Answers

Part 2 Examination – Paper 2.3(MWI)

Business Taxation (Malawi) December 2004 Answers

1 (a) Calculation of fringe benefits tax

Calculated as follows 12·5% of salary or
actual rental which ever is higher
Rent – General Manager K60,000 x 12·5% = 7,500
Accountant K35,000 x 12·5% = 4,375
–———
11,875
Actual rental is higher as follows :
General Manager K25,000
Accountant K12,000 K
––———
37,000 x 12 444,000
Motor vehicles 10% of cost
General Manager K680,000 68,000
Accountant K300,000 30,000
School fees total paid K70,000
50% is taxable 35,000
————
Total taxable benefits 577,000
————
Fringe benefit tax at 35% 201,950
————

(b) MADIMBA LIMITED

CAPITAL ALLOWANCES
ALLOWANCES
TWDV TWDV
01.04.03 Additions Disposal Total Investment Initial Annual Total 31.03.04
K K K K K K K K K
Industrial building 850,000 350,000 1,200,000 140,000 60,000 200,000 1,000,000
Plant & machinery 650,000 525,000 1,175,000 210,000 117,500 327,500 847,500
Delivery vehicles 165,100 250,000 (42,000) 373,100 – 50,000 74,620 124,600 248,480
Motor vehicles 310,000 310,000 – 62,000 62,000 248,000
Office equipment 42,500 – (6,000) 36,500 – 3,650 3,650 32,850
Computers – 175,000 – 175,000 35,000 35,000 70,000 105,000
————— ————— —–—— ————— –—–—— —–—— –—–—— –—–—— —————
2,017,600 1,300,000 (48,000) 3,269,600 350,000 85,000 352,770 787,770 2,481,830
————— ————— —–—— ————— –—–—— —–—— –—–—— –—–—— —————

Summary of Allowances
Motor Lorry Furniture K
Sale K K Investment 35,000
Proceeds 90,000 4,000 Initial 85,000
TWDV 42,000 6,000 Annual 352,770
––––––– –––––– Balancing Allowance 2,000
Balancing (48,000) 2,000 Balancing charge (38,000)
(charge) allowance ––––––– –––––– ––––––––
restricted to Allowances given 38,000 Total Allowances 751,770
–—–——

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 (c) Calculation of tax to be paid by Madimba Limited
K K
Profit before taxation 851,450
Add: Items not allowed for taxation
Manufacturing
– Depreciation 285,600
– Exchange losses 765,100
Distribution
– Depreciation 160,100
– Traffic fines 26,000
Lease for house 36,500
Increase in share capital 16,000
Late payment of tax 6,150
Donations
– Malawi Red Cross 150
– SDA Church 16,000
Other expenses
– Provision for doubtful debts 14,000
– Fringe benefits tax 201,950
Marketing:
– Depreciation 44,500
– Donation 15,000 1,587,050
———— —————
2,438,500
Less: Profit on sale of
fixed assets 30,000
Capital allowances 751,770 781,770
———— —————
Taxable profits 1,656,730
—————
Tax at 30% 497,019
Less withholding tax
Less Interest (over K10,000) (22,000)
—————
Tax payable 475,019
—————
—————

2 (a) James Bauleni

Calculation of taxable profits for Bauleni Enterprises
K K
Profit before tax 165,070
Add: Items not allowable for taxation
Depreciation
– Office equipment 16,500
– Motor vehicles 32,100
Rent, water & electricity 1/3 35,333
Subscription – owners 20,000 103,933
———— ————
269,003
Less: Capital allowances
Office equipment 18,000
Motor vehicles 22,500 40,000
———— ————
Adjusted profits for tax 228,503
————

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 Calculation of total income subject to taxation.
Mr Bauleni Mrs Bauleni
K K
Business profits 228,503 –
Salary 680,500 240,000
Housing allowance 120,000 60,000
House rents 72,000 –
Directors fee 15,000 –
Interest 26,000 –
————— ————
1,142,003 300,000

Interest on mortgage (35,000) –

Repairs to house (4,500) –
Subscription – Institute of Chemists (25,600) –
Donation – Save the Children Fund – (450)
Exempt portion of interest (10,000) –
Pension (3,000) –
————— ————
(78,100) (450)
————— ————
Taxable income 1,063,903 299,550
—————
————— ————
————
The house rent receivable by the wife is taxable income in the hands of the husband since this is unearned income.
Dividend income is not taxable nor can the related withholding tax be taken as a tax credit.
The first K10,000 interest in the hands of an individual is exempt from taxation.
No withholding tax is deducted on K10,000 of interest.
Pension contributions will only be allowed to the husband to reduce the amount available to be taxed at higher rates.

