EXAMINATION NO.

______________________

2019 EXAMINATIONS
ACCOUNTING TECHNICIAN PROGRAMME
PAPER T3.3: TAXATION

TUESDAY 4 JUNE 2019 TIME ALLOWED: 3 HOURS

9.00 AM - 12.00 NOON

INSTRUCTIONS:

1. You are allowed 15 minutes reading time before the examination begins during which you
should read the question paper and, if you wish, make annotations on the question paper.
However, you are not allowed, under any circumstances, to open the answer book and
start writing or use your calculator during this reading time.

2. Number of questions on paper – 7.

3. The paper is divided into TWO Sections, A and B. BOTH questions to be answered in
Section A and ANY THREE from Section B.

4. Each question carries 20 marks.

5. Use of non-programmable calculators is allowed.
6. You are provided with the following:

(i) A set of tables containing rates of tax on taxable income (Table 1).
(ii) Rates of capital allowances (Table 2).
(iii) Penalty rates for underpaid provisional tax (Table 3).
(iv) Conversion factors adjusting basis of an Asset for Disposals (Table 4)
occurring from January – December 2015.

7. Begin each answer on a fresh page.

8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE

INVIGILATOR.
This question paper contains 8 pages

This question paper must not be removed from the examination hall.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

1 / 312
 SECTION A-ANSWER BOTH QUESTIONS

1. (a) Describe the current taxation system in Malawi. 2 Marks

(b) The income statement of Kondani investments, which is owned by John
Kwale, for the year ended June, 2018 is as follows:

Description Note K’ 000 K’ 000

Sales 100,022
Cost of sales (1) 43,879
Gross Profit 56,143
Rental income (2) 120
Profit on sale of a business non current asset 3,270
Discount received 1,130
60,663
Expenses
Salaries and wages 9,924
Motor expenses 3,120
Repairs and maintenance (3) 8,690
Insurance 5,600
General expenses (4) 1,230
Bad debts 1,300
Pension costs (5) 530
Social contributions 110
Provision for doubtful debts (6) 112
Legal costs 180
Depreciation 1,368
Travel expenses 1,118
Income tax expenses 3,150
Profit 36,432

Notes
(1) Included in cost of sales is depreciation for machinery amounting to
K2,250,000.
(2) Rental income is received from a tenant who is renting one of the
rooms from the building which Kondani Investments owns and is
occupying.

(3) Repairs and maintenance costs includes an amount of K3,650,000

paid to a contractor for an extension to one of the rooms in the
building.

(4) General expenses include the following:

Groceries the business bought for John Kwale’s home K210,000

Donation made by the business to Pemba Church K 50,000

Page 2 of 8
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

2 / 312
 (5) Pension contributions is an amount paid for permanent staff employed
by the business who in total earn K5,650,000 per annum

(6) The break down of provision for doubtful debts are as follows:
Specific provision K72,000
General provision K 40,000

(7) Capital allowances have been agreed at K2,225,000.

Required:
Compute taxable income for Kondani Investments for the year ended 30 June,
2018. Show all your workings where necessary. 14 Marks
(c) Explain circumstances under which a taxpayer is allowed to register for Value
Added Tax (VAT) under the compulsory or voluntary registration modes.
4 Marks
(TOTAL: 20 MARKS)

2. (a) (i) Mention the three types of Capital Allowances which are recognized
under the second schedule of the Taxation Act. 3 Marks

(ii) The tax written down values of a manufacturer for the year ended 31
December, 2016 were as follows:

K’000 Annual allowances rate

Factory building 45,350 5%
Plant and machinery 25,000 10%
Motor Vehicles-Commercial 115,000 20%
Furniture and fittings 10,820 10%
Computers 15,200 40%
Motor vehicle-saloons 60,750 20%
Transactions during the year were as follows:
Additions:
Period Asset K’000 Comments
January 2017 Factory building 15,000 New
March 2017 Sealer machine 22,000 New
June 2017 Blower machine 9,500 Second hand
June 2017 10 ton truck 35,000 Second hand
August 2017 Lap tops 2,500 New
August 2017 Toyota Hilux Double cabin 18,000 New

Page 3 of 8
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

3 / 312
 Disposals
A capital gain of K1.5million was realized on disposal of furniture and fittings
which was sold at K5million in the month of April 2017.
A capital loss of K900,000 was realized for scrapping off an old blower
machine in the month of September 2017.

Required:
(1) Calculate the tax written down value for the furniture and fittings and the
old blower machine which were disposed off. 2 Marks

(2) Compute all capital allowances which the taxpayer was entitled to in the
year ended 31 December 2017. 10 Marks
(b) Mention the three approved Post Offices for the clearance of postal importation
in Malawi. 3 Marks

(c) State any two situations where goods liable to excise duty can be manufactured
without a licence. 2 Marks
(TOTAL: 20 MARKS)

Page 4 of 8
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

4 / 312
 SECTION B:
ANSWER ANY THREE QUESTIONS FROM THIS SECTION

3. (a) (i) Describe the main features of each of the following examples of
VAT special schemes:

(1) VAT on property transactions

(2) Margin scheme for second hand car dealers
(3) VAT on retail schemes 6 Marks

(ii) A second hand car dealer imported a car at a landed Cost

(i.e buying price) of K3,700,000 and sold it for K4,500,000.

Required:

Calculate the VAT payable by the dealer on the second hand car sale.
4 Marks

(b) (i) Define “farm fencing.” 2 Marks

(ii) Describe a qualifying “replacement asset.” 2 Marks

(ii) Describe records that must be kept by a taxpayer who:

1 - Operates Pay As You Earn (P.A.Y.E.) system. 2 Marks

2 - Provides fringe benefits to its employees. 3 Marks

(c) State the rate for calculating fringe benefit tax. 1 Mark
(TOTAL: 20 MARKS)

4. (a) Explain how provisional tax payable is determined according to section 84A
of the Taxation Act. 6 Marks

(b) (i) Summarise the rule of secrecy. 2 Marks

(ii) Identity officers to whom the rule of secrecy applies 2 Marks

(iii) Explain the significance of the rule of secrecy. 2 Marks

(c) Kamunike Limited is a company that is about to be registered in Malawi. The
main business of the company will be importing and selling of motor vehicle
spare parts and similar accessories. It is expected that once the company
commences its operations, it will provide a wide range of benefits to its senior
and junior staff. It will also sell accessories on credit and cash basis. Similarly,
it will be buying its accessories and other supplies on cash and credit basis from
local and international suppliers.

Page 5 of 8
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

5 / 312
 Required:
Advise the owners of the prospective company on the following;
(i) Taxes that will be paid and the collection methods that will be used by
the company.

(ii) respective due dates for the taxes in (i). 8 Marks

(TOTAL: 20 MARKS)

5. (a) (i) Define a bonded warehouse. 2 Marks

(ii) State any two purposes of a bonded warehouse. 2 Marks

(b) (i) Describe the circumstances that give rise to allowable and non
allowable discounts under the customs and excise Act. 4 Marks

(iii) Michael Venda has been importing and selling second hand vehicles
for the past ten years. In January 2019, he imported a second hand
Nissan 3 ton truck for one of his customers which was quoted at
US$4,132 Cost Insurance and Freight (CIF) through Tanzania.

Michael was offered two discounts by the suppliers of the truck. These
were: 10% discount because Michael Vendor was appointed an agent
of the suppliers in Malawi some five years ago and also 5% discount
because he had ordered more second hand cars from Japan in the year
2018. Both of these discounts are not included in the quoted figure
but are available to Michael Venda for use.

When the truck arrived at Songwe border, he negotiated that it should

be transferred to a bonded warehouse in Lilongwe so that it can be
cleared from there.

Required:

(1) Under which type of discount do the two discounts which

Michael Venda received fall? 2 Marks

(2) Explain the implications of the discounts which Michael

Venda received on the valuation of the truck for customs duty
purposes. 2 Marks

(3) State any five reasons that the Malawi Revenue Authority
could consider to allow Michael Venda to clear the truck in
Lilongwe and not at the border in line with the Act. 5 Marks

Page 6 of 8
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

6 / 312
 (c) A Malawian taxpayer imported machinery spare parts from China worth
US$2,340 at the beginning of the month of October 2018 inclusive of insurance
and freight. After two weeks, he received the parts and arranged a payment for
US$2,000 on 20th October, 2018 against the invoice. The taxpayers financial
year end falls in October.

Note the following information: exchange rates on 1 October 2018 =

K730/1US$, 20 October 2018 = K735/1US$, 31 October, 2018 = K728/1US$

Required:
(i) Calculate the foreign exchange gain or loss arising from the payment of
US$2,000 on 20th October, 2018. 1⅟2 Marks
(ii) Compute the foreign exchange gain or loss that was incurred on the
balance of the invoice when the taxpayer was preparing his year end
financial statements. 1⅟2 Marks
(TOTAL : 20 MARKS)

6. (a) Describe any four types of expenditures which a farmer who derives his
income from pastoral, agricultural or other farming operations is allowed to
deduct from his assessable income according to section 58(2) of the Taxation
Act. 4 Marks

(b) (i) Explain how the withholding tax system operates in Malawi. 2 Marks
(ii) State any three types of withholding taxes. 3 Marks
(iii) Mention any two benefits of withholding tax to the government .
2 Marks
(c) A taxpayer, who also happens to be a bank, made the following payments in
the month of November 2018.

(1) Paid the Marketing manager a salary of K5,540,000 for the month of
November 2018.
(2) Paid Kalimbo General supplies K1,300,000 for supplying stationery to
the bank (assume they do not have an exemption certificate).
(3) Paid X Associates, a consultant from South Africa who came to attend
to the Bank’s banking software an amount of K10million through a
transfer into her account in South Africa.
Required:
Calculate the amount of tax that was supposed to be withheld from the
payments effected in the month of November 2018. 9 Marks
(TOTAL: 20 MARKS)

Page 7 of 8
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

7 / 312
7. (a) (i) Mention any five examples of disposal details that the excise return must
show. 5 Marks

(ii) You are the internal auditor at the Malawi Revenue Authority (MRA)
and have sampled one excise return for the month of August 2018 for a
company that brews beer and other alcoholic drinks. Some of the issues
that have caught your attention are as follows:

(1) The excise return was stamped that it was received on 17th September
2018 at MRA.
(2) Sales of beer for the month of August was declared on the return as
K23million inclusive of excise tax at 15%.
(3) Sales spirits for the month of August was declared on the return as
K10million exclusive of excise tax at 15%.
Required:
(1) State whether or not the excise return was submitted on time.
2 Marks
(2) Compute the excise tax payable on the beer and spirits for the
month of August 2018. (Assume there are no other taxes
charged on these sales.) 6 Marks

(b) The Taxation Act designated certain industries for the purposes of assessment
of income tax.

Required:
(i) State the designated industries. 2 Marks
(ii) Explain the income tax benefits that are granted to priority industries
under the Act. 2 Marks
(c) The taxable income of Lusaka Limited, a foreign company, for the year ended
31 December 2017 was K35,680,000.

Required:
Calculated income tax payable by the company for the year ended 31 December,
2017. 3 Marks
(TOTAL: 20 MARKS)

END

Page 8 of 8
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

8 / 312
 EXAMINATION NO.______________________

2018 EXAMINATIONS
ACCOUNTING TECHNICIAN PROGRAMME
PAPER TC 10(B): TAXATION

TUESDAY 5 JUNE 2018 TIME ALLOWED: 3 HOURS

9.00 AM - 12.00 NOON
INSTRUCTIONS:

1. You are allowed 15 minutes reading time before the examination begins during which you
should read the question paper and, if you wish, make annotations on the question paper.
However, you are not allowed, under any circumstances, to open the answer book and start
writing or use your calculator during this reading time.

2. Number of questions on paper – 7.

3. The paper is divided into TWO Sections, A and B. BOTH questions to be answered in
Section A and ANY THREE from Section B.

4. Each question carries 20 marks.

5. Use of non-programmable calculators is allowed.
6. You are provided with the following:

(i) A set of tables containing rates of tax on taxable income (Table 1).
(ii) Rates of capital allowances (Table 2).
(iii) Penalty rates for underpaid provisional tax (Table 3).
(iv) Conversion factors adjusting basis of an Asset for Disposals (Table 4) occurring
from January – December 2015.

7. Begin each answer on a fresh page.

8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE

INVIGILATOR.
This question paper contains 10 pages

This question paper must not be removed from the examination hall.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

9 / 312
 SECTION A- ANSWER BOTH QUESTIONS

1. (a) A, B and C are in partnership sharing profits in the ratio of [Link] in line with their
agreement. The capital contributed by the partners is as follows:

A K30 million, B K20 million and C K10 million.

The partnership registered a profit of K30,560,000 in the year ended 30 June, 2017 after
deducting expenses which included the following:
Notes K’000
Administration expenses 1 50,877
Travel expenses 2 9,630
General expenses 3 1,341

Notes

(1) Administration expenses are composed of:

K’000 K’000
Partners salaries:
A 4,000
B 3,000
C 2,000 9,000
Salaries for the rest of employees 11,393
Motor vehicle fuel 5,400
Interest on partners’ capital -10% of each partner’s capital 6,000
Audit fees 2,000
Depreciation – Partnership vehicles and furniture 5,900
Motor vehicle repairs 4,800
Refreshments and other allowable expenses 2,347
Partnership office rent 2,000
Utilities 1,643
Stationery 394
Total 50,877

(2) Travel expenses were made up of the following:

Partners’ drawings in form of holiday allowance

A 2,450
C 1,950 4,400
Traffic fines – over speeding partnership vehicles on official trips 42
Exchange loss on conversion of a foreign liability at year end 938
Local and foreign business travels 4,250
Total 9,630

Page 2 of 10
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

10 / 312
 (3) General expenses comprise:
K’000
Office repairs 197
Donation to the Malawi Red Cross 150
Office cleaning 994
Total 1,341

(4) Capital allowances for the partnership have been agreed with the Commissioner
General of the Malawi Revenue Authority at K8,543,000.

Required:

(i) Compute the partnership’s taxable income for the year ended 30 June,
2017. 6½ Marks

(ii) Compute the taxable income for each of the three partners, A, B and C.
5½ Marks

(b) (i) Mention any four uses which would make a building to qualify as an industrial
building. 4 Marks
(ii) Kamenya owns an industrial building. One of the rooms is used as a showroom.
The whole building is valued at K30 million. The room used as a showroom is
valued at K3 million.

Required:

Advise Kamenya if his building qualifies as an industrial building, for purposes of

capital allowances. 3 Marks
(c) State any one significance of the bill of entry to the Government. 1 Mark
(TOTAL : 20 MARKS)

Continued/……

Page 3 of 10
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

11 / 312
2. (a) The tax written down values of business assets of Chilalo Limited, a manufacturing
company, as at 1January, 2017 were as follows:
Agreed Rate for
Item Tax written Down Value Annual Allowance
K’000
Factory building 105,000 5%
Plant and machinery 97,000 10%
Motor vehicles 125,500 20%
Furniture and fittings 55,400 10%
Computers 38,800 40%

The following transactions took place during the year:

Additions during the year Cost (K’000)
Factory buildings 24,100
Machinery – Second hand sealer 1,200
– New mixer 2,300
Second hand 10 ton truck 9,300
Furniture 2,400
Computers 5,900

Disposals during the year Tax written down value

Motor vehicle 670
Furniture 145
Computers 845

Required:
Compute initial or investment allowances, as the case may be, and annual allowances for
Chilalo limited for the year ended 31 December, 2017. 10 Marks

(b) (i) Define the term “country of origin of goods” in terms of the Customs and Excise
Act. 3 Marks

(ii) Buywrong Chain Stores imported the following goods for their business:
(1) 100kg vegetables which were grown in Zambia but packaged in South
Africa.
(2) One ton pickup whose entire parts were made in Japan but assembled in
South Africa.

Required:

Identify the country of origin of the above two goods. 2 Marks

Page 4 of 10
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

12 / 312
(c) State how the rate of excise duty is determined by a manufacturer in each of the
following cases:

(i) where excisable goods pass the duty point. 1 Mark

(ii) where there is a change in the rate of excise duty. 2 Marks

(iii) where the goods were delivered duty free because they were for export or for
removal into bond or rebate store but for one reason or another were not so
exported or received in bonded warehouse or used for rebate. 2 Marks
(TOTAL : 20 MARKS)

Continued/……

Page 5 of 10
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

13 / 312
 SECTION B: ANSWER ANY THREE QUESTIONS FROM THIS SECTION

3. (a) (i) State the due dates for paying the following:

(1) Withholding tax from specified payments.

(2) Withholding tax from salaries and wages (PAYE)
(3) Provisional tax 3 Marks

(ii) Mr Kambewa, a taxpayer, made the following tax transactions during the year
ended 30 June, 2017:

(1) Withheld K62,500 in the month of January 2017 as tax from a payment to
a supplier who did not have an exemption certificate and remitted the
same to the Malawi Revenue Authority on 25 March 2017.

(2) Remitted K78,430 to the Malawi Revenue Authority on 18 September

2016, being Pay As You Earn (PAYE) recovered from employees’ salaries
for the month of August 2016.

(3) Paid K2,695,000 as provisional tax for the year ended 30 June 2017
instead of K3,450,000.

Required:

Calculate the penalties to be paid by Mr Kambewa. 7 Marks

(b) Customs duty is said to be an advalorem duty levied on either imported or exported
goods. For imported goods this duty comprises three taxes.

Required:

(i) Name these taxes. 3 Marks

(ii) Why is customs duty called advalorem? 1 Mark

(iii) Identify six methods of valuation on which the GATT valuation system is based.
6 Marks
(TOTAL : 20 MARKS)

Continued/……

Page 6 of 10
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

14 / 312
4. (a) (i) Define a person resident in Malawi. 3 Marks

(ii) When does a person become liable to non-resident tax and when is such tax
payable? 4 Marks

(iii) Mr Sauya, a person not resident in Malawi, in terms of the definition of the
Taxation Act, earned K19,540,000 after providing technical services to a company
in Malawi in the month of May 2017.

Required:

(1) Calculate the non-resident tax payable on the earnings. 2 Marks

(2) Assuming that Mr Sauya’s employers withheld 10% fees from the
K19,540,000 and remitted it to the Malawi Revenue Authority (MRA),
compute the amount which the employer needs to pay or claim
from MRA in order to have paid the correct non-resident tax. 2 Marks

(b) (i) Explain the terms direct taxes and indirect taxes. 4 Marks

(ii) Timba Mbalame earned a salary of K6 million for the year ended 30 June 2017.
During the same year, he received rent allowance of K490,000 and directors fees
of K850,000 gross and also made a donation of K30,000 to the Malawi Against
Physical Disabilities.

Required:

Compute the tax payable by Timba Mbalame for the year ended 30 June 2017.
5 Marks
(TOTAL : 20 MARKS)

Continued/……

Page 7 of 10
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

15 / 312
5. (a) (i) Mention any four situations where neither capital gain nor loss shall be recognized
for purposes of the Taxation Act on the transfer or disposal of any capital asset.
4 Marks
(ii) Mr Phiri constructed an office building in 1979 at a cost of K20,000. During the
2015/2016 fiscal year, he sold it for K10,000,000.

Required:

Compute the capital gain or loss realized on disposal of the property and the tax
payable, where applicable. Ignore VAT. 3 Marks

(b) (i) Describe the following three categories of supplies that are recognized under the
VAT Act.

(1) taxable supplies

(2) zero rated supplies
(3) exempt supplies 6 Marks

(ii) An extract of transactions from a VAT registered taxpayer is as follows:

- Local sugar sales (VAT exclusive) K2,500,000

- Export sugar sales (VAT exclusive) K2,000,000
- Total expenses on which VAT has been paid (VAT inclusive) K2,118,181

Required:

(1) Compute the VAT on local sales, export sales and expenses. 6 Marks
(2) Calculate the VAT payable or claimable by the tax payer. 1 Mark
(TOTAL : 20 MARKS)

Continued/……

Page 8 of 10
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

16 / 312
6. (a) You have been approached by the Manager of Chigweje Leisure Club for advice on tax
issues relating to the club.

Chigweje Leisure Club was formed and is operated solely for the recreation of its
members who are mainly tobacco farmers in Namwela in Mangochi.

The Manager has given you a carton containing documents which should help you give
advice. The documents contain the following information for the twelve months ended
31 December 2017.
K’000
Painting the club 20
Club entrance fees 1,220
Licence fees to Mangochi District Assembly 50
Sale of food (proceeds) 790
Salaries and wages 1,480
Cost of goods 685
Sale of drinks (proceeds) 1,650
Live band performance (proceeds) 460

Required:

(i) Advise the Manager whether Chigweje Leisure Club is liable to tax or not and
give a reason for your advice. 1 Mark

(ii) Assuming the Club is liable to tax, compute the tax payable for the year ended
31 December 2017. 3 Marks

(b) Explain any two differences and one similarity between a representative taxpayer and an
agent, according to Sections 77 and 81 of the Taxation Act.
Consider the following in your explanation:
- appointment
- restrictions
- service 6 Marks
(c) The Taxation Act provides conditions which, if a person fails to undertake, makes him/
her liable to penalties.

Required:
Give any five of those conditions. 5 Marks

(d) Name five general conditions that traders dealing with excisable goods must observe.
5 Marks
(TOTAL : 20 MARKS)

Page 9 of 10
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

17 / 312
7. (a) (i) State four functions of a Customs Officer under the Customs and Excise Act.
4 Marks

(ii) Simenye, an entrepreneur who is into minibus business, wants to import a spare
part and has approached you for advice. She provides you with the following data
so that you can make an informed decision:

Japan South Africa

Cost of spare part US$20 R210
Exchange rate (Malawi Kwacha) K740 K55
Customs Duty (rates) 15% 10%
Excise duty (rates) 25% 20%
Value Added Tax (rates) 16.5% 16.5%

Required:

Advise Simenye where to import the spare part from, based purely on customs duty,
excise and value added tax. Show your workings. 8 Marks

(b) Section 6 of the Taxation Act requires that officers observe secrecy on all information
that comes to their knowledge during the performance of their duties.

Required:

Explain any four exceptions to this rule i.e. where the Act allows the officers to disclose
such information. 4 Marks

(c) Explain any two reasons why a government imposes taxes on its citizens. 4 Marks
(TOTAL : 20 MARKS)

END

Page 10 of 10
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

18 / 312
 EXAMINATION NO.______________________

2018 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 10(B): TAXATION

MONDAY 3 DECEMBER 2018 TIME ALLOWED: 3 HOURS

9.00 AM - 12.00 NOON
INSTRUCTIONS:

1. You are allowed 15 minutes reading time before the examination begins during which you
should read the question paper and, if you wish, make annotations on the question paper.
However, you are not allowed, under any circumstances, to open the answer book and start
writing or use your calculator during this reading time.

2. Number of questions on paper – 7.

3. The paper is divided into TWO Sections, A and B. BOTH questions to be answered in
Section A and ANY THREE from Section B.

4. Each question carries 20 marks.

5. Use of non-programmable calculators is allowed.
6. You are provided with the following:

(i) A set of tables containing rates of tax on taxable income (Table 1).
(ii) Rates of capital allowances (Table 2).
(iii) Penalty rates for underpaid provisional tax (Table 3).
(iv) Conversion factors adjusting basis of an Asset for Disposals (Table 4) occurring
from January – December 2015.

7. Begin each answer on a fresh page.

8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE

INVIGILATOR.
This question paper contains 7 pages

This question paper must not be removed from the examination hall.
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

19 / 312
 SECTION A- ANSWER BOTH QUESTIONS

1. (a) Mayani Limited, a manufacturer, carried out the following transactions during the twelve
months ended 30 June, 2018:

Assets

Bought the following:

(1) A new and unused industrial building worth K45 million for use in its
manufacturing business and brought it into use on 1 January 2018 (annual
allowances 5%).
(2) Plant and equipment valued at K6,500,000 (second hand) and K2,400,000 (new)
respectively (annual allowances 10%).

(3) A second hand Toyota Prado at K45 million for use by the General Manager
(annual allowances 20%).

(4) Office furniture costing K3,550,000 (annual allowances 10%).

Office furniture bought at K950,000 in February 2015 was sold for K520,000.
Others: Paid the following:
(1) Annual rental of K2,640,000 for a furnished house which the General Manager
was occupying.
(2) Annual subscription for DSTV for the General Manager amounting to K492,000.
(3) Annual salary for the General Manager amounting to K24 million.
Required:

(i) Calculate the investment or initial allowances, as the case may be, and annual
allowances, for Mayani Limited for the year ended 30 June, 2018 (show all your
workings). 7½ Marks

(ii) Compute the profit or loss on disposal of the furniture that was sold during the
year. 4 Marks

(iii) Calculate the fringe benefits tax payable by Mayani Limited for the quarter ended
30 June, 2018. 5½ Marks

(b) State any three ways through which goods may be imported into Malawi. 3 Marks
(TOTAL : 20 MARKS)

Page 2 of 7
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

20 / 312
2. (a) Describe the VAT credit system. 2 Marks

(b) Fodya Trading is a duly registered partially exempt taxpayer for Value Added Tax (VAT).
An extract of its records for the month of August 2018, revealed the following
transactions:

(1) Sales
K
Total supplies for the month (inclusive of taxable and exempt supplies) 7,281,250
Taxable supplies (inclusive of VAT) 4,660,000

(2) VAT on purchases

VAT on purchases attributable to exempt supplies 140,000
VAT on purchases attributable to taxable supplies 440,000
VAT on purchases which cannot directly be attributable to either
taxable or exempt supplies 300,000

Required:
(i) Compute the VAT on taxable supplies for the month of August 2018. 2 Marks

A×B
(ii) Using the standard method , compute the VAT on purchases which can be
C
claimed, out of the VAT on purchases which cannot be directly attributable to
either taxable or exempt supplies, as given above. 2 Marks

(iii) Compute the amount of VAT that Fodya Trading will either pay to or claim from
the Malawi Revenue Authority (MRA) for the month of August 2018. 3 Marks

(iv) State the date by which Fodya Trading should have submitted their return to
the Malawi Revenue Authority. 1 Mark

(c) Describe the following terms:

(i) progressive tax 2 Marks

(ii) proportional taxes. 2 Marks

(d) (i) Mention two records which an excise trader is required to maintain by law.
2 Marks
(ii) Explain how non-exempt clubs, societies or other associations are taxed. 4 Marks
(TOTAL : 20 MARKS)

Page 3 of 7
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

21 / 312
 SECTION B:
ANSWER ANY THREE QUESTIONS FROM THIS SECTION

3. (a) (i) Prospective manufacturers of excisable goods are required to apply for a licence
before they can start manufacturing the goods.

Required:
Mention any four items that prospective manufacturers of excisable goods are
required to state in their application to the Commissioner General for a licence.
4 Marks

(ii) Explain the meaning of the term “duty point”. 2 Marks

(iii) Determine the duty point for the following types of excisable goods:

(1) excisable goods to be sold. 1 Mark

(2) excisable goods to be consumed 2 Marks

(b) (i) Define the following terms:

(1) amount realized 2 Marks

(2) basis of an asset, according to the Taxation Act. 2 Marks

(ii) Kalulu Enterprises is in the business of buying and selling farm produce.
In the twelve months ended 30 June 2018, it sold two of its properties as
follows:

No. Item Year of Cost (K) Tax written Sale

purchase down value proceeds
01/07/17 (K) Comments
1 Warehouse 2011 3 million N/A 8 million Kalulu enterprises never
claimed capital allowances
on the warehouse
2 Office 2015 1.5 million 945,000 2 million
furniture

Required:

(1) Calculate the basis of the warehouse and office furniture that Kalulu Enterprises
sold during the year. 3 Marks

(2) Compute the capital gain or loss on the disposal of the two assets. 2 Marks

Page 4 of 7
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

22 / 312
 (iii) Assuming that the sale was as a result of an involuntary conversion and that the
taxpayer was reinvesting the sale proceeds into replacement assets related in
service or use, valued at K9 million and K1.8 million for the warehouse and
office furniture respectively.

Required:

Calculate the capital gain or loss on the sale of the two properties, taking into
account the involuntary principles. 2 Marks
(TOTAL : 20 MARKS)

4. (a) Mention any four discretionary powers that are expressly given to the Commissioner
General in the Taxation Act. 4 Marks

(b) You have been approached by Dizilo Limited to compute their provisional tax for the
year ended 30 June 2018. They have provided you with the following information:

(1) At the beginning of the year, they estimated taxable profits of K73,500,000.
(2) During the year, the company paid provisional tax amounting to K20,000,000.
(3) At the end of the year the actual taxable profits amounted to K85,600,000.

Required:

(i) Calculate the provisional tax that Dizilo Limited should have paid in the first
three quarters of the year. 3 Marks

(ii) Compute the provisional tax that Dizilo Limited should have paid in the fourth
quarter of the year. 3 Marks

(iii) By how much did the company under or over pay the provisional tax? 1 Mark

(c) Describe any three circumstances under which the Commissioner General of the Malawi
Revenue Authority may estimate a taxpayer’s income. 3 Marks

(d) (i) State any four purposes for which goods may be imported into Malawi. 4 Marks

(ii) Explain how customs duty is used to protect domestic industries from foreign
competition in Malawi. 2 Marks
(TOTAL : 20 MARKS)

Continued/……

Page 5 of 7
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

23 / 312
5. (a) (i) Define the terms “manufacturer” and “staff housing”. 4 Marks
(ii) Describe two categories of staff who make the employer unable to claim
maximum capital allowances on staff houses which they have occupied. 2 Marks

(iii) State how much the capital allowances are restricted to in 5(a)(ii) above. 1 Mark

(b) (i) Chijota Limited is a foreign company. It’s return for the twelve months ended
31 December 2017, contained a taxable profit of K44,550,000.

Required:
(1) Compute the tax payable by Chijota Limited. 2 Marks
(2) In which tax year is the profit going to be assessed? 1 Mark

(ii) Describe the three grounds on which Chijota Limited may appeal against an
assessment. 3 Marks

(c) Identify any four limitations that the Taxation Act imposes on companies regarding the
carrying forward of assessed losses. 4 Marks

(d) Describe three categories of income that are exempt from non-resident tax. 3 Marks
(TOTAL : 20 MARKS)
6. (a) Explain the following cannons of taxation:
(i) equity 2 Marks
(ii) certainty 2 Marks

(b) (i) Withholding tax is not deductible to any payment to a person who is a holder of
a valid Withholding Tax Exemption Certificate.
Required:
(1) Mention four conditions that must be met in order for a taxpayer to be
granted a Withholding Tax Exemption Certificate. 4 Marks

(2) Explain the benefit, to the taxpayer, of having a Withholding Tax

Exemption Certificate. 2 Marks

(ii) Kamenya Phiri is an employee who earns a salary of K2.8 million per month. His
employer also gives him a house allowance equivalent to 20% of his salary.

Required:
Calculate the annual Pay As You Earn (PAYE) for Kamenya Phiri. 6 Marks
(c) State any four obligations of a customs bonded warehouse licensee. 4 Marks
(TOTAL : 20 MARKS)
Page 6 of 7
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

24 / 312
7. (a) Mention any four examples of locally approved and manufactured goods which are liable
to excise duty in Malawi. 4 Marks

(b) A taxpayer wants to import 200 tons of bread flour from Mozambique and has obtained
the following quotations:

(1) Cost of bread flour is $1,200 per ton

(2) Freight is $50 per ton from Mozambique to Malawi
(3) Insurance is 0.15% of the cost of bread flour
Required:
(i) Calculate the expected value for duty purposes, assuming the exchange rate is
K790 to 1 dollar. 5 Marks
(ii) Compute the customs duty that the taxpayer will be expected to pay, assuming the
rate of customs duty is 15%. 2 Marks
(iii) Calculate the total amount of revenue that the Malawi Revenue Authority would
get from this importation, assuming that the rates of VAT and Excise duty are
16.5% and 10% respectively. 5 Marks
(c) State the circumstances under which input VAT on the following expenses is deductible
from output VAT:

(i) Motor vehicles and motor vehicle spare parts. 3 Marks

(ii) Entertainment, including restaurant, meals and hotel expenses. 1 Mark
(TOTAL : 20 MARKS)

END

Page 7 of 7
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

25 / 312
 EXAMINATION NO.______________________

2017 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 10(B): TAXATION

TUESDAY 6 JUNE 2017 TIME ALLOWED: 3 HOURS

9.00 AM - 12.00 NOON
INSTRUCTIONS:

1. You are allowed 15 minutes reading time before the examination begins during which you
should read the question paper and, if you wish, make annotations on the question paper.
However, you are not allowed, under any circumstances, to open the answer book and start
writing or use your calculator during this reading time.

