Staff Housing – Actual recoupment ($50 000/$150 000*$85 000) – The cost of each unit

restricted to $10 000 for each for the purposes of calculating capital allowances hence same

restriction applied to recoupment.

3. SIA and W&T

$

Computer Equipment (W&T $10 000* 25%) 2 500

Furniture and Fittings (W&T $15 000* 25%) 3 750

Delivery Trucks – (W&T $55 000*25%) 13 750

Plant & Machinery- (W&T $40 000*25%) 10 000

Total 30 000

Warehouse (SIA – $14 000* 25%) 3 500

Part A : TKF Partnership -$ +$ Marks

ii) Capital Gains implications of the transfer of assets

from the partnership to the new company, TKF (Pvt)

Limited

Due to sale of the partnership assets to the new

company TKF (Pvt) Limited Capital gains implications

arise on the disposal of specified assets i.e warehouse

and staff housing

2

Therefore the transfer prices of $18 000 and $85 000

respectively would constitute the gross capital

proceeds.

1

The recoupments of $3 500(warehouse) and $28 333

(staff housing) would be deducted from the gross

capital proceeds

1

The costs of acquisition ($14 000 warehouse and $150

000 staff housing) would be an allowable deduction

2



reduced by the value of capital allowances allowed

under the income tax act ($3 500 warehouse and $50

000 staff housing)

6

Part B : TKF (Pvt) Ltd -$ +$ Marks Net Income as per Income statement 169 100 Less: Interest from financial institutions – exempt 3rd schedule

1 230 1

Insurance Proceeds – Capital in nature – Sect 8 1 500 1 SIA – Warehouse (W2) – 4th schedule 23 375 5 W&T (W2) – 4th schedule 5 150 3 7th Schedule allowances: Fencing of leased farms 7 000 1 : Sinking of boreholes 3 000 1 (41 255) 127 845 Add Back Interest payable: Portion related to purchase of shares ($15 000/$29 00* $5 800)

3 000 2

Staff costs: Provision for Directors fees – Sect 15 16 000 1 Lump sum payment – K in nature(restraint of trade)

7 230 1

Penalty for late PAYE – Sect 16 630 1 Distribution costs: Vehicle lease hire - limited to $10 000 per passenger motor vehicle (Sect 16 (k)

2 000 2

Depreciation 6 000 1 Impaired debts provision: 1% of debtors book – general provision not allowable – Sect 15

10 500 1

: Purchased as a condition of land lease agreement – originally not included in the gross income of TKF (Pvt) Ltd hence not allowed

3 700 2 Legal Fees: Preparation of memo with former production manager – K – sect 15

300 1

Other admin costs: Trademark registration – K in nature sect 15

2 000 1

Recoupment (w1) – sect 8 - 1 Taxable Income 179 205 Tax thereof at 25.75% 46 145 1 27



Workings

1. Insurance proceeds $ Total proceeds 1 500 Less ITV (1 500) Potential Recoupment -

2. SIA and W&T Computer Equipment (SIA $8 000* 25%) 2 000 Furniture and Fittings (SIA $10 000* 25%) 2 500 Nissan Primera (SIA $7 500*25%) 1 875 Quality controllers vehicle (SIA $4 000* 25%) 1 000 Delivery Trucks – (SIA $32 000*25%) 8 000 Plant&Machinery- (SIA $32 000*25%) 8 000 Total 23 375

Warehouse (W&T – $18 000* 5%) 900 Staff Housing (W&T - $85 000* 5%) 4 250

5 150 Part A Marks Acquisition of small retailing business: No VAT was payable on the acquisition since the retail business was acquired as a going concern therefore no input tax deduction is available.

- 2

The ‘passenger motor vehicles’ cars acquired are going to be used to make taxable supplies therefore no section 17(1) adjustment is necessary (however see section 17(2) deemed output tax below).

-

2 The use of the computer is to make exempt supplies (financial services) and thus a section 17(1) adjustment arises on 1 April 2012. Therefore output tax of 15% of $20 000 is required.

3 000

2

Trading stock taken by Munashe: This would constitute a section 18(1) adjustment to output tax as the goods and services which had been acquired to make taxable supplies has been applied for non-taxable purposes.

1 The adjustment is calculated as 15% of $13 680. 2 052 1 The use of the motor cars This is a fringe benefit and therefore a deemed supply (section 17(2)). 1 The output tax on the fringe benefit is determined by applying the tax fraction (15/115) to the deemed benefit value as determined under the income tax Act. Therefore the value of the output tax obtained will be a cost to Honeyberry (Pvt) LTD.