(b) Additional tax to be paid by Mr & Mrs Bauleni:

Mr Bauleni Mrs Bauleni

K K
Salary 680,000 240,000
Housing 120,000 60,000
————— ————
800,000 300,000
Less pension 3,000 (3,000)
————— ————
Taxable income 797,000 297,000
First K2,400 of housing allowance exempt
First K36,000 0 0
Next K18,000 at 10% 1,800 1,800
Next K18,000 at 20% 3,600 3,600
Next K722,600 at 30% (Mr) 216,780 –
Next K222,600 at 30% (Mrs) – 66,780
————— ————
Tax payable 222,180 72,180
————— ————
Total taxable income 1,063,903 299,550
————— ————
Up to 74,400 5,400 5,400
Next 992,503 at 30% 296,700–90
Next 225,150 at 30% – 67,545
–————— ————
302,100–90 72,945
Less: PAYE (222,180–00) (72,180)
Withholding tax
– Rents (14,400–00) –
– Interest (3,200–00) –
–————— ————
Additional Tax payable 62,320–90 765
–—————
–————— ————
————

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3 (a) The taxation of individuals and companies is done as follows:
(i) Individuals
Income tax is charged, levied and paid for each year of assessment upon the income of any individual received or
accrued from a source within or deemed to be within Malawi upon that individual’s total taxable income ascertained in
accordance with the Taxation Act at the rates specified in the eleventh schedule.
Income, other than earned income received by or accrued to or in favour of a married woman shall be deemed to be
income received by or accrued to or in favour of her husband.
Where a married couple has elected to file a joint return and the wife’s income comprises in whole or in part the wife’s
earned income, the income tax liability shall be determined as if:
(1) his income does not include his wife’s earned income, and
(2) there were added to the tax payable by him an amount equal to the tax which would be payable by him if his only
income were the wife’s earned income.

(ii) Companies
Income tax shall be charged, levied and paid for each year of assessment upon income of every company at the
company rate of income tax as specified in the eleventh schedule on the taxable income received or accrued from
sources within or deemed to be within Malawi.
The rate applicable to locally incorporated companies is 30 per cent. This rate is applicable on all the taxable income
except that:
(1) in the case of companies in an export processing zone, so designated by the Minister for this purpose by order
published in the Gazette, the applicable rate shall be 0%;
(2) in the case of companies operating in priority industries, so designated by the Minister for this purpose by order
published in the Gazette, the applicable rate shall be either:
0% for such period, not exceeding 10 years, as the Minister may grant in the order; or
15%:
Provided that an additional tax of 5% of taxable income shall be charged in respect of all companies not
incorporated in Malawi;
Where a company does not make taxable income, that is it makes a loss, minimum tax is payable based on
turnover as follows:
Income per annum Minimum tax
does not exceed K
K200,000 5,000
Exceeds 2,K200,000 but not 2,K500,000 25,000
Exceeds 2,K500,000 but not K2,000,000 50,000
Exceeds K2,000,000 but not K5,000,000 100,000
Exceeds K5,000,000 200,000