2. Number of questions on paper – 7.

3. The paper is divided into TWO Sections, A and B. Answer BOTH questions in Section A and
ANY THREE from Section B.

4. Each question carries 20 marks.

5. Use of non-programmable calculators is allowed.

6. You are provided with the following:

(i) A set of tables containing rates of tax on taxable income (Table 1).
(ii) Rates of capital allowances (Table 2).
(iii) Penalty rates for underpaid provisional tax (Table 3).

7. Begin each answer on a fresh page.

8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE

INVIGILATOR.
This question paper contains 12 pages.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

26 / 312
 This question paper must not be removed from the examination hall.

SECTION A- ANSWER BOTH QUESTIONS

1. (a) Thandeka Limited is a company incorporated in Malawi and operates from
Kanengo Industrial site. The company manufactures cartons which it sells locally.
The company’s latest income statement for the year ended 30 June, 2016 is as
follows:

Note K
Sales 77,297,750
Cost of sales 1 (46,378,650)
Gross profit 30,919,100
Selling expenses 2 (8,540,000)
Administration expenses 3 (16,800,230)
Finance costs 4 (5,901,300)
Other income 5 3,185,000
Profit before tax 2,862,570

The following additional information in connection with the income statement is

available:

(1) Cost of sales

Cost of sales includes the following:

K
Cost of raw materials 32,465,055
Plant depreciation 2,318,930
Factory salaries and wages 3,763,860
Penalty – not following Malawi Bureau of Standards rules 660,850
Bonuses – provision for current year bonuses 1,947,970
Bonuses – provision for last year but paid in current year 863,560
Other allowable expenses 4,358,425
46,378,650

(2) Selling expenses comprise the following:

K
Commissions for sales persons 1,341,600
VAT on advertisements 85,400
Fuel, tyres and repairs for delivery vans 4,270,000
Depreciation for delivery vans 427,000
Other allowable expenses 2,416,000
8,540,000

Page 2 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

27 / 312
 Continued/……

(3) Administration expenses comprise:

K
Audit fees 3,495,000
Debt collection 137,250
Bad debts written off 98,540
Provision for bad debts – 2% of debtors 1,516,470
Property valuation 1,530,000
Stamp duty – increase on share capital 2,400,000
Subscription – Production magazine 276,400
Fringe benefits tax 2,356,700
Donations – Malawi Against Physical Disabilities 600,000
Donations to the Institute of Chartered Accountants in
Malawi (ICAM) conference 500,000
Other allowable expenses 3,889,870
16,800,230

(4) Finance expenses:

K
Interest on bank overdraft 4,694,184
Interest on late payment of PAYE 567,000
Interest on loan on feasibility study on new cartons 640,116
5,901,300

(5) Other income:

K
Profit on disposal of old machine 340,000
Sale of scrap metal 623,000
Dividends received 950,000
Interest from staff loans 867,000
Exchange gain – conversion of foreign creditors to
Malawi Kwacha at year end 405,000
3,185,000

Required:

Compute the taxable income for Thandeka Limited for the year ended 30 June
2016. 7 Marks

(b) (i) Mention the characteristic of Value Added Tax (VAT) as a form of tax.
1 Mark
(ii) State any three advantages of taxes that have a characteristic like that of
VAT. 3 Marks
Page 3 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

28 / 312
 Continued/…..
(iii) The following transactions were recorded in the books of a VAT registered
taxpayer for the month of September 2016:

Business related expenditure, inclusive of VAT at 16.5%

K
Legal expenses 87,375
Office furniture 285,658
373,033

Business related expenditure exclusive of VAT

K
- Postal services 3,125
3,125

In addition to the above transactions, the value of sales net of VAT were
K6,000,000 and K2,000,000 in respect of local sales and export sales
respectively.

Required:

(1) State any four obligations of a VAT registered taxpayer. 4 Marks

(2) Calculate the amount of VAT paid or payable on each of the
following expenditure and income items:
(i) legal expenses
(ii) office furniture
(iii) postal services
(iv) sales
5 Marks
(TOTAL : 20 MARKS)

Continued/……

Page 4 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

29 / 312
2. (a) The tax written down value of business assets of Kanga Limited, a manufacturer,
as at 31 December, 2015 was as follows:
Agreed rate for
Item Tax written down value annual allowance
K’000
Factory buildings 85,200 5%
Plant and machinery 68,000 10%
Motor vehicles 54,600 20%
Furniture and fittings 16,300 10%
Computers 7,500 40%

During the year to 31 December 2016 the following transactions took place:
(1) The company disposed of some plant and machinery for K9,900,000
resulting into a capital loss of K800,000. New replacement plant and
machinery was bought during the year at K12,700,000.
(2) One motor vehicle was sold during the year for K4,820,000 resulting in
a capital loss of K720,000. A second hand five ton lorry was purchased
using the sales proceeds, amounting to K4,820,000.
(3) The company realized a capital gain of K490,000 after selling office
furniture for K1,680,000.
(4) A new computer was purchased at a cost of K980,000.

Required:

(i) Calculate the tax written down value for the assets that have been disposed
of during the year. 3 Marks

(ii) Compute capital allowances i.e. initial or investment allowances as the

case may be, and annual allowances, on the business assets for Kanga
Limited, for the financial year ended 31 December 2016. 7 Marks

(b) State five types of expenditure which a farmer, who derives income from
livestock production and other farming operations, is allowed to deduct from
his/her income in line with Section 58(2) of the Taxation Act. 5 Marks

Page 5 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

30 / 312
 Continued/……
(c) (i) Why does the Taxation Act provide taxpayers with an opportunity to
appeal? 1 Mark
(ii) A taxpayer received a notice of assessment from the Commissioner
General on 7 October 2016 which was dispatched on the same day. Since
he had cash flow problems, on 11 November 2016, he wrote the High
Court appealing to it that it should assist him to reduce the amount and
allow him to pay when his cash flow situation improves.

Required:

Comment on the procedure for appeal to be followed by the taxpayer.

4 Marks
(TOTAL : 20 MARKS)

Continued/……

Page 6 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

31 / 312
 SECTION B
ANSWER ANY THREE QUESTIONS FROM THIS SECTION

3. (a) Tadala Limited imported goods worth US$67,500 from China on an open account.
The country of origin for these goods was deemed to be China, hence the
company declared the same when clearing them.
Required
(i) Why is the correct completion of the certificate of origin (form 18)
significant for customs duty taxes? 3 Marks

(ii) Compute the duties and taxes that the company paid in order to clear the
goods. (Assume that the goods attracted 25% customs duty, 30% excise
duty and 16.5% value added tax and the exchange rate used at the time of
clearing was K755 to 1$). 7 Marks

(b) State the circumstances when the following income is not assessed to tax in
Malawi.

(i) Leave passages 2 Marks

(ii) Income of an expatriate 1 Mark
(iii) Foreign exchange gain 2 Marks
(iv) Capital gains on shares traded on the stock exchange 1 Mark

(c) Section 45 of the Taxation Act disallows some expenditure from being deducted
from the assessable income of a taxpayer.

Required:

State any four examples of such expenditure. 4 Marks

(TOTAL : 20 MARKS)

Continued/……

Page 7 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

32 / 312
4. (a) (i) Emoluments from employment received by or accrued to or in favour of a
wife may not qualify as earned income if paid under certain circumstances.

Required:

State the four circumstances. 4 Marks

(ii) How is an employer’s pension contribution, which is allowed as a

deduction from assessable income according to Section 37 of the Taxation
Act, determined? 3 Marks

(b) (i) Mention two examples of income which is liable to a final tax. 2 Marks

(ii) Mr Limpopo, a Zimbabwean, left Malawi two years ago having worked
for ten years for an insurance company which is registered and operates in
Malawi. He left some investments in Malawi in form of shares in a stock
exchange listed company and money in a savings account. Since he left
for Zimbabwe, he has not returned to Malawi.

During the twelve months ended 30 June, 2016, the following amounts
were remitted to him in Zimbabwe:
- K200,000 dividends from a company in which he owns shares in
Malawi
- K345,200 bank interest from a savings account
- K600,000 withdrawal from his savings account
Required:
(1) State the type of tax which is payable on each of the above
amounts. Give reasons for your answers. 4 Marks

(2) Calculate the tax due on the above amounts. 2 Marks

(c) State the circumstances that will necessitate the Commissioner General to issue an
assessment or additional assessment to a taxpayer, in line with section 91.
2 Marks

(d) (i) Mention the term used to describe the levying of income tax by more than
one country on the same income of a taxpayer. 1 Mark

(ii) Explain one way in which the levying of income tax by more than one
country arises. 2 Marks
(TOTAL : 20 MARKS)

Page 8 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

33 / 312
5. (a) Explain the following canons of tax, according to Adam Smith:
(i) certainity
(ii) economy
4 Marks

(b) Vinthukutu Limited produces and sells limestone locally and in the neighbouring
countries of Tanzania, Zambia and Mozambique.

The following information is available for the financial year ended 30 June, 2016:
(1) Taxable profits for the year (before adjusting for taxable foreign exchange
losses and gains) K34,566,000
(2) Provisional tax paid during the year K4,675,000

(3) Tax withheld by its debtors when paying, in form of withholding tax
amounted to K2,190,000

(4) An analysis of its foreign exchange account for the year revealed the
following balances:

 realized foreign exchange gains K16,872,430

 realized foreign exchange losses K10,500,420
 unrealized foreign exchange gains of K3,778,100

(Note: The taxable profits have not taken into account exchange differences from
the accounting and from the tax position).

Required:

(i) State the foreign exchange gains and losses that will be allowable for tax
purposes for Vinthukutu Limited. 3 Marks

(ii) Compute the tax to be paid by Vinthukutu Limited after year end.8 Marks

(c) (i) State the due date for the submission of the monthly excise duty return by
a registered licensee. 1 Mark
(ii) Give any four examples of disposal details of excisable goods that an
excise return must show. 4 Marks
(TOTAL : 20 MARKS)

Page 9 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

34 / 312
6. (a) Lusangazi Sports Complex and Club is a fast growing taxable club registered in
Malawi. For the financial year ended 30 June, 2016, it presented the following
income and expenditure account:

K’000
Income
Gambling machine 8,100
Membership fees 10,340
Live band performances 1,560
Sale of food 5,102
Video shows 940
Sale of drinks 9,430
Total income 35,472

Expenditure
Repairs and maintenance 2, 300
Salaries and wages 5,320
Cost of goods sold 6,355
Sundry expenses 1,230
Grounds maintenance 960
Total expenditure 16,165
Surplus 19,307

Required:

(i) Compute the taxable income of Lusangazi Sports Complex and Club for
the year ended 30 June, 2016. 4 Marks

(ii) Assuming the taxable income for Lusangazi Sports Complex and Club is
K2,550,000, calculate the tax payable. 2 Marks

Continued/……

Page 10 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

35 / 312
 (b) Lusangazi Club offered the following fringe benefits to its Manager for the period
ended 30 June 2016.

- a car with unrestricted usage and was bought at K9 million.

- school fees for one child and in April 2016 the club paid K50,000 directly
to the school.

- monthly DSTV subscription at K48,000 per month.

Required:

Compute the fringe benefits tax payable by Lusangazi Club for the quarter ended
30 June 2016. 9 Marks

(c) (i) Define the term “relief supplies”. 1 Mark

(ii) Give any four examples of relief supplies. 4 Marks
(TOTAL : 20 MARKS)

7. (a) Mr Pemba Phiri was employed by an entrepreneurer as a Business Development

Manager on a three year contract. The terms of the contract were as follows:

Contract period : 3 years (starting on 01/07/13, ending on

30/06/16).

Salary : K820,000 per month (salary was the same

throughout the contract period).

House allowance : 1% of salary,

Contract gratuity : 25% of total salary received during the

contract period.

Mr Phiri was paid the contract gratuity on expiry of his contract on 30 June, 2016.

Other transactions during the year for Mr. Phiri were as follows:

(1) Received rental income of K510,000 net of tax from his tenant who occupies
his house in Kasungu

Continued/……
Page 11 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

36 / 312
 (2) Paid city rates of K15,000 to Kasungu Town Assembly
(3) Made a donation of K1,000 to the Malawi Red Cross Society during the
flag week campaign

Required:

Compute Mr Pemba Phiri’s tax liability for the year ended 30 June, 2016.
8 Marks

(b) Define mining expenditure in line with paragraph 11 of the second schedule of the
Taxation Act. 6 Marks

(c) Chimoka Limited recovered PAYE from its employees in the month of January
2016 amounting to K317,526 and remitted it to the Malawi Revenue Authority
(MRA) on 30 May 2016.

Required:

(i) State the latest date that Chimoka Limited should have paid the PAYE to
MRA, in line with the tax rules. 1 Mark

(ii) State the penalties that an employer who fails to pay PAYE by the due
date is liable to. 2 Marks

(iii) Compute the penalties that Chimoka Limited paid to MRA for paying
PAYE late. 3 Marks
(TOTAL : 20 MARKS)

END

Page 12 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

37 / 312
 EXAMINATION NO.______________________

2017 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 10(B): TAXATION

TUESDAY 5 DECEMBER 2017 TIME ALLOWED: 3 HOURS
9.00 AM - 12.00 NOON
INSTRUCTIONS:

1. You are allowed 15 minutes reading time before the examination begins during which you
should read the question paper and, if you wish, make annotations on the question paper.
However, you are not allowed, under any circumstances, to open the answer book and start
writing or use your calculator during this reading time.

2. Number of questions on paper – 7.

3. The paper is divided into TWO Sections, A and B. BOTH questions to be answered in
Section A and ANY THREE from Section B.

4. Each question carries 20 marks.

5. Use of non-programmable calculators is allowed.
6. You are provided with the following:

(i) A set of tables containing rates of tax on taxable income (Table 1).
(ii) Rates of capital allowances (Table 2).
(iii) Penalty rates for underpaid provisional tax (Table 3).
(iv) Conversion factors adjusting basis of an Asset for Disposals (Table 4) occurring
from January – December 2015.

7. Begin each answer on a fresh page.

8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE

INVIGILATOR.
This question paper contains 9 pages

This question paper must not be removed from the examination hall.
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

38 / 312
 SECTION A- ANSWER BOTH QUESTIONS

1. (a) (i) Mention any four uses of a building that would disqualify it from being classified
as an industrial building. 4 Marks

(ii) State one circumstance under which the Commissioner General can agree to
increase the rates of annual allowances for a taxpayer. 1 Mark

(b) Mr Bengo, who manufactures juices, had the following tax written down (TWD) values
for capital allowances as at 31 December 2014:

Asset TWDV 1.1.2015 Annual allowance

K’000
Factory building 95,430 5%
Plant and equipment 68,980 10%
Motor vehicles 120,420 20%
Furniture and fittings 37,000 10%
Office equipment 15,650 10%

During the year the following transactions took place:

(1) A new Pajero motor vehicle was bought at K65,150,000 replacing a
Toyota Fortuner that cost the business K15,000,000 on 5 February 2013
but sold during the year.

(2) In order to increase production capacity of the business, a new factory

building worth K25,550,000 was constructed and brought into use in the
month of March 2015. Included in the factory building is a supervisor’s
office valued at K700,000.

(3) In the month of May, 2015, the business bought a second hand juice bottle
sealer at K1,560,000.

(4) Furniture worth K955,000 was also bought during the year.

Required:

Compute capital allowances to be claimed by Mr Bengo for the year ended

31 December 2015. 11 Marks

Continued/……

Page 2 of 9
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

39 / 312
 (c) The Taxation Act has, with effect from the 2013/2014 tax year, designated agro-
processing industries and electricity generation, transmission and distribution as priority
industries for purposes of assessment of income tax.

Required:

State any two income tax benefits that a taxpayer who is operating in the above
mentioned sectors, has obtained a certificate and is complying with prescribed conditions,
will enjoy. 2 Marks

(d) State any two obligations of a value added tax registered person. 2 Marks
(TOTAL : 20 MARKS)

2. (a) Michael and Bertha are a family. They are employed as Hotel Manager and Secretary at
Chambo Hotel and Mcheni Fisheries Limited respectively. Michael has no interest in
Mcheni Fisheries Limited. The couple also runs personal businesses and owns some
property and investments.

The following details were applicable to the couple during the twelve months ended
31 December 2015:

(1) Michael and Bertha’s monthly salaries were K550,000 and K120,000 respectively
and their employers deducted the necessary PAYE tax and remitted it to the
Malawi Revenue Authority.

(2) Bertha runs a saloon business in her own right and for the year ended 31 December
2015, she realized a taxable profit of K3,500,000.

(3) Bertha receives royalties from the sale of books which she authored and published.
During the year she received gross royalties of K84,000.

(4) During the period, Michael received K130,000 gross from Usipa Lodge as
consultancy fee after he privately assisted the lodge in developing hotel systems
and procedures.

(5) Michael owns a house which he bought using a mortgage from FN Bank, a bank
registered with the Reserve Bank of Malawi. The monthly mortgage repayment is
K78,500 (capital component is K23,100). The house is being rented out at
K120,000 per month. During the year K50,800 was paid as city rates and K95,400
was paid as premium for the house insurance.
Continued/……

Page 3 of 9
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

40 / 312
 (6) During the year Michael sold a house which he had bought in 2006 at K3,500,000
for K15,000,000.

Required:

(i) Compute the taxable income for Michael and Bertha for the year ended 31
December 2015, assuming that they elect to submit a joint return in line with
Section 73(3) of the Taxation Act. 10 Marks
(ii) State the due date for the submission of Michael and Bertha’s joint income tax
return in line with Section 84(1) of the Taxation Act. 1 Mark
(iii) Explain the circumstances that may lead to Michael and Bertha to pay penalties in
relation to their return, according to Section 112(3) of the Taxation Act. 3 Marks

(b) Describe progressive and regressive taxes. 2 Marks

(c) The Minister of Finance is empowered, by Section 8 of the Customs and Excise Act, to
prescribe ports at or through which goods shall be imported or exported.

Required:

Name any four such ports used by road transport. 4 Marks

(TOTAL : 20 MARKS)

Continued/……

Page 4 of 9
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

41 / 312
 SECTION B

ANSWER ANY THREE QUESTIONS FROM THIS SECTION

3. (a) (i) Explain any four functions of the Malawi customs tariff. 4 Marks
(ii) Alinafe Mandambwe wants to import a tent from South Africa to be used in her
business of hiring out entertainment facilities. The tent is currently costing
R45,500 CIF Blantyre. An enquiry from the Malawi Revenue Authority reveals
that once it has been imported, Alinafe will have to pay the following taxes: 10%
customs duty, 15% excise tax and 16.5% Value Added Tax.

Required:
Compute the total taxes that Alinafe will have to pay, assuming that at the time
she clears the tent the exchange rate will be K45 to R1. 7 Marks

(b) Define the following terms of the Taxation Act:

(i) Non-resident tax

(ii) Provisional tax
(iii) Seasonal income 3 Marks

(c) Zabi Limited was incorporated in Zambia. The company, which operates from
Malangalanga in Malawi, is preparing to submit an income tax return for the year ended
30 June 2016. The following are the details:

K
Taxable income 50,471,000
Provisional tax paid 5,000,000
Withholding tax 2,310,000

Required:

(i) State how Zabi Ltd will determine the amount of tax that will be submitted
together with the income tax return, in line with section 84(c). 2 Marks

(ii) Compute the amount of tax that Zabi Ltd will pay when submitting the income tax
return. 4 Marks
(TOTAL : 20 MARKS)

Continued/……

Page 5 of 9
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

42 / 312
4. (a) Foni Limited, manufactures cell phone handsets. The company commenced trading in
August 2015. It has approached you for advice on the completion of the income tax
return for its business for the 2015/2016 fiscal year.

The following are some of the details of the payments that are presented to you for
advice:

Month work
No. Nature of payment done/paid Amount (MK)

1 Salaries January 2015 532,120

2 Sponsorship of the under 17 youth sporting development January 2016 2,500,000
3 Extension of factory building to add a dispatch section November 2015 857,400
4 Premium for use of a trademark for manufacturing cellphone
handsets for 40 years August 2015 11,412,500
5 Painting the interior of the factory building November 2013 1,210,000
6 Legal charges in connection with the increase of share capital
of the business May 2006 210,000

Note: Some of these expenditures were incurred before Foni Limited commenced trading.

Required:

Identify the amounts that will be allowable and those that will not be allowable as
deductions for tax purposes. Give reasons for your position. 11 Marks

(b) In relation to excisable goods, describe the circumstances under which the Commissioner
General will allow the following to happen:

(i) Refund of excise duty. 2 Marks

(ii) Destruction of excisable goods. 1 Mark

(c) State the legal requirements that an employer who has employees earning more than the
zero percent tax threshold must put in place. 2 Marks

(d) List any four types of payments that are subject to withholding tax under the fourteenth
schedule of the Taxation Act. 4 Marks
(TOTAL : 20 MARKS)

Continued/……

Page 6 of 9
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

43 / 312
5. (a) (i) State the three main functions of the Malawi Revenue Authority (MRA).3 Marks

(ii) The taxable income of Changoima Banda, for the 2015/2016 tax year was
K850,000. The taxable income includes K170,000 which is also taxable in
Britain.

Required:
Calculate the tax liability for Changoima Banda, assuming that full reduction is
given under the Double Tax Agreement between Malawi and Britain. 7 Marks

(b) Paragraph 11 of the second schedule of the Taxation Act specifically excludes certain
expenditure from the definition of mining expenditure.

Required:
State any three of such expenditure. 3 Marks

(c) Describe the three types of bonded warehouses for customs duty purposes. 3 Marks

(d) State any four types of income that are not subject to withholding tax exemption
certificate. 4 Marks
(TOTAL : 20 MARKS)

6. (a) Explain the penalties that operators of Pay As You Earn (PAYE) and withholding
taxes (WHT) would be liable to if they did not follow the prescribed regulations.
5 Marks

(b) Mrs Bokosi, a taxpayer, paid the following taxes in the 2016/2017 tax year:

(1) Pay As You Earn (PAYE) tax recovered from January 2017 salaries amounting to
K74,200 was remitted to the Malawi Revenue Authority on 20 February 2017.

(2) Withholding tax withheld on payments in the month of May 2017 amounting to
K55,000 was remitted to the Malawi Revenue Authority on 25 June 2017.

(3) Provisional tax of K910,000 was paid during the year out of the required
K3,500,000.

Required:
Calculate the penalties payable. 7 Marks

Continued/……

Page 7 of 9
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

44 / 312
 (c) (i) Define excise tax. 1 Mark

(ii) Explain in detail the two components of excise tax. 3 Marks

(iii) A prospective manufacturer of excisable goods or services is required to apply in

writing for a license to the Commissioner General.
Required:
State the four items that should be addressed in the application. 4 Marks
(TOTAL : 20 MARKS)
7. (a) A taxpayer paid the following taxes during the 2015/2016 tax year:

Withholding tax; Non-resident tax; Value added tax; Customs duty; Provisional tax;
Estate duty; Excise tax; Income tax; Pay As You Earn tax and tax on dividends.

Required:

In line with the various Acts, classify these into direct taxes, indirect taxes and methods
of collecting taxes. 5 Marks

(b) Explain the standard practice that is followed in order to determine the value of
imported goods for value added tax purposes. 4 Marks

(c) (i) State the two examples of invalid grounds for appeal according to the Taxation
Act. 2 Marks

(ii) Give any two courses of action that the Commissioner General takes when an
appeal is received. 2 Marks

Continued/……

Page 8 of 9
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

45 / 312
(d) Tim realized the following capital gains and losses from the disposal of assets which
were used in his business in respect of which no capital allowances were given.

Realised capital gain Realised capital loss

K K
Year 1 250,000 130,000
Year 2 420,000 505,000

Required:

(i) State how Tim will determine the deductible realized capital loss in line with
section 28(3) of the Taxation Act. 3 Marks

(ii) Calculate the amount of realized capital loss which will be deductible from Tim’s
assessable income. 4 Marks
(TOTAL : 20 MARKS)

END

Page 9 of 9
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

46 / 312
 STRICTLY CONFIDENTIAL
THE INSTITUTE OF CHARTERED ACCOUNTANTS
IN MALAWI
2017 EXAMINATIONS
ACCOUNTING TECHNICIAN PROGRAMME
PAPER TC 10(B): TAXATION
(DECEMBER 2017)

TIME ALLOWED: 3 HOURS

SUGGESTED SOLUTIONS

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

47 / 312
 SECTION A
1. (a) (i) Any four buildings that are excluded by the Act from the definition of industrial
building are:

(1) Dwelling houses

(2) Retail shops
(3) Show rooms
(4) Storehouses
(5) Offices

(ii) (1) The Commissioner General can agree to increase the rates of annual
allowances for a taxpayer if an asset is subject to extensive use such as
machinery working in double shifts, so that its expected economic life is
reduced.

(2) Computation of capital allowances for Mr Bengo for the year ended 31/12/15

Capital Allowances
Asset Opening Additions Sub-total Disposals Sub-total Investment Initial Annual Closing
TWDV TWDV
K’000 K’000 K’000 K’000 K’000 K’000 K’000 K’000 K’000
Factory
Building 95,430 25,550 120,980 - 120,980 25,550 - 4,771.5 90,658.5
Plant &
Equipment 68,980 1,560 70,540 - 70,540 624 699.16 69.216.84
M/ vehicles 120,420 65,150 185,570 2,400 183,170 - - 36,634 146,536

Furniture & 37,000

Fittings 955 37,955 - 37,955 - 191 3,776.4 33,987.6
Office 15,650 -
equipment - 15,650 15,650 - - 1,565 14,085

TWDV – Toyota Fortuner

Financial Year Details Amount

K’000
31 December 2013 Cost 15,000
Initial allowance -
Annual allowance (20% x 15,000,000) 3,000
TWDV 12,000
31 December 2014 Annual allowance (20% x 12,000,000) 2,400
31 December 2014 Tax written Down Value (on disposal) 2,400

Page 2 of 11
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

48 / 312
 New Factory

Cost K25,550,000
Office K700,000

If the cost of the office is more than 20% of the factory then the whole factory
will not be an industrial building.

Percentage of the office to the factory = (700,000/25,550,000 x 100) (½) = 2.7%

Therefore the whole factory is an industrial building. ½

(b) Two income tax benefits that a taxpayer who is operating in the designated sectors and
has obtained a certificate and is complying with prescribed conditions will enjoy are:

(i) Shall hold the priority industry status for ten years.

(ii) The rate of tax applicable to priority industries in agro-processing and electricity
generation, distribution and transmission shall be zero for the whole period
granted.

(c) Four obligations of a value added tax registered person are:

(i) Issuance of VAT invoice

(ii) Maintenance of VAT account
(iii) Production of monthly returns
(iv) Maintenance of records and accounts
(v) Maintenance of sales records
(vi) Maintenance of purchases records
(vii) Maintenance of bill of entry.

Page 3 of 11
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

49 / 312
2. (a) Michael and Bertha Joint Tax Return
Details All other Michael – Bertha –
income Husband Wife
K’000 K’000 K’000
Salaries (550,000 x 12) (120,000 x 12) 8,040 6,600 1,440
Profit from salon 3,500 3,500
Royalties 84 84
Fees 130 130
Rent (120,000 x 12) 1,440 1,440
Capital gain = sale proceeds – adjusted basis
Sales proceeds = 15,000,000
Basis = 3,500,000 x 3.428090 = 11,998,315
Capital gain = 15,000,000 – 11,998,315 = 3,001,685 3,001,685 3,001.685
Assessable income 16,195,685 11,255.685 4,940
Allowable deductions
Interest of mortgage 55.4 55.4
City rates 50.8 50.8
Insurance 95.4 95.4
Taxable income 15,994.085 11,054.085 4,940

(ii) 30 June 2016

(iii) Michael and Bertha will pay penalties in relation to their joint return if they:
(1) Fail to furnish the Commissioner General with a return of income for any
year of assessment;
(2) Omit income from their return.
(3) Make a deduction which is not allowed or claims an allowance to which
they are not entitled.

(b) Wealth Tax is tax levied on the wealth of individuals either at the time of their death or
on transfer of property e.g. estate duty and capital gains tax.
Whereas property rates are taxes levied on the value of property.
They are used by local authorities such as city and town councils to raise revenue which
they use to provide services like cleaning and sewage.

(c) Port through which goods shall be imported and exported by road include:
Mwanza
Mchinji
Muloza
Songwe
Dedza.

Page 4 of 11
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

50 / 312
3. (a) (i) Four functions of the Malawi Customs tariff are to provide the:
(1) collection of government revenue
(2) protection of and assistance of infant industries
(3) collection of trade statistics
(4) implementation of the provision of trade agreements with other countries
in so far as they relate to Malawi duties.

(ii) Taxes payable by Alinafe Mandambwe on the importation of a tent

Value for customs duty purposes (45,500 x 45) 2,047,500
Customs duty (2,047,500 x 10%) 204,750
Value for excise tax purposes (2,047,500 + 204,750) 2,252,250
Excise tax (2,252,250 x 15%) 337,837.50
Value for value added tax purposes (337,837.50 + 2,590,087.50) 2,590,087.50
Value added tax (2,590,087.50 x 16½%) 427,364.44)
Total taxes payable (204,750 + 337,837.50 + 427,364.44) 969,951.94

(b) (i) Non-resident tax is a tax that is levied on any income arising from a source within
Malawi that is payable to a person who is not resident in Malawi.

(ii) Provisional tax is an advance payment of income tax in quarterly instalments.

(iii) Seasonal income is income that is ordinarily received from a given source during
any period of six consecutive months of the year of assessment of the person
receiving such income.

(c) Tax relief to taxable income that has been assessed to tax in more than one
accounting period is available.

(i) if the taxpayer ceases to trade.

(ii) in the last year of assessment.

Page 5 of 11
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

51 / 312
4. (a) Advice to Foni Limited

Description Allowable Not allowable Reasons

K K
Salaries 532,120  Even though it was incurred before
commencement of trading, it is
allowed because it was incurred
within 18 months prior to
commencement of trading and also
 That salaries would be allowable
had it been incurred after
commencement of trading
 Foni Limited is a manufacturer.

 The Taxation Act allows taxpayers

Sponsorship of the under 17 1,250,000 1, 250,000 to deduct 50% of the cost of
youth sporting development sponsorship towards youth sporting
(2,500,000 x 50%) development.

 Extension of the factory building is

Extension of factory building 857,400 an expense of capital in nature which
to add a dispatch section is not allowable as a deduction.

 The Taxation Act allows the

Premium for use of a trademark 456,500 285,312.50 premium to be allowed for deduction
for manufacturing cellphone to be the amount paid divided by the
handsets for 40 years number of years. but
(11,412,500/25)  The maximum number of years is set
(11,412,500/40) at 25.

 Amount is disallowed because

Painting the interior of the 1,210,000 ½ despite the fact that it is revenue in
factory building nature, it was incurred more than
18 months before commencement of
Trading.

 Expense is capital in nature.

Legal charges in connection 210,000
with the increase of share
capital of the business

Page 6 of 11
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

52 / 312
 Note
Where there is no need for calculations, candidates should be awarded full marks for
simply stating it as allowable or deductible or not allowable or deductible.

(b) In relation to excisable goods, the Commissioner General would allow:

(i) Refund of excise duty:

(1) when goods are accidentally lost on the entered premises prior to being
delivered for consumption

(2) when goods are accidentally destroyed on the entered premises prior to
being delivered for consumption.

(ii) Destruction of excisable goods:

If goods are found to be defective after delivery and are returned to the entered
premises.

(c) The following administrative arrangements must be put in place by the employer:

(i) operate the PAYE system in respect of all employees earning more than the zero
percent threshold.

(ii) deduct tax from the emoluments of such employees at the time the emoluments
are paid (this could be weekly, fortnightly or monthly).

(iii) calculate PAYE based on the gross salary.