3

Sale of computer to relative Output tax on the consideration for the supply: Munashe is a connected person to Honeyberry (Pvt) Limited and because Veronica is a relative of Munashe, Veronica is a connected

1



person in relation to Honeyberry (Pvt) Ltd. Because she is not a VAT vendor section 7 would normally deem the supply to be at market value.

1

However the proviso to section 7 states that the provision does not apply when section 17(2) applies (see below). Assuming that the benefit is granted in the context of Munashe’s employment and not as a shareholder this will constitute a fringe benefit in Munashe’s hand. Therefore output tax must be accounted for on the consideration of the supply namely 15/115 x $1 026.

134

1

1

1 There would be deemed output tax on the fringe benefit deemed to be granted to Munashe (15/115 x (1 596 – 1 026))

74

2

19



Mock 8

Question 1 75 marks

Part A: 55 marks

You are a third-year trainee at a medium-sized audit firm based in Harare. You have been placed in an auditing team responsible for the audit of a group of companies manufacturing office furniture. The partner in charge of the audit asked you to have a meeting with the group financial manager regarding the planned restructuring of the operations of the client and to also review the 2014 tax computations for the companies in the Zimbabwe Furniture’s Limited Group. The financial manager is especially interested in your advice regarding the most tax efficient way to structure the expansion amongst other issues. All amounts are exclusive of VAT unless indicated otherwise.

The group structure of the client is as follows:

100% 100% 40%

In preparation for your meeting, the financial manager forwarded you the following background information with regards the companies in the group.

Zimbabwe Furniture’s

Limited (Holding Company) -

(ZFL)

Fast Manufacturers (Pvt)

Limited (FML)

Manufacturers of office

equipment for the low

end market

Blue Manufacturers (Pvt)

Limited (BML)

Manufacturers of high end

office equipment

Zamgold (Pvt) Limited

(ZAL)

Operating associate in

Zambia



Zimbabwe Furniture’s Limited (ZFL)

Zimbabwe Furniture’s Limited (ZFL) is a company incorporated and registered in Zimbabwe and was listed on the Zimbabwe Stock Exchange (ZSE) in 2008. The ZFL group has two operating subsidiaries which are wholly owned and a 40% shareholding in Zamgold (Pvt) limited a company which operates in Zambia. ZFL is a registered Value Added Tax (VAT) operator under Category C. All the companies in the ZFL group are controlled and related to ZFL for the purposes of the Income Tax Act (Chapter 23:06), Capital Gains Tax Act (Chapter 23:01) and Value Added Tax Act (Chapter 23:12).

Fast Manufacturers (Pvt) Limited (FML)

FML was established to manufacture office equipment mainly targeted for the low-end consumer market. FML’s strategy is to manufacture low cost equipment through the use of cheaper wood which is sourced from local timber traders. This strategy has seen FML grow its business exponentially for the past couple of years as most consumers have shifted towards buying low-cost products. FML is a registered VAT operator under Category C.

Blue Manufacturer’s (Pvt) Limited (BML)

BML was established to manufacture high end office equipment mainly targeted towards the high income consumer market. Most of BML’s furniture is manufactured using higher quality wood such as teak wood and mukwa wood which is highly sought after by most executives in the corporate world. However due to the continued economic decline in Zimbabwe, BML’s business has been on the downward trend for the past 3 years. This has prompted management to contemplate engaging in a restructuring exercise which is intended to turn around the fortunes of the group. BML is also a registered operator under Category C.



Attached below is an extract of the minutes of the meeting you held with the group financial manager.

Present: Third year trainee Group Financial Manager (Mr Godwin Moyo) Group Management Accountant (Mrs. Bianca Matara) BML restructuring exercise Due to the continued poor performance being experienced by BML, the group is considering implementing the following strategies which are intended to turn around the fortunes of the company: 1. Sale of non-performing assets

In October 2014 BML sold one of their manufacturing buildings to FML for an amount of $130 000. The market value of the building as at that date was determined to be $150 000. BML had originally purchased the building in 2009 from a non-registered operator for an amount of $80 000 and paid stamp duty of $4 000 in June of the same year. BML claimed a notional input tax deduction equivalent to the stamp duty paid. FML immediately commenced to use the acquired building for the purposes of trade in the making of taxable supplies in October 2014. Also sold along with the manufacturing building was equipment which was acquired by BML in 2009 for amount of $50,000 (the equipment was acquired from a VAT registered operator). This equipment was sold to Padoro Furniture’s (Pvt) Limited (an unrelated entity) for an amount of $30,000. BML has always claimed the maximum available capital allowances on the above sold assets.