(b) (i) Every person chargeable to income tax under this Act, shall within 180 days from the end of the year of assessment,
as defined in this Act, or such longer time as the Commissioner may allow, prepare and deliver to the Commissioner a
return of income in the form approved by the Commissioner for such year of assessment computed in accordance with
the provisions of this Act provided that a married couple may elect to make a joint return of income.
(ii) The Commissioner may, by notice in writing, require any person to prepare and deliver to him, within 30 days of the
date of issue of such notice, or such longer time as the Commissioner may allow, a return of income in the form approved
by him for a year of assessment.
(iii) Any person signing any such return of income shall be deemed for all purposes in connection with this Act to be
cognizant of all statements therein.
(iv) All returns of income required to be furnished under this Act shall be delivered at or sent by post to the address given
in the approved form:
Provided that in the case of an individual chargeable with income tax under this Act in respect only of his income from
employment or pension or from both and in relation to which income PAYE tax has been deducted, he shall not, except
of his own volition, be required to prepare and deliver to the Commissioner a return in respect of such income.
(v) Every person chargeable with income tax who:
(a) is required to prepare and deliver a return of income; or
(b) is not required to prepare and deliver a return of income but opts to do so under the provisions of this Act, shall
apply in the prescribed form to, and obtain from, the Commissioner a permanent taxpayer identification number
for use in all correspondence for the purpose of this Act.

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 (c) A person who fails to pay any amount of tax shall be liable to a penalty as follows:
If the amount of tax unpaid as a percentage
of total tax liability Penalty
(a) does not exceed 10% Nil
(b) exceeds 10% but does not 25% of the
exceed 50% unpaid amount of tax
(c) exceeds 50% 30% of the
unpaid amount of tax.
The Commissioner may reduce or waive the amount of penalty chargeable if in his opinion a satisfactory explanation for failure
to pay the tax is given.

4 (a) A capital gain is included in assessable income on the basis that sale proceeds exceed the tax written-down values or that
the sale proceeds exceed the cost as adjusted for inflation or its open market value as at 1 April 1992 as adjusted for the
subsequent inflation factors.
The open market value at 1 April 1992 must have been agreed to by the Commissioner of Taxes by 30 September 1995.
The capital gain is added to other income and the appropriate tax rates are applied based on total income to determine the
amount of income tax due.

(b) In determining the basis for taxation of a capital asset for capital gain purposes, an inflation factor may be applied. The
application of the inflation factor is to determine the acceptable basis on cost in arriving at the capital gain. This is to arrive
at what can be deemed to be a realistic gain, since using the actual cost of asset would result in taxing a gain which in actual
fact has resulted from inflation factors. Therefore, the inflation factor is to allow the cost of the asset to be brought to recent
cost (taking into account inflation).
(c) Involuntary conversion in relation to a capital asset means the conversion of an asset by whatever means which in the opinion
of the Commissioner is beyond the control of a taxpayer.
Such conversion will include but not be limited to:
– destruction in whole and in part
– theft, requisition and condemnation.
On threat of imminent destruction, seizure requisition or condemnation. The gain arising on conversion is taxable except that
there is a relief where the asset so converted has to be replaced by a qualifying replacement asset (i.e. similar asset) or an
election has been made to the effect that a qualifying replacement asset will be acquired within two years after the year of
assessment in which the capital gain is realized.
When an asset is involuntarily converted the gain will arise only to the extent that the amount realized from the conversion
exceeds the cost of the replacement asset. The relief will be worked out by comparing the proceeds from the conversion to
the value of the replacement asset. This is the gain that will be taxed, the difference between the gain worked out under
normal capital gain rules and the relief will be deferred.

(d) Deductibility of a capital loss from the assessable income of a taxpayer is restricted to the lesser of:
– the capital loss itself;
– any capital gain realized by the taxpayer in that year of assessment.
This, in effect, means that a capital loss can only be set off against a capital gain realized in the year of assessment.
Where there is no capital gain realized, the capital loss can only be carried forward and is to be deducted from any future
capital gain.
This restriction does not apply where the capital loss is in connection with a capital asset that was used in a trade or business
in respect of which capital allowances were given under the Taxation Act.

5 (a) The following activities are included within the definition of taxable supply for the purposes of surtax for 2001.
(i) the processing of data or supply of information or similar service;
(ii) the supply of staff;
(iii) the acceptance of a wage or stake in the form of betting or gaming, including lotteries and gaming machines;
(iv) the making of gifts or loans of goods;
(v) the leasing or letting of goods on hire;
(vi) the appropriation of goods for personal use or consumption by the taxable person or by any other person;

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 (vii) the sale, transfer, assignment, or licensing of patents, copyrights, trade marks, computer software and other proprietary
information; and
(viii) exports.
A supply is made as part of the business activities of a person if the supply is made by him or her as part of or incidental to
any economic activity he or she conducts.
Where a person produces goods by processing or treating the goods of another person, the supply of the goods shall be
regarded as supply of goods.
The supply of any form of power, heat, refrigeration or ventilation shall be regarded as supply of goods.
A supply is made for consideration, if the supplier, directly or indirectly, receives payment wholly or partly in money or in kind
from the person supplied or any other person.