(d) Payments that are subject to withholding tax under the fourteenth schedule of the
Taxation Act are:
(i) Royalties
(ii) Rents
(iii) Payments for any supplies to traders and institutions i.e. foodstuff etc
(iv) fees
(v) Commission
(vi) Payment for carriage and haulage
(vii) Payment for tobacco and other farm products
(viii) Payment for public entertainment
(ix) Payment of over K20,000 for casual labour or services
Page 7 of 11
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

53 / 312
 (x) Bank interest

5. (a) (i) Three main functions of the Malawi Revenue Authority are:

(1) assessment of income to tax

(2) collection of tax revenue
(3) accounting for tax revenue

(ii) Tax liability for Changoima Banda

K K
Taxable income in Malawi 850,000
Tax liability
First K240,000 0% 0
Next K60,000 15% 9,000
Balance K550,000 ½ 30% 165,000
174,000
Amount taxable in Britain 170,000
Maximum tax credit under the double taxation (170,000/850,000 x 174,000) 34,800
agreement ½
Tax liability will be (174,000 – 34,800) 139,200

(b) Expenditure that are excluded from the definition of mining expenditure by paragraph
11 of the second schedule are:

(i) the acquisition of the site of deposits connected with mining operations.

(ii) the acquisition of the site of buildings or works connected with mining operations.

(iii) mining expenditure incurred after 1 November 1969.

(c) The three types of bonded warehouses for customs duty purposes are:

(i) private bonded warehouses : these are for the deposit of dutiable goods
belonging to the licensee only.

(ii) general bonded warehouses : these are for the deposit of dutiable goods
belonging to several other importers.

(iii) bonded factories for processing of goods EPZ ½: the bonded warehouse will be
approved by the Commissioner General if its area is not less than 186 square
meters.

Page 8 of 11
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

54 / 312
 (d) The following income is not subject to withholding tax exemption certificate:

- Bank interest
- Rent
- Royalties
- Fees
- Commissions
- Payment of casual labour
- Payment of contractors and subcontractors

6. (a) (i) The following would be the penalties:

Withholding taxes

Failure to withhold renders a person personally liable to pay the amount which he
fails to withhold plus a penalty of 20%.

Failure to remit the amount withheld renders a person personally liable to pay the
amount which he fails to remit plus a penalty of 20%.

Late payment of amount withheld renders a person personally liable to a penalty

of 20%.

PAYE

An employer is personally liable to a penalty of 20% of the tax due if he does not
pay the tax in time.
An additional surcharge at 5% of the accrued amount is also imposed monthly
until the amount due is paid.

(ii) (1) PAYE

K
Month and amount recovered January 2017 74,200
Due date 14 February 2017
Date remitted to MRA 20 February 2017
Number of months or part thereof delayed

K
Penalties (74,200 x 20%) 14,840
Surcharge (74,200 x 5%) 3,710
Total 18,550

Page 9 of 11
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

55 / 312
 (2) Withholding tax

K
Month and amount recovered May 2017 55,000
Due date 14 June 2017
Date remitted to MRA 25 June 2017
Penalty (55,000 x 20%) 11,000

(3) Provisional tax

K
Provisional tax due 3,500
Provisional tax paid 910
Unpaid provisional tax 2,590
Amount unpaid as a percentage of the (910/3,500 x 100) 26%
provisional liability

Since 26% is more than 10% but does not exceed 50%, the penalty will be 25%
of the unpaid provisional tax 1

Penalty (25% x 2,590) 647.5

(b) (i) Excise tax is an indirect tax charged on the sale or use of specific goods and
services.

(ii) Two components of excise tax:

(1) Import excise tax

- is levied on certain importations and
- is administered by the customs division

(2) Domestic excise tax

- is levied on certain locally manufactured products and services
- is administered by the domestic taxes division

(iii) Items to be addressed in the application are:

Full name and trading style of applicant.
The goods to be manufactured
The anticipated annual turnover
The size and location of premises

Page 10 of 11
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

56 / 312
7. (a) Classification of taxes

Direct taxes Indirect taxes Tax collection methods

Non-resident tax Value added tax Withholding tax
Estate duty Customs duty Provisional tax
Income tax Excise tax Pay As You Earn
Tax on dividends

(b) (i) Value for value added tax purposes of imported goods is determined by taking the
sum of the following:

(1) the value determined for Customs purposes under Customs Act – (CIF)

(2) import duties, if any, paid or payable at the time of importation.

(3) any other duty at the time of importation i.e. excise.
(4) any levy payable at the time of importation.

(ii) The value for value added tax purposes for Tambala who imported baking
ingredients will be the following:

K’000
Value determined for customs purposes 10,000
Customs duty (5% x 10,000,000) 500
Value for excise tax purposes 10,500
Excise tax (10% x 10,500) 1,050
MBS levy (0.01% x 10,000,000) 1
Value for Value Added Tax purposes 22,051

(c) (i) Examples of invalid grounds for tax appeals are:

(1) an appeal is made simply because the taxpayer does not want to pay tax

(2) has cash flow problems.

(ii) When an appeal is made, the Commissioner General can ……….. any of the
following courses of action:

(1) may amend the assessment

(2) may change the decision or determination
(3) may disallow the appeal
)

END
Page 11 of 11
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

57 / 312
 EXAMINATION NO.____________________

2016 EXAMINATIONS

TECHNICIAN PROGRAMME

PAPER TC10(B) : TAXATION

THURSDAY 9 JUNE 2016 TIME ALLOWED: 3 HOURS

9.00 AM - 12.00 NOON

INSTRUCTIONS:

1. You are allowed 15 minutes reading time before the examination begins during which you
should read the question paper and, if you wish, make annotations on the question paper.
However, you are not allowed, under any circumstances, to open the answer book and start
writing or use your calculator during this reading time.

2. Number of questions on paper – 7.

3. The paper is divided into TWO Sections, A and B. BOTH questions

to be answered in Section A and ANY THREE from Section B.

4. Each question carries 20 marks.

5. Use of non-programmable calculators is allowed.

6. You are provided with the following:

(i) A set of tables containing rates of tax on taxable income (Table 1).
(ii) Rates of capital allowances (Table 2).
(iii) Penalty rates for underpaid provisional tax (Table 3).

7. Begin each answer on a fresh page.

8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE

INVIGILATOR.

This question paper contains 12 pages

This question paper must not be removed from the examination hall.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

58 / 312
 SECTION A- ANSWER BOTH QUESTIONS

1. Hapana Minerals Limited is a Malawian company mining bauxite in Mulanje. The

company makes up its accounts to 30 June annually. The company’s latest income
statement for the year ended 30 June 2015 is as follows:

Notes K K
Turnover 75,400,600
Less:
Mining and processing costs (1) 38,700,000
Export costs (2) 9,770,000 48,470,000
Gross profit 26,930,600

Administration expenses (3) 10,800,000

Finance costs (4) 8,175,500
Marketing costs (5) 2,850,000 21,826,000
5,104,600

Other income (6) 936,000

Exchange gain (7) 1,865,440
Interest receivable (8) 657,000 3,476,440
Net profit before tax 8,491,040

The following additional information is available in connection with these financial results:

(1) Mining and processing costs include:

K
Depreciation 1,265,100
Amortisation of purchase of mining rights 419,700
Salaries & Wages 2,800,700
Provision for production losses 569,300

Salaries and Wages include a provision for severance pay of K780,000 for the
current year and an additional amount of K265,000 which relates to excess paid
over the provision made in the prior year.

(2) Export costs include:

K
Salaries & Wages 3,500,100
VAT on packaging materials 575,000
Packaging materials 759,000

Continued/……
Page 2 of 13
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

59 / 312
(3) Administration expenditure includes the following:

Legal fees: K
Debt collection 375,000
Renewal of lease 565,000
Stamp duty on increase in share capital 814,500

Subscription and donations:

Mining international magazine 67,800
Donation to old people’s home 44,500
Other donations – all under K100 17,500
Donation to Red Cross 240

(4) Finance costs include the following:

Professional fees:
Audit fees 415,000
Property revaluation 385,000
Interest payable
Bank overdraft 147,800
Late payment of tax 612,100
On loan to finance feasibility study on new processing methods 78,500

(5) Marketing costs include:

Depreciation 965,000
Fringe benefits tax 875,000
Pension costs 410,000
Bad debts written off 434,000
Entertainment of customers 12,500

(6) Other income consists of:

Commissions 286,000
Sale of waste 650,000
936,000

(7) Exchange gain is from the conversion of year-end debtors to Malawi Kwacha.

(8) Interest receivable consists of:

Staff loans 315,000

Bank interest 360,000
675,000

Interest received from the bank is stated gross. Each receipt of interest was in
excess of K10,000.

Page 3 of 13
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

60 / 312
 Continued/……
(9) During the year the company paid K1, 250,000 for the access to mineral deposits.
This expenditure has been capitalised and is amortised in the mining and
processing costs.

(10) The company purchased the following assets during the year:
K
Processing machinery 6,425,100
Motor vehicles 2,710,000
Computers 1,250,000

Extension to the factory (of this K300,000 related to expenditure on offices)

K1,475,000
All the assets bought were brought into use during the year.
Motor lorry (for light work) K9,000,000

The processing machinery would have no value to the company after the mine
has ceased to be worked. However, the buildings would have alternative use.

(11) A motor vehicle which was bought in 2009 for K4,250,000 and has a nil book
value and a tax written down value of K789,100 as at 1 July 2014 was sold for
K975,500.

(12) The tax written down value of the company’s fixed assets as at 1 July 2014 were:

K
Industrial buildings 6,865,700
Plant and equipment 3,950,100
Motor vehicles 4,842,500
Motor lorries 6,500,000
Furniture & fittings 1,975,000
Computers 1,201,000

(13) Agreed capital allowances by the tax authorities were K3,780,000

Required:

(a) Calculate capital allowances to be claimed by Hapana Mineral Limited for the
year ended 30 June 2015. 12 Marks

(b) Compute the taxable income of Hapana Mineral Limited for the year ended
30 June 2015. 8 Marks
(TOTAL : 20 MARKS)

Continued/……
Page 4 of 13
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

61 / 312
2. (a) (i) Explain the difference between direct and indirect taxes. 2 Marks
(ii) Give two examples of direct taxes and two examples of indirect taxes used
in Malawi. 4 Marks

(b) The deduction of certain types of expenditure is specifically provided for in the
Taxation Act upon certain conditions being met.

Required:
State the conditions to be met and the amounts to be allowed as a deduction in
respect of the following expenditures:

(i) Premium or consideration in the nature of a premium (Section 34 of the

Taxation Act). 4 Marks

(ii) Bad debts 2 Marks

(iii) New business: Initial expenditure (Section 41 of the Taxation Act). 3 Marks

(c) Details of income for an individual who was in employment for 6 months only
(Jan 2015 to June 2015) were as follows:

(1) Basic salary

K895, 000 per month for three months to March 2015
K960, 000 per month for three months to June 2015.

(2) Housing allowance

20% of basic salary, paid together with salary.

(3) Clothing allowance 20% of one month basic salary for every six months
payable in January and July each year.

(4) Motor vehicle maintenance allowance K320,000 per month paid together
with salary.

PAYE tax was deducted at a rate of K261,750 per month for the three months to
March 2015 and K281,250 per month for the three months to June 2015.

Required:
(i) Compute the taxable income of the individual for the tax year to 30 June
2015. 3 Marks

(ii) Calculate the amount of tax due and payable on the income in (i) above,
assuming the total income for the tax year to 30 June 2015 is K8,777,000.
Page 5 of 13
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

62 / 312
 2 Marks
(TOTAL : 20 MARKS)
SECTION B
ANSWER ANY THREE QUESTIONS

3. (a) (i) Describe the two categories of clubs or associations which are recognized
under the Taxation Act. 3 Marks

(ii) How is income of such clubs, societies or associations treated for tax
purposes? 2 Marks

(b) (i) Where a club or association is subject to tax, state how the taxable income
is computed. 3 Marks

(ii) Kamba Sports Club, which is a taxable club, carried out the following
transactions in the year ended 31 December 2015:

K’000
Income 8, 308

This was made up as follows:

3,870
Ground entrance fees
590
Sale of food
650
Sale of drinks
900
Club membership fees
410
TV shows – live football
1460
Live band performances
428
Gambling machine
8,308

Expenses 1,962

The breakdown was as follows:

Trading licence 140

Food licence 115
Salaries and wages 480
Cost of goods sold 385
Repairs and maintenance 842
1,962

Page 6 of 13
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

63 / 312
 Continued/……

Required:

(i) Compute the taxable income of Kamba Sports Club for the financial year
to 31 December 2015. 4½ Marks

(ii) Calculate the amount of tax payable on the taxable income computed in (i)
above, assuming the taxable income was K220,625. 1½ Marks

(iii) State the tax year in which the taxable income computed in (i) above will
be assessed. 1 Mark

(c) (i) When may the Commissioner General accept a taxpayer’s estimate of
amount of his taxable income? 2 Marks

(ii) When may the Commissioner General estimate a taxpayer’s taxable

income or assessed loss? 3 Marks
(TOTAL : 20 MARKS)

Page 7 of 13
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

64 / 312
 Continued/……

4. (a) State any five expenditures that are incurred by a farmer, which are admissible as
a deduction in the determination of taxable income derived by any farmer during
any year of assessment. 5 Marks

(b) State how the taxable income of a cooperative that is liable for tax is determined
and taxed in line with Section 59 of the Taxation Act. 2 Marks

(c) A taxpayer has received an estimated assessment from the tax authorities
showing that he has been assessed for the year of assessment to 30 June 2015 in
the absence of his return of income. Tax amounting to K756, 240 is shown to be
due and payable. As no information has been provided, no credit for advance
taxes paid has been given.

The taxpayer has asked you to help him contest the assessment, and has produced
the following information:

(1) A statement that, during the year under review, the taxpayer rece ived
gross rents amounting to K860, 000. City rates of K19, 200 were paid
within the year and were the only expenditure incurred against the rental
income.

(2) Withholding tax amounting to K86, 000 was recovered from the rental in
(1) above.

(3) A PAYE certificate showing K2, 100,000 as total salary and K549, 000 as
PAYE deducted for the year under review.

(4) Evidence of payment of professional subscriptions amounting to K87,000

was produced. These have been allowed for tax purposes in the past.

Required:

(i) Advise the taxpayer whether or not withholding tax on rentals has been
correctly operated by the taxpayer’s tenant. If not, what consequences are
likely to follow on both the tenant and the taxpayer? 5 Marks

(ii) State the penalties which are chargeable where PAYE has been under
deducted by an employer. 2 Marks

(iii) Based on the information made available in notes (1) to (4), above,
calculate the net amount of tax payable by the taxpayer. Indicate by what
amount the estimated tax will be reduced or how much additional tax he
will be required to pay. 6 Marks
(TOTAL : 20 MARKS)

Page 8 of 13
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

65 / 312
 Continued/……

5. (a) Distinguish compulsory from voluntary registration for Value Added Tax (VAT)
purposes. 2 Marks

(b) A Value Added Tax (VAT) registered taxpayer made the following transac tions
in the month of August 2015:

(1) Paid K233,000 security charges for the month of August to Gonjetsani
Security Ltd inclusive of VAT.

(2) Paid K850,000 salaries for the month of August 2015 exclusive of VAT.

(3) In the month of August 2015, made local sales of K4,600,000 exclusive of
VAT.

(4) Paid K16,310 electricity bill to ESCOM, for the month of July 2015,
inclusive of VAT.

(5) Paid K3,800 for postage stamps to post price lists to prospective customers
exclusive of VAT.

(6) Paid K40,775 to Lamya Telephone Ltd (LTL) in respect of July 2015
telephone bills inclusive of VAT.

(7) During the month of August 2015, exported goods translating to

K2,400,000 exclusive of VAT.

(8) Bought stationery costing K17,475 inclusive of VAT.

Required:

Calculate the amount of VAT on each of the above transactions. 8 Marks

(c) Chibwete Retailers, a Malawi registered company, buys and sells motor vehicle
spare parts. On 1 February, 2014, Chibwete Retailers bought parts worth
K1,850,000 from Makoka Trading on credit. Chibwete Retailers paid Makoka
Trading on 9 April, 2015 net of 10% withholding tax.

Required:

(i) Calculate the amount of withholding tax that was deducted from Makoka
Trading’s payment. 2 Marks

(ii) When was the withholding tax deducted due for payment to the Malawi
Revenue Authority? 1 Mark
Page 9 of 13
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

66 / 312
 Continued/……
(iii) Calculate the penalty that Chibwete Retailers could have paid had they
not remitted the withholding tax to the Malawi Revenue Authority on the
due date. 4 Marks

(iv) State any three conditions that Makoka Trading must meet in order to be
granted a withholding tax exemption certificate by the Malawi Revenue
Authority (MRA). 3 Marks
(TOTAL : 20 MARKS)

6. (a) (i) Define the term “fringe benefit” as stipulated in the Taxation Act.
2 Marks
(ii) How does the liability to fringe benefit tax arise? 1 Mark

(iii) What records should an employer maintain in relation to fringe benefits

tax? 2 Marks

(iv) When is fringe benefits tax due for payment? 1 Mark

(b) Assume that Kawiluwilu Estate has offered you benefits upon taking up
appointment with them as follows:

(1) A housing allowance of K300,000 per month payable in cash to you.

(2) School fees of K780,000 per term of three months payable directly to
Karonga Academy where your children go to school.

(3) Unrestricted use of a Range Rover car which was acquired at a cost of
K25,000,000.

(4) Vehicle insurance and running costs of K350,000 and K600,000 per
annum respectively. The insurance premium will be payable to the
insurance company while the amount meant for the vehicle running costs
will be payable to you in cash.

(5) A gardener will be provided at a salary of K30,000 per month.

Required:

(i) State, with reasons, whether Kawiluwilu Estate, the employer, or you, the
employee, will bear the tax burden of each of the employment benefits
listed and being offered to you under (1) to (5), above. 6 Marks

(ii) Calculate the fringe benefits tax payable on the school fees for one term.
2 Marks
Page 10 of 13
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

67 / 312
 Continued/……
(c) The cost of a watchman is a fringe benefit if the employer rents a house for an
employee, but not if the employer allows the employee use of a house owned by
the employer.

Required:

Why does the legislation allow the employer this fringe benefit? 2 Marks

(d) An expatriate employee from South Africa was refunded the costs of flying to
Malawi with her family and personal effects at the beginning of her contract and
for repatriation at the end of the contract.

Required:

State the tax position of this expatriate as far as fringe benefits tax (only) is
concerned. 2 Marks

(e) How can an employer avoid becoming liable for the payment of fringe benefits
tax? 2 Marks
(TOTAL : 20 MARKS)

Page 11 of 13
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

68 / 312
 Continued/…..
7. (a) Takondwa General Suppliers imported goods from South Africa on 1 July 2015
on an open account. The goods cost the business US$45,000. At the time of
importation the exchange rate was K550 to $1. The business prepared
management accounts for the month of July 2015 and recorded the foreign
liability in its books using an exchange rate of K540 to $1, which was ruling at
31 July 2015. The business eventually paid for the goods on 20 August 2015
when the exchange rate was K520 to $1.

Required:

(i) Calculate the value of the goods in Malawi Kwacha (MK) at the time of
importation and also at the time of preparing management accounts.
1 Mark

(ii) When are foreign exchange gains or losses said to be from a source from
Malawi? 2 Marks

(iii) Calculate the exchange gain or loss to the business at the date of paying
for the goods. 2 Marks

(b) Assuming the goods imported by Takondwa General Suppliers attracted customs
duty at 25%, excise duty at 30% and Value Added Tax of 16.5%.

Required:

(i) Calculate the value for duty purpose in respect of the imported goods.
1 Mark

(ii) Calculate the total duties and taxes (customs duty, excise duty and value
added tax) that the business paid in order to clear the goods. 7 Marks

(c) According to the Customs and Excise Act, goods may be imported for a number
of reasons:

Required:

(i) State any three reasons why the Act allows goods to be imported.
3 Marks

(ii) Mention any four documents that are commonly used in customs clearing
which must be submitted to customs authorities. 4 Marks
(TOTAL : 20 MARKS

Page 12 of 13
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

69 / 312
END

Page 13 of 13
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

70 / 312
 EXAMINATION NO._____________________

2016 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 10(B): TAXATION

TUESDAY 6 DECEMBER 2016 TIME ALLOWED : 3 HOURS

9.00 AM - 12.00 NOON

INSTRUCTIONS:

1. You are allowed 15 minutes reading time before the examination begins during which you should read
the question paper and, if you wish, make annotations on the question paper. However, you are not allowed,
under any circumstances, to open the answer book and start writing or use your calculator during this
reading time.

2. Number of questions on paper – 7.

3. The paper is divided into TWO Sections, A and B. BOTH questions to be answered in Section A and
ANY THREE from Section B.

4. Each question carries 20 marks.

5. Use of non-programmable calculators is allowed.

6. You are provided with the following:

(i) A set of tables containing rates of tax on taxable income (Table 1).
(ii) Rates of capital allowances (Table 2).
(iii) Penalty rates for underpaid provisional tax (Table 3).

7. Begin each answer on a fresh page.

8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE

INVIGILATOR.

This question paper contains 12 pages

This question paper must not be removed from the examination hall.
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

71 / 312
 SECTION A- ANSWER BOTH QUESTIONS

1. (a) Khombedza Investments is a sole trader who has been manufacturing shoes for a
long time. The business’s profit and loss account for the year ended 31 December,
2015 is summarised as follows:

DETAILS NOTES MK 000

Sales 95, 200
Cost of sales 1 (73, 100)
Gross profit 22, 100
Sundry income 2 150
Production costs 3 (8, 630)
Selling costs 4 (6, 420)
Administration costs 5 (5, 585)
Interest costs 6 (3, 840)
Loss before tax (2, 225)

Notes:

(1) Included in the cost of sales is a provision for stock losses amounting to K32,000.

(2) Sundry income includes net dividends of K12,000 which the business received
during the year.

(3) Production costs were made up of the following: K

Electricity and water 1,400,000

Depreciation 1,550,000
Salaries and wages 3,330,000
Rent for the factory 2,350,000
Total 8,630,000

(4) Selling costs comprise: K

Donation towards the construction of a government health centre

at Salima 500,000
Travel and subsistence 2,150,000
Loss on sale of a van which was being used in the business 65, 000
Police fines for the sales van over-speeding 10,000
Delivery van expenses 3,695,000
Total 6,420,000

Continued/……

Page 2 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

72 / 312
(5) The breakdown of administration costs is as follows:
K
Salaries 1,459,770
Auditor’s fees 440,000
Pension costs 2,945,000
General provision for bad debts 156,000
Donations - Talimbika Church of Christ 20,000
- Malawi Against Physical Disabilities 230
Specific provision for bad debts 45,000
Amortization of premium 6,000
Cost of two pairs of shoes given to the Managing Directors’
daughters who had just been selected to university 85,000
Sundry expenses – all allowable 428,000
Total 5,585,000

(6) Interest costs comprise:

K
Interest on overdraft 2,540,000
Penalty for late payment of income tax 1,300,000
Total 3,840,000

(7) During the year, the total annual salary of all staff who were on pension amounted to
K3, 560, 000.

(8) In 2014, Khombedza paid a premium of K240, 000 to acquire a right to produce “Nike”
shoes for 40 years. This is being written off in the accounts over a period of 40 years.

(9) Capital allowances for the year were agreed at K145, 500.

Required:

(i) State the tax year in which the taxable income of Khombedza Investments will be
assessed. 1 Mark

(ii) Compute the taxable income for Khombedza Investments for the year ended
31 December, 2015. (Show clearly your calculations where necessary).
12½ Marks

Continued/……

Page 3 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

73 / 312
(b) The Managing Director (MD) of Khombedza Investments has heard that according to the
Malawi Taxation Act, sections 36A and 41B, any business that exports goods is entitled to
claim allowances. The MD is curious and wants to start exporting shoes manufactured by
her company to neighbouring countries and overseas.

Required:

(i) Mention any one “traditional good” in Malawi in the context of the Export
Incentive Act. 1 Mark

(ii) Explain to the MD the conditions that must be met by an exporter in order to claim
export allowances. 2 Marks

(iii) In line with the Export Incentive Act, explain how export allowances are calculated.
2 Marks

(c) State any three transactions that require a tax clearance certificate. 1½ Marks
(TOTAL : 20 MARKS)

Continued/……

Page 4 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

74 / 312
2. (a) Kadango & Sons Investments has the following capital allowances information
on record for the year ended 31 March 2016:

Summary of opening Tax Written Down Values (TWDV).

31 March 2015
ITEM
TWDV [K’ 000]
Buildings
Factory Building- FB1 90,000

Plant and Machinery

Mixing Machine MM1FB 45,000

Motor Vehicles
Fleet of Delivery Vans 39,000

Computers 8,700

Office Furniture 20,600

During the year to 31 March 2016, the following transactions took place:

(1) Construction of a new building which is now being used for packaging
goods. The building cost the company K12,000,000.

(2) Construction of a staff house for K1,300,000. The house is allocated to the
Production Manager.

(3) New mixing machine BLPP25S for K7,500,000 and a second hand sifting
machine SM11LZ45RP were purchased for K12,500,000.

(4) Kadango & Sons made a gain of K1,848,000 by selling one of the delivery
vans from the fleet, Registration MGH788ER at K6,200,000 on
28 February 2016, which had been purchased on 16 June 2013.

(5) A new Land Cruiser MJ566SER was purchased for K9,250,000.

(6) Some office chairs with a TWDV of K10, 700, 000 caught fire during the
year and the insurance company settled a claim for K9,950,000.

(7) Office chairs were bought for K1,842,000.

Continued/……
Page 5 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

75 / 312
 Required:

(i) Calculate the tax written down value of the van registration number MGH788ER
that was sold. 1½ Marks

(ii) Calculate the gain or loss realised on the insurance claim settlement for the office
chairs which had been destroyed by fire. 1½ Marks

(iii) Compute the total capital allowances claimable by Kadango & Sons Investments for
the year ended 31 March 2016. 11 Marks

(b) Fathers’ Pride Bakery entered into an agreement with Sisko Mills of South Africa. The
terms of the agreement were that Fathers’ Pride Bakery would be the sole distributer of their
flour in Malawi. Due to that arrangement, Fathers’ Pride Bakery was granted an agency
discount of 2.5% on the cost of any consignment they order.

In November 2015, Fathers’ Pride ordered a large consignment of bread flour, under the
agreement, for sale in readiness for the Christmas festive season. The gross cost of the bread
flour, before any customs and other duties and other deductions, was an equivalent of K235,
580, 000. Due to the size of the consignment, Sisko Mills offered a quantity [bulk] discount
of 5% on the cost of the bread flour.

Required:

(i) Describe two types of discounts that are recognized in the valuation of goods for
customs purposes in Malawi. 2 Marks

(ii) Calculate, separately, the values of the agency discount and the quantity (bulk)
discount. 2 Marks

(iii) Compute the value of the bread flour which Fathers’ Pride Bakery ordered
in November 2015, for customs valuation purposes. 2 Marks
(TOTAL : 20 MARKS)

Continued.,,,,,,

Page 6 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

76 / 312
 SECTION B

ANSWER ANY THREE QUESTIONS

3. (a) (i) State the circumstances under which initial expenditures of a new business can be
allowed as a deduction from a taxpayer’s assessable income, according to Section
41 of the Malawi Taxation Act. 3 Marks

(ii) Why does Section 54 of the Malawi Taxation Act require every person doing
business to keep sufficient records of his income and expenditure, and for how long
should such records be kept? 2 Marks

(iii) Mention any five types of income that are exempt from tax under the first
schedule of the Taxation Act. 5 Marks

(b) Ms Fulo Chimbiya is in the business of importing second hand cars from Japan and selling
them in Malawi. In March 2016, she imported a second hand Toyota Corolla, for sale with
the following further transactions:

K
Value of the vehicle for duty purposes 2,000,000
Import duty 500,000
Import excise 750,000
Import VAT 536,250
Expenses incurred in collecting the vehicle from Tanzania 135,560
The car was eventually sold at 4,430,000
Required:

(i) Describe the three value added tax special schemes which are operated to deal with
different categories of business and transactions and are recognized by the VAT
legislation. 3 Marks

(ii) Calculate the output value added tax for Ms Fulo Chimbiya on the second hand
Toyota Corolla she procured in March 2016. 7 Marks
(TOTAL : 20 MARKS)

Continued/……

Page 7 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

77 / 312
4. (a) (i) State two classifications of insurance business and explain how each
classification is treated for tax purposes. 4½ Marks

(ii) Kambewa Trading sells assorted hardware in Ntandile Market. During the tax
year ended 30 June 2016, total sales were K9,960,000.

Required:

(1) Describe any four rules that govern the operations of Turnover tax. 4 Marks

(2) Give examples of any three categories of income on which Turnover tax is not
applicable. 3 Marks

(3) Calculate the Turnover tax that Kambewa Trading should have paid in the month
of April 2016 (assume income was accruing evenly). 2 Marks

(b) (i) When is rental income assessable? 1 Mark

(ii) A taxpayer received rental income from her tenant amounting to K191,250
(net).

Required:

How much is she supposed to include in her income tax return? 2½ Marks

(c) State the penalties that tax officers who break the oath of secrecy are liable to. 3 Marks
(TOTAL : 20 MARKS)

Continued/……

Page 8 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

78 / 312
5. (a) Sections 63 – 82(d) of the Customs and Excise Act details the requirements for
the administration, charging and collection of excise duty.

Required:

(i) Define the word “duty point” in terms of the Customs and Excise Act. 2 Marks

(ii) Name any four examples of locally approved and manufactured goods on which
excise duty is collected in Malawi. 4 Marks

(iii) Describe the type of records which a taxpayer, dealing in excisable goods, is
supposed to maintain in line with the Customs and Excise Duty Act. 2 Marks

(b) (i) Tayamba Limited secured a foreign loan from the United States of America
(USA) amounting to $12,000 (twelve thousand dollars) on 1st November 2015
to be used as working capital in its business. The agreement was that the loan
would be repaid in two equal installments.
The repayment and other details were as follows:

Date Description Amount Exchange Rate

01/11/15 Loan secured $12,000 K550/1$
31/12/15 Repayment of loan $6,000 K650/1$
31/01/16 Repayment of loan $6,000 K760/1$

Required:

Compute the foreign exchange gains or losses on the repayment of the foreign loan
to be included in the assessable income of Tayamba Limited. 3 Marks

(ii) State two conditions that must be fulfilled by a taxpayer in order to enjoy tax roll
over relief. 3 Marks

(c) Mr. James Phiri is employed by a bank in Lilongwe. The following were his annual income
details for the tax year ended 30 June, 2016:

(1) Salary K11,880,000

(2) Net interest received from a locally registered bank K443,600
(3) Net dividends received from a Malawian registered company K65,600
Required:

Compute the tax liability for Mr James Phiri for the tax year ended 30 June, 2016.
6 Marks
(TOTAL : 20 MARKS)

Page 9 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

79 / 312
6. (a) There are two principles of taxation, namely: the source principle and the residence
principle.

Required:

(i) Define the term “Tax”. 2 Marks

(ii) Distinguish the “source” from the “residence” principle in taxation. 4 Marks

(b) (i) State any two reasons why withholding tax legislation was introduced. 2 Marks
(ii) Define “a person resident in Malawi” in terms of the Taxation Act. 3 Marks

(iii) Yobanduka Investments is a minibus operator who owns a fleet of minibuses in

Zolozolo Township in Mzuzu. For the quarter ended December, 2015, he was
supposed to pay provisional tax for his minibuses amounting to K170,000.
However, due to cashflow problems, he only managed to pay K120,000.

Required:
(1) State the date by which Yobanduka Investments should have paid the
provisional tax for his fleet of minibuses in line with the tax law. 1 Mark

(2) State the rate at which a penalty for late payment of provisional tax is
charged. 2 Marks

(3) Compute the penalty that Yobanduka Investments was supposed to pay,
assuming he did not pay the balance by the due date. 3 Marks

(c) State three circumstances under which the Commissioner General is empowered, under
Section 89 [1] of the Taxation Act, to estimate a taxpayer’s income. 3 Marks
(TOTAL : 20 MARKS)

Continued/……

Page 10 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

80 / 312
7. (a) State any two prerequisites for one to be appointed a public officer at the Malawi
Revenue Authority (MRA). 1 Mark

(b) Shabs Limited is a company that operates from Lilongwe, but was incorporated in Kenya.
The taxable income for the company for the year ended 30 June, 2016 was K29,546,500.