2. Employee Reassignments

In order to reduce their employment costs BML decided to second ten of their engineers to Zamgold (Pvt) limited (Zamgold) initially for a period of five months effective 1 August 2014. During this secondment period Zamgold will be responsible for paying all the staff related costs in relation to these employees.

3. Retrenchment exercise After the disposal of the above mentioned assets a decision was made to merge the operations of BML with those of FML. In view of the above decision BML’s managing director



along with the finance director were retrenched as they had been made redundant. The two executives were each paid the following amounts upon their retrenchment: $ Leave pay 8 900 Gratuity 7 000 15 900 ZFL Transactions

4. During the same meeting Mr. Moyo gave you details of a transaction entered into during the year by ZFL. The details of the transaction are as follows: In October 2014 ZFL sold an office building located in the Harare CBD for an amount of $287 500 (inclusive of VAT). The cash price of the office building was determined to be $220 000 (exclusive of VAT). The sale proceeds are receivable in 5 quarterly equal installments commencing 1 November 2014. Since 1 June 2010 the building was being leased to Tatenda Venture Capital (Pvt) Limited (TVCL) under a 10 year lease agreement. In terms of the lease agreement TVCL effected lease improvements to the cost of $50 000. The lease improvements were completed and brought into use on 1 December 2010. Also in terms of the lease agreement between TVCL and ZFL a monthly rental of $7 000 was payable in advance. ZFL had initially acquired the building in 2009 for a purchase consideration of $126 500 (Inclusive of VAT) with the intention of holding the building as investment property. The decision to sell the building was made mainly in light of the failure by TVCL to pay the lease rental obligations. On the date of disposal an amount of $35 000 was owed to ZFL in respect of arrear rentals and in December 2014 ZFL was notified that TVCL had been put under liquidation and in a creditors meeting held in the same month the liquidator informed creditors that they will only be able to recover 25cents for every $1 owed to them. ZFL has always claimed the maximum capital allowances available on the office building. Mr. Moyo also requested for advice in respect of an amount of $145 000 that was credited to ZFL’s income statement in respect of their share of profit from Zamgold (Pvt) Limited. He was not sure whether this amount should be included in ZFL’s taxable income for the 2014 tax year.

The Meeting was duly adjourned at 3:30 pm and Mr Moyo promised to send you information with regards FML’s tax affairs for the 2014 tax year.



Part B: 20 marks The following day Mr Moyo send you an email with the draft financial statements for FML for the year ended 31 December 2014. The net profit before tax for the year as shown on the draft financial statements amounted to $475 000. The net profit before tax was determined after taking the following items amongst others into account: 1. Included in revenue is an amount of $260 000 in relation to sales of furniture made to

Zamgold (Pvt) Limited. The sales were made evenly during the year under review.

2. Included in other income are the following items: $

Dividends (gross)* 16 000 Rental Income – From property in Botswana 56 000 Realised Exchange gain^ 8 500 80 500 * The dividends were received in respect of shareholding held by FML in Capro Limited a company registered in South Africa. The dividend was received net of South African withholding tax of $1 600. ^ The exchange gain was in respect of an amount owed to a supplier in Germany for the acquisition of manufacturing equipment. Below is a breakdown of the costs incurred in respect of the acquisition of the equipment: $ Invoice Amount (Including shipping costs up to Beitbridge) 64 000 Transport costs from Beitbridge to Harare 800 Import duty 3 200 Import VAT 10 080 78 080 The equipment was delivered in November 2013 and brought into use in the making of taxable supplies on the 1 March 2014. The balance owing to the supplier in respect of the equipment was paid in February 2014.

3. In November 2014 FML sold equipment which they had been using in their office building at

their Masasa premises. The equipment was sold for an amount of $10 925 (inclusive of VAT) and at the date of sale the equipment had a net book value of $3 500. The resulting profit on



disposal was included in other income in the determination of net profit before tax. FML had originally purchased the equipment in 2010 at a total cost of $25 000 and had been using the equipment since that date.

4. Included in cost of sales were the following expenses: $

Depreciation: Manufacturing equipment 16 000 Stock written down to net realizable value 4 500 20 500

5. The company has a registered pension fund to which all employees are members. FML pays 50% of the contributions whilst the balance of 50% is deducted from the employee’s salaries. Included in the staff costs are the following pension contributions made by FML to the pension fund:

$ Pensions contributions – staff (30 employees) 20 000 Pension contributions – executive staff: Managing Director 6 700 Finance Director 5 800 Human Resources Director 4 800 37 300

6. Also included in other expenses are the following:

$ Rental costs in respect of a stand at the Zimbabwe International Trade Fair 2 000

Cost of air tickets in respect of potential customers from Germany 2 500 Depreciation: office building 3 500 Depreciation motor vehicles 12 000 Fair Value loss on financial instruments 1 300 21 300

7. In October 2014 FML sold one of their pool cars a Mazda 323 sedan for an amount of $6 500

which was equal to its net book value at the date of disposal. The vehicle was originally acquired in 2011 for an amount of $28 750 (inclusive of VAT) and was immediately used for the purpose of trade in that year.