(b) (1) Unless otherwise directed in writing by the Commissioner General, a taxable person shall account for surtax each
calendar month on a return.
(2) The return shall be in the prescribed form and shall state
(i) the amount of surtax payable for the tax period;
(ii) the amount of input tax credit or refund claimed; and
(iii) such other matters as may be prescribed.
(3) A return shall be submitted to the Commissioner General not later than the thirtieth day of the month immediately
following the month to which the return relates.
(4) Upon application in writing by a taxable person, the Commissioner General may, where good cause is shown by the
taxable person, extend the period in which a return is to be submitted.
(5) The payment of surtax in the tax period shall be made to the Commissioner General not later than the thirtieth day of
the month immediately following the tax period to which the return relates.
(6) A taxable person directed to make his or her return other than within 30 days shall be informed of the date by which
the return and payment shall be made to the Commissioner General.

(c) The following are the penalties for failing to register, failing to issue a surtax invoice and for providing false or misleading
statements.
For failing to register, where the failure:
(i) is deliberate or reckless, the person shall be liable on conviction to a fine of K100,000 and imprisonment for five years;
(ii) for any other reason, the person shall be liable to a fine of K20,000 and to imprisonment for 12 months.
A person who fails to issue a surtax invoice is liable on conviction to a fine of ten times the value of the surtax involved in
the transaction.
For false or misleading statements the fines are the same as those applicable to failing to register.

6 (a) The following are the provisions with regard to the applicability of provisional tax as stated in s.84 of the Taxation Act.
Every person who is chargeable with income tax shall at the beginning of the year of assessment estimate the amount of
income tax payable by him in respect of that year of assessment. Such tax (provisional tax) will be payable by quarterly
instalments.
The payment will be made 14 days after the end of each quarter of that year of assessment.
Where a person whose income is expected for that year of assessment to include 75% or more of seasonal income: the tax
payer shall before the end of the first quarter of the year of assessment notify the commissioner of the time or times during
the year when the provisional tax payments will be made.
However, the Commissioner may, either generally or specially having due regard to the circumstances in which the seasonal
income in question is received, specify the date by which every such person shall be deemed able to pay a substantial part
of his provisional tax; and notwithstanding any written notification to the Commissioner, every such person shall, within 14
days from the date specified by the Commissioner, pay his provisional tax.
The aggregate of the instalments of provisional tax payable or the total amount of provisional tax payable as the case may be,
shall be an amount equal to not less than 90% of the actual tax liability for the year of assessment.
Provisional tax will not apply to any individual whose taxable income for the year of assessment in question is estimated:
(i) not to exceed K30,000;
(ii) to exceed K30,000 but the whole of the income is from employment or from pension or from both employment and
pension and in relation to which PAYE tax is being deducted; and
(iii) to exceed K30,000 and to include non-employment or non pension income of not more than K30,000.