Required:

Compute the tax payable by Shabs Limited for the year ended 30 June, 2016. 1 Mark

(c) State any two functions of customs duty in Malawi 1 Mark

(d) Mention four options available to the Malawi Revenue Authority, which they can use to
sufficiently and effectively serve a document or tax assessment on a person. 4 Marks

Continued/……

Page 11 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

81 / 312
(e) Tawalezi Macademia Estate has three senior employees: Tamara Phiri, Chalo Kanama
and Kwali Banda. The company provided housing fringe benefits to the employees
during the tax year ended 30 June 2016, as follows:

The estate provided housing to all the three employees. The nature of the housing and
relevant details are given below:
Annual
Employee Nature of Building Rental value
(K)
Tamara Phiri Rented- furnished 3,000,000
Chalo Kanama Rented-unfurnished 1,200,000
Kwali Banda Estate owned- furnished 4,500,000

Annual Salaries

The following were the annual salaries for the employees for purposes of fringe benefit tax
calculations.

Employee Salary
K
Tamara Phiri 12,000,000
Chalo Kanama 10,000,000
Kwali Banda 13,800,000

Required:

(i) State two occasions when the fringe benefits tax is not payable by an employer
even if fringe benefits have been provided to an employee by the employer.
2 Marks

(ii) Compute the fringe benefits tax payable by Tawalezi Macademia Estate for the
quarter ended 30 June 2016. 10 Marks

(iii) State the due date for payment of the fringe benefits tax that you have computed in
(ii) above. 1 Mark
(TOTAL : 20 MARKS)

END

Page 12 of 12
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

82 / 312
 STRICTLY CONFIDENTIAL

2016 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 10(B): TAXATION

TUESDAY 6 DECEMBER 2016 TIME ALLOWED : 3 HOURS

9.00 AM - 12.00 NOON

SUGGESTED SOLUTIONS

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

83 / 312
 SECTION A

ANSWER BOTH QUESTIONS IN THIS SECTION

1. (a) (i) 2015/2016 tax year or 1 July 2015 to 30 June 2016. 1 Mark

(ii) Khombedza investments taxable income for the year ended 31 December 2015

K ‘ 000 K ‘ 000
Loss before taxation (2,225)
Add:
Provision for stock losses 32 ½
Depreciation 1,550 ½
Loss on sale of van 65 ½
Police fines 10 ½
General provision for doubtful debts 156 ½
Donations – Talimbika church of Christ 20 ½
Donation – MAP 0.23 ½
Amortization of premium 6 ½
Shoes for MD daughters 85 ½
Interest on late payment of income tax 1,300 ½
Pension costs 2,945 ½ 6,169.23
Less:
Dividend received 12 ½
Allowance on donation to Government health centre. (Note 1) 250 ½
Pension allowable (Note 2) 534 ½
Premium allowable (Note 3) 9.6 ½
Capital allowances 145.5 ½ (951.1)
Taxable Income 2,993.13

Note 1: Allowance for donating towards construction of health centre (50% x 500,000) ½ = 250,000
Note 2: Pension allowable is lower of ½
Company contribution ½ = K2,945,000; and

15% of salaries of employees on pension ½ (15% x K3,560,000) ½ = K534,000

Note 3: Premium allowable will be the lower of ½

lease (40 years) life ½ and 25 years ½ (K240,000 / 25) ½ = K9,600

Note: To Markers

Premium

 If a candidate deducts K3,600 from the loss (instead of adding K6,000 and deducting
K9,600 as above) award

Page 2 of 16
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

84 / 312
 Pension

 If a candidate adds K2,411,000 to the loss (instead of adding K2,945,000 and

deducting K534,000 as above) award

(b) (i) Traditional goods include manufactured tobacco and tobacco refuse, tea,
coffee and cane sugar.

(ii) Conditions to be fulfilled for an exporter to claim export allowances

(1) The tax payer must register with Malawi Investment and Trade
Centre (MITC) under the Export Incentives Act;

(2) The exporter must be exporting non- traditional goods.

(iii) Export allowances to be claimed and how they are calculated:

1. - Export allowance
- 15% taxable income from export revenue.

2. - Transport allowance
- 25% of international transport expenses on exporting the
goods.
5 Marks

(c) - transferring of land and buildings

- renewal of business resident permit

renewal of certificate of fitness for commercial vehicles

- renewal of certificate of registration under the national construction

industry Act

- renewal of professional business licences and permits of medical

practitioners or dentists, legal practitioners, engineers and architects who
are engaged in private practice on their own or in partnership with private
practitioners.

- getting withholding tax exemption certificate.

(TOTAL : 20 MARKS)

2. (i) Tax written down value (TWDV) of the van MGH788ER that was sold

Sale proceeds K6,200,000

Less: Gain K1,848,000 ½ Mark

Page 3 of 16
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

85 / 312
 TWDV K4,352,000 ½ Mark

(ii) Gain or loss realised on insurance claim settlement for the office chairs which
caught fire.

Sale Proceeds [insurance refund] K 9, 950, 000 ½ Mark

Tax written down value K10, 700, 000 ½ Mark
Loss K 750, 000 ½ Mark

Page 4 of 16
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

86 / 312
 (iii)..Capital allowances claimable by Kadango & Sons Investments for the year ended 31 March 201 6.
INVESTMENT INITIAL ANNUAL
ITEM O TWDV ADDITIONS DISPOSALS BALANCE C TWDV
ALLOWANCES ALLOWANCES ALLOWANCES
K’ 000 K’ 000 K’ 000 K’ 000 K’ 000 K’ 000 K’ 000 K’ 000
Factory Buildings
Factory Building - FB 1 90, 000 - - 90, 000 - - 4, 500 [½] 85, 500
New building - 12, 000 [½] - 12, 000 12, 000 [½] - - -
Staff housing - 1, 300 [½] - 1, 300 - 130 [½] 65 [½] 1,105
Sub – Total 90, 000 13, 300 - 103, 300 12, 000 130 4, 565 86, 605
Plant & Machinery
Mixing Machine – MM1FB 45, 000 - - 45, 000 - - 4, 500 [½] 40, 500
Mixing Machine – BLPP25S - 7, 500 [½] - 7, 500 7, 500 [½] - - -
Sifting Machine – - 12, 500 [½] - 12, 500 5, 000 [½] - 1, 250 [½] 6, 250
SM11LZ45RP
Sub – Total 45, 000 20, 000 65, 000 12, 500 5, 750 46, 750
Motor Vehicles
Fleet of Delivery Vans 39, 000 - [4, 352] [½] 34, 648 - - 6, 929.6 [½] 27, 718.4
Land Cruiser MJ566SER - 9, 250 [½] - 9, 250 - -½ 1, 850 [½] 7, 400
Sub – Total 39,000 9, 250 [4, 352] 43,898 8,779.6 35,118.4
Computers
Dell E620 Intel Inside 8,700 - - 8,700 - - 3,480 [½] 5,220
Office Furniture
Office Chairs and tables 20, 600 1,842 (½) [10, 700] [½] 11,742 - 368.4 (½) 1, 174.2 [½] 10,199.4
[ 11 Marks]

Page 5 of 16
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

87 / 312
(b) (i) Two types of discounts recognized for customs valuation purposes are:

(1) Allowable discounts are those which are not given because of
commercial relationship i.e. cash and quantity discounts. 1 Mark

(2) Non allowable discounts are those that are given because of
commercial relationships i.e. agent discount or distributor discount.
1 Mark
2 Marks

(ii) Calculations of discounts

(1) Agency discount

Gross purchase = K235,580,000
Agency discount rate = 2.5%
Value of Agency discount (2.5% x K235,580,000) ½ = K5,889,500 ½

(2) Quantity discount

Gross purchase = K235,580,000
Quantity discount rate = 5%
Value of Agency discount (5% x K235,580,000) ½ = K11,779 000 ½

(iii) Value of bread flour for customs valuations purposes

Gross purchase = K235,580,000 ½

Less: Allowable discounts = K11,779,000 ½
Value of bread flour for Customs Valuation purposes = K226,3801,000 1
_______
6 Marks

(TOTAL : 20 MARKS)

Page 6 of 16
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

88 / 312
 SECTION B:

ANSWER ANY THREE QUESTIONS

3. (a) (i) Circumstances under which new business initial expenditures can be
allowed as a deduction from a taxpayer’s assessable income.

(1) The taxpayer must be a manufacturer [must be in a manufacturing

business; 1 Mark

(2) The expenditure must have been incurred not more than 18 months
before beginning the business; and 1 Mark

(3) The expenditure must be the one that should have been allowed
had it been incurred after beginning business. 1 Mark
3 Marks

(ii) - Taxpayer must keep sufficient records of income and expenditure

to enable the Commissioner General to readily ascertain the
taxpayers assessable income and allowable deductions. 1 Mark

- Tax payer shall retain records of income and expenditure for at

least seven years. 1 Mark
2 Marks

(iii) Five incomes that are exempt for tax under the first schedule are:

(1) The revenues of local authorities 1 Mark

(2) Receipts and accruals of land and agricultural banks established by

any law of Malawi 1 Mark

(3) Receipt and accruals of a registered trade union 1 Mark

(4) Receipt and accruals of clubs and associations formed or operated

solely or principally for social welfare, civic improvement or other
similar purposes, if the receipt and accruals are not divided
amongst the members. 1 Mark

(5) Receipts and accruals of statutory corporations that may be

specified by the Minister 1 Mark

(6) interest up to K10,000 per annum received by or accrued to or in

favour of an individual 1 Mark

Page 7 of 16
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

89 / 312
 (7) capital gains on shares traded on the stock exchange if the shares
have been held by the taxpayer for at least a year 1 Mark

(8) capital gains realized by an individual on disposal of personal and

domestic assets not used in connection with any trade 1 Mark

(9) gratuity, pension and other benefits granted by Government to a

former president or former vice president 1 Mark

(10) salary and emoluments of president and vice president received

from Government 1 Mark

(11) Amount up to K50,000 paid by an employer to an employee who

has been declared redundant. 1 Mark
Any five, 1 Mark each = 5 Marks
10 Marks

(b) (i) Three value added tax special schemes:

(1) VAT on property transaction. Under this scheme, there is no VAT

on rental or sale of residential properties however rent and disposal
of commercial property is subject to VAT at the standard rate.
1 Mark

(2) Margin scheme for second hand car dealers. Under this scheme, a
seller of second hand vehicle will be required to calculate VAT on
the difference between the buying price and the selling price of the
vehicle. 1 Mark

(3) VAT retail scheme. Under this scheme, a trader is not required to
issue a VAT invoice for each and every sale which the business
makes, as normally required. 1 Mark
3 Marks

(ii) Output value added tax for Ms Fulo Chimbiya on the second hand Toyota
Corolla she procured in March 2016

Selling price of the vehicle = K4,430,000 1

Buying price
(2,000,000 + 500,000 + 750,000 + 536,250 + 135,560) 1 = K3,921,810 1
+Difference = K 508,190 1
Output VAT = 16.5% x 508,190 2
= K83,851 1
_______
7 Marks
(TOTAL : 20 MARKS)
Page 8 of 16
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

90 / 312
4. (a) (i) (1) Two classifications of insurance business

Life assurance, and ½ Mark

General insurance or short term insurance. ½ Mark

(2) The receipts and accruals of general insurance business are taxable.
½ Mark
(3) The receipts and accruals of life assurance business are exempt
under the first schedule. ½ Mark

(4) Under section 63(2) investment income. ½ Mark

excluding income attributable to pension, ½ Mark
provident and ½ Mark
annuity fund, ½ Mark
arising from the business of life assurance is liable to tax ½ Mark
4½ Marks
(ii) Kambewa Trading

(1) Four rules that govern the operations of Turnover tax

- It is payable by small taxpayers with turnover below a
specified turnover (currently below K10 million) 1 Mark

- Tax is payable monthly on the turnover realized 1 Mark

- Turnover tax is charged at 2% of total turnover that month

1 Mark
- It is a final tax, any withholding tax deducted is credited
1 Mark
4 Marks

(2) Three categories of income on which Turnover tax is not applicable

- Rental income, management or professional or training fees
1 Mark

- Income of incorporated companies 1 Mark

- Any income which is subject to final withholding tax

1 Mark
3 Marks

Page 9 of 16
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

91 / 312
 (3) Turnover tax that Kambewa Trading should have paid in the month
of April 2016

Turnover for April 2015 (K9,9960,000/12) = K830,000 1 Mark

Turnover tax rate = 2%
Turnover tax (2% x 830, 000) = K16,600 1 Mark
2 Marks

(b) (i) Rental income is taxable when it is received or receivable, whichever is

earlier. 1 Mark

(ii) Amount received net = K191,250

Since withholding tax on rental is currently at 15%, therefore K191,250 is

equivalent to 85% (100% - 15%) ½ Mark

However a taxpayer is required to include the gross amount in the tax

return. ½ Mark

The gross amount, which is 100%, will be:

(100%/85% x 191, 250) 1 Mark

= K225, 000 2½ Marks
2 Marks

(c) - any person who takes up an office before taking an oath of secrecy shall
be liable to a fine of K20. 1 Mark

- if a person who has taken an oath of secrecy reveals any matter to any
person which has come to his knowledge in the course of carrying out his duties
under the Act he shall be liable to a penalty of K1,000 and 1 Mark
- 2 years imprisonment. 1 Mark
3 Marks
(TOTAL 20 : MARKS)

5. (a) (i) Duty point is the point at which duty becomes payable. 2 Marks

(ii) Four examples of locally approved and manufactured goods on which

Excise duty is collected in Malawi:

(1) Cigarettes
(2) Snuff [pipe tobacco, cigarette tobacco]
(3) Beer produced by factory method i.e. Carlsberg green

Page 10 of 16
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

92 / 312
 (4) Opaque beer i.e. chibuku
(5) Ethanol
(6) Potable spirits i.e. Malawi Gin
(7) Manufactured Tobacco
(8) Vessels for pleasure
(9) Motor cars
Any four, 1 Mark each = 4 Marks

(iii) The Excise trader is required by law to keep:

(1) Stock records of receipt or disposal of raw materials 1

(2) Stock records of receipt or disposal of finished goods sufficient to

satisfy the Officer that all excisable goods manufactured are duly
accounted for 1
2 Marks

(b) (i) Tayamba Limited foreign exchange gains or losses computation

(1) Payment on 31 December, 2015

$6,000 x 550 – $6,000 x 650 ½ Mark
K3,300,000 – K3,900,000 ½ Mark
Exchange loss K600,000 ½ Mark

(2) Payment on 31 January, 2016

$6,000 x 550 – $6,000 x 760) ½ Mark

(K3,300,000 – K4,560,000) ½ Mark
Exchange loss K1,260,000 ½ Mark
3 Marks

(ii) Two conditions that must be full filed by a taxpayer in order to enjoy tax
roll over relief are:

(1) The Taxpayer whose asset has been disposed of, shall acquire a
qualifying replacement asset (asset related in service as use to the
asset so disposed) 1 Mark within 18 months from the date of the
disposal of the business asset. 1 Mark

(2) Shall declare in his return of income. 1 Mark

3 Marks

Page 11 of 16
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

93 / 312
 (c) Tax liability for Mr James Phiri

Salary K11,880,000 ½ Mark

Gross interest received (100% /80% x 443,600) ½ K 554,500 ½ Mark
Dividends K 0 ½ Mark
Assessable income K12,434,500
Less: Interest tax free portion K 10,000 ½ Mark
Taxable income K12,424,500 ½ Mark
First K 240,000 0% K 0 ½ Mark
Next K 60,000 15% ½ K 9,000 ½ Mark
Balance (12,424,500 – 300,000)
K12,124,500 30% ½ K3,637,350 ½ Mark
Tax liability K3,646,350 ½ Mark
_______
6 Marks

(TOTAL : 20 MARKS)

6. (a) (i) (1) Tax is defined as an imposition made by governing bodies on income and
wealth of persons under their jurisdiction. 2 Marks

(2) - The source principle holds that income and wealth that is subject to
tax in that country is only that which has been earned from that
country regardless of the residence status of the taxpayer. 2 Marks

- The residence principle holds that persons are taxed or their entire
world wide income and wealth in the country in which they are
resident [regardless of the source] 2 Marks
4 Marks

(b) (i) Two reasons why withholding tax legislation was introduced:

(1) Accelerating tax collection. 1 Mark

(2) Bringing into the tax net certain incomes which are not declared by the
recipients. 1 Mark
Any two, 1 Mark each = 2 Marks

Page 12 of 16
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

94 / 312
(ii) A person resident in Malawi is:

(1) Any individual present in Malawi for an aggregate of 183 days or more in
any 12 months period commencing or ending in the year of assessment
concerned. 1 Mark

(2) Any trust, estate or partnership established or otherwise organized under

any written law of Malawi; and 1 Mark

(3) Any company incorporated in Malawi. 1 Mark

(iii) Yobanduka Investments

(1) 25th January, 2016 1 Mark

(2) The rate of penalty is determined as listed below:

If the amount of provisional tax unpaid

as a percentage of total provisional tax Penalty
liability
Does not exceed 10% Nil (½)
Exceeds 10% but does not exceed 50% 25% of the unpaid provisional tax (1)
Exceeds 50% 30% of the unpaid amount of
provisional tax (½)
2 Marks

(3) Computation of penalty payable by Yobanduka Investments

Provisional tax payable K170,000 ½
Provisional tax paid K120,000 ½
Underpayment K 50,000
Amount underpaid as a percentage of provisional tax liability
(50,000 /170, 000 x 100) = 29.41% ½ Mark

29.41% is more than 10% but less than 50%, therefore the penalty rate to
be used will be = 25% ½ Mark

Penalty = (25% x 50, 000) ½ Mark

= K12, 500 ½ Mark
3 Marks

Page 13 of 16
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

95 / 312
 (c) The Commissioner general can estimate a taxpayer’s income in the following
circumstances

(i) When a taxpayer defaults in furnishing any return or information; 1 Mark

(ii) When the Commissioner general is not satisfied with the return or information
furnished by the taxpayer; and 1 Mark

(iii) When the Commissioner General has reason to believe that the taxpayer is about
to leave Malawi without furnishing a return or satisfactory return. 1 Mark
_______
3 Marks

(TOTAL : 20 MARKS)
7. (a) Prerequisites

- must be residing in Malawi ½ Mark

- must be appointed by the company to represent that company ½ Mark
- the appointment must be approved by the Commissioner General. ½ Mark
Any two, ½ Mark each = 1 Mark

(b) Taxable income = 29,546,500 ½

Tax rate = 35%
= 35% x 29,546,500 ½
Tax payable = K10,341,275

(c) Two functions of customs duty in Malawi:

(i) Source of revenue for Government; ½ Mark

(ii) Protection of domestic industry from foreign competition; and ½ Mark

(iii) Discouraging importation and consumption of certain undesirable goods i.e

marijuana and illegal firearms. ½ Mark
Any two, ½ Mark each = 1 Mark

(d) Options available to Malawi Revenue Authority which they can use to sufficiently and
effectively serve a document or tax assessment to a person are:

(i) Personally serve the person; 1 Mark

(ii) Leave with an adult person who is resident at that person’s last known place of
abode, office or place of business; 1 Mark

Page 14 of 16
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

96 / 312
 (iii) Send by post addressed to such last known place of abode, whether inside or
outside Malawi, office or place of business; and 1 Mark

(iv) Affix at the last known place of abode, office or place of business and the
person will be deemed to have received the notice on the 14th day after affixing.
1 Mark
4 Marks

(e) Two occasions when fringe benefit tax is not payable even if the employer provides
fringe benefits to employees:

- When the employer is government; 1 Mark

- When the fringe benefits are given to an employee whose salary before fringe
benefits are less than the tax free salary threshold (currently at K240,000 per
annual/K20,000 per month); and 1 Mark
2 Marks

Page 15 of 16
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

97 / 312
Page 16 of 16
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

98 / 312
 EXAMINATION NO._________________

2015 EXAMINATIONS - KNOWLEDGE LEVEL

PAPER P6 : PRINCIPLES OF TAXATION

THURSDAY 4 JUNE 2015 TIME ALLOWED: 3 HOURS

9.00 AM - 12.00 NOON

INSTRUCTIONS:

1. You are allowed 15 minutes reading time before the examination begins during which you should
read the question paper and, if you wish, make annotations on the question paper. However, you are
not allowed, under any circumstances, to open the answer book and start writing or use your
calculator during this reading time.

2. Number of questions on paper – 7.

3. The paper is divided into TWO Sections, A and B. BOTH questions

to be answered in Section A and ANY THREE from Section B.

4. Each question carries 20 marks.

5. Use of non-programmable calculators is allowed.

6. You are provided with the following:

(i) A set of tables containing rates of tax on taxable income (Table 1).
(ii) Rates of capital allowances (Table 2).
(iii) Penalty rates for underpaid provisional tax (Table 3).

7. Begin each answer on a fresh page.

8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE INVIGILATOR.

This question paper contains 12 pages

This question paper must not be removed from the examination hall.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

99 / 312
 1

SECTION A

ANSWER BOTH QUESTIONS IN THIS SECTION

1. Mbobo Resources Limited is a Malawian company and is involved in the mining of

Niobium in Mulanje. The company makes up its accounts to 30 June annually. The
company‟s latest income statement for the year ended 30 June 2014 is as follows:

K K
Turnover 56,500,800
Less
Mining and processing costs 16,300,000
Exports costs 7,450,000 23,750,000
Gross profit 32,750,800

Less
Administration expenses 7,900,600
Finance costs 13,175,900
Marketing costs 13,809,000 34,885,500
(2,134,700)
Other income 1,642,900
Exchange gain 1,760,465
Interest receivable 275,000 3,678,365
Net profit before tax 1,543,665

The following additional information is available in connection with these financial

results:

(1) Mining and processing costs include:

K
Depreciation 1,265,100
Amortisation of purchase of mining rights 1,138,900
Salaries and wages 8,600,400
Provision for production losses 675,900
Other allowable costs 4,619,700
16,300,000

Salaries and wages include a provision for severance pay of K1,890,000 for the current
year and an additional amount of K265,200 which relates to excess paid over the
provision made in the prior year.

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

100 / 312
 2

(2) Export costs include:

K
Salaries and wages 2,600,700
VAT on packaging materials 75,900
Packaging materials 770,500
Other allowable costs 4,002,900
7,450,000
(3) Administration expenditure includes the following:

Legal fees: K
- Debt collection 775,000
- Renewal of lease 265,700
- Stamp duty on increase in share capital 84,200
1,124,900

Subscription and donations: K

- Mining International magazine 11,500
- Donation to Red Cross 450
- Donation to old people‟s home 144,500
- Donation to the University of Malawi Appeal fund 540,000
- Other allowable costs 7,204,150
7,900,600
(4) Finance costs include the following:

Professional fees: K
- Audit fees 4,315,000
- Property revaluation 1,165,000
Interest payable:
- Bank overdraft 767,800
- Late payment of tax 222,900
- On loan to finance feasibility study on new processing methods 556,500
- Other allowable costs 6,146,700
13,173,900
(5) Marketing costs include the following:
K
- Depreciation 1,265,000
- Fringe benefits tax 675,000
- Provision for doubtful debts (1% of debtors) 468,000
- Bad debts written off 324,000
- Entertainment of customers 442,100
- Other allowable costs 10,634,900
13,809,000
Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

101 / 312
 3

(6) Other income consists of the following:

Commissions K
Sale of waste 588,000
Sale of motor vehicle 279,500
775,400
1,642,900
(7) Exchange gain is from the conversion of year-end debtors to Malawi Kwacha

(8) Interest receivable consists of the following:

K
Staff Loans 115,000
Bank interest 160,000
275,000
Interest received from the bank is stated gross.

(9) During the year, the company paid K4,600,400 for the access to mineral deposits.
This expenditure has been capitalized and is amortized in the mining and processing
costs.

(10) The company purchased the following assets during the year:
K
Processing machinery 12,765,800
Motor vehicles 29,710,000
Computers 3,290,800
Extension to the factory 32,494,000
Motor lorry 11,700,000
All the assets bought were brought into use during the year

These processing machinery would have no value to the company after the
mine has ceased to be worked. However, the buildings would have
alternative use

(11) A motor vehicle which was bought in 2011 for K3,750,000 and has a nil book value
and a tax written down value of K689,100 as at 1 July 2013 was sold for K775,400
which was included in other income.

(12) The tax written down value of the company‟s fixed asset as at 1 July 2013 were:
K
Industrial buildings 12,865,700
Plant and equipment 3,980,600
Motor vehicles 4,845,500
Motor lorries 7,800,000
Furniture & fittings 765,800
Computers 871,300
Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

102 / 312
 4

Required:
(a) Calculate capital allowances to be claimed by Mbobo Resources Limited for the year
ended 30 June 2014. 12 Marks

(b) Compute the taxable income of Mbobo Resources Limited for the year ended 30 June
2014. 8 Marks
(TOTAL : 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

103 / 312
 5

2. (a) Explain the circumstances or rules of determining when a taxable supply of goods
or services, including supply on a continuous basis or hire purchase arrangement,
is deemed to occur for purposes of charging value added tax (VAT). 8 Marks

(b) Katoni Limited is involved in wholesale business.

The company is registered for value added tax (VAT).In the month of October
2014, the company entered into the following transactions (where applicable, all
income is shown exclusive of VAT and all expenses are shown inclusive of
VAT):

(1) Sold laundry soap worth K4,500,000 to Zonse ndi Moyo shop.

(2) Sold tyres to a customer worth K656,000.

(3) Sold clothing worth K425,000 to Zonse ndi Moyo shop.

(4) The managing director travelled to Lilongwe on business where he stayed at

Kalikuti Hotel for three days. He paid K257,962 for accommodation and
meals.

(5) The amount paid for electricity used in his business was K104,850.

(6) Paid salaries for the month totaling K1,725,000.

(7) Bought motor vehicle spares worth K64,075.

(8) Paid for fuel worth K155,000 for use in company motor vehicles for the month.

Required:

(i) State how each of these transactions will be dealt with for the purpose
of submitting Katoni Limited‟s VAT return for the month of October 2014.
4 Marks

(ii) Calculate the VAT payable or VAT credit for the month of October, 2014.
3 Marks

(iii) State, in general terms, the rules regarding the deductibility of input tax
from output tax charged on taxable supplies and services. 4 Marks

(iv) State the penalties, if any, that are due for the late submission of a VAT
return. 1 Mark
(TOTAL : 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

104 / 312
 6

SECTION B

ANSWER THREE QUESTIONS ONLY FROM THIS SECTION

3. Zokoma, Zili and Mtsogolo are in partnership trading as produce merchants. The
partnership agreement provides for the sharing of profits after paying partners‟ salaries in
the ratio of [Link] respectively.

The annual partners‟ salaries for the year ended 30 June 2014 were:
K
Zokoma 2,280,000
Zili 1,750,000
Mtsogolo 1,270,000

The results of the partnership for the year ended 30 June 2014 showed a profit before
taxation of K3,262,000, after charging (crediting) the following items:
K
Depeciation 1,386,100
Accounting fee 1,115,000
Staff costs 3,465,000
Executive management costs 6,905,000
Repairs and maintenance 775,000
Sundry business charges 545,000
Exchange gains (325,600)

The following additional information is available in connection with the affairs of the
partnership:

(1) All the partners work in the business. Mtsogolo is its general manager. The
executive management costs are made up of the salaries for the partners and
school fees of K1,605,000 paid for Mtsogolos‟s son. No fringe benefits tax has
been paid on this amount.

(2) The partnership rents a warehouse from Zokoma for the storage of produce. The
annual rental for this property is K1,225,000. Withholding tax was duly deducted
on this payment. The rental is included in sundry business charges.

(3) Included in repairs and maintenance is the cost of repairing Zili‟s wife‟s personal
car. The repair costs incurred were K200,600.

(4) Exchange gains are made up of:

K
Conversion of year end balances 254,050
Realised on receipt of sales proceeds 71,550
325,600
Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

105 / 312
 7

(5) Capital allowances claimable on the packing machinery and motor vehicles have
been agreed at K480,055.

(6) As the partnership does not have a withholding tax exemption certificate,
withholding tax was deducted from all of its sales proceeds. The total tax withheld
during the year amounted to K658,200.

(7) Provisional tax paid by the partnership during the year amounted to K325,980.

(8) PAYE has been deducted on all salaries paid by the partnership, including those
of the partners and remitted to the Malawi Revenue Authority (MRA) on the due
dates.

The other income of the partners and their wives for the year of assessment ended
30 June 2014, none of which is connected with the partnership in any way, was as
follows:
Zokoma Zili Mtsogolo
K K K
Director‟s fee 540,000 - -
Interest gross (no tax was deducted) 480,000 225,000 125,500
Wive‟s income: Salary 800,000 - 992,000
Rental, net of allowable expenses - 855,000 -

Withholding tax of 10% had been deducted on payment of the director‟s fee. Zili‟s wife
rental income was received without deduction of withholding tax.

Required:

(a) Compute the partnership‟s taxable profits for the year ended 30 June 2014 and
show how these profits will be distributed amongst the partners. 9 Marks

(b) Calculate the tax payable by or refundable to each of the partners and refundable,
if any, to Zokoma for the year ended 30 June 2014. 11 Marks
(TOTAL : 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

106 / 312
 8

4. (a) Sections 58 to 64 of the Malawi Taxation Act set out the provisions for the
taxation of „special trades and cases‟.

Required:

(i) List the types of expenditure incurred by taxpayers who are engaged in
pastoral, agricultural or other farming operations which are specifically
allowable in determining their taxable incomes. 3 Marks

(ii) Explain how the taxable income of a consumer cooperative society, other
than those covered under section 59 of the Taxation Act, is computed.
3 Marks

(iii) Gawa Limited is a company that procures and sells produce locally in
Malawi. Recently, the company has been exporting maize and groundnuts
to Mozambique and has, in the process, generated foreign exchange for
the country. For the year ended 31 March 2014, Gawa had the following
results in respect of foreign currency transactions:
K‟000
Realized gains 14,200
Realized losses 12,945
Unrealized gains 2,670
Unrealized losses 1,450

Required:

Compute the amount of foreign exchange gains which are assessable, and
amount of losses which are deducible for Gawa Limited for the year ended
31 March 2014. 4 Marks

(b) The Taxation Act allows a taxpayer to deduct both foreign exchange losses and
capital losses from assessable income in order to arrive at the taxable income.

Required:

(i) Mention the situations where the deductions of each of the losses (foreign
exchange losses and capital losses) are restricted. 3 Marks

(ii) Name the limitations in each of the two losses mentioned in (i) above.
3 Marks

(iii) State the circumstances under which the restrictions or limitations do not
apply in each of the two losses (foreign exchange losses and capital loss).
4 Marks
(TOTAL : 20 MARKS)

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

107 / 312
 9

5. (a) The following transactions relate to Malembo Limited in the year ended 30 June
2013.

(1) Received bank interest totalling K645,000 from which withholding tax
had been deducted.

(2) Paid K860,000 in audit fees from which withholding tax was deducted.
(3) Made several payments to suppliers from which a total of K1,450,500.00
in withholding tax was deducted.

(4) Paid fringe benefits tax on the benefits given to its employees totalling
K454,000.

(5) Paid total provisional tax of K865,400.

(6) Paid value added tax totalling K385,985.

The total tax adjusted profits of Malembo Limited, for the year ended 30 June
2013 were K4,524,000.

Required:

(i) State by which date the various taxes relevant to transactions (1) to (5)
above, would have been due and payable. 3 Marks

(ii) Calculate the income tax payable by Malembo Limited for the year ended
30 June 2013, clearly indicating the effect of the various taxes referred to
in transactions (1) to (6) above, on the amount of corporate tax payable. In
the case of any amounts which you treat as having no effect, state the
reason for treating them in the way you have done. 5 Marks

(b) Kang‟oma Limited is a company involved in the provision of accounting

consultancy services. The company has a Managing Director, a Finance Manager
and a Market Development Manager and also employs five consultants and a
messenger. The monthly salaries payable to its employees are as follows:

K
Managing Director 3,200,000
Finance manager 1,200,000
Market Development Manager 1,000,000
Chief Accountant 460,000
Sales Manager 340,000
Human Resources Officer 470,000

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

108 / 312
 10

The company provided the following benefits to its senior staff in the year ended
31 December 2013:

(1) A furnished house for the Managing Director for which the company paid
a monthly rental of K355,000. Unfurnished houses for the Finance
Manager, Human Resources Manager and the Market Development
Manager. The company paid a monthly rental fee of K125,000 for each of
these managers‟ houses.