8. During the year one of FML’s employees retired due to ill-health. The effective date of the retirement was 31 July 2014 from which date the employee was removed from FML’s payroll. However the directors of FML made a resolution to pay this former employee a monthly allowance of $120 commencing 1 August 2014 for the next 5 months. This decision was made purely on compassionate grounds given the health condition of the former employee. The full amount paid to the employee in respect of the 2014 year was expensed under staff costs in the determination of profit before tax.



9. In the year ending 31 December 2014 FML paid $24 463 provisional tax for the 2014 year of

assessment and paid $400 in respect of an under payment of income tax for 2013. FML has always claimed the maximum possible capital allowances on its assets.

Question 2: 25 marks

Part A – 15 marks

Baby Blankets Manufacturers (Pvt) Ltd (Baby Blankets) is a manufacturer of baby blankets. Baby Blankets is registered for VAT and has a 31 December year end. The company is a wholly owned subsidiary of Chipinge Ltd (Chipinge) who is not a VAT registered operator. Chipinge also has a 31 December year end.

As the tax manager of Baby Blankets, it is part of your duties to review the company’s VAT affairs at the end of each financial year. During the course of your reviews, you came across the following information. All amounts provided, unless stated, are exclusive of VAT.

1. During the year, the company made the following supplies:

35 000 baby blankets sold to registered operators

6 000 baby blankets sold to non-registered operators.

5 000 baby blankets sold at a discount.

25 000 baby blankets exported to Zambia. The exports were consigned by Baby Blankets to Zambia.

The blankets are sold to customers for $20 each. However, blankets that fail to meet Baby Blankets’ quality control procedures are sold to customers at a discounted price of $12 each.

2. Expenses incurred by Baby Blankets during the year were as follows:

Pre-owned Ford Ranger single cab $22 000 purchased from a registered operator. The vehicle was used in the business by the company’s driver and is parked at the company’s premises overnight.



Purchase of local raw material $150 000

Purchases of imported raw material at a cost of $200 000 plus freight and insurance up to the port of entry of $2 500. Import duty of 5% was levied on the import.

Salaries $25 000

Electricity $2 500

Municipal rates $8 500

3. On 1 May 2013, Baby Blankets sold 12 000 blankets to a local customer on credit. As at 1 December 2014, the customer had only paid 60% of the debt. It is company policy that any debts that remain unpaid after 12 months from date of purchase should be placed in the provisions for bad debts account before they are written off. By 31 December 2014, the debt had not been paid and as such was sitting in the provisions for bad debts account.

4. Baby Blankets operates in an industrial building which it purchased on 3 January 2014. The property was purchased from a non-registered operator for $450 000. Terms of the purchase were that Baby Blankets will pay a deposit of 50% of the purchase price on signing of the agreement of sale with the balance payable in equal instilments over a 14 months period. Transfer of the property into Baby Blankets’ name was to be done through conveyancers appointed by the seller upon payment of the full purchase consideration. The conveyancer’s charge was 7.5% of the selling price, 5% of which represented stamp duty. By 31 December 2014, Baby Blankets had not fully paid for the property as well as the conveyancers’ fees together with stamp duty. Baby Blankets immediately after signing the purchase agreement started to use the property 15% as administration offices and the balance for its manufacturing operations. During the course of the year, Baby Blankets identified the need for more office space for its manufacturing operations and on 1 December 2014, it moved the administrative operations out of the property to create the much needed space for the manufacturing operations. Chipinge who owns a property in the same area offered Baby Blankets office space for the administrative functions. In terms of the lease agreement, Baby Blankets would pay a monthly rental of $15 000 payable six months in advance. In terms of the lease agreement, Baby Blankets was to effect alterations to the building to suit its requirements and this expense was to its own account. By 31 December 2014, Baby Blankets had incurred expenses amounting to $12 000 towards the alterations. All the expenses were incurred from registered operators.

Part B – 4 marks



ICAZ (Pvt) Ltd (ICAZ) and AJK (Pvt) Ltd (AJK) are wholly owned subsidiary companies of Haveit Corporation (Haveit). ICAZ holds 25% shareholding in AJK. ICAZ and AJK are registered operators in category C. They maintain separate accounting records and they all have a 31 December financial year end. For the purpose of assessing the group’s performance, Haveit consolidates financial records for the two subsidiaries at the end of their respective financial years.