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 (b) The taxable income or assessed loss of any person carrying on the business of insurance, other than life assurance, shall be
determined in accordance with the provisions of the Seventh Schedule as follows:
The taxable income or assessed loss of an insurer in respect of short-term insurance business other than life assurance shall
be determined by charging the losses, expenses and deductions in respect of his short-term insurance business against the
sum of:
(a) premiums received in Malawi in respect of his short-term insurance business, and
(b) amounts, other than premiums, received in Malawi from the carrying on of his short-term insurance business; and
(c) the amount of a reserve allowed as a deduction in the previous year of assessment for unexpired risks at the percentage
for such risks adopted by the insurer in relation to his short-term insurance operations as a whole.
The losses, expenses and deductions in respect of the short-term insurance business of an insurer shall be
(a) premiums paid on reinsurance;
(b) actual losses in Malawi less losses recoverable on reinsurance;
(c) expenses of management in Malawi other than those of a capital nature;
(d) commission in Malawi, that is to say, net commission after deduction of commission received on reinsurance;
(e) expenditure, other than expenditure of a capital nature, expenses referred to in sub-paragraph (d), which is incurred in
Malawi in the production of income;
(f) an allowance of such an amount as the Commissioner may approve in respect of expenses incurred outside Malawi in
connection with premiums and other amounts referred to in 1(a) and (b); and
(g) the amount of a reserve for unexpired risks at the percentage adopted for such risks by the insurer in relation to his
insurance operations as a whole which is set aside by the insurer at the end of the year of assessment.
In calculating the taxable income of an insurer there shall be deducted any assessed loss arising solely out of short-term
insurance business in Malawi, incurred by the insurer in any previous year of assessment, not being earlier than the year of
assessment which commenced on the 1st day of April 1945, to the extent to which such assessed loss has been allowed as
a deduction from his income of a previous year of assessment; and ss.42, 43 and 44 of this Act shall apply thereto.

7 (1) Chinthu Moyo

Own business as Limited Company K K
Loss for the year (125,000)
Add: items not allowed for taxation
Depreciation – plant 85,000
Depreciation – motor vehicle 87,500
Fringe benefits 117,250 289,750
———— ————
164,500
Less: Capital allowances 195,000
————
Tax loss 30,250
————
Since the company has tax losses it will pay minimum tax based on turnover of K200,000.
Chinthu will pay PAYE on salary as follows: K
Salary 1,200,000
PAYE on salary 343,800
—————
Net of tax salary 856,200
—————
Calculation of fringe benefits K
Rental K25,000 x 12 = K300,000
10% of salary 1,200,000 =K120,000 (unfurnished)
The higher 300,000
Motor vehicle
10% of original cost
K350,000 at 10% 35,000
—————
Total value 335,000
—————
Fringe benefits tax at 35% 117,250

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 Calculation of capital allowances
Investment Annual
Plant & equipment K250,000 100,000 25,000
Motor vehicle K350,000 – 70,000
–———— ————
K100,000 K95,000
–———— ————
Total allowances K195,000

(2) As an employee
K
Salary 1,440,000
Housing allowance 576,000
—————
2,016,000
—————
PAYE
First K2,400 of housing Nil
Up to K1,200,000 of salary 343,800
Excess K813,600 at 40% 325,440
—————
Total PAYE 669,240
—————
Net pay K1,346,760
Advice
Company Employment
K K
Net salary 856,200 1,346,760
Less:
Rental – 300,00
School fees 100,000 –
———— —————
Net cash flow 756,200 1,046,760
———— —————
Based on the first year’s results it is beneficial for him to be employed since his own net earnings are much better and the
company will pay minimum tax of K200,000.
However based on profits expected per second year his taxable profits will be K721,250
Less tax loss 30,250
—–———
691,000
Less tax at 30% 207,300
—–———
483,700
—–———
Thus, as profits increase it will be beneficial for Chinthu Moyo to be in business particularly as any dividends declared are
only subject to 10% tax.

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Part 2 Examination – Paper 2.3(MWI)
Business Taxation (Malawi) December 2004 Marking Scheme

1 (a) calculation of fringe benefits tax

1 mark for fringe benefits on housing based on rent
1 mark for fringe benefits on housing based on salary
1 mark for fringe benefits on motor vehicle
1 mark for fringe benefits on school fees
1 mark for total correct total benefits
1 mark for fringe benefits tax

(b) calculation of capital allowances

1 mark each for each of the capital allowances claimed
1 mark for balancing charge
1 mark for balancing allowance
1 mark for summary of allowances
1 mark for net tax written down value at 31 March 2004

(c) calculation of tax to be paid by Madimba Limited

1/ mark for profits before taxation
2
1/ mark each for items not allowed for taxation
2
1/ mark for deduction for profit on sale of fixed assets
2
1/ mark for deduction for capital allowances
2
1/ mark for correct taxable figure
2
1/ mark for tax calculation
2
1/ mark for withholding tax figure on rents
2
1/ mark for tax payable figure
2