(2) The company provided a motor vehicle for the use of its Managing Director,
a Prado which cost the company K25 million when it was bought in the year
2011.

(3) The company paid for utilities (water, electricity and telephone) of K75,000
per month in total for its Managing Director. The company also paid the
Finance Manager, Human Resources Manager and Market Development
Manager an allowance of K40,000 each per month towards their utility bills.

(4) The company paid school fees for the children of the Managing Director
and the Finance Manager. The fees paid during the year were:

K
January 2013 2,435,000
July 2013 2,465,000
October 2013 2,635,000

The fees were paid to Takulandirani International Private School.

Required:

(i) Prepare Kang‟oma Limited‟s fringe benefits tax return for the
quarter ended 31 December 2013. 9 Marks

(ii) State the administrative provisions with regard to the taxation of

fringe benefits provided by an employer to its employees. 3 Marks
(TOTAL : 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

109 / 312
 11

6. (a) Chikangawa Farms Limited grows timber for commercial purposes. The timber
takes 20 years to reach maturity. The following information is available in respect
of the timber grown on one of its farms:

Area planted 600 hectares

Year of planting 1992
Cost of planting K11,500,000
Annual maintenance costs from 1992 K765,000
The timber from this farm has never been sold before.
300 hectares were harvested in August 2013.

The yield was 200 cubic metres of timber per hectare and this was sold at a price
of K650 per cubic metre.

The area harvested was replanted in January 2014 at a cost of K15,345,000.

Required:

(i) State the rules governing the alternative method of determining the taxable
income derived from timber growing that Chikangawa Farms Limited can
opt for, in accordance with s.58(4) of the Tax Act; 5 Marks

(ii) In accordance with the provisions of the alternative method mentioned in

(i) above, calculate the taxable income or loss for Chikangawa Farms
Limited for the year to 30 June 2014 (assume the income is only from this
farm). 7 Marks

(b) How is the taxable income of an agricultural producer co-operative society,

registered under Malawi law, which is not exempt from tax, determined? 3 Marks

(c) Define the terms “reorganization” and “qualified reorganization” as stipulated in

the Taxation Act. 5 Marks
(TOTAL : 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

110 / 312
 12

7. (a) (i) Mention the term used to describe the levying of income tax by more than
one country on the same income of a taxpayer? 1 Mark

(ii) How does the scenario in (i) above arise? 2 Marks

(b) Niyasu General Dealers are a firm operating in Malawi. In August 2013 the firm
became indebted to a supplier based in Kenya to the tune of $12 million on
account of merchandise supplied. Due to foreign exchange shortages the firm
managed to pay $7 million in January 2014 and $2 million in June 2014. The
balance of $3 million was included in the accounts for 30 June 2014 at K1,
350,000,000 using an exchange rate of $1 =K 450 .

Required:

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

August 2013 : $1 = MK380

January 2014 : $1 = MK400
June 2014 : $1 = MK430
5 Marks

(ii) State whether the foreign exchange loss on the outstanding $3 million
which was converted to K1.350 billion and included in the accounts to 30
June 2014 is an allowable deduction. Give reasons for your answer.
1 Mark

(c) (i) What is the significance of correctly completing a certificate of origin

under the Malawi Customs Tariffs? 3 Marks

(ii) Under the Customs and Excise Act, what are the functions of customs
officers? 2 Marks

(iii) State the six methods of Customs Valuation under the new GATT
valuation system. 6 Marks
(TOTAL : 20 MARKS)

END

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

111 / 312
 STRICTLY CONF IDENTIAL

2015 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 10(B): TAXATION

THURSDAY 4 JUNE 2015 TIME ALLOWED: 3 HOURS

SUGGESTED SOLUTIONS

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

112 / 312
 1

SECTION A

ANSWER BOTH QUESTIONS IN THIS SECTION

1. (a) MBOBO RESOURCES LIMITED

Capital Allowances Computation

Industrial Plant & Motor Motor Furniture

Building Equipment vehicles Lorries & Fittings Computers
K’000 K’000 K’000 K’000 K’000 K’000
TWDV 1/7/2013 12,865.7 3980.6 4845.5 7,800 765.8 871.3
Additions 32,494 12765.8 29710 11,700 3290.80
Disposals -___ _______ 689.1 _____ _____ ______
45,359.70 16746.40 33866.4 19,500 765.8 4162.10
Investment Allowance 32,494.0 12765.8 - - -
Initial Allowance - 2,340 - 658.16
Annual Allowance 643.28 398.06 6773.28 3,900 76.58 1664.84
12,222.415 3582.52 27093.12 13,260 689.22 2671.52

Summary of Allowances
Investment 45259.8
Initial 2998.16
Annual 13456.04
Capital gain (86.3)_
61,627.70
Sale of motor vehicle
Sales proceeds 775400
TWDV of vehicle 689,100
Capital gain 86,300

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

113 / 312
 2

(b) Computation of taxable income

K K
Net profit before tax 1,543,665
Add: Mining and processing costs
- Depreciation 1,265,100
- Amortisation of rights 1,138,900
- Provision for production losses 675,900
- Provision for severance pay 1,890,000
Export cost
- VAT on packaging ………… 75,900

Administration expenditure

- Stamp duty 84,200

- Donation to old people’s home 144,500

Finance costs
1,165,000
- Property revaluation 222,900
- Interest on late payment of tax

Marketing costs
1,265,000
- Depreciation 675,000
- Fringe benefit tax 468,000
- Provision for doubtful debts 9,070,400
9,838,665

Less allowable expenses

1,760,465
- Exchange gain
- Mining expenditure 4,600,400
- Access to mineral deports 12,765,800
- Purchase of machines 42,127,485
- Capital allowances 775,400
- Profit on sale of vehicle 62,029,550
(52,190,885)

Note to Markers

Treatment of purchase of machinery can either be treated as capital allowances or

as deduction for taxable income in either case.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

114 / 312
 3

2. (a)(1) A supply of goods or services occurs:

(i) In case of goods and services appropriated to own use, on the date on
which the goods or services are first applied to own use.

(ii) Where the goods or services are supplied by way of gift, on the date on
which ownership in the goods passes or the performance of the services is
completed.

(iii) In any other case the earliest date on which:

- the goods are removed from the premises, or

- the goods are made available to the person to whom they are supplied
or
- the services are supplied or rendered or
- payment is received for all or part of the supply or
- a tax invoice is issued.

(2) Where supplies are made on a continuous basis or by metered supplies the time of
supply shall be the time of each determination of supply or meter reading.

(3) The supply of goods under higher purchase agreement or finance lease it will be
on the date goods are made available under the hire purchase agreement or lease
finance.

(4) Where:

(i) goods are supplied under a rental agreement; or

(ii) goods or services are supplied under an agreement, the goods shall be
treated as successively supplied and each successive supply occurs on the
earliest of the date on which payment is due or is received.

(b) (i) The following items will be dealt with as follows:

(1) Sale of laundry soap will be on the line of zero rated items as VAT is
chargeable on laundry soap at zero rate.

(2) Sale of tyres will be shown under taxable supplies and VAT is
chargeable.½

(3) Clothing is taxable supply and VAT will therefore be charged.

(4) The hotel expenses are not regarded as a taxable input; as such any
VAT suffered is not claimable as input VAT.

(5) The VAT on electricity is claimable and this expense will be

included. ½

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

115 / 312
 4

(6) Salaries are not subject to value added tax.

(7) The VAT would be claimable on motor vehicle spares if used wholly,
exclusively and necessarily for purposes of the business.

(8) Fuel is a petroleum product which is exempt from VAT.

(ii) Calculation of VAT payable

Sales VAT
K K
Tyres 656,000 x 16.5 108,240
Clothing 425,000 x 16.5 70,125
178,365
Input

Electricity (gross) 104850 x 16.5/116.5 14,850

Motor spares 64,075 x 16.5/116.5 9,075
23,925
VAT payable 154,440

(iii) At the end of the period, a taxable person may deduct from the output tax
due for the period, VAT on goods and services purchased in Malawi or
goods and services imported by the taxable person and used wholly,
exclusively and necessarily in the course of their business provided that:

(1) the supply is a taxable supply;

(2) in respect of purchases made in Malawi; the taxable person is in

possession of a tax invoice and

(3) in respect of importation or removal of goods from bonded warehouse,

the taxable person is in possession of the relevant customs entries
indicating that VAT was paid.

No input tax shall be deducted on purchases or imports in respect of

exempt supplies by the taxable person.

No input tax deduction shall be taken more than once nor shall it be taken
after the expiration of a period of 12 months from the date the deduction
accrued.

A taxable person does not qualify for an input tax deduction in respect of a
taxable supply or import of motor vehicles or motor vehicle spare parts
unless the taxable person is in the business of dealing in or hiring of motor
vehicles, or selling motor vehicle spare parts; however motor vehicles and
motor vehicle spare parts used wholly, exclusively and necessarily for
business will qualify for deduction.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

116 / 312
 5

A taxable person does not qualify for an input tax deduction in respect of a
taxable supply in respect of entertainment, including restaurant, meals and
hotel expenses, unless the taxable person is in the business of providing
entertainment.

Where a taxable supply to, or an import of goods by, a taxable person is

partly for business or partly for personal or other use, the amount of input
tax allowed as a credit shall be restricted to that part of the supply t hat
relates to the business use.

(iv) A taxable person who fails to submit a return on due date is liable to a
penalty of K20,000 and a further penalty of K1,000 for each day the return
is not submitted.

SECTION B
ANSWER THREE QUESTIONS ONLY FROM THIS SECTION

3. (a) Computation of taxable profits of the partnership

Year ended 30 June 2014
K’000 K’000
Profit before tax 3,262
Add: Items not allowed
Partners salaries
Zokoma 2,280
Zili 1,750
Mtsogolo 1,270
Depreciation 1,386.1
School fees 1,605.0
Repairs – Zili’s wife car 200.6 8,491.70
11,753.7
Less:
- Capital allowance 480.055
- Unrealised exchange gain 254.050 734.105
Profits adjusted for taxation 11,019.595

Allocation of taxable profits

Zokoma Zili Mtsogolo Total

K’000 K’000 K’000 K’000
Partners salaries 2,280 1,750 1,270 5,300
School fees 1,605 1,605
Repairs to car ______ 200.6 ______ 200.6
2,280 1950.6 2,875 7105.6
Share of profits 1565.598 1565.598 782.799 3913.995
3845.598 3516.198 3657.799 11019.595

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

117 / 312
 6

(b) Calculation of tax payable by each of the partners

Zokoma Zili Mtsogolo

K K K
Business income 3845.598 3516.198 3657.795
Directors fee 540 - -
Interest 480 225 125.5
Warehouse rental 1225 - -
Wife’s unearned income -___ 855 -__
6090.60 4596.20 3783.30
Tax
First 240,000 % 0 0 0
Next 60,000 9,000 9,000 9,000
Balance over 1,737,180.40 1,288.860 1,044,990
1,746,180 1,297,860 1,053,990
Less

Withholding tax Directors fees (54,000)

PAYE (W1) (603,000)
Withholding tax sales (263,280)
Withholding tax on rental (183,750)
Provisional tax (130,392)
Tax payable/(refundable) 511,758

Working 1
Zokoma
K
PAYE 2,280,000
First K300,000 9,000
Balance over K300,000 594,000
603,000

4. (a) (i) The special allowances given to taxpayers who are engaged in pastoral,
agricultural or other farming operations are that the expenditure on the
following will be fully (100%) allowable as a deduction from the taxable
income of such farmers when incurred.

- the stumping levelling and clearing of lands;

- works for the prevention of soil erosion;
- boreholes;
- wells;
- aerial and geophysical surveys; and
- any water control works connected with the cultivation and growing
of sugar or such other crop that the minister may approve.

(ii) The taxable income of consumer cooperative societies other than those
covered under section 59 shall be deemed to be an amount equivalent to

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

118 / 312
 7

six and one quarter per centum of the turnover of such co-operative
society and shall be charged at the rate applicable to companies.

(iii) Foreign exchange gains assessable and allowable and deductible

K
Assessable gains 14,200,000 realized gain
Loss deductible
Excess of realized loss over unrealized gain
K
Realized loss 12,945,000
Unrealized gain 2,670,000
Unrealized loss 1,450,000 1,220,000
Loss deductible 11,725,000
Loss carried forward 2,475,000

(b) (i) Restriction on foreign and capital losses

- Foreign exchange losses – when there are unrealized foreign

exchange gains.

- Capital losses – when there are realized capital gains.

- When both foreign exchange losses and capital losses are not
realized.

(ii) Limitations

- Foreign exchange losses – amount allowed is restricted to the

excess of foreign exchange losses over unrealized foreign
exchange gain.

- Capital losses – amount allowed is restricted to the lower of the

capital loss and the realized capital gain.

- Both of them must be realized.

(iii) No restriction

- Foreign exchange losses in the year of assessment in which the

taxpayer dies or ceases to exist.

- Capital losses – in the year in which the taxpayer ceases to exist or

dies.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

119 / 312
 8

5. (a) (i) (1) to (3) withholding tax must be paid over on the 14 th of the month
following the month it was deducted.

(4) Fringe benefits tax must be paid on the 14 th of the month following the
end of the quarter to which it relates.

(5) Provisional tax is paid quarterly, and must be paid within 25 days from
the end of the quarter.

(6) VAT must be paid by 25th of the month following the month to which
it relates.

(ii) Amount payable by Malembo Limited for year ended 30 June 2013

K
Taxable profits 4,524,000
Tax at 30% 1,357,200
Less:
Provisional tax 865,400 ½
Withholding tax and interest received 129,000 ½ 994,400
Balance of tax payable 362,800

The payment of withholding tax on payments to suppliers has no effect on

the tax payable. Such withholding tax is claimable against the income tax
payable by the recipient.

Fringe benefits tax is not allowable as deduction, and is added back to

arrive at the taxable profits. Nor is it deductible from income tax payable.

Value added tax is an indirect tax which is ultimately paid by the consumer.
VAT is not an expense to the business and is accounted for under a separate
system using monthly returns.

(b) (i) Fringe benefits return

Month 1 Month 2 Month 3 Total
K K K K
Housing (W1) 759,000 759,000 759,000 2,277,000
Motor vehicles (W2) 312,500 312,500 312,500 937,500
Others (W3) 1,392,500 75,000 75,000 1,542,500
Total 2,464,000 1,146,500 1,146,500 4,757,000
Tax at 30% 1,427,100

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

120 / 312
 9

Workings

W1
Taxable Value
Housing benefit K
Managing Director – furnished house
Rental value K355,000 or
12% of salary 3,200,000 = 384,000 whichever is higher 384,000
Finance Manager/Market Manager/HR Officer
Rental 125,000 each or 10% of salary 375,000
Finance Manager 1,200,000 x 10% = 120,000
Market Manager 1,000,000 x 10% = 100,000
HR Officer 470,000 x 10% = 47,000 _______
Total Value 759,000

W2 K

Motor vehicle
15% of value of 25m
= 3,750,000 per annum/12 = per month 312,500

W3

Others
Utilities - Managing Director 75,000
School fees - October 2013 only at 50%
2635000 x 50% ½ 1,317,500
October 1,392,500

(ii) Every employer, other than government, who provides benefits to any of
its employees is liable to pay fringe benefits tax on the total value of such
benefits at the rate specified in the eleventh schedule currently at 30%,
subject to the regulations under the Act.

The employer is required to calculate the total taxable value of the fringe
benefits provided to its employees and pay the fringe benefits tax on such
value at the applicable rate by the 14 th of the month, following the end of
each quarter.

The employer is required to make records available for inspection to an

officer authorized by the Commissioner General, for purpose s of verifying
that the FBT is correctly calculated.

The employer is liable to penalties for delayed payment of fringe benefits

tax payable.

Fringe benefits tax is not payable on employees who earn not more than
K240,000 per annum.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

121 / 312
 10

6. (a) (i) A farmer who derives taxable income from growing timber may elect that
such taxable income shall be determined in accordance with the following
rules:

- the cost of planting the timber shall be carried forward until such
timber reaches maturity.

- to the cost of planting there shall be added annually until the

timber reaches maturity an amount equal to 5% of such costs.

- wherever timber which has been grown by such a farmer is sold,

there shall be deducted from proceeds of such sale a proportionate
part of the sum of the cost of planting and the total of the fixed
percentage added annually, and the remaining amount shall be
included in the taxable income or assessed loss as the case may be
of such a farmer.

- there shall be added to the taxable income or deducted from the

assessed loss, as the case may be of such farmer in each year of
assessment the amount of the annual fixed percentage.

- there shall be deducted from the taxable income or added to the

assessed loss as the case may be of such farmer all expenditure
including deductions made under Section 33 and 34 and the second
schedule incurred in the maintenance and upkeep of such timber.

(ii) Calculation of the taxable income or loss for the year ended 30 June 2014
K
Cost of planting timber 11,500,000
Add fixed percentage
11,500,000 x 5% x 22 (carried forward annually) 12,650,000
Total cost 24,150,000

Proportionate cost of timber sold

300/600 = 50% x 24,150,000 12,075,000

Sale proceeds of timber

200 x 300 = 60000 cu

Price per cubic K650 x 60,000 39,000,000
Sales proceeds 39,000,000
Less: proportionate cost and fixed percentage 12,075,000
Cost of maintenance not deducted
765,000 x 22 years 16,830,000
Taxable income 10,095,000

(b) Every producer’s cooperative agricultural society registered under the Malawi
laws which is not exempt from income tax on some of its assessable income shall
submit proposals to the Commissioner for the determination of its income.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

122 / 312
 11

The Commissioner will consider the proposals submitted and if he is of the

opinion that the taxable income calculated approaches closely what must be
expected if the general provisions of the tax Act were applied may accept the
proposals and that will be taken as the taxable income of the society for such tax
year.
Should the proposals not be acceptable, the commissioner may determine the
taxable income in such manner as appears to him to be most appropriate taking
into account the circumstances of the case.

(c) Reorganization and qualified reorganization for the purposes of the taxation
Act means:

- Reorganization means a mere, change in a company’s form; a

recapitalization of a company; a combination of two or more companies
a division of a company into two or more companies; the acquisition of at
least eighty percent of the equity interest in a company in exchange solely
for, equity interests in the acquiring company; and the acquisition of
at least eight percent by value, of the assets of a company in exchange
solely for equity interest the acquiring company.

- Qualified reorganization means a reorganization pursuant to a written plan

undertaken for valid business purposes and not avoidance by any person
involved in the reorganization.

7. (a) (i) Double taxation.

(ii) Double taxation arises because:

- Countries use different bases for tax purposes.

- One country could use source i.e. Malawi.
- Another country could use residence i.e. UK
- A person who resides in UK but has income sourced from Malawi may
be taxed twice on the same income.

(iii) Exchange gains/loss

K
(1) January 2014 payment

(7m x 380) – (7m x 400)

2,660,000,000 – 2,800,000,000 ½ – 140,000,000

June 2014 payment

K
(2 x 380) – (2 x 430) ½
760,000,000 – 860,000,000 ½ = -100,000,000
Total loss 240,000,000

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

123 / 312
 12

(2) The exchange loss on 1.3 billion debt was not allowable as deduction
because it was unrealized.

(b) (i) It enables the customs officers to establish the correct rate of duty in
accordance with preferential provisions of the customs tariff.

It enables them to establish whether the goods are subject to open general
licence (OGL) importation that does not require an import licence of
specific licence.

It also enables customs officials to correctly collect trade statistics for the
national statistics office.

(ii) To receive and process monthly returns and exercise remittances.

To send reminders to excise traders in arrears of payment.
To visit excise traders and verify the correctness of the excise returns.
To advise the Commissioner of any irregularities or omissions by excise
traders.

(iii) Transaction value method : is the price actually paid or payable for the
imported item.

Transaction value of identical goods: is the customs value sold for the
import of the same country of importation and imported at or about the
same time as the goods being valued.

Transactional value of similar goods: the value of goods alike in nature.

Deductive method

Fall back method

Computed value method

END

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

124 / 312
 EXAMINATION NO._________________

2015 EXAMINATIONS – TECHNICIAN PROGRAMME

PAPER TC10(B) : TAXATION

THURSDAY 3 DECEMBER 2015 TIME ALLOWED: 3 HOURS

9.00 AM - 12.00 NOON

INSTRUCTIONS:

1. You are allowed 15 minutes reading time before the examination begins during which you should
read the question paper and, if you wish, make annotations on the question paper. However, you are
not allowed, under any circumstances, to open the answer book and start writing or use your
calculator during this reading time.

2. Number of questions on paper – 7.

3. The paper is divided into TWO Sections, A and B. BOTH questions to be answered in Section A and
ANY THREE from Section B.

4. Each question carries 20 marks.

5. Use of non-programmable calculators is allowed.

6. You are provided with the following:

(i) A set of tables containing rates of tax on taxable income (Table 1).
(ii) Rates of capital allowances (Table 2).
(iii) Penalty rates for underpaid provisional tax (Table 3).

7. Begin each answer on a fresh page.

8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE INVIGILATOR.

This question paper contains 11 pages

This question paper must not be removed from the examination hall.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

125 / 312
 SECTION A- ANSWER BOTH QUESTIONS

1. Namwera Limited, whose main business is production of blankets, is incorporated in

Malawi. A summarized profit and loss account for the year ended 31 December 2014 is
as listed:

Details Note K’000 K

Sales 21, 300, 000
Cost of sales 1 16, 800, 000
Gross profit 4, 500, 000
Other income 2 25, 200

Expenses
Depreciation 9, 500
Audit fees 2, 400
Bad debts 750
Doubtful debts 3 900
Traffic fines 2, 250
Repairs and maintenance 4 15, 000
Fringe benefits tax 3, 300
Staff expenses 5 12, 450
Directors fees 3, 600
Company incorporation expenses 520
General expenses 6 23, 600
74,270
Profit before tax 4, 450,930

Notes:

1. Included in the cost of sales is K7,500,000 depreciation of plant and equipment.

2. Included in other income is a net dividend of K5,400,000 received from a

company in which Namwera Limited bought shares lately.

3. Doubtful debts comprise specific provisions of K220,000.

4. Repairs and maintenance costs include an amount of K380,000 for maintenance

of a vehicle of the General Managers‟ wife who does not work for Namwera
Limited.

5. Staff expenses include a provision of K3,630,000 for staff bonuses and K2,100,000
employer‟s pension contribution for staff to unapproved pension scheme.

Continued/......

Page 2 of 11
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

126 / 312
6. General expenses include stock write-off of K4,600,000 which was stolen during
the year but the insurance company compensated the company for the loss in
question. The rest were allowable for tax purposes.

7. Capital allowances were agreed at K12,350,000.

Required:

(a) (i) Compute the taxable income for the accounting year to 31 December,
2014 and calculate the amount of tax payable assuming the taxable
income computed was K4,467,640. 15 Marks

(ii) In which tax year is the taxable income going to be assessed? 1 Mark

(iii) By what date is Namwera Limited expected to have submitted the income
tax return? 1 Mark

(b) Section 69 of the Taxation Act states that any person carrying on trade in Malawi
may be required to submit to the Commissioner other returns, other than the
income returns which may be required by the Commissioner.

Required:

Mention three information declarations that these additional returns should

contain. 3 Marks
(TOTAL : 20 MARKS)

Continued/......

Page 3 of 11
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

127 / 312
2. The tax written down value of business assets of Mawawa Limited as at 30 June 2014 was as
follows:
Agreed Rate for
Item Tax written down value annual allowance

K‟000
Factory buildings 75,000 5%
Plant and machinery 65,000 10%
Motor vehicles 45,800 20%
Furniture and fittings 14,500 10%
Computers 5,600 40%

During the year to 30 June 2015 the following transactions took place:

(1) Some plant and machinery with a tax written down value of K10,700,000 and net book
value of K6,700,000 were disposed of on 30 June 2014 for K9,900,000. New
replacement plant and machinery was bought during the same year at K11,800,000.

(2) One motor vehicle with a net book value of K5,500,000 and a tax written down value of
K2,900,000 was sold during the year for K3,940,000. A new vehicle, a 3 tone lorry, was
purchased at a cost of K17,500,000.

(3) Office furniture with zero net book value but a tax written down value of K154,000 was
sold for K260,000.

(4) Two new computers were purchased at a total cost of K1,280,000.

Required:
(a) Calculate the accounting profits or accounting losses resulting from the asset disposals
stated above. 4½ Marks

(b) Calculate the capital gains or losses resulting from the asset disposals stated above.
4½ Marks

(c) State the effects of an accounting loss as well as an allowable capital loss on the tax
computation. 2 Marks

(d) Calculate the capital allowances, initial or investment allowances as the case may be, and
annual allowances, on the business assets stated above for the financial year to 30 June
2015. 7 Marks

(e) State the circumstances under which a capital loss is not deductible. 2 Marks
(TOTAL : 20 MARKS)

Page 4 of 11
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

128 / 312
 SECTION B
ANSWER ANY THREE QUESTIONS

3. (a) The following transactions relate to Chilala Limited in the year ended 30 June
2014:

(1) Received bank interest totaling K455,000 from which withholding tax had
been deducted.

(2) Paid K750,000 in audit fees from which withholding tax was deducted.

(3) Made several payments to suppliers from which a total of K1,365,450

withholding tax was deducted.

(4) Paid fringe benefits tax on the benefits given to its employees totaling
K125,000.

(5) Paid total provisional tax of K 800,425.

(6) Paid value added tax totaling K865,785.

The total tax adjusted profits of Chilala Limited, for the year ended 30 June 2014,
were K5,565,000.

Required:

(i) State by when should the various taxes relevant to transactions (1) to (6)
above, be due and payable. 4 Marks

(ii) Calculate the income tax payable by Chilala Limited for the year ended 30
June, clearly indicating the effect of the various taxes referred to in
transactions (1) to (6), above on the amount of corporate tax payable. In
the case of any amounts which you treat as having no effect, state why.
6 Marks

Continued/……

Page 5 of 11
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

129 / 312
(b) Mr Kadango is a registered taxpayer and operates the following tax schemes:

(1) PAYE (Pay as you earn)

(2) Provisional tax
(3) Fringe Benefits Tax
(4) Withholding tax

Required:

(i) State when the tax in each of the four schemes is payable. 4 Marks

(ii) State the rate at which a penalty for late payment is charged in respect of
each of the above tax schemes. 6 Marks
(TOTAL : 20 MARKS )

Continued/……

Page 6 of 11
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

130 / 312
4. On 1 July 2013, Mada and Chitsanzo entered into a partnership to trade in produce under
the name Madachi Trading. The partnership agreement states that they will share profits
in the ratio 60:40. This profit sharing ratio has been based on their respective capital
contributions to the business and will be computed after charging both salaries and
interest on capital.

The income and expenditure statement for Madachi Trading for the year ended 30 June
2015, its first year of operation, is as follows:

Note K K
Income
Capital introduced:
by Mada 1,500,000
by Chitsanzo 900,000
Sales of produce 7,600,000
Bank interest received (gross) 225,000
Sales of used packing materials 175,000
10,400,000
Less: Expenditure
Salaries 1 5,300,000
Purchase of produce 3,400,000
School fees for Chitsanzo‟s child 2 665,000
Rental for warehouse 1,150,000
Printing and stationery 82,400
Maintenance of vehicles 3 1,340,000
Fuel 849,000
Interest on capital 240,000 (13,026,400)
Loss for the year (2,626,400)

Notes:

1. Included in salaries are the salaries paid to the partners as follows:

K
Mada 1,850,000
Chitsanzo 1,150,000

2. The school fees for Chitsanzo‟s child had been paid in cash to Chitsanzo.

Continued/……

Page 7 of 11
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

131 / 312
Other information:

(1) The partnership paid provisional tax of K460,000 during the year.

(2) Mada has no other source of income. However, Chitsanzo had other income in the
year ended 30 June 2015 as follows:
K
Interest from a savings account in a local bank (net amount received) 60,000
Dividends from a local company 86,500
Sale of his personal car (not a partnership asset) which had been
bought for K2,000,000 in 2014 890,000

Required:

(a) State how the income of a partnership is taxed, including who is responsible for
submitting the tax return(s). 3 Marks

(b) Compute the taxable profit of the partnership for the year ended 30 June 2015.
4 Marks
(c) Show the allocation of the partnership profit between the partners. 5 Marks

(d) Calculate the tax to be paid by or refunded to Chitsanzo for the year ended
30 June 2015. 8 Marks

Note: Indicate the items which are not taxable or not allowable by the use of a zero.
(TOTAL : 20 MARKS)

Continued/……

Page 8 of 11
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

132 / 312
5. (a) Sections 58 to 65 of the Malawi Taxation Act set out the provisions for the
taxation of „special trades.

Required:

(i) List the types of expenditure incurred by taxpayers who are engaged in
pastoral, agricultural or other farming operations which are specifically
allowable in determining their taxable incomes. 3 Marks

(ii) Explain the special basis that taxpayers who are engaged in timber
growing operations may use to determine their taxable income. 6 Marks

(iii) (1) State whether or not the taxable income of a club or society which is
organized or operated solely or principally for pleasure or recreation
is liable to tax. 1 Mark

(2) Explain how any taxable income is determined and taxed, if your
answer was affirmative in (1) above. 2 Marks

(b) Define the term mining expenditure as stated in part (II) of the Second Schedule
to the Taxation Act. 4 Marks

(c) Any person carrying out duties under the Taxation Act is required to observe
secrecy. However, the duty to observe secrecy is waived in certain circumstances.

Required:

State any four circumstances under which the duty to observe secrecy is waived
for persons carrying out duties under the Taxation Act. 4 Marks
(TOTAL : 20 : MARKS)

Continued/......

Page 9 of 11
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

133 / 312
6. (a) (i) List five general conditions that all traders dealing with goods and services
that attract Excise tax must comply with according to the C ustoms and
Excise tax law. 2½ Marks

(ii) For purposes of Customs duty, the law demands that all goods must be
cleared at the border port except in some circumstances where the
importer is allowed to clear them at an inland port.

Required:

Name five reasons/circumstances that may necessitate the Commissioner

General of the Malawi Revenue Authority to allow an importer to clear
their goods at an inland port. 2½ Marks

(b) State the circumstances under which each of the following may be allowed as a
deduction from a taxpayer‟s assessable income:

(i) Bad debts 3 Marks

(i) Doubtful debts 3 Marks
(iii) Research and experiments 3 Marks
(iv) Individual donations 3 Marks
(v) Repairs 3 Marks
(TOTAL : 20 MARKS)

7. (a) Mangunda Private Limited is a cassava chips processing company located in

Mangunda, and is registered for value added tax (VAT). In the month ended
March 2014, the company entered into the following transactions:

(1) Sold taxable supplies to customers as follows:

Sales to VAT registered customers K3,250,000 and K675,000 to unregistered

customers.

(2) Bought a brand new pick-up vehicle from Toyota at K13,000,000.

(3) Bought stationery worth K165,000 from suppliers who are not registered
for VAT.

(4) Entertained major customers at a local hotel at a cost of K46,200.

(5) Bought cassava from local farmers at a cost of K4,150,000.

(6) Paid for electricity and telephone at K232,300 and K144,200, respectively.

Page 10 of 11
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

134 / 312
 (7) A consultant on production processes was hired from Brazil. The
consultant had no local office; as a result he was not registered for VAT.
He invoiced K5,250,000 for the work done.

(8) Wrote off K275,600 in debtors as a bad debt. This amount was due from a
customer who has been put into liquidation.

(9) Received a deposit of K250,000 on sale to a customer amounting to K745,000.

Unless specifically stated, all the above persons are registered for VAT, while the
transactions are stated exclusive of VAT.

Required:

(i) Explain the VAT treatment of each of the above transactions.

(Note: Calculations are not required). 8 Marks

(ii) Calculate the VAT payable or any excess carried forward for the period
ended 31 March, 2014. 7 Marks

(Note: Indicate items on which no VAT is due, or where no VAT claim is possible,
by the use of a zero).