During the current financial year, ICAZ sold goods amounting to $230 000 to AJK who in turn sold the goods for $330 000. ICAZ had purchased the goods from other registered operators for $200 000.

During the current financial year the Zimbabwe Revenue Authority (ZIMRA) requested Haveit to submit a consolidated financial statement for the group for the year ended 31 December 2014. The following trading results were presented:

ICAZ AJK Haveit

Sales 230 000 330 000 330 000

Cost 200 000 230 000 200 000

Gross Profit (GP) 30 000 100 000 130 000

Allocation of GP 23% 67%

Three weeks later, ZIMRA wrote to the financial director advising him of the following suggested adjustments:

ICAZ AJK Haveit

Sales 330 000 330 000 330 000

Cost 200 000 330 000 200 000

Gross Profit (GP) 130 000 100 000 130 000

Allocation of GP 100% 0%

ZIMRA’s basis of the proposed adjustment was that ICAZ and AJK were related parties and the price of $230 000 for goods sold by ICAZ to AJK was not an arm’s length price and as such an adjustment was necessary.

The financial director of Haveit, is concerned that this adjustment may affect the companies’ VAT and has approached you for assistance.



Part C- 6 marks

Easiway Hotels (Easiway) operate a lodge in the resort town of Victoria Falls. Waiters in the

hotel’s restaurant are entitled to a free meal and a beverage of their choice on completion of

each shift. Currently no input or output tax adjustment is made for the free supplies.



Required

1

Part A

a. With reference to the sale of the non-performing assets by BML as detailed in

note1 to the minutes discuss with supporting calculations the income tax, value

added tax and capital gains tax implications of the transactions to Blue

Manufacturers (Pvt) Limited in the 2014 tax year.

b. Assuming that Fast Manufacturers (Pvt) Limited (FML) subsequently sold the

manufacturing building acquired and the equipment from BML in August 2015

for an amount of $200,000, discuss with supporting calculations the income tax

and capital gains tax implications of the transactions to FML for the 2015 tax

year.

Note in answering this question you can assume that there has not been any

changes in tax legislation between the 2014 and 2015 tax years.

c. With reference to note 2 advice the group financial manager on whether or not

the income earned by the employees during their secondment to Zamgold (Pvt)

Limited will be taxable in Zimbabwe.

d. With reference to Note 4 to the minutes:

i. Discuss with supporting calculations the income tax implications to ZFL

of the disposal of the office building during the 2014 tax year.

ii. Calculate the minimum capital gains tax payable on the sale of the office

building by ZFL in October 2014.

iii. Discuss with supporting calculations the VAT implications of the sale of

the office building.

iv. Advice Mr Moyo on whether or not the share of profit from Zamgold

(Pvt) Limited is taxable in Zimbabwe.

Part B

e. Calculate the minimum taxable income and income tax payable by Fast

Manufacturer’s (Pvt) Limited for the year ended 31 December 2014. For

amounts which require no adjustment provide a brief explanation and indicate

by the use of a zero on your tax computation.

15

12

6

7

8

4

3

20



2

a) Explain, supported by calculations, the VAT implications to Baby Blankets

of each of the transactions.

b) Discuss the VAT effect of the price adjustment suggested by ZIMRA.

c) (i) Advise Easiway on the income tax and VAT implications of the free

supplies to waiters in the restaurant.

(ii) What will be the VAT implications to Easiway, if the hotel had organised

a function for its clients and the meals and beverages were given to

employees as left overs.

15

4

5

1



Solution

Question 1: Zimbabwe Furniture Limited Group

Part A:

a. With reference to the sale of the non-performing assets by BML as detailed in note1 to the minutes

discuss with supporting calculations the income tax, value added tax and capital gains tax implications

of the transactions to Blue Manufacturers (Pvt) Limited in the 2014 tax year.

15 marks

Income Tax Act:

Since BML was claiming capital allowances on both the manufacturing building and equipment,

they should calculate recoupment in terms of sect 8 1 (j) which would be included in BML’s taxable

income for the 2014 tax year. 1

Recoupment: Manufacturing Building:

Since the building was sold to FML which is a company under the same control as BML, in terms

of the 4th schedule par 8(3) BML is allowed to deem the proceeds of sale to be equal to the income

tax value of the building as at the date of sale. 2

This therefore means that the recoupment amount would be nil. 1

However if BML has an assessed loss in the current year it would be advantageous for them to

calculate the recoupment based on the actual transaction price of $130,000. 2

Recoupment in this case would be restricted to an amount equal to the original cost of the

building (80 000). 1

Recoupment: Equipment

The recoupment on the equipment will be calculated as follows:

$

Sales Proceeds 30,000 1/2

Less ITV (capital allowance had been exhausted) nil 1

Recoupment 30,000

Capital Gains Tax:

The disposal of the manufacturing building qualifies as a disposal of a specified asset.