2 (a) calculation of taxable profits

1/ mark for profits before taxation
2
1/ mark each for disallowable items
2
1/ mark each for capital allowances
2
1 mark for correct adjusted profits for tax calculation of total income subject to taxation
1/ mark for business profits
2
1/ mark each for salary
2
1/ mark each for housing allowance
2
1/ mark for house rents under Bauleni
2
1/ mark for directors fee under Bauleni
2
1/ mark for interest income
2
1/ mark each for the allowance deductions
2
1 mark each for correct taxable income
1/ mark each for the 5 explanations as stated
2

(b) Additional tax payable by Mr and Mrs Bauleni

1/ mark each for calculation of PAYE
2
1/ mark each for calculation of tax on taxable income
2
1/ mark each for deduction of PAYE
2
1/ mark for deduction of withholding tax on rents
2
1/ mark for deduction of withholding tax on interest
2

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3 (a) taxation of individuals or companies
(i) Individuals
1 mark for paragraph 1
1 mark for paragraph 2
1/ mark for 1 under paragraph 3
2
1/ mark for 2 under paragraph 3
2
(ii) Companies
1 mark for paragraph 1
1/ mark for paragraph 2
2
1/ mark for (1) under paragraph 2
2
1/ mark for paragraph 2 under (2)
2
1/ mark for paragraph 2 under (2)
2
1 mark for minimum tax rates for minimum tax

(b) 1 mark for (i)

1 mark for (ii)
1/ mark for (iii)
2
1/ mark for paragraph 1 of (iv)
2
1/ mark for paragraph 2 of (iv)
2
1/ mark for (v)
2

(c) 1 mark for (a)

1 mark for (b)
1 mark for (c)

4 (a) capital gain

1 mark for first part of second sentence
1 mark for last part of second sentence
1 mark for second paragraph
1 mark for third paragraph

(b) Inflation Factor

1 mark for second sentence of (b)(i)
1 mark for third sentence of (b)(i)
1 mark for last sentence of (b)(i)
1 mark for first paragraph of (b)(ii)
1/ mark each for second and third sentence of second paragraph (b)(ii)
2
1 mark for second sentence of third paragraph of (b)(ii)
1 mark for paragraph four of (b)(ii)

(c) capital loss

1 mark for second line of paragraph 1
1 mark for third line of paragraph 1
1/ mark for second paragraph
2
1/ mark for third paragraph
2
1 mark for fourth paragraph

5 (a) taxable supply

1/ mark each point from (i) to end of answer
2

(b) return
1/ mark for (b)(1)
2
1/ mark each for (b)(2)(i) to (iii)
2
1 mark for (b)(3)
1/ mark for (b)(4)
2
1 mark for (b)(5)
1 mark for (b)(6)

(c) penalties
1 mark for (c)(i)
1 mark for (c)(ii)
1 mark for paragraph 3
1 mark for paragraph 4

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6 (a) provisional tax
1 mark each from paragraph 2 to 6
1/ mark for paragraph 7
2
1/ mark each for paragraph 7(i) to (iii)
2

(b) insurance companies

1/ mark paragraph 2
2
1/ mark each paragraph 2(a) to (c)
2
1/ mark each paragraph 3(a) to (g)
2
1 mark for paragraph 4

7 (a) Limited Company

1/ mark for loss for the year
2
1/ mark each for disallowable items
2
1/ mark for capital allowances
2
1/ mark for tax losses
2
1/ mark for minimum tax
2
1/ mark for calculation of PAYE for Chinthu
2
1/ mark for fringe benefits value for housing
2
1/ mark for fringe benefits value for vehicle
2
1/ mark for fringe benefits actual tax
2
1/ mark for investment allowance
2
1/ mark each for annual allowances
2

(b) as employee
1/ mark for salary
2
1/ mark for housing allowance
2
1/ mark for total
2
1/ mark for calculating PAYE
2
1/ mark for total PAYE
2
1/ mark for net pay
2

for advice
1/ mark for net salary each option
2
1/ mark for rental expense under employment
2
1/ mark for school fees under company
2
1 mark each for net cash flow under each option
1 mark for calculation of taxable future profits

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