(b) (i) Define the term “fringe benefit” as stipulated in the Taxation Act.
2 Marks

(ii) An employer operating a fringe benefits tax scheme is required, under the
Fringe Benefits Tax Regulations to keep proper records of the scheme.

Required:

What information would you expect to see in such a record? 3 Marks

(TOTAL : 20 MARKS)

END

Page 11 of 11
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

135 / 312
 STRICTLY CONFIDENTIAL

2015 EXAMINATIONS - TECHNICIAN LEVEL

PAPER TC10(B) : TAXATION

THURSDAY 3 DECEMBER 2015 TIME ALLOWED: 3 HOURS

9.00 AM - 12.00 NOON

SUGGESTED SOLUTIONS

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

136 / 312
 SECTION A

ANSWER BOTH QUESTIONS IN THIS SECTION

1. (a) (i) Computation of taxable income and tax payable

Mk’ 000 K
Profit before taxation 4,450,930 1
Add: depreciation 9, 500
Depreciation 7, 500
General provisions-doubtful debts (900 – 22) 680
Traffic fines 2, 250
Repairs and maintenance 380
Fringe benefits tax 3, 300
Provision for staff bonus 3, 630
Contribution to unapproved pension scheme 2, 100
Incorporation expenses 520
Insurance claimed stocks 4, 600 34,460
4,485,390
Less: capital allowances 12, 350
Dividend 5, 400 17, 750

Taxable profits 4,467,640

Tax payable 30% x 4,467,640 1,340,292

(ii) 2014/2015 tax year

(iii) 30 June, 2015

(b) Any three declarations

 Payments made to any person in respect of any share or interest in such trade.

 Money received by him from any person on deposit for any fixed time or period
with or without interest.

 Any other information which is in his possession in respect of income received

by himself or any other person.

 A copy of the resolution declaring the dividend.

Page 2 of 14
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

137 / 312
  A statement containing in respect of each person to whom a dividend has
accrued:

(i) name and address of the person

(ii) the amount of the dividend accrued
(iii) the date on which the dividend was declared.
)

2. (a) Calculation of accounting profits and accounting losses

Net Book Accounting

Proceeds Value Profit/(Loss)
K’000 K’000 K’000
Plant and machinery 9,900 ½ 6,700 3,200
Motor vehicle 3,940 ½ 5,500 (1,560)
Furniture & fittings 260 ½ 0 260
(b) Calculation of capital gains or capital losses
Capital
Proceeds TWDV Gain/(Loss)
K’000 K’000 K’000
Plant and machinery 9,900 ½ 10,700 (800)
Motor vehicle 3,940 ½ 2,900 1,040
Furniture & fittings 260 ½ 154 106

(c) An accounting loss is an add back item in the tax computation it increases the
taxable income or reduce computed loss.

On the other hand, an allowable capital loss is a deductible item in the tax
computation. It reduce the taxable income or increases computed losses.

(d) Capital allowances computation

Factory Plant & Motor Furniture &

Buildings Machinery Vehicles Fittings Computer
K’000 K’000 K’000 K’000 K’000
75,000 65,000 45,800 14,500 5,600
TWDV 30/6/14
__-___ 11,800 17,500 -__ 1,280
Additions 75,000 76,800 63,300 14,500 6,880
Disposals -___ 10,700 2,900 154 -__
Less: Investment 75,000 66,100 60,400 14,346 6,880
Allowance - 11,800 - - 256
Initial allowance - - 3,500 -
Annual All 3,750 5,430 12,080 14,346 2,752
71,250 48,870 44,820 12,911 3,872

Page 3 of 14
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

138 / 312
(e) A capital loss is not tax deductible where it is not realized: or if realized, where it is in
respect of an asset not used in trade or business

There is no realized capital gain

Page 4 of 14
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

139 / 312
 SECTION B

ANSWER THREE QUESTIONS ONLY FROM THIS SECTION

3. (a) Chilala Limited

(i) (1) to (3) Withholding tax must be paid within 14 days of the month
following the month it was deducted.

(4) Fringe benefits tax must be paid within 14 days of the

month following the end of the quarter to which it relates.

(5) Provisional tax is paid quarterly, and must be paid within

30 days from the end of the quarter.

(6) Value added tax is payable within 25 days of the month

following the month to which it relates.

(ii) K K
Taxable profits 5,565,000
Tax at 30% 1,669,500
Less: Provisional tax 800,425
Less: Withholding tax on (20% x 455,000)
Less: interest received 91,000 891,425
Balance of tax payable 778,075

The payment of withholding tax on payments to suppliers has no effect on the tax
payable. Such withholding tax is claimable against the income tax payable by the
recipient.

Fringe benefits tax is not allowable as a deduction, and is added back to arrive at
the taxable profits. Nor is it deductible from income tax payable. Therefore no
effect.

Value added tax is an indirect tax which is ultimately paid by the consumer. VAT
is not an expense to the business and is accounted for under a separate system
using monthly returns. Therefore no effect.

Page 5 of 14
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

140 / 312
 (b) (i) The tax in the four schemes is due for payment as follows:

(1) PAYE – 14 days after the end of the month in which the tax was
deducted.

(2) Provisional tax – 25 days after the end of each quarter in the year
of assessment.

(3) Fringe Benefits Tax – 14 days after the end of each quarter in the
year of assessment.

(4) Withholding Tax – 14 days after the end of the month in which
deduction was made.

(ii) Penalty Rates

(1) PAYE - 15% initial

5% additional on accrued amount monthly

or part thereof.

(2) Provisional Tax - Amount unpaid

Not exceeding 10% 0% of amount not paid

Between 10 – 50% 25% of amount not paid

Over 50% 30% of amount not paid

(3) Fringe Benefits Tax - 20% of amount due

(4) Withholding Tax - 20% of amount due

4. Madachi Trading

(a) - The income of a partnership is assessed on each partner

- Each partner is responsible for paying their share of tax

- Each partner is separately ½ and individually liable for the submission

of a joint return for the partnership income.

Page 6 of 14
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

141 / 312
(b) Taxable profit of the partnership for the year ended 30 June 2013

K K
Loss for the year (2,626,400)

Add: Items not allowed for taxation:

Partners’ salaries
– Mada 1,850,000
– Chitsanzo 1,150,000
School fees for Chitsanzo’s child 665,000
Interest on capital 240,000 3,905,000
1,278,600

Less: Items not taxable:

Introduction of capital:

– Mada
– Chitsanzo 1,500,000
900,000 (2,400,000)
Adjusted loss for tax
________
(1,121,400)

(c) Allocation of profit amongst the partners for the year ended 30 June 2015
Mada Chitsanzo Total
K K K
Salaries 1,850,000 1,150,000 3,000,000
School fees 665,000 665,000
Interest on capital 144,000 96,000 240,000
1,994,000 1,911,000 3,905,000
Share of profit (672,840) (448,560) (1,121,400)
1,321,160 1,462,440 2,783,600
_______

Page 7 of 14
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

142 / 312
 (d) Tax to be paid by Chitsanzo for the year ended 30 June 2015
K K
Partnership income (from (c)) 1,462,440
Interest K60,000/0.8) 75,000
Less: Exempt (10,000)
65,000
Dividends -

Sale of personal car -____

1,527,440
Taxable income

Tax 0
First 240,000 at 0% 9,000
Next K60,000 at 15% 368,232
Balance K1,227,440 30% 377,232

Less:

Withholding tax
-On interest K75,000 at 20% 15,000
Share of provisional tax paid 199,000
40% of K460,000 184,000 178,232
Tax to be paid

5. (a)(i) The special allowances given to tax payers who are engaged in pastoral,
agricultural or other farming operations are that the expenditure on the following
will be fully (100%) allowable as a deduction from the taxable income of such
farmers when incurred:

– the stumping, levelling and clearing of lands;

– works for the prevention of soil erosion;
– boreholes;
– wells;
– aerial and geophysical surveys; and
– any water control works connected with the cultivatio n and growing of rice,
sugar or such other crop that the Minister may approve.

(ii) Farmers who derive taxable income from the growing of timber may elect that
their taxable income be determined as follows:

– The cost of planting the timber to be carried forward until the timber has
reached maturity.
Page 8 of 14
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

143 / 312
 – To the cost above until the timber reaches maturity a fixed percentage of 5%
will be added annually.

– When such timber is sold, the proportionate part of the cost and the total of the
fixed percentage added annually will be deducted from the proceeds and the
balance included in taxable income or assessed loss.

– Each year the annual fixed percentage will be added to the taxable income or
deducted from the assessed loss.

– All expenditure incurred by the farmer including deductions under ss.33 and 34
and the second schedule on the maintenance and upkeep of such timber will be
deducted from the taxable income or added to the assessed loss.

(iii) – The taxable income of any club, society or association formed, organized or
operated principally for pleasure or recreation shall be liable to taxation
notwithstanding that it arises from transactions with its members.

– The taxable income is equivalent to six and one-quarter percent of all

receipts by or accruals to, or in favour of it from the sale of goods,
cinematograph performances, stage plays and gambling machines. Tax
will be charged at the rate applicable to companies, currently 30%.

(b) Mining expenditure means capital expenditure incurred in Malawi by a person

carrying on or about to carry on mining operations in Malawi.

– in searching for or discovering and testing or winning access to deposits of

minerals.

– in the acquisition of or of rights in or over such deposits other than the

acquisition from a person who has carried on mining operations in relation to
such deposits.

– in the provision of plant and machinery and industrial buildings which would
have little or no value to such person if the mine ceased to be worked.

– on the construction of any buildings or works which would have little or no

value if the mine ceased to be worked.

Page 9 of 14
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

144 / 312
 – on development, general administration and management prior to the
commencement of mining operations.

(c) Waiver of secrecy

– Where the information is required by the Auditor General or any officer duly
authorized by him for the performance of official duties.

– Where information is required by authorized government officers of another

country which has a double tax treaty with Malawi to enable implementation
of tax relief under the agreement or prevention of tax avoidance.

– Where the information is required by a taxpayer or a duly authorized agent of

a taxpayer.

– Where the Commissioner wishes to compile and publish statistics about the
total amount of income received by any class of persons as declared in returns
to the Commissioner.

– Where information is required for the purpose of carrying the Act into effect
or for the purpose of any prosecution for an offence committed in relation to
any tax on income.

6. (a)(i) Five general conditions that all traders dealing with goods and services that
attract Excise tax must comply with according to the customs and excise tax law.

– No other business should be conducted on the entered premises except with

the permission of the Controller.

– No other excisable goods may be kept on the entered premises except those
manufactured on the premises.

– All rooms, stores, plant, equipment and warehouses must be given

distinguishing marks and numbers.

– The licensee must provide office, sanitary or living accommodation for an

officer or facilities for proper excise of the officers functions as the
Commissioner require.
– The name of the licensee must be exhibited on a conspicuous place outside the
entered premises.

(ii) Five reasons/circumstances that may necessitate the Commissioner general of the
Malawi Revenue Authority to allow an importer to clear their goods at the inland
port.

– Finance institutions are not available at the border.

Page 10 of 14
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

145 / 312
 – Need to facilitate trade.

– Carriers are not the owners of the goods and may not possess all the necessary
documents for clearance at the border.

– No customs clearing agents at the border.

– Security reasons.

(b) (i) Bad debts

- debts proved to be bad to the satisfaction of the Commissioner and

- which have become bad during the year of assessment if

- the amount of the debt is included in the current year of assessment or

- was included in any previous year in the taxpayer’s assessable income

(ii) Doubtful debts are allowed as a deduction from taxpayers assessable income
where

- they are specific

- the amount of the debts are included in the taxpayers income of the current
year of assessment

- the amounts are only those estimated to be doubtful

- were included in the previous year of assessment

In practice, only specific provisions of doubtful debts will be allowed, whereas

general provisions are not allowed.

(iii) Research and experime nts will be allowed as a deduction if it meets the
following conditions:

- the amount of any expenditure, not being expenditure of a capital nature,

incurred by the taxpayer during the year of assessment on experiments and
research relating to his trade.

- any sum contributed by the taxpayer during the year of assessment to any
scientific or educational society or institution or other body of a public

Page 11 of 14
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

146 / 312
 character approved by the minister if the taxpayer has stipulated that the
sum must be utilized by such society, institution or body, as the case may
be, solely for the purpose of industrial research or scientific experimental
work connected with the trade of the taxpayer;

- any sum contributed by the taxpayer during the year of assessment in the
form of grant, bursary, or scholarship to enable any other person to take a
course of technical education related to the trade of such taxpayer at any
educational institution approved by the Minister.

(iv) Individual donations of not less than K250 made during the year of assessment
by the taxpayer to any such charitable organisation as the Minister may publish in
the Gazette.

- Individual donations of not less than K500 made during the year of
assessment by the taxpayer to any such non-profit institution operated
solely or principally for social welfare, civic improvement, educational
development, or other similar purposes as the Minister may, from time to
time by notice, publish in the gazette approve.

Repairs sums actually expended by the taxpayer during the year of assessment
for repairs not being expenditure of capital nature:

– to any premises or part of premises occupied for the purposes of his trade

– resulting from the letting of property; or

– of articles, implements, plant, machinery and utensils employed by him for the
purposes of his trade shall be an allowable deduction.

7. (a)(i) 1. Taxable supplies made will be subject to value added tax (VAT) irrespective of
whether they are sold to customers who are registered for VAT or not.
Of relevance is the fact Mangunda Private Limited is registered for VAT and
therefore charges VAT on all its supplies as long as they are taxable supplies.

2. The brand new pick-up will be subject to VAT by the supplier. Mangunda
Private Limited will claim the VAT as input tax.

3. The stationery bought from an unregistered supplier will not have VAT
charged and therefore will not be subject to a VAT claim.

4. The VAT charged by the hotel on an entertainment invoice of K46,200 will not

Page 12 of 14
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

147 / 312
 be claimable by ½ Mangunda Private Limited, since Mangunda Private Limited
is not involved in the entertainment business.

5. Cassava are exempt from VAT. Vegetable products in a raw state are exempt
from VAT.

6. Electricity and telephone charges are subject to VAT. As these are used for the
purpose of the business, the VAT will be claimed as input tax by Mangunda
Private Limited.

7. The consultancy services are subject to VAT. Although the consultant would
not charge VAT on his ½ invoice, Mangunda Private Limited has to self
declare and pay the relevant VAT as input tax.

8. The bad debt written off will be claimed by Mangunda Private Limited and will
reduce the output tax on sales.

9. VAT would be paid on the whole amount of sale and included as output tax. As
receipt of part payment is a time of supply, even if earlier than delivery of the
goods.

(ii) Calculation of VAT payable or carried forward for the month ending 29 February
2012

Taxable supply VAT Rate VAT

Value of K % K
Sales 3,250,000 16.50 536,250
Sales for the moth 675,000 16.50 111,375
Sale on credit 745,000 16.50 122,925
Bad debt (275,600) 16.50 (45,474)
725,076

Input tax
Capital goods – Toyota 13,000,000 16.5 2,145,000
Stationery 165,000 27,225
Entertainment 46,100 0
Cassava 4,150,000 Exempt 0
Electricity and telephone 376,500 16.5 62,122.5
Consultants 5,250,000 16.5 866,250
3,073,372.5
VAT payable/(claimable) (2,348,296.5)

(b) (i) fringe benefit is any asset, service or other benefit in kind provided to an
employee if such benefit includes an element of personal benefit to the
employee

Page 13 of 14
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

148 / 312
(1) records to be kept by an employer

 Nature of fringe benefit

 Names of employees to whom fringe benefits are provided
 Taxable values of the benefits as determined in accordance with
the rules

(2) Offences

 Failure to register for fringe benefits tax

 Failure to pay fringe benefits tax on due date

END

Page 14 of 14
Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

149 / 312
 EXAMINATION NO._________________

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2014 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 10(B): TAXATION

TUESDAY 3 JUNE 2014 TIME ALLOWED: 3 HOURS

9.00 AM – 12.00 NOON
INSTRUCTIONS:

1. You are allowed 15 minutes reading time before the examination begins during
which you should read the question paper and, if you wish, make annotations on the
question paper. However, you are not allowed, under any circumstances, to
open the answer book and start writing or use your calculator during this reading
time.

2. Number of questions on paper – 7.

3. The paper is divided into TWO Sections, A and B. BOTH questions to be

answered in Section A and ANY THREE from Section B.

4. Each question carries 20 marks.

5. Use of non-programmable calculators is allowed.

6. You are provided with the following:

(i) A set of tables containing rates of tax on taxable income (Table 1).
(ii) Rates of capital allowances (Table 2).
(iii) Penalty rates for underpaid provisional tax (Table 3).

7. Begin each answer on a fresh page.

8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY

THE INVIGILATOR.

This question paper contains 10 pages

This question paper must not be removed from the examination hall.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

150 / 312
 1

SECTION A

ANSWER BOTH QUESTIONS IN THIS SECTION

1. Tonamwana Limited is incorporated in Malawi and manufactures biscuits. The

company’s summarized profit and loss account for the year ended 31 December 2012
is as follows:

Detail Notes K’000 K’000

Sales 10,200,000
Cost of sales 9,950,000
Gross profit 250,000
Interest 20,000

Overheads

Depreciation 1 11,500
Audit fees 3,500
Bad debts 750
Doubtful debts 2 900
Net exchange gains 3 (1,200)
Repairs & maintenance 4 15,400
Fringe benefits tax 6,200
Staff expenses 5 22,450
Directors fees 2,500
Other allowable expenses 52,600
Total overheads 114,600
Total profit before tax 155,400

Notes

1. Included in the cost of sales is K7,500,000 in respect of depreciation of plant

and equipment.

2. Doubtful debts are made up of the following:

K’000
Specific provision 600
General provision 300
900

3. Net exchange gains are in respect of imported machinery and are made up of
the following:
K’000
Exchange gains – realized (2,400)
Exchange losses – realized 800
Exchange losses – unrealized 400
(1,200)

In the previous years all exchange gains and losses were realized.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

151 / 312
 2

4. Repairs and maintenance cost includes an amount of K380,000 in

relation to the maintenance of the vehicle for the Director’s wife who
does not work for Tonamwana.

5. Staff expenses include K270,000 being the cost of tuition and expenses
incurred by Tonamwana in respect of two Malawian employees who
obtained a degree in food processing.

6. Capital allowances are agreed at an amount of K15,750,000.

Required:

(a) (i) Compute the taxable income for the accounting year to 31 December
2012 and then calculate the amount of tax payable thereon. 8 Marks

(ii) In which tax year is the taxable income going to be assessed? 1 Mark

(iii) By what date is Tonamwana Limited expected to have submitted the

income tax return for the year under review? 1 Mark

(iv) Assuming that the computed taxable income in (i) above amounted to
K167,000,000, calculate the amount of tax payable thereon by
Tonamwana Limited:

(1) as a limited company incorporated in Malawi? 1 Mark

(2) as a limited company not incorporated in Malawi? 1 Mark

(b) Section 84A of the Taxation Act requires that taxpayers pay provisional tax
except where certain conditions, as stipulated in section 84B of the same Act
obtain, in which case provisional tax is not payable.

Required:

State the conditions under which provisional tax is not payable. 3 Marks

(c) Sections 45 and 46 of the Taxation Act provide for inadmissible deductions
for purposes of determining taxable income.

Required:

List any five inadmissible deductions under the said section 45. 5 Marks
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

152 / 312
 3

2. (a) State the circumstances under which a taxpayer is given an investment

allowance. 2 Marks

(b) The tax written down value of business assets of a manufacturer as at 31

December 2012 was as follows:

Item Tax written down value Rate of annual allowance

K’000
Factory building 18,900 5%
Plant and machinery 9,500 10%
Motor vehicles 14,400 20%
Furniture and fittings 7,700 10%

During the financial year to 31 December 2013 the following transactions took
place:

(1) Asset disposals

Plant & Motor Office
Machinery Vehicles Furniture
K’000 K’000 K’000
Net book value 31/12/12 860 - 430
Tax written down value 31/12/12 250 620 120
Proceeds 850 350 695

(2) Asset added during the year

Date Item Cost

K’000
1/3/2013 New machinery 4,200
19/5/2013 Saloon motor vehicle 12,500
1/12/2013 New office furniture 2,800

Required:

(i) Calculate the capital allowances; initial or investment as the

case may be, and annual allowances on the business assets
outlined above for the financial year to 31 December 2013.
6 Marks

(ii) Calculate the capital gains or capital losses resulting from the asset
disposals stated above. 4½ Marks

(iii) Calculate the accounting gain or loss, as the case may be, resulting
from the disposal of plant and machinery as stated above.
1½ Marks

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

153 / 312
 4

(c) Mr Bola Kunthazi is a registered taxpayer and operates the following tax
schemes:

(1) PAYE (Pay as you earn);

(2) Provisional tax;
(3) Fringe benefits tax;
(4) Withholding tax.

Required:

(i) State when the tax in each of the four schemes is payable. 2 Marks

(ii) State the rate at which a penalty for late payment is charged, for each of
the tax schemes above. 4 Marks

(TOTAL: 20 MARKS)

Continued/…..

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

154 / 312
 5

SECTION B

ANSWER THREE QUESTIONS ONLY FROM THIS SECTION

3. (a) Expenditure may only be deducted from assessable income where the
expenditure is wholly, exclusively and necessarily incurred by the taxpayer for
the purposes of his trade.

Required:

Explain the meaning of the phrase “wholly, exclusively and necessarily”.

2 Marks

(b) Bad debts and doubtful debts can both be allowable deductions from assessable
income provided that the related income has been declared.

Required:

(i) What other conditions must obtain in order to have the bad debts and the
doubtful debts allowed as deduction from assessable income. 2 Marks

(ii) Where a specific debt has been provided for and the provision has been
allowed as a deduction, what adjustment, if any, should be made to the
income of the taxpayer for the following year of assessment, and to what
extent is such adjustment affected if the debt:

(1) remains unpaid;

(2) is recovered;
(3) has become bad? 4 Marks

(c) Calculate the amount of realized capital loss, which is deductible from assessable
income in the following circumstances. Assume that the capital loss arises from
the disposal of assets in respect of which no capital allowances were given:

(i) where a taxpayer has a realized capital loss of K320,000 and there is no
realized capital gain. 2 Marks

(ii) where a taxpayer has a realized capital loss of K420,000 and there is a
realized capital gain of K270,000. 1½ Marks

(d) How would your answers to part (c) above, differ if the capital losses and gains
were wholly related to the disposal of assets on which capital allowances had
been given? 2½ Marks

(e) When may the Commissioner estimate the taxpayer’s taxable income or assessed
loss? 3 Marks

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

155 / 312
 6

(f) Penalties imposed take two forms when offences, as listed in Section 112 of the
Taxation Act, are committed with intent to defraud.

Required:

(i) State the two forms of penalties. 2 Marks

(ii) List any two such offences. 1 Mark
3 Marks
(TOTAL: 20 MARKS)

4. (a) Under the Taxation Act, some clubs, societies or associations are taxable under
Section 61 while others are exempt from tax under the 1 st schedule to the same
Act.

Required:

(i) State the conditions that must be met to enable the clubs, societies or
associations enjoy the exemptions available in the 1 st schedule to the
Taxation Act. 3 Marks

(ii) State how the income of clubs, societies or associations which are liable to
income tax is determined, and the rate at which they are taxed. 3 Marks

(b) Kabuli Sports Club is operated principally for pleasure and recreation. The
statement of income and expenditure for the year to 31 December 2012 which
was used to support the clubs return of income for that year is as follows:

Kabuli Sports Club

Income and expenditure statement for the year to 31/12/12
Notes K
Gross revenue 1 2,560,000
Less: expenses 2 1,890,000
Net revenue 670,000

Notes
(1) Gross revenue is made up of the following:
K
Bar receipts – gross 375,000
Donations 625,000
Entrance fees 450,000
Gambling machines 322,000
Members’ subscriptions 178,000
Stage plays 319,000
Cinematograph performances 291,000
2,560,000

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

156 / 312
 7

(2) The amount of expenses is arrived at as follows:

K
Salaries and wages 640,000
Electricity 225,000
General expenses 145,000
Repairs and maintenance 350,000
Bar purchases 530,000
1,890,000

Required:

Compute the taxable income and the tax payable by Kabuli Sports Club for
the year to 31 December 2012. 8 Marks

(c) (i) Define the term “fringe benefit” for purposes of the Taxation Act.
1 Mark

(ii) An employee makes a contribution to a fringe benefit provided to him/

her by his or her employer.

Required:

In what way does such a contribution affect the amount of fringe

benefits tax payable by the employer and the normal tax payable by
the employee? 3 Marks

(iii) If an employer provides housing to an employee and the house belongs

to the employer, certain advantages may be enjoyed by the employer.

State any two of these advantages. 2 Marks

(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

157 / 312
 8

5. (a) The first and second schedules to the VAT Act specify the goods and services
which are exempt and zero rated respectively.

Required:

(i) State one common feature between exempt and zero rated supplies
with reference to VAT liability. 1 Mark

(ii) State the main differences between exempt and zero rated supplies.
2 Marks

(b) When does a taxable supply become a relief supply and what advantage, if
any, is enjoyed by the user of the goods and services that qualify as relief
supplies? 3 Marks

(c) Under what circumstances does a taxable person qualify for input tax
deduction in respect of taxable supply of motor vehicles or motor vehicle
spare parts. 4 Marks

(d) A manufacturer incurred business expenditure during the year to 31 December

2012 as follows:

Nature Cost VAT paid

K’000 K’000
Telephone charges 450,000 74,250
Electricity charges 175,000 28,875
Security charges 345,000 56,925
Stationery 226,000 37,290
Rent 522,000 86,130
In addition, raw materials were purchased at a cost of K1,689,250 inclusive of
VAT.

During the same year, revenue from exports of manufactured products and
from local sales, exclusive of VAT, was K4,200,000 and K6,300,000
respectively.

Required:

(i) Calculate the amount of VAT paid on services and raw materials.
4 Marks
(ii) Calculate the amount of VAT chargeable on total sales. 3 Marks

(iii) Calculate the amount of VAT payable or claimable by the taxpayer.

3 Marks
(TOTAL : 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

158 / 312
 9

6. (a) Certain types of expenditure, when incurred by taxpayers who are engaged in
pastoral, agricultural or other farming operations, are specifically allowable in
determining their taxable incomes.

Required:
Mention any five types of such expenditure. 5 Marks

(b) Explain the basis that taxpayers who are engaged in timber growing may use
in determining their taxable income according to Section 58(4) of the
Taxation Act. 5 Marks

(c) In June 2012 Antony Phalalapsya imported 200 wedding rings from the
United Kingdom for sale. The cost of the rings was £6,500. On the day of the
transaction the rate of exchange was £1 = K560. Payment for the rings was
done in three instalments as the rings took long to sale, as follows: £3,000 in
September 2012, £2,000 in November 2012 and the balance in January 2013.
The rates of exchange in September 2012, November 2012 and January 2013
were £1 = 525, £1 = 570, £1 = 545 respectively.

Required:
Calculate the foreign exchange loss or gain on each of the three payments.
6 Marks

(d) Chawaka Limited, whose taxable profits for 2012/2013 amounted to

K72,300,700 had never paid provisional tax during the period. Compute the
penalty that the company is liable to. 4 Marks
(TOTAL: 20 MARKS)

7. (a) K and M Mining Limited is a mining company which was incorporated in

Malawi on 1 September 2011 with the aim of exploiting mineral resources in
Malawi.

During the period to 30 June 2012, the following expenditures were incurred:
K’000
Acquisition of the proposed mining site 14,000
Construction of site buildings 165,000
Acquisition of machinery 425,000
Testing of samples 44,000
General administration and management 126,000
774,000

Mining operations commenced in July 2012 and during the period to 30 June
2013, the following expenditures were made:
K’000
Acquisition of mining rights from government 43,000
Additional site buildings 32,500
Motor vehicles and trucks 230,000
General administration and management 172,500
477,000

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

159 / 312
 10

Required:

(i) Define the term “mining expenditure” as stipulated in part (ii) of the
Second Schedule of the Taxation Act. 3 Marks

(ii) Calculate the amount of mining expenditure for the period to 30 June
2012 and the amount to be allowed as a deduction for the same period.
4 Marks

(iii) K and M mining Limited transferred/sold their full interest in the mine
in November 2012 to Glo Metals Limited. How much will each be
entitled to claim in respect of expenditure incurred in the year to
30 June 2013? 3 Marks

(b) (i) In accordance with the Taxation Act, under what circumstances may a
taxpayer appeal to the Commissioner? 3 Marks

(ii) What are the actions available to the Commissioner in a case where an
appeal is made to him by the taxpayer? 3 Marks

(iii) State the difference between “direct taxes” and “indirect taxes”.
4 Marks
(TOTAL: 20 MARKS)

END

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

160 / 312
 STRICTLY CONFIDENTIAL

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2014 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC10(B): TAXATION

TUESDAY 3 JUNE 2014 TIME ALLOWED: 3 HOURS

9.00 AM – 12.00 NOON

SUGGESTED SOLUTIONS

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

161 / 312
 1

SECTION A

ANSWER BOTH QUESTIONS IN THIS SECTION

1. (a) (i) Taxable income for Tonamwana Limited

K’000 K’000
Profit before taxation 155,400
Add back: Depreciation 11,500
Depreciation 7,500
General provisions 300
Exchange gain realized 2,400
Repairs and maintenance 380
Fringe benefits tax 6,200 28,415
183,815
Less: Capital allowance 15,750
Exchange gain per A/Cs 1,200
Exchange loss realized 800 (17,885)
Training allowance 135
Taxable income 165,795

Tax payable = 165,795,000 x 30% ½ = K49,738,50

(ii) In the 2012/2013 tax year i.e. 1 July 2012 – 30 June 2013.

(iii) 30 June 2013.

(iv) 1. Tax payable = 167,000,000 x 30% = K50,100,000

2. Tax payable = 167,000,000 x 35% = K58,450,000

(b) Where the taxable income for the year of assessment is estimated;

- not to exceed K180,000 or the prevailing tax free limit.

- to exceed K180,000 or the tax free limit but is all from employment or from
pension or both employment and pension and in relation to which PAYE tax
is being deducted.

- to exceed K180,000 or the tax free limit and to include non-employment or

non-pension income of not more than K180,000 or the tax free limit.

(c) Expenditures not allowed under section 45 of the Taxation Act:

(i) The cost incurred by any taxpayer in the maintenance of himself, his
family or establishment.
(ii) Domestic or private expenses of the taxpayer including the cost of travel
between the taxpayer’s residence and place of work.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

162 / 312
 2

(iii) Any loss or expense which is recoverable under any insurance contract or
indemnity.

(iv) Tax upon the income of the taxpayer or interest payable thereon whether
charged in terms of this Act or any other law of any country whatsoever.

(v) Income carried to any reserve fund or capitalized in any way.

(vi) Any expenses incurred in respect of any amounts received or accrued

which are not included in the term income as defined in the taxation Act.

(vii) Any expense in respect of which a subsidy has been or will be received.

(viii) Fringe benefit tax and any penalty chargeable thereon.

2. (a) Investment allowance is given to a taxpayer:

- who is also a manufacturer;

- on the cost of industrial buildings and plant and machinery;

- which is brought into use by the taxpayer during the year of assessment;

- is used by the taxpayer in the process of manufacture for the purpose of his
business of a manufacturer.

(b) (i) Capital Allowances for year to 31 December 2013

Factory Plant & Motor Furniture &
Buildings Machinery Vehicles Fittings
K’000 K’000 K’000 K’000
Written Down Value 1/1/2013 18,900 9,500 14,400 7,700
Additions -___ 4,200 12,500 2,800
18,900 13,700 26,900 10,500
Disposals __-___ (250) (620) (120)
18,900 13,450 26,280 10,380
Investment allowance - (4,200) - -
Initial allowance - - - (560)
Annual allowance (945) (925) (5,256) (1,038)
Written down value 31/12/13 17,955 8,325 21,024 8,782

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

163 / 312
 3

(ii) Capital gain or loss

Plant & Machinery Motor vehicles Office furniture
K’000 K’000 K’000
Proceeds 850 350 695
TWDV (250) (620) (120)
600 gain (270) loss 575 gain

(iii) K’000
Proceeds 850
Less net book value 860
Accounting loss (10)

(c) (i) The tax in the four schemes is payable as follows:

(1) PAYE - Within 14 days after the end of the

month in which the tax was
deducted.