1/2

However since the disposal is to FML which is a company under the same control BML is allowed

to elect to transfer the building at the amount equal to the deductions available in the hands of

BML (i.e. cost and inflation allowances). Sect 15 2



If BML makes this election this means the Capital Gain on the disposal would be equal to zero.

1

Value added Tax Act

Since BML is a registered operator for VAT purposes, the company should charge Output VAT on

the sale of the both the manufacturing building and the equipment. 1

Manufacturing Building:

The sale of the building qualifies as a sale to a connected person as FML is under the same control

as BML. Therefore the value of supply ordinarily should be the market value of the building unless

FML will be able to claim input tax on the purchase. Sect 9 (4) b. 2

The value of supply would be equal to the sale amount of $130,000 as FML is a VAT registered

operator hence will be able to claim an input tax deduction on the purchase as the building was

immediately brought into use in October 2014. 1

Therefore BML should charge output tax of $19,500 ($130,000 * 15%) and would include the

output tax in the October 2014 tax period. 1

Equipment:

Since BML would have claimed an input tax deduction on the acquisition of the equipment in

2009, they should account for output tax on disposal. 1

FML should charge output tax of $4,500($30,000 * 15%) 1

b. Assuming that Fast Manufacturers (Pvt) Limited (FML) subsequently sold the manufacturing building

acquired from BML in August 2015 for an amount of $200,000 to an unrelated entity, discuss with

supporting calculations the income tax and Capital Gains tax implications of the transactions to FML

for the 2015 tax year.

Note in answering this question you can assume that there has not been any changes in tax

legislation between the 2014 and 2015 tax years. 4 marks

Income Tax Act

In terms of the 4th schedule par 8(3) for the purposes of calculating the recoupment, the building

would be deemed to have been sold by BML. 2

FML would then include the calculated recoupment in their taxable income for the 2015 tax year

of assessment. 1

Therefore recoupment is calculated as follows:

$



Sales Proceeds 200,000 1/2

ITV ($80,000 - $80,000 * 5% * 6) (56,000) 1/2


Actual Recoupment (limited to capital allowances previously granted) 24,000 1

Capital Gains Tax Act

In terms of section 15 par 2 for the purposes of calculating the capital gain, the building would be

deemed to have been sold by BML. 2

FML would then include the calculated capital gain in their taxable capital gains for the 2015 tax

year of assessment. 1

The capital gain and tax payable would be calculated as follows:

$ $

Proceeds 200,000 1

Less Recoupment (refer to above) (24,000) 1/2

176,000

Less Allowable deductions

Cost 80,000 1

Inflation allowance ($80,000*2.5%*6years) 12,000 2

Less recoupment (24,000) (68,000) 1/2

108,000

Tax @20% 21,600 1

c. With reference to note 2 advice the group financial manager on whether or not the income earned

by the employees during their secondment to Zamgold (Pvt) Limited will be taxable in Zimbabwe.

Refer to applicable case law where relevant. 6 marks

The true source of employment income is where the services for which the salary is paid have

been rendered. (COT vs Shein 1958 14 SATC 12). 1

Therefore it would appear that the income earned by the employees whilst on secondment to

Zamgold (Pvt) Limited would not be taxable in Zimbabwe. 1

However in terms of sect 12 (1) (e) employment income earned by an employee who is ordinarily

resident in Zimbabwe, during temporary absence from Zimbabwe shall be deemed to be from a

source within Zimbabwe. 1

Since the employees will be on secondment for only 5 months they will be temporarily absent

from Zimbabwe as the period of stay outside Zimbabwe will be less than 183 days. 1



Therefore the income earned by the employees during their absence from Zimbabwe will be

taxable in Zimbabwe. 1

However in terms of sect 93 any taxes paid in Zambia in respect of the employees income will be

allowed as a credit against the tax payable in Zimbabwe since the true source of the income is

Zambia. The tax credit is limited to the lower of the Zambian tax or Zimbabwean tax on the foreign

income. 1

d. With reference to Note 4 to the minutes:

i. Discuss with supporting calculations the income tax implications to ZFL of the disposal of the

commercial building during the 2014 tax year. 7 marks

Lease improvement:

Since the lease improvements effected by TVCL were obligatory in terms of the lease

agreement these would constitute gross income to ZFL and taxable over the lower of the

remaining lease period or 10years. Sect 8 (1) (e). 1

Therefore as at the beginning of the 2014 the remaining balance of untaxed improvements

would be $33,772 ($50,000 – ($50,000*37/114*$50,000)). 1

Since ZFL sold the building in 2014 the remaining balance of untaxed improvements become

immediately taxable during the 2014 tax year. Therefore $33,772 would be included in ZFL’s

taxable income. 2

Recoupment on sale of the commercial building:

Since ZFL was claiming capital allowances on the office building, recoupment accrues in the

year of disposal being 2014. Sect 8 (1) (j). 1

Recoupment is calculated as follows:

$

Sale proceeds ($287,500*100/115) 250,000 1/2

Less ITV (($126,500*100/115) – ($126,500*100/115*2.5%*5)) (96,250) 1


Actual Recoupment (Limited to capital allowances previously granted) 13,750 1

ii. Calculate the minimum capital gains tax payable on the sale of the office building by ZFL in October

2014. 8 marks

$ $



Sale Proceeds ($287,500*100/115) 250,000 1/2

Less Recoupment (sect 8 (1) (a) (13,750) 1/2

236,250

Less Allowable deductions

Acquisition cost ($126,500*100/115) 110,000 1

Inflation allowance on cost ($110,000*2.5%*6) 16,500 1

Lease improvements (Sect 11(5) 50,000 2

Recoupment (13,750) (162,750) 1/2

Capital Gain 73,500

Less Sect 18 (1) allowance ($73,500*$150,000/$250,000) (44,100) 2

Taxable gain 29,400

Tax payable ($29,400 * 20%) 5,880 1/2

iii. Discuss with supporting calculations the value added tax implications of the sale of the office

building. 4 marks

Sale of office building:

The sale of the office building is under an installment sale agreement as defined in the VAT

act. Sect 2. 1

Therefore the time of supply for the sale of the building is the date the sale agreement was

entered into, which in this case is October 2014. 1

Since the sale is under an installment sale agreement the value of supply would be $220,000

being the cash price of the building. 1

Therefore ZFL should charge output vat of $33,000 ($220,000*15%). 1

iv. Advisce Mr Moyo on whether or not the share of profit from Zamgold (Pvt) Limited is taxable in

Zimbabwe. 3 marks

For income to be taxable in Zimbabwe it has to be from a source or deemed source within

Zimbabwe. 1

The source of business income is determined with reference to where the income generating

business activities are carried out. 1

Therefore since the share of profit is from Zamgold (Pvt) Ltd which operates in Zambia, the

source of the profit is Zambia and therefore not taxable in Zimbabwe. 1



Part B

e. Calculate the minimum taxable income and income tax payable by Fast Manufacturer’s (Pvt) Limited

for the year ended 31 December 2014. For amounts which require no adjustment provide a brief

explanation and indicate by the use of a zero on your tax computation. 20 marks

$ Marks

Net Profit before tax 475,000 ½

Sales to Zamgold – Sect 8 (1) (a) 0 ½

Dividends – Foreign dividends taxed a special rate of 20% (16,000) ½

Rental Income – not from a source within Zimbabwe (sect 8 (1) (a)) (56,000) 1

Realised exchange gain – capital in nature (8,500) ½

SIA on equipment (($78,080-$10,080^-$8,500*) * 25%) (14,875) 1

Profit on disposal ($10,925*100/115 - $3,500) (6,000) 1

Recoupment : equipment ($9,500 – 0) 9,500 1

Depreciation: Manufacturing equipment 16,000 ½

Stock written down to net realizable value – not incurred 4,500 ½

Staff pension fund contributions – deductible in full below limit of $5,400

per employee

0 ½

Executive : Managing director ($6,700-$5,400) sect 15 (2) (h) 1,300 1

Finance Director ($5,800 - $5,400) sect 15 (2) (h) 400 1

HR Director 0 ½

Rental costs ZITF- allowable – sect 15 0 ½



Air tickets – export market development expenditure – sect 15 (2) (gg) (2,500) 1

Depreciation: office building 3,500 ½

Depreciation motor vehicles 12,000 ½

Fair value loss on financial instruments 1,300 ½

Recoupment : mazda 323 – w1 100 3

Payment to former employee (($120*5)-$500) – sect 15(2)(q) 100 1


Tax at 25.75% 108,105 ½

Dividends from Capro

Gross Dividends 16,000 ½

Tax @ 20% 3,200 ½

Less SA withholding tax – sect 92 (1,600) 1

Tax Payable 1,600

Total Tax ($108,105+$1,600) 109,705

Less Provisional tax paid (24,463) 1

Net tax payable 85,242

Total Marks 20



Calculations

Working 1: Recoupment mazda 323

$

Deemed Proceeds ($6,500*$10,000*(($28,750*100/115)) 2,600

ITV ($10,000*25%) (2,500)

Recoupment 100

*Since the equipment is being used for the making of taxable supplies, FML will be able to claim an input

tax deduction in respect of the import VAT.

^The realized exchange gain is deducted from the cost of the equipment according to sect 8(2).



Question 2

a. Explain, supported by calculations, the VAT implications to Baby Blankets of each of the transactions. (15 marks)

(i) Sales of baby blankets to local customers, including discount customers and non-registered operators is subject to VAT at 15% (1 mark).

Output tax therefrom will thus be $132 000 ((35 000 +6 000) * 20 + (5 000 * 12)) * 15% (1 mark)

The supply of blankets to Zambia is a zero rated supply and therefore VAT at 0% is chargeable (1)

(ii) Input tax on expenses will be claimed as follows:

Ford Ranger: no input tax claimable as it is at second hand vehicle which is not subject to VAT but 5% excise duty. (1 mark)

Purchases of raw material: $22 500 (150 000 * 15%) (1/2 mark)

Imported Raw material: Cost 200 000

Insurance and Freight 2 500

Value for Duty purposes 202 500

5% Duty 10 125

Value for tax purposes 212 500

Input tax claimable 31 893.75 (2 marks)

Salaries: Not a supply and therefore no input tax claimable. (1/2 mark)

Electricity: $ 375 (2 500 * 15%) (1/2 mark)

Municipal rates: No input tax claimable as rates are exempt from VAT (1/2 mark)

(iii) A registered operator is allowed to claim input tax on debts that have been written off (section 22(1)) (1 mark).

Since the debt is still a provision, no input tax is claimable until the debt has been written off. (1 mark)

(iv) Purchase of the property: A registered operator is allowed to claim notional input tax on the purchase of fixed property from a non-registered operator. (1 mark)

The input tax is limited to stamp duty paid and is only claimable when payment has been made. (1 mark)

In this case the stamp duty has not been paid, hence no input tax is claimable in the current year (1 mark)

Lease of property: No input tax is claimable as Chipinge did not charge VAT on the rentals as it is not registered for VAT (1 mark).



Alterations: Baby blankets is able to claim input tax of $1 800 (12 000 * 15%) incurred on the alterations (1 mark).

b. Discuss the VAT effect of the transfer pricing adjustment (4 marks).

ICAZ and AJK are connected persons by virtue of the former’s shareholding in the later. (1 mark)

Generally the value of supply on supplies between connected is the open market value of the supply. (1 mark)

However, the value could be the purchase consideration paid by the purchaser’s if the purchaser is able to claim input tax. (1 mark)

Since AJK is a registered operator who is entitled to claim input tax, the value of supply of its purchases from ICAZ is $230 000. (1 mark)

Therefore the transfer adjustment will not affect the $230 000 price. (1 mark)

C) Advise Easiway on the income tax and VAT implications of the free supplies to waiters in the

restaurant. (5 marks)

(i) Income tax implications: the provision of free meals and beverages to employees is a taxable benefit

in terms of section 8(1)(f) of the Income Tax Act. The value of the benefit will be determined by the cost

to the employer of providing such benefit to the employees (2 mark).

VAT Implications: an employer who provides fringe benefits to employees is deemed in terms of section

17(3) to have supplied goods and services on which VAT is payable (1/2 mark).

The employer is therefore required to account for VAT on the benefit and the value of supply for that

supply is the amount as determined for PAYE purposes (1/2 mark).

However, in terms of proviso (a) to section 17(3), VAT is not payable on a benefit that has arisen as a

result of the supply of entertainment (1/2 mark).

Provision of meals and beverages is entertainment as defined (section 16(2)) and as such VAT is not

payable on the benefit (1/2 mark)

On the other hand, the meals and beverages were supplied in the ordinary course of Easiway’s business

and the provision of the meals to employees, free of charge, constitutes change of use, from taxable to

non-taxable supplies (1 mark).

The employer is required to account for VAT on the change of use and the value of such supply is the

open market value (section 9(7)) (1 mark)



C. II. What will be the VAT implications to Easiway, if the hotel had organised a function for its clients

and the meals and beverages were given to employees as left overs. (2 marks)

(ii) If the meals and beverages were supplied to employees as left overs, the employer is allowed to

claim input tax and as such no adjustment to output tax is required (section 16(2)(a)(i)A.II. (2 marks).

Documents

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