(2) Provisional tax - Within 25 days after the end of each

quarter in the year of assessment.

(3) Fringe benefits - Not later than 14 days after the end
of each quarter in the year of
assessment.

(4) Withholding tax - Within 14 days from the end of the

month in which the deduction was
made.

(ii) Penalty rates:

PAYE - 20% of the tax payable and a further

additional 5% per month or part thereof.

Provisional tax - No penalty where the tax not paid does not
exceed10% of the total tax liability.

- 25% of the tax not paid where such unpaid

tax exceeds 10% but does not exceed 50%.

- 30% for tax not collected exceeds 50%.

Fringe benefits tax - 20% of unpaid tax.

Withholding tax - 20% of the tax not paid on time

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

164 / 312
 4

SECTION B

ANSWER THREE QUESTIONS ONLY FROM THIS SECTION

3. (a) Wholly, exclusively and necessarily means that an expenditure:

– must be specific for the business.

– expenditure that would be necessary to produce income or for the trade.
– dual purpose expenditure would be disallowed.
– private purpose expenditure is not allowed.
(b) (i) Bad debts are those that:
– They must be proved to be bad to the satisfaction of the
Commissioner.
– They must have become bad during the year of assessment.

Doubtful debts are those that:

– They must be specific and not general.
– The amount to be considered for an allowance must be only that part
of the debt considered doubtful and not necessarily the whole debt.

(ii) The income of the taxpayer must include the amount of the provision
allowed as a deduction in the previous year of assessment. This adjustment
is not affected by whatever happens to the debt itself.

If debt remains unpaid

A new provision is claimed that is if the debt continues to be considered

doubtful.

If debt recovered

There will be no need to make a new provision since the debt is recovered.

If the debt has become bad

The debt will now be written off and the write off will be allowed as a
deduction if conditions are satisfied.

(c) (i) The capital loss of K320,000 would not be deductible from assessable
income.

(ii) Only K270,000 would be allowed as a deduction as there will be a

restriction on the amount deductible to the lesser of the realized capital
loss or any capital gain realized by the taxpayer.

(d) The answers would differ if the assets attracted capital allowances. There is no
restriction on assets which attract capital allowances. Therefore in both (c)(i) and

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

165 / 312
 5

(c)(ii) the full amounts of K320,000 and K420,000 would be allowed as a

deduction from assessable income.

(e) The Commissioner may estimate the taxpayers’ income where:

(1) a taxpayer makes default in furnishing any return or information; or

(2) the Commissioner is not satisfied with the return or information furnished
by the taxpayer.

(3) the commissioner has reason to believe that a taxpayer is about to leave
Malawi without furnishing a return or a satisfactory return.

(f) (i) - Monetary

- Imprisonment.

(ii) Any three of the following:

- making a false statement or giving false information

- keeping false books of account or other records
- making a false claim for repayment of any tax
- omission of income from a return
- claiming any deduction of allowance to which one is not entitled or
allowed.

4. (a) (i) For a club to be exempt it needs:

– to be formed and operated solely or principally

– for – social welfare
– civic improvement or
– other similar purposes and

– If its receipts or accruals are not shared among the members.

(ii) The taxable income is 6.25% of its gross receipts and accruals from:

– sales of goods
– cinematograph performances
– stage plays
– gambling machines
– rate applicable to companies

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

166 / 312
 6

(b) Kabuli Sports club taxable income computation

K
Bar receipts 375,000
Gambling machines 322,000
Stage plays 319,000
Cinematograph performances 291,000
1,307,000

Taxable income = 6.25% x 1,307,000 = K816,875

Tax payable = 816,875 x 30% = K245,062.50

(i) Fringe benefit is any asset service or other benefit in kind provided by or
on behalf of an employer to an employee if such benefit includes an
element of personal benefit to the employee.

(ii) If an employee contributes towards a fringe benefit provided to him.

- the taxable value of the benefit will be reduced by the amount of

the contribution.
- the employer will pay less tax on the benefit as a result.
- the employee’s tax status is unchanged as it is not affected by the
contribution.

(iii) Where the property is owned by the employer:

- the cost of a gardener shall not constitute a taxable fringe benefit.

- the cost of security guard and watchman shall not constitute a
fringe benefit.
- the taxable value will be reduced by 50%.

5. (a) (i) One common feature between exempt and zero rated supplies is that VAT
is not payable in respect of both supplies.

(ii) Main differences are:

- Exempt supplies are not subject to VAT; while
- Zero rated supplies are subject to VAT;
- Input tax is not claimable in respect of exempt supplies; while
- Input tax is claimable in respect of zero rated supplies.

(b) A taxable supply becomes a relief supply if the supply is made to:
- individuals ;
- organizations; and
- businesses.
Specified in the Third Schedule to the VAT Act.

The user of the goods and services that qualify as relief supplies enjoys an
advantage in that no VAT is payable because of the relief that is given.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

167 / 312
 7

(c) A taxable person qualifies for input tax deduction in respect of taxable supply of
motor vehicles or motor vehicle spare parts if the taxable person is in the
business of:

- dealing in motor vehicles; or

- hiring of motor vehicles; or
- selling of motor vehicle spare parts.

However, where the taxable person uses the motor vehicles or motor
vehicle spare parts:

- wholly
- exclusively; and
- necessarily

for the business, such taxable person shall qualify for input tax deduction
in respect of such motor vehicles and motor vehicle spare parts

(d) (i) VAT on services VAT

Telephone 74,250
Electricity 28,875
Security 56,925
Stationery 37,290
Rent 86,130
283,470
Add: VAT on raw materials
= 239,250

Total 522,720

(ii) Value of exports K4,200,000

VAT thereon at 0% -___
Total value of export sales K4,200,000

Value of local sales 6,300,000

VAT on sales at 16.5% 1,039,500
7,339,500
Total value of VAT on sales therefore 0+1039500 = K1039500

K
(iii) Total value of VAT on sales 1.039,500
Total VAT on purchases 522,720
VAT payable 516,780

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

168 / 312
 8

6. (a) Section 58 allows taxpayers who are engaged in pastoral, agricultural or other
farming operations:

(i) Stumping, clearing and leveling of lands;

(ii) Works for the prevention of soil erosion;
(iii) Boreholes;
(iv) Wells;
(v) Aerial and geographical surveys;
(vi) Any water control work connected with the cultivation and growing of
rice, sugar or such other crop as the minister may approve.

(b) Farmers who derive their taxable income from growing timber may elect that their
taxable income be determined as follows:

(i) The cost of planting the timber to be carried forward until the timber has
reached maturity.

(ii) To the cost above, until the timber has reached maturity a fixed percentage
of 5% will be added annually.

(iii) When such timber is sold, the proportionate part of the cost and the total
of the fixed percentage added annually will be deducted from the proceeds
and the balance included in taxable income or assessed loss.

(iv) Each year the annual fixed percentage will be added to the taxable income
or deducted from the assessed loss.

(v) All expenditure incurred by the farmer including deductions under Section
33 and Section 34 and the Second schedule on maintenance and upkeep of
such timber will be deducted from the taxable income or added to the
assessed loss.

(c) Formula for exchange gains/losses

ar1 – ar2
where a = amount of foreign currency
r1 = official rate of exchange at the time of establishing the transaction
r2 = official rate of exchange at the time of the transaction settling.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

169 / 312
 9

1st payment September 2012

(3000 x 560) – (3,000 x 525)
1,680,000 – 1,575,000
= 105,000 gain

2nd payment November 2012

(2000 x 560) – (2,000 x 570)
1,120,000 – 1,140,000
= (20,000) loss

3rd payment January 2012

(1500 x 560) – (1,500 x 545)
840,000 – 817,500
= 22,500 gain

(d) Chawaka Limited

Penalty for provisional tax liability for year 2012/2013

Taxable income given = 72,300,700

Actual tax at 30% = 30% x 72,300,700
= 21,690,210
Total tax liability
% of tax not paid = 100%
Penalty for amount not paid exceeding 50% is 30%
Penalty therefore = 30% x 21,690,210
= K6,507,063

7. (a) (i) Mining expenditure is capital expenditure incurred in Malawi by a

person carrying on or about to carry out mining operations in Malawi.
The capital expenditure herein includes:

- Searching for or discovery and testing or winning access to

deposits of minerals.

- The acquisition of rights over such deposits other than from a

person who has carried on mining operations in relation to such
deposits.

- The provision of plant and machinery and industrial buildings

which would have little or no value if the mine ceased to be
worked.

- The construction of buildings or works which would have little or

no value if the mine ceased to be worked.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

170 / 312
 10

- The development, general administration and management prior to

the commencement of mining operations.

(ii) Mining expenditure for the period to June 2012

K’000
Construction of site buildings 165,000
Acquisition of machinery 425,000
Testing of samples 44,000
General administration & management 126,000
760,000

The whole expenditure will be claimed as a deduction from assessable

income.

(iii) Mining expenditure for year to 30 June 2014

Total expenditure 477,000

The allowance will be apportioned in such a manner as the

Commissioner General may determine to be just and reasonable
between K & M and Glo Metals i.e. based on time.
K & M Limited = 5/12 x 477,000 = 198,750
Glo Metals Limited = 7/12 x 477,000 = 278,250

(b) (i) A taxpayer may appeal to the Commissioner when he/she is aggrieved
by:

(1) Any assessment made upon him by the Commissioner

(2) The determination by the Commissioner of a reduction in tax
under the double tax relief arrangements (Sections 123 or 124
of the Taxation Act).
(3) Any decision of the Commissioner in relation to an assessment.

(ii) The Commissioner:

(1) may amend the assessment, decision or determination or disallow

the appeal;
(2) shall send to the applicant written notice of his decision on the
appeal;
(3) shall record any amendment of the assessment in the assessment
register.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

171 / 312
 11

(iii) Direct taxes are assessed on income or property with the expectations that
the persons from whom the tax is collected losses purchasing power.
Examples are income tax and property tax.

Indirect taxes are collected from products or sellers in the expectation that
they will pass it on to consumers. Examples are value added tax, customs
duty.

END

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

172 / 312
 EXAMINATION NO._________________

2014 EXAMINATIONS
ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 10(B): TAXATION

THURSDAY 4 DECEMBER 2014 TIME ALLOWED: 3 HOURS

9.00 AM - 12.00 NOON

INSTRUCTIONS:

1. You are allowed 15 minutes reading time before the examination begins during which you should read the question paper and, if you wish, make
annotations on the question paper. However, you are not allowed, under any circumstances, to open the answer book and start writing or use your
calculator during this reading time.

2. Number of questions on paper – 7.

3. The paper is divided into TWO Sections, A and B. BOTH questions

to be answered in Section A and ANY THREE from Section B.

4. Each question carries 20 marks.

5. Use of non-programmable calculators is allowed.

6. You are provided with the following:

(i) A set of tables containing rates of tax on taxable income (Table 1).
(ii) Rates of capital allowances (Table 2).
(iii) Penalty rates for underpaid provisional tax (Table 3).

7. Begin each answer on a fresh page.

8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE INVIGILATOR.

This question paper contains 10 pages

This question paper must not be removed from the examination hall.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

173 / 312
 1

SECTION A

ANSWER BOTH QUESTIONS IN THIS SECTION

1. Lilongwe Limited is incorporated in Malawi. Its main activity is the production and sale of soap.

A summarized profit and loss account for the year ended 30 June 2013 is as follows:
Note K’000 K’000
Turnover 870,000
Less: production costs 1 675,000
195,000

Less: Overheads

Audit fees 1,200

Provision for bad debts 2 1,500
Provision for gratuities 3 920
Provision for bonuses 4 880
Depreciation, buildings 44,000
Exchange losses 5 5,800
Formation expenses 1,250
Staff relief fund 6 1,850
Repairs & maintenance 7 14,500
Other allowable staff costs 9,000
Other allowable expenses 14,500
Fringe benefits tax 1950
Traffic fines 250 97,600
Profit before tax 97,400

Notes:

1. Production costs include K15,000,000 depreciation costs for machinery.

2. K645,000 was in respect of a general provision, whilst the rest was in respect of one debtor who was under liquidation.

3. Provision for gratuities is in respect of employees’ contracts, which are running and not yet completed.

4. Bonuses provided for had not yet been declared and therefore not paid out.

5. K250,000 of exchange losses was unrealized.

6. This was a self administered fund to provide sickness and accident benefits to employees or widows, children or nominees of
deceased employees.

7. A quotation for maintenance work for buildings K1,300,000, and machinery K650,000 was received. The actual work had not yet
started by 30 June 2013.

8. Capital allowances for the year, approved by the Commissioner General, amounted to K18,700,000.

Required:
(a) Compute the amount of taxable income or loss for the year to 30 June 2013.
6 Marks

(b) Assuming that the taxable income in (a) above, amounted to K245,000,000, compute the amount of corporation tax payable by
Lilongwe Limited for the year ended 30 June 2013. 2 Marks

(c) Assume that Lilongwe Limited received a net dividend amounting to K2,700,000 from a subsidiary company during the financial
year to 30 June 2012, and that towards the end of the same year, Directors of Lilongwe Limited declared a dividend to
shareholders who were registered as at 31 December 2012. The dividend declared totalled K7,200,000 and was from the retained
earnings which included the dividend from the subsidiary company.

Required:
(i) Calculate the tax paid on the dividend which was declared and paid by the subsidiar y company.
2½ Marks

(ii) Calculate the tax payable by Lilongwe Limited on the dividend declared
to the shareholders at the end of the financial year to 30 June 2012.
2 Marks
(iii) State whether or not the tax on dividends is recoverable. Give reasons for
your answer. 2 Marks

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

174 / 312
 2

(d) Under Section 94 of the Taxation Act, the register of assessments shall not be open to public inspection.

Required:
(i) State the contents of the register and where is it kept. 1 Mark
(ii) Other than officials in the course of their duty, who else may see the register or may have access to any information in it?
2 Marks

(iii) Why is the register not open to public inspection? 1 Mark

(e) A return of income of a limited company requires that a declaration be made as to the company’s country of incorporation.

Required:
Why should such a declaration be made? 1½ Marks
(TOTAL: 20 MARKS)

2. (a) Jatropha Limited, a company that is involved in the Production of Biofuel from Jatropha in Balaka, has the following details in
connection with its property and equipment for the year ended 31 December 2013:

Tax Written Down Values [TWDV] as at 1 January 2013 were as follows;

K’000 Annual allowance

rate
Factory building 15,250 5%
Plant and machinery 14,000 10%
Motor vehicles [commercial vehicles] 78,000 20%
Furniture and fittings 12,430 10%
Computers 9,250 40%
Motor vehicles [saloon] 12,500 20%

The following transactions took place during the year:

(1) The company extended the factory building and brought it into use in April 2013.
The extension cost the company 6,500,000 in total, out of which K1,500,000 was spent on partitioning a storeroom in the
factory building.

(2) Purchased plant for K8,400,000 through leasing on 10 December, 2013 but brought it into use on 4 January 2014.

(3) Other additions to the property and equipment were as follows:

K
February 2013 second hand seed extractor 8,800,000
May 2013 second hand 30 ton truck 45,000,000
August 2013 Motor vehicles [Saloon] 18,000,000

(4) Disposals during the year were as follows:

TWDV
August, 2013 Old extractor K5,250,000
Sept, 2013 Motor vehicle (commercial) K1,750,000
Dec, 2013 Furniture K3,500,000

Required:

Prepare the Capital Allowances schedule for Jatropha Limited and compute all allowances that the company was entitled to in t he
year. 15 Marks

(b) In January 2013, a Malawian businessman imported trade goods whose cost was £375,000. On the day of the transaction, the rate
of exchange was £1 to K450. Payment of these goods was made in three insta llments in June 2013 (£75,000), October 2013
(£150,000) and December 2013(£150,000). The rate of exchange for these months were as follows :

K
June, 2013 500
October, 2013 550
December, 2013 400

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

175 / 312
 3

Required:

Using the formula given below, calculate the foreign exchange loss or gain realized on the day of the payment for the goods.

a x r1 - a x r2 where:

a = amount of foreign currency involved.

r1 = official rate of exchange of the pound sterling with respect tothe Malawi Kwacha at the time of establishing the transaction.
r2 = official rate of exchange of the pound sterling with respect to the Malawi Kwacha at the time of satisfying the
transaction. 5 Marks
(TOTAL: 20 MARKS)

SECTION B

ANSWER ANY THREE QUESTIONS ONLY

3. (a) State the circumstances under which a person is registrable as taxable for purposes of the Value Added Tax (VAT) Act.
2½ Marks

(b) State four reasons why the Commissioner General may decline a person’s registration application under the voluntary
registration provisions of the Value Added Tax (VAT) Act. 2½ Marks

(c) The following transactions were recorded in the books of a VAT registered taxpayer for the month of June, 2013:

(1) Business related expenditure, inclusive of VAT at 16.5%

K
Security 291,250
Legal 186,400
Stationery 87,375
Office furniture 436,875
Office rentals 495,125
Electricity 80,385

(2) Business related expenditure exclusive of VAT

K
Salaries 6,250,000
Water 125,000
Postal services 252,200

In addition to the above transactions, the value of sales net of VAT were K9,600,000 and K4,300,000 in respect of local
sales and exports respectively.

Required:

(i) Calculate the amount of VAT paid or payable on each item stated above.
9 Marks
(ii) Calculate the amount of VAT chargeable on total sales, local and export, indicating gross sales values.
2 Marks

(iii) Calculate the amount of net VAT payable to the Malawi Revenue Authority after taking into account the input tax paid on
each of the expenditure items given above. 1½ Marks

(c) State the conditions which must be fulfilled by a taxable person, who is not a motor vehicle dealer, to enable such a taxable person
claim input tax deduction in respect of taxable supply of motor vehicles or motor vehicle spare parts.
2½ Marks
(TOTAL : 20 MARKS)

4. (a) An employer intends to provide benefits to a few of his employees but before doing so, he seeks your advice.

Required:

(i) Advise the employer on the tax implications of providing benefits to employees.
2½ Marks

(ii) How can the fringe benefits tax burden be reduced? 2½ Marks

(b) Chisitu Limited is a company that produces protective wear in Mulanje. The company provided salary and benefits as part of its
remuneration package. The following members of staff were on its payroll and the annual payments were made to or for each
member of staff in the year to 31 December, 2013.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

176 / 312
 4

Type of fringe General Chief Production Human Marketing

benefit Manager Accountant Manager Resources Manager
Manager
K’000 K’000 K’000 K’000 K’000
Annual salary 28,000 18,000 15,000 12,500 20,500
(Subject to PAYE)
Car at cost 45,000 25,000 25,000 25,000 20,000
Accommodation: 5,400 3,600 3,600 2,400 3,600
Unfurnished, owned
by Chisitu (annual
rental value)
School fees ( paid to 2,700 1,500 0 0 1,500
school)
Garden boy ( paid 240 180 180
direct to member of
staff)

Watchman(paid to 540 360 360 300 300

security firm)
Cook( paid to cook) 360 0 180 180 0
DSTV subscription 420 420 420
(paid to
Multichoice)

Required:

Compute the fringe benefits tax that would be payable by Chisitu for the quarter ended31December,2013.
15 Marks
(TOTAL : 20 MARKS)

5. (a) (i) Explain the difference between direct taxes and indirect taxes. 3 Marks

(ii) Give two examples of direct taxes and three examples of indirect taxes used in Malawi.
5 Marks

(b) A taxpayer has received an estimated assessment from the tax authorities showing that he has been assessed for the year of
assessment to 30 June 2013 in the absence of his return of income. Tax amounting to K3,875,500 is shown to be due and
payable. As no information has been provided, no credit for advance taxes paid has been given.

The taxpayer has asked for your assistance and has produced the following information as he wants to contest the assessment:

(1) A statement that, during the year under review, the taxpayer received gross rents amounting to K1,520,000. City rates of
K184,000 were paid within the year and were the only expenditure incurred against the rental income.

(2) Withholding tax amounting to K136,000 was recovered from the rental in (1) above.

(3) A PAYE certificate showing K11,500,000 as total salary and K3,351,000 as PAYE deducted for the year under review.

(4) Evidence of payment of professional subscriptions totalling K175,000 was produced. These have been allowed for tax
purposes in the past.

Required:

(i) Advise the taxpayer whether or not withholding tax on rentals has been correctly operated by the taxpayer’s tenant. If not
correctly operated, calculate the amount of withholding tax that should have been deducted and indicate the amount of the
under or over deduction. 3 Marks

(ii) What are the consequences that are likely to follow, if a person fails to deduct withholding tax?
3 Marks

(iii) On the basis of the withholding tax and PAYE schemes that were operated, calculate and advise the taxpayer, the net
amount of tax payable by him. Indicate by what amount the estimated assessment will be reduced or how much
additional tax will need to be paid. 6 Marks
(TOTAL : 20 MARKS)

6. (a) Recently, the Government introduced several tax and non tax measures which are meant to underpin the domestic revenue side of

the budget. Some of the measures were as follows:

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

177 / 312
 5

(1) Increased investment allowance from 40% to 100% for new and unused factory buildings and plant and equipment.

(2) Increased export allowances from 15% to 25%.

(3) Increased the zero percent threshold of the individual tax rate structure from K20,000 to K25,000 and also increased the
15% bracket of the same structure from K3,000 to K5,000 per month.

(4) Increased excise tax rate from 150% to 250% on alcohol packed in sachets and plastic bottles.

(5) Changed collection point of motor vehicle license fees from Road Traffic Directorate to the Malawi Energy Regulatory
Authority (MERA) through the introduction of fuel levy.

Required:
State one specific objective of each of the measures listed above. 5 Marks

(b) A taxpayer is allowed to deduct “deductible expenses” from his or her assessable income to determine the taxable income.
Section 28(1) of the Taxation Act stipulates the conditions which must be met for expenses to be deductible from the assessable
income.

Required:
Mention the five main conditions for allowable expenses as stipulated in Section 28(1) on the deductibility of expenses.
5 Marks

(c) Define the term “capital gain” or “loss”. 2 Marks

(d) State any three instances where neither gain nor loss shall be recognized for purposes of the Taxation Act on the transfer or
disposal of any capital asset.
3 Marks
(e) Calculate the amount of realized capital loss which is deductible from assessable income in the following circumstances. Ass ume
that the capital loss arises from the disposal of assets in respect of which no capital allowances were given:

(i) Where a taxpayer has a realized capital loss of K120,000 and there is a realized capital gain of K170,000.
2 Marks

(ii) Where a taxpayer has a realized capital loss of K60,000 and there is a realized capital gain of K40,000.
2 Marks

(f) How would you answer part (e) above, if the capital losses and gains related wholly to the disposal of assets on which allowances
had been given? 1 Mark
(TOTAL : 20 MARKS)

7. (a) (i) What is the term used to describe the levying of income tax by more than one country on the same income of a taxpayer?
1 Mark

(ii) How does the scenario in (i) above arise and how can it be mitigated or prevented in Malawi?
3½ Marks

(b) Under what three circumstances will a taxpayer make an appeal to the Commissioner General under the Taxation Act?
3 Marks

(c) Where a taxpayer is not satisfied with the determination of the Commissioner General, he has an option to appeal to the Special
Arbitrator.

Required:

State the procedure that the Special Arbitrator follows in making his determination.
3½ Marks

(d) Mention any three functions of customs officers under the Customs and Excise Act.
3 Marks

(e) State six methods of customs valuation under the new GATT valuation system.
6 Marks
(TOTAL : 20 MARKS)

END

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

178 / 312
 STRICTLY CONFIDENTIAL

2014 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 10(B): TAXATION

THURSDAY 4 DECEMBER 2014 TIME ALLOWED: 3 HOURS

SUGGESTED SOLUTIONS

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

179 / 312
 1

SECTION A

ANSWER BOTH QUESTIONS IN THIS SECTION

1. (a) Taxable income for Lilongwe Limited

K’000 K’000
Profit before tax 97,400
Add back:
Depreciation 44,000
Depreciation production 15,000
Bad debts 645
Provision for bonuses 880
Exchange loss 250
Provision for gratuities 920
Staff relief fund 1,850
Maintenance – buildings 1,300
Maintenance – machinery 650
Traffic fines 250
Fringe benefits tax 1,950
Formation expenses 1,250 68,945
166,345
Less: Capital Allowances (18,700)
______
Taxable income 147,645

(b) Taxable income for Lilongwe Limited

Taxable income 245,000

Rate 30%
 245,000,000 x 30%

= K73,500,000

(c) (i) Tax on the dividend declared by the subsidiary company:

K
Net dividend received = 2,700,000
Gross dividend = 2,700 x 100
90
Gross dividend  = 3,000,000

Tax therefore = 3,000,000 – 2,700,000 = K300,000

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

180 / 312
 2

(ii) Tax on the dividend paid by Lilongwe Ltd:

K
Gross dividend declared = 7,200,000
Less: Net dividend received from
Subsidiary company = 2,700,000
Balance 4,500,000
= 450,000
Tax thereon @ 10%

(iii) Tax on dividends is not recoverable:

 The tax paid is final
 Dividends cannot be included in the return as they are
not taxable in the hands of the recipient.

(d) (i) The register contains complete copies of notices of assessment and these
are filed in the office of the Commissioner.

(ii) Every taxpayer shall be entitled to copies certified by or on behalf of the

Commissioner of his own notice of assessment. The Auditor
General or his appointee may also have access to the register.

(iii) The information of the taxpayer is confidential and not open to the public

(e) Because the rate of corporation tax for a company incorporated in Malawi is
different from the rate of tax for a company incorporated outside Malawi.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

181 / 312
 3

2. (a) Capital Allowances for Jatropha Limited

Motor Motor
Factory & Plant & vehicles vehicles Furniture
Buildings Machinery Commercial Saloons & Fittings Computers
K’000 K’000 K’000 K’000 K’000 K’000
TWDV 1/1/2013 15,250 14,000 78,000 12,500 12,430 9,250
Additions 6,500 8,800 45,000 18,000 - -
Disposals -___ (5,250) (1,750) _____ (3,500) ______
21,750 17,550 121,250 30,500 8,930 9,250
Investment Allowance (6,500) (3,520)
Initial Allowance - - (9,000) - - -
Annual Allowance (762.5) (1,755) (24,250) (6,100) (893) (3,700)1
14,487.5 12,275 88,000 24,400 8,037 5,550

Notes

Computation of amount of addition with storeroom

K
TWDV of factory building 15,250
Addition 6,500
21,750
Cost of storeroom 1,500

% of total value 1500_ x 100 = 7% = less than 20%

21,750

Therefore the full addition is claimable as an industrial building.

(b) Foreign exchange gain/loss

Cost of goods £375,000

Formula given ar1 – ar2

1st payment gain or loss June 2013

($75,000 x 450) – ($75,000 x 500)

= K33,750,000 – K37,500,000
Loss = (K3,750,000)

2nd payment gain or loss October 2013

($150,000 x 450) – (150,000 x 550)

= K67,500,000 – K82,500,000
Loss = (K15,000,000)

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

182 / 312
 4

3rd payment gain or loss December 2013

($150,000 x 450) – ($150,000 x 400)

= K67,500,000 – K60,000,000
Gain = K7,500,000

SECTION B

ANSWER THREE QUESTIONS ONLY FROM THIS SECTION

3. (a) A person is registrable as taxable for purposes of Value Added Tax (VAT) Act
where:

(i) such person makes taxable supply of goods or services.

(ii) the business turnover is or exceeds K10 million.

Any business which satisfies criterion (i) above and whose business turnover is
below K10 million mark stipulated in (ii) above may apply for voluntary
registration.
Section 11(i) – VAT Act

(b) The Commissioner General will not register any person under the voluntary
registration provisions of the VAT Act if:

(i) the Commissioner General is satisfied that the person applying for
voluntary registration has no fixed place of business or

(ii) the Commissioner General has reasonable ground to believe that:

 the person will not keep proper accounting records relating to any
business activity carried out by that person or

 the person will not submit regular and reliable returns required under
the VAT Act; or

 the person is not a fit and proper person to be registered.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

183 / 312
 5

(c) Calculation of VAT paid on business related

(i) Expenditure

Expenditure Gross Amount VAT

K K
Security 291,250
41,250
Legal 186,400
26,400

Stationery 87,375 12,375

Office furniture 436,875 61,875

Office rentals 495,125 70,125

Electricity 80,385 11,385

Salaries 6,250,000 N/A -

Water 125,000 N/A -

-
Postal services 252,200 N/A
______
223,410
Total

(ii) VAT on sales

Sale Type Net VAT Total
K K K
Local sales 9,600,000 1,584,000 11,184,000
Export sales 4,300,000 -___ 4,300,000
13,900,000 1,584,000 15,484,000

(iii) Calculation of net VAT payable to MRA

K
Value of output VAT on sales 1,584,000
Less input VAT on expenditure 223,410
Net VAT payable to MRA 1,360,590

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

184 / 312
 6

(d) The conditions for taxpayers who are not motor dealer

The taxable person must:

- be in the business of hiring of motor vehicles; or

- be in the business of selling motor vehicle spare parts; or
- use the motor vehicle or motor vehicle spare parts wholly, exclusively
and necessarily in his or her business.
Section 30(5) of the VAT Act

4. (a) (i) According to section 94A of the Taxation Act:

 every employer other than government

 who provides fringe benefits to any of his employees
 shall be liable to pay fringe benefits tax
 on the total taxable value of such fringe benefit
 at the rate specified from time to time.

(ii) The fringe benefits tax can be reduced by:

 not providing fringe benefits

 letting employees contribute towards the benefits provided
 paying school fees direct to institutions
 allocating housing accommodation belonging to employer

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

185 / 312
 7

(b) Chisitu Limited Computation of Fringe Benefits Tax

1. Housing accommodation – property owned by employer

H
General Chief Production R
Manager Accountant Manager M
K’000 K’000 K’000

Annual rental values 5,400 3,600 3,600

10% of annual salary 28,000 x 10% 18,000 x 10% 15,000 x 10% 1
= 2,800 1,800 1,500
Taxable value is the
greater of (a) and (b) above 5,400 3,600 3,600
50% thereon – property is
owned by employer 2,700 1,800 1,800

2. Motor vehicles

Cost of vehicles 45,000 25,000 25,000 2

15% thereon 45,000 x 15% 25,000 x 15% 25,000 x 15% 2
6,750 3,750 3,750
Annual taxable value 6,750 3,750 3,750

3. School fees

Paid direct to institutions 2,700 1,500 -

50% thereon 1,350 750 -
Taxable value 1,350 750 -

4. Garden boys No benefit as amount is taxed in hands of

employee ½

5. Watchman No benefit as housing is property is owned

by employer ½

6. Cook full cost 360 - 180

180 -

7. DSTV subscription 420 - 420

- 420

Total annual taxable values 11,580 6300 6,150

5,130 5,970
Total for all employees 35,130
Annual total taxable values : 35,130
For one quarter = 35,130 ÷ 4 = 8,782.5
FBT thereon at 30% ½ = 2,634.75
= 2,634,750

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

186 / 312
 8

5. (a) (i) Direct taxes are assessed on income or property (wealth).

Indirect taxes are taxes that are levied on goods and services.

(ii) Examples of direct taxes are - income tax

- property tax

Examples of indirect taxes are - value added tax

- customs duty
- excise tax

(b) (i) Advice to taxpayer – withholding tax on rentals has not been correctly
operated.
Withholding tax on rent at 15% = 1520000 x 15% = 228,000
Withholding tax deducted = 136,000
Under withheld withholding tax (underdeduction) 92,000

(ii) Penalty for incorrect accounting for withholding tax

- Failure to deduct withholding tax makes one personally liable to

pay the tax which was not withheld plus 20% additions as it is paid
late.

- Failure to operate a withholding tax scheme makes one guilty of an

offence punishable by a fine of K1,000.

(iii) Income Tax Computation

K’000
Rent 1,520
Salary 11,500
13,020
Less:
Rates 184
Subscription 175 ½
12,661

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

187 / 312
 9

Tax payable
K’000
st
1 240,000 @ 0% -
Next 60,000 @ 15% 9,000
Balance 12,361,000 @ 30% 3,708,300
3,717,300

Tax payable 3,717,300

Less : Withholding tax 136,000
PAYE tax 3,351,000 3,487,000
Tax payable 230,300
Tax on estimated assessment 3,875,500
Tax over estimated 3,645,200

6. (a) 1 – to encourage investment and private sector growth.

2 – to promote exports and earn foreign exchange thereby improve the balance
of payment position.

3 – to compensate for loss of value of local currency due to devaluations or

inflation.

4 – to discourage consumption of undesirable products.

5 – to ensure that all vehicles are contributing to the road fund and ease
congestion at the road traffic offices.

(b) Conditions for deductibility of expenses under Section 28:

 Expenditure and losses must not be capital in nature

 The expenditure that has been wholly incurred for the business
 Those that have been exclusively incurred for the trade.

 Necessary for the business or trade.

 All expenditure and losses must have been incurred by the taxpayer for the
purposes of his trade or in production of the income.

(c) A capital gain is the excess of the amount realized on the disposal of a capital
asset over its basis or adjusted basis.

A capital loss is the excess of the basis or adjusted basis of a capital asset over the
amount realized on the disposal of a capital asset.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

188 / 312
 10

(d) Any three circumstances below:

- transfer between spouses or former spouses.

- to a spouse from an estate of a deceased spouse.
- on disposal of an individual’s principal residence.
- capital gains realized by an individual on the disposal of personal and
domestic assets not used in connection with any trade.

- from deceased parent to a child.

(e) (i) The capital loss of K120,000 would be deductible from assessable income
since we have a realized capital gain which is more than the realized loss
in the same year.

(ii) Only K40,000 would be allowed as a deduction as there will be a

restriction on the amount deductible to the lesser of the realized capital
loss or any capital gain realized by the taxpayer.

(f) There would be no restriction if the assets attracted capital allowances and
therefore the full amount of losses would be allowed in both cases.

7. (a) (i) Double taxation.

(ii) This arises from:

- Differences in bases of taxation in different countries as some

countries use source while others use residence and other criteria when
taxing revenue.

- This can be mitigated by:

 entering into double tax agreements with other countries
 provisions in the Taxation Act that allow deducting foreign tax.

(b) A taxpayer may appeal to the Commissioner if he is aggrieved by:

- any assessment made upon him by the Commissioner under the Act.
- any decision of the Commissioner in relation to an assessment.
- the determination of a reduction in tax under Sections 123 and 124.

(c) A taxpayer who is aggrieved by the decision of the Commissioner may appeal to a
special arbitrator.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

189 / 312
 11

The special arbitrator

- shall have the power to summon and enforce prompt attendance of

witnesses to hear and take evidence.

- where required may appoint assessors who will act solely in an advisory
capacity.

- shall ensure that proceedings are not conducted in public and shall exclude
or withdraw any persons whose attendance is considered not necessary.

- may allow the appeal and amend the assessment, decision or

determination in respect of which the appeal is made.

- may disallow the appeal.

- shall set out findings of fact and decisions on points of law in written
judgement.

- findings of fact in a judgment of the special arbitrator shall be final and

conclusive.

(d) Functions of Customs Officers:

- to receive and process monthly returns and excise remittances

- to send reminders to excise traders in arrears of payments
- to visit excise traders and verify the correctness of excise returns
- to advise the Commissioner of any irregularities or omissions by excise
traders.

(e) - transactional value method

- transactional value of similar goods
- deductive method
- fall back method
- computed value method
- identical goods method.
)

END

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

190 / 312
 EXAMINATION No._____________________

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2013 EXAMINATIONS
ACCOUNTING TECHNICIAN PROGRAMME
PAPER TC 10(B): TAXATION

WEDNESDAY 5 JUNE 2013 TIME ALLOWED: 3 HOURS

9.00 AM - 12.00 NOON

INSTRUCTIONS:

1. You are allowed 15 minutes reading time before the examination begins during which
you should read the question paper and, if you wish, make annotations on the question
paper. However, you are not allowed, under any circumstances, to open the answer
book and start writing or use your calculator during this reading time.

2. Number of questions on paper – 7.

3. The paper is divided into TWO Sections, A and B. BOTH questions to be answered in
Section A and ANY THREE from Section B.

4. Each question carries 20 marks.

5. Use of non-programmable calculators is allowed.
6. You are provided with the following:

(i) A set of tables containing rates of tax on taxable income (Table 1).
(ii) Rates of capital allowances (Table 2).
(iii) Penalty rates for underpaid provisional tax (Table 3).

7. Begin each answer on a fresh page.

8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE

INVIGILATOR.

This question paper contains 11 pages

This question paper must not be removed from the examination hall.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

191 / 312
 1

SECTION A

ANSWER BOTH QUESTIONS IN THIS SECTION

1. (a) Mrs Makokola, an individual taxpayer who used to trade in general

merchandise, produced the following information for the year to June 2012.
She now requires your assistance to enable her submit a return of income to
the tax authorities.

Profit and loss account for the year to 30 June 2012

Note K‟000 K‟000

Turnover 5,440
Sundry income 1 277
5,717

Less:
Depreciation 840
Salaries 550
Legal costs 2 300
Motor vehicle repairs 3 270
Road permit & licences 3 50
Penalties & fines 4 120
Fringe benefits tax 165
Accountancy services 360
Rent payable 5 400
General expenses 6 525
Electricity 70
Water 87 3,737
Profit before tax 1,980

Note 1
Sundry income of K277,000 is made up of the following:
K‟000
Proceeds from sale of gift 60
Rental income (net of withholding tax) 102
Bank interest (net of withholding tax) 115
277

Note 2
Legal costs of K300,000 were incurred as follows: K‟000
Debt collection 70
Documentation for processing business contracts 120
Traffic fines 110
300

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

192 / 312
 2

Note 3
Private motoring
In addition to vehicles specifically designated for private use, Mrs Makokola
and family made use of business vehicles for private purposes. Because of
practical difficulties in tracking such private use, it was agreed by the Malawi
Revenue Authority to estimate such private use at 30% and, therefore, disallow
relevant expenses to that extent.

Note 4
Penalties and fines; K120,000, were made up as follows:

K‟000
Late submission of tax return 100
Fine for selling expired products 20
120

Note 5
Rent payable K400,000
50% of the rent payable was in relation to a house Mrs Makokola used as her
residence.

Note 6
General expenses : K525,000
K‟000
Donations to orphan care centre 75
Donations to local church 125
Office refreshments 250
Donation to MACOHA 75
525

Capital allowances of K620,000 were to be allowed as a deduction instead of

depreciation.

Required:

(a) (i) Compute Mrs Makokola‟s taxable income for the year to 30 June 2012.
9½ Marks
(ii) Assume the following:

(1) The taxable income in the above tax computation was K5,555,444.
(2) Withholding tax was deducted from the bank interest at a rate of
20%.
(3) Withholding tax was deducted from rentals received at 15%; and
(4) Provisional tax of K840,000 was paid within the year under
review.

Compute the amount of net tax payable. 5½ Marks

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

193 / 312
 3

(b) (i) Mention any five general conditions that all traders dealing in goods and
services that attract excise tax must comply with, according to the customs
and excise tax law. 2½ Marks

(ii) For purposes of customs duty, the law demands that all goods must be
cleared at the border port except in circumstances where the importer is
allowed to clear them at an inland port.

Required:

Name any five reasons/circumstances that may necessitate the

Commissioner General of the Malawi Revenue Authority to allow an
importer to clear their goods inland. 2½ Marks
(TOTAL: 20 MARKS)

2. (a) State the circumstances under which an investment allowance is given to a

taxpayer. 3 Marks

(b) For purposes of paragraph 4 of the Second Schedule to the Taxation Act:

(i) State the types of motor vehicles in respect of which investment allowance
cannot be given. 1 Mark

(ii) Define the term „manufacturer‟ as stipulated in the Second Schedule to the
Taxation Act. 1 Mark

(c) For purposes of the Second Schedule to the Taxation Act, the definition of farm
improvement excludes three types of buildings.

Required:

Mention the three types of buildings. 3 Marks

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

194 / 312
 4

(d) A taxpayer‟s schedule of capital allowances as at 31 December 2011 is as

follows:

Tax written Rate of annual

Type of asset down value allowance
K‟000
Factory building 55,200 5%
Plant & machinery 72,400 10%
Motor vehicles 45,600 20%
Furniture & fittings 17,200 10%
Office equipment and computers 12,500 40%

During the year to 31 December 2012, transactions recorded were as follows:

Plant and machinery

New machinery was bought during the year at a cost of K4,500,000. Some
machinery was sold during the year for K2,200,000 which resulted in a capital
loss of K100,000.

Motor vehicles

One motor vehicle which was acquired in April 2010 for K3,200,000 was sold
during the year for K1,825,000.

Furniture and fittings

New furniture and fittings were purchased at a cost of K1,500,000 and additional
secondhand fittings were purchased at a cost of K520,000.

Office Equipment

Six new computers were purchased at K1,800,000.

Factory building

A total of K6,500,000 was spent on extending the factory building.

Required:

(i) Calculate the tax written down value of the machinery that was sold.
1½ Marks
(ii) Calculate the capital gain or loss on the saloon vehicle that was sold
during the year. 3 Marks

(iii) Calculate the capital allowances due for the year to 31 December 2012.
7½ Marks
(TOTAL: 20 MARKS)
Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

195 / 312
 5

SECTION B

ANSWER THREE QUESTIONS ONLY FROM THIS SECTION

3. (a) (i) State three circumstances under which liability to non-resident tax
arises. 1½ Marks
(ii) Mention the rate at which the non-resident tax is charged. 1 Mark

(b) Non-resident tax is not payable on certain types of income.

Required:
State the two types of the income. 2 Marks

(c) Define the term “person resident in Malawi” as it refers to an individual,

partnership or company. 3½ Marks

(d) Apao Limited is a company registered in Malawi trading in motor vehicle spare
parts. In August 2011, the firm became indebted to a supplier based in China in
the sum of $6,500,000 on account of the spare parts supplied.

$3.0 million was paid in November 2011 and $2.5 million was paid in January
2012. The balance of $1 million was included in the 30 June 2012 accounts at
K300 million using an exchange rate of $1 = K300.

Required:
(i) Using the formula specified in the Taxation Act, calculate the foreign
exchange gains or losses on the transactions given above, to be claimed
for the year of assessment to 30 June 2012. Assume the following
exchange rates were in use:

August 2011 $1 = 160

November 2011 $1 = 250
January 2012 $1 = 280 5 Marks

(ii) State whether the foreign exchange loss on the outstanding balance of $1
million which has been converted to K300 million and included in the
accounts to 30 June 2012 is an allowable deduction. Give reasons for your
answer. 2 Marks

(e) Mapando Limited is registered for purposes of operating withholding tax from
salaries, commonly known as PAYE. PAYE tax for April 2011 amounting to
K2,455,000, was paid to the Malawi Revenue Authority (MRA) on 17 November
2011, several months late.

Required:
Calculate additional sums chargeable as a result of paying the tax late. 5 Marks
(TOTAL: 20 MARKS)

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

196 / 312
 6

4. (a) Malawi taxation is based on source.

Required:

Explain what the above statement means. 2½ Marks

(b) Under section 45 of the Taxation Act, the deduction of contributions made by
a taxpayer to a fund providing for sickness, accident, unemployment or other
benefits for employees or widows, children or nominees of deceased
employees is prohibited.

Required:

Mention five other types of expenditure whose deduction is similarly

prohibited. 5 Marks

(c) (i) State the restrictions, if any, that are imposed on the deductibility of a
realized foreign exchange loss. 2½ Marks

(ii) State the amount that would be allowed as a deduction from the
taxpayer‟s assessable income where realized foreign exchange losses
of K250,000 are equal to the unrealized foreign exchange gains of
K250,000. 3 Marks

(d) Chabwera Limited had computed taxable income of K24,950,000 for the year
to 30 June 2012. The tax paid in advance by way of provisional tax was
K5,900,000. Withholding tax amounting to K550,000 was also deducted from
payments made to the company during the year under review.

Required:

(i) Calculate the balance of tax payable for the tax year to 30 June 2012.
3 Marks
(ii) Calculate the penalty, if any, for the underpaid provisional tax.
4 Marks
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

197 / 312
 7

5. (a) Motamota Limited has been given a government contract to supply subsdised
fertilizer and would like to pay K7,500,000 as premiums for use of a building
as a warehouse. Before making the decision, the company Chief Executive
Officer decided to ask you for advice.

Required:

Advise the investor:

(i) whether expenditure on the warehouse facilities is an allowable deduction.

1 Mark
(ii) how the amount of deduction is arrived at, if it is allowable. 2 Marks

(iii) how much will be allowed as a deduction, if the periods of use of the
building is:

1 - 20 years; 1 Mark
2 - 36 years. 1 Mark

(b) (i) The Taxation Act has provisions which subject clubs, societies or
associations to tax under Section 61, while exempting others from tax
under the First Schedule of the same Act.

Required:

State the main differences between the two categories of clubs, societies or
associations, and explain the taxation treatment for each type. 4 Marks

(ii) State how the taxable income of the clubs, societies or associations
that are liable to income tax is determined, and what is the tax rate?
3 Marks

(c) State any four types of expenditure which a farmer is allowed to claim as a
deduction, under section 58 of the Taxation Act, in determining the taxable
income from pastoral, agricultural or other farming operations. 2 Marks

(d) An individual taxpayer had the following income from e mployment in the
year to 30 June 2012.

(1) Basic monthly salary

K150,000 for the first 6 months to December 2011 and K170,000 for
the next six months to June 2012.

(2) Housing allowance

20% of basic monthly salary paid together with the salary.

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

198 / 312
 8

(3) School fees

K600,000 per term for each of his 3 children for the three terms of the
year. This was paid together with his salary in September 2011,
January 2012 and March 2012.

(4) Motor vehicle allowance

A monthly gross allowance of K150,000.

(5) Professional subscriptions

Professional subscriptions of K120,000 were paid during the year

(these were previously allowed for tax purposes).

Required:

Compute the taxable income of the individual for the tax year to 30 June
2012. 6 Marks
(TOTAL : 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

199 / 312
 9

6. (a) (i) Define the term “fringe benefit” as stipulated in the Taxation Act.
1 Mark
(ii) When is an employer supposed to register for the Fringe Benefits Tax?
1 Mark
(iii) State four instances when taxable values of certain benefits can either be
reduced or completely disregarded. 4 Marks

(b) Mr Ndasauka was employed by a Bank in Zomba on 1 January 2012 as a Bank

Manager. According to the grade of his position, he was entitled to the following
benefits:

(i) Salary of K850,000 per month.

(ii) Use of a motor vehicle without restriction. The vehicle which was bought
on 1 January 2012 cost the bank K12 million.

(iii) The Bank pays a rent of K150,000 per month for a fully furnished house
in Matawale.

(iv) School fees for each of his two children paid directly to Sir Harry
Johnston at K500,000 per term.

(v) A cook and a gardener at a cost of K15,000 and K12,000 per month,
respectively.

Required:

Compute the taxable values for the fringe benefits tax purposes for all the benefits
provided for the quarter ended 30 April 2012. 8 Marks

(c) What circumstances must one attain, if repairs to property (premises and
equipment) are to be allowed as a deduction from the taxable income of a
taxpayer. 4 Marks

(d) What restrictions, if any, are imposed on the deductibility o f a capital loss from
the assessable income of a taxpayer? 2 Marks
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

200 / 312
 10

7. (a) Marko and Sadaki are partners in an unincorporated hardware business

operating in Malawi. Their partnership accounts for the year to 30 June 2012
showed the following:

(1) Profits between the two partners were shared 3:2 respectively, and
these amounted to K750,000.

(2) The share of profits in (1) above was calculated after Marko and
Sadaki had drawn salaries of K450,000 and K330,000 respectively
during the year under review.

(3) The share of profits in (1) above was also net of interest on capital of
K82,000 for Marko and K64,000 for Sadaki and also a total
depreciation of K126,000.

(4) Marko received a rental income of K650,000 in the year under review.

All other expenses were allowable for tax purposes.

Required:

Calculate Marko‟s taxable income and the income tax thereon. 8½ Marks

(b) A public officer of a company incorporated in Malawi is required to furnish

information relating to any declaration of a dividend within 30 days of such
declaration.

Required:

State the items that must be submitted and what they must contain. 3½ Marks

(c) State three instances where penalties may be charged in connection with a
return of income. 3 Marks

(d) State how much would be allowable or additionally allowable in each of the
given circumstances below:

(i) K1,450,000 – training expenses incurred by an employer in training a

Malawian employee to a degree qualification. 2 Marks

(ii) A donation to the Malawi Council for the Handicapped (MACOHA)

amounting to K2,500 by an individual. 1 Mark

(iii) K650,000 being the total provisions for bad debts. One debtor owing
K75,000 is reported sick and chances of debt repayment are
diminishing every day. The balance is an estimate for several debtors.
The K650,000 was included in sales when the transactions were
initiated. 1 Mark

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

201 / 312
 11

(iv) K700,000 – being expenditure incurred in May 2011, a few months

before the company began its manufacturing operations on 1 April
2012. 1 Mark
(TOTAL: 20 MARKS)

END

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

202 / 312
 EXAMINATION NO._____________________

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2013 EXAMINATIONS
ACCOUNTING TECHNICIAN PROGRAMME
PAPER TC 10(B): TAXATION

MONDAY 2 DECEMBER 2013 TIME ALLOWED: 3 HOURS

9.00 AM - 12.00 NOON

INSTRUCTIONS:

1. You are allowed 15 minutes reading time before the examination begins during
which you should read the question paper and, if you wish, make annotations on the
question paper. However, you are not allowed, under any circumstances, to
open the answer book and start writing or use your calculator during this reading
time.

2. Number of questions on paper – 7.

3. The paper is divided into TWO Sections, A and B. BOTH questions
to be answered in Section A and ANY THREE from Section B.

4. Each question carries 20 marks.

5. Use of non-programmable calculators is allowed.
6. You are provided with the following:

(i) A set of tables containing rates of tax on taxable income (Table 1).
(ii) Rates of capital allowances (Table 2).
(iii) Penalty rates for underpaid provisional tax (Table 3).

7. Begin each answer on a fresh page.

8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED

BY THE INVIGILATOR.

This question paper contains 9 pages

This question paper must not be removed from the examination hall.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

203 / 312
 1

SECTION A

ANSWER BOTH QUESTIONS IN THIS SECTION

1. (a) Describe the circumstances under which the following items are allowable or
deductible for tax purposes in accordance with the Taxation Act:

(i) Bad debts 2 Marks

(ii) Doubtful debts 2 Marks
(iii) Individual donations 4 Marks

(b) Chikwanda Limited is incorporated in Malawi and manufactures toilet tissue.

The company’s summarized profit and loss account for the year ended 31
December 2012 is as follows:

Notes K’000 K’000

Sales 255,500
Cost of sales 148,200
Gross profit 107,300
Interest 7,200
Depreciation 1 8,400
Auditor’s fees 1,200
Bad debts 750
Doubtful debts 2 720
Net exchange (gains) 3 (600)
Repairs & maintenance 4 2,200
Fringe benefits tax 450
Staff expenses 6,200
Directors fees 2,100
Other allowable expenses 18,400
Total expenses 39,820
Profit before tax 74,680

Notes
1. Included in the cost of sales is K15,200,000 in respect of depreciation
for plant and equipment.

2. Doubtful debts are made up of the following:

K’000
Specific provision 320
General provision 400
720

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

204 / 312
 2

3. Net exchange gains are in respect of imported machinery and are made up
of the following:

K’000
Exchange gains – realized (1,500)
Exchange losses – realized 600
Exchange losses – unrealized 300
Total net exchange gains (600)

In the previous years all exchange gains and losses were realized.

4. Repairs and maintenance includes an amount of K1,200,000 for work

paid for but not done by 31 December 2012.

5. Staff expenses include K285,000 being cost of tuition and related

expenses incurred by Chikwanda Limited in respect of a Malawian
employee who obtained a degree in Engineering and works as a
production manager.

6. Agreed capital allowances were K21,200,000.

Required:

(i) Compute the taxable income and tax payable for the accounting year
ended 31 December 2012. 7 Marks

(ii) How much tax would Chikwanda Limited have paid had it been a foreign
company? 1 Mark

(iii) Define the term “mining expenditure” as provided in part (ii) of the second
schedule to the Taxation Act. 5 Marks
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

205 / 312
 3

2. (a) Define the term “staff housing” as stipulated in the Malawi Taxation Act.
2 Marks

(b) What must a taxpayer do to ensure that maximum capital allowances are claimed
in respect of staff housing? 2 Marks

(c) Mention the type of fencing expenditure that is eligible for capital allowances.
2 Marks
(d) Chikobonya is running a manufacturing business. The capital allowances
schedule as at 1 July 2012 contained the following information:

Tax written Annual

Asset Type down value Allowance Rate
K’000
Factory building 32,600 5%
Plant & machinery 15,400 10%
Motor vehicles 19,200 20%
Furniture & fittings 5,300 10%

During the year to 30 June 2013, the following transactions were recorded:

Fencing

Fencing of the factory which started in 2009 was completed and brought
into use during the year under review and an amount of K767,000 was spent
in this final phase.

Plant & machinery

Some aging machinery was sold for K4,250,000. This sale resulted in a
capital loss of K750,000. New replacement machinery was acquired at a
cost of K12,200,000.

Motor vehicle

One motor vehicle with a tax written down value of K2,600,000 was sold
for K4,400,000. A replacement saloon vehicle was acquired at a cost of
K14,800,000.

Furniture & fittings

Additional furniture and fittings were acquired at a cost of K2,200,000.

Staff housing

One staff house was built at a cost of K9,620,000.

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

206 / 312
 4

Required:

(i) Calculate the tax written down value of the machinery that was sold.
2 Marks

(ii) Calculate the capital gain or loss on the motor vehicle that was sold.
2 Marks

(iii) Calculate the capital allowances due for the year to 30 June 2013.
(Assume initial allowances have been claimed, where appropriate).
10 Marks
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

207 / 312
 5

SECTION B

ANSWER THREE QUESTIONS ONLY FROM THIS SECTION

3. (a) Describe the two types of clubs, societies or associations which are recognized
under the Taxation Act. 3 Marks

(b) How is the income of such clubs, societies or associations treated by the Malawi
Revenue Authority? 2 Marks

(c) Where a club or association is subject to tax, state how the taxable inco me is
computed. 3 Marks

(d) The transactions of Chawaka C lub, which is a taxable club and registered in
Malawi, for the financial year ended 30 June 2013, were listed as follows:

Income K’000
Gambling machine 315
Live band performances 416
Sale of food 250
Video shows 85
Sale of drinks 320
Club membership fees 160

Expenses:
Repairs & maintenance 485
Trading licences 265
Cost of goods sold 125
Food licence 25
Salaries & wages 675

Required:
(i) Compute the taxable income of Chawaka Club for the financial year ended
30 June 2013. 4 Marks

(ii) Calculate the amount of tax payable on the taxable income computed in (i)
above. 1 Mark

(iii) State the tax year in which the taxable income computed in (ii) above will
be assessed. 1 Mark

(e) Explain how turnover tax works. 5 Marks

(f) Name any two reasons why turnover tax was introduced. 1 Mark
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

208 / 312
 6

4. (a) A Malawian businessman obtained a foreign currency loan facility whose

proceeds were used to set up a fertilizer company in Balaka. The loan was for
$320,000 and was obtained in September 2011. The payment of the loan was
made as follows:

March 2013 $95,000

June 2013 $125,000
September 2013 $100,000

Exchange rates for the relevant periods were as follows:

September 2011 $1 = 150

March 2013 $1 = 365
June 2013 $1 = 420
September 2013 $1 = 480

Required:

(i) Define the term “foreign currency liability”, in terms of the Taxation Act.
1½ Marks

(ii) Calculate the value of the foreign currency in Malawi Kwacha at the time
of establishing the foreign currency liability, in September 2011. 1 Mark

(iii) Calculate the total amount of foreign exchange gain, or foreign exchange
loss, as the case may be, realized on the loan transaction upon being paid
in full. 10 Marks

(iv) Calculate how much would have been saved in realized foreign exchange
loss, or how much would have been realised as additional foreign
exchange gains if the whole of this foreign exchange liability was settled
in March 2013. 3½ Marks

(b) The Taxation Act exempts certain capital gains and losses realized on the
transfer of some capital assets from being assessable for tax.

Required:

State any four situations in which those exempt capital gains or losses could arise.
4 Marks
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

209 / 312
 7

5. (a) Mention any five general conditions that all traders dealing with goods and
services that attract excise tax must comply with, in accordance with the customs
and excise tax law. 2½ Marks

(b) For purposes of customs duty, the law demands that all goods must be clea red at
the border port except in circumstances where the importer is allowed to clear
them at an inland port.

Required:

Name any four reasons/circumstances that may necessitate the Commissioner

General of the Malawi Revenue Authority to allow an importer to clear their
goods inland. 2½ Marks

(c) In readiness for Easter, a shop ordered 5,000 cards from China. The prospective
supplier sent an email to indicate that the cost of each card was $2 CIF Blantyre.

An enquiry from the Malawi Revenue Authority reveals that upon arrival at the
border port of the imported cards, the shop will be required to pay 30% customs
duty, 25% excise tax and 16½% value added tax.

Required:

(i) Explain the term CIF as used in international trade. 1½ Marks

(ii) Advise how much the shop will pay to MRA should they go ahead to
import the cards. (Assume the exchange rate at the time of arrival of the
cards will be K450 to 1 US dollar). 8½ Marks

(d) Chikoko Limited is a company incorporated in Malawi. Its taxable profits for the
2012/2013 tax year amounted to K245,600,000. During this period the company
never paid provisional tax.

Required:

Calculate the penalty that the company is liable to. 5 Marks

(TOTAL : 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

210 / 312
 8

6. (a) Under what circumstances is a person liable to register as a ta xable person for
purposes of the Value Added Tax (VAT) Act? 2 Marks

(b) The following transactions were recorded in the books of a VAT registered
taxpayer for the month of July 2013.

1. Business related expenditure inclusive of VAT at 16.5%

K’000
Security expenses 81,550.00
Legal expenses 17,475.00
Stationery 13,980.00
Office furniture 18,640.00
Office rentals 45,435.00
Electricity 8,737.50
185,817.50

2. Business related expenditure exclusive of VAT

K’000
Salaries and wages 195,000
Water 25,000
Postal services 10,000

3. In addition to the above transactions, the value of sales net of VAT were
K425,000,000 and K5,000,000 in respect of local sales and exports
respectively.

Required:

(i) Calculate the amount of VAT paid or payable on each of the above
expenditure items. 9 Marks

(ii) Calculate the amount of VAT chargeable on total sales, local and export,
indicating the gross sales values. 2 Marks

(iii) Calculate the amount of net VAT payable to the Revenue Authorities after
taking into account input tax paid on each of the expenditure items given
above. 2 Marks

(iv) In relation to Value Added Tax (VAT), the time of supply of goods and
services for normal value added tax purposes is when the earliest of five
events occurs.

Required:

Mention the five events which may define the tax point. 5 Marks
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

211 / 312
 9

7. (a) Certain types of expenditure incurred by farmers during a year of assessment,

which would normally be accounted for as special expenditure, are fully
deductible from the taxable income.

One of the six types of expenditure listed in the Taxation Act, as eligible for
this treatment, is water control work in connection with the cultivation and
growing of rice, sugar or other approved crops.

Required:

(i) Mention four other types of expenditure listed in the Taxation Act.
4 Marks
(ii) Define the term “water control work” as stipulated in Section 58 of the
Taxation Act. 3 Marks

(b) Mrs Katundu is a Managing Director of Viwemi Limited. She is paid a salary
of K2,600,000 per month and a house allowance of 50% of the salary. She is
also paid K600,000 together with her salary every quarter for school fees for
her children, and K75,000 every month for domestic servants.

Required:

Calculate her tax liability for the twelve months period ended 31 December
2012. 5 Marks

(c) State any five offences listed under Section 112 of the Taxation Act which,
when committed, attract the imposition of a penalty. 5 Marks

(d) Explain the circumstances under which research and experiments may be
allowed as a deduction from a taxpayer’s assessable income. 3 Marks
(TOTAL: 20 MARKS)

END

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

212 / 312
 STRICTLY CONFIDENTIAL

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2013 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 10(B): TAXATION

MONDAY 2 DECEMBER 2013 TIME ALLOWED: 3 HOURS

9.00 AM - 12.00 NOON

SUGGESTED SOLUTIONS

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

213 / 312
 1

SECTION A

ANSWER BOTH QUESTIONS IN THIS SECTION

1. (a) (i) Bad debts will be allowed if:

- they have been proved to be bad to the satisfaction of the

commissioner general.

- they have become bad during the year of assessment.

- the amount of debt must have been included in the current year of
assessment or was included in any previous year in the taxpayers
assessable income (trade debts) either in terms of the Act or any
previous law. _______

(ii) Doubtful debts will be allowable:

- To the extent that they are estimated to be doubtful if the

amounts of such debts are included in the current year of
assessment or were included in any previous year of assessment in the
taxpayers income either in terms of this Act or any previous law.

- They must be specific provisions.

(iii) Individual donations:

- must not be of less than K250.

- must be made to a charitable organization approved by the minister
for this purpose.
- must not be of less than K500.
- must be made to any such non-profit institution operated.

Solely or principally for:

- social welfare
- civic improvement
- educational development; or
- other similar purposes as the minister may approve.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

214 / 312
 2

(b) (i) Taxable income for Chikwanda Ltd

K’000 K’000
Profit before taxation 74,680
Add back:
Depreciation 8,400
Depreciation 15,200
General provision doubtful debt 400
Exchange gain per A/Cs 600
Exchange loss realized (600)
Exchange gain realized 1,500
Repairs and maintenance 1,200
Fringe benefits tax 450
Training allowance additional
(50% x 285,000) 142.5 27,292.50
101,972.50
Less: Capital allowances 21,200 21,200.00
Taxable income 80,772.50

Tax rate 30% ½

Tax 30% x 80,772.50 = 24,231.75

Note to markers

Calculations for exchange gain in two formats all correct i.e.

Gain as per accounts (600)

Add back unrealized exchange loss (300)
Taxable gains (900)

(ii) Tax if it was foreign company

Rate 35%
Therefore 35% x 80,772.5 = 28,270.38 ____

(iii) Mining expenditure means capital expenditure incurred in Malawi by a

person carrying on or about to carry on mining operations in Malawi.

- In searching for or in discovering and testing or winning access to

deposits of minerals.

- In the acquisition of or of rights over such deposits other than the

acquisition from a person who has carried on mining operations in
relation to such deposits.

- In the provisions of plant and machinery and industrial buildings

which would have little or no value to such person if the mine ceased
to be worked.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

215 / 312
 3

- On the construction of any buildings or works which would have little

or no value if the mine ceased to be worked.

- On development, general administration and management prior to the

commencement of mining operations.

2. (a) Staff housing means any dwelling house erected for occupation by an employee
engaged in the business or farming operations of a taxpayer who is a
manufacturer or a farmer.

(b) Staff housing must be occupied by:

(i) a fulltime employee

(ii) someone who is not able to directly or indirectly control more than 5% of
voting rights attaching to all classes of shares in the company.

(c) Its only that fencing which is used in the carrying on of farming
operations referred to as ‘farm fencing’ and any essential protective fencing
enclosing any building deemed to be an industrial building.

(d) Capital allowances

(i) Tax written down of machinery that was sold.

Sale proceeds K4,250,000

Loss K 750,000
Tax written down value K5,000,000

(ii) Gain/loss on vehicle sold

Sale proceeds K4,400,000

Tax written down value K2,600,000
Gain K1,800,000

(iii) Capital allowance computation

Factory Plant & Motor Furniture Staff

building machinery vehicles & fittings Housing
K’000 K’000 K’000 K’000 K’000
1 July 2012 32,600 15,400 19,200 5,300 -
Disposals -___ (5,000) (2,600) -___ -___
32,600 10,400 16,600 5,300 -
Additions 767 12,200 14,800 2,200 9,620
33,367 22,600 31,400 7,500 9,620
Investment allowance (767) (12,200) - - -
Initial allowance -__ -__ -___ (440) (962)
32,600 10,400 31,400 7,060 8,658
Annual allowance (1,630) (1,040) (6,280) (750) 481
30,970 9,360 25,120 6,310 8,177

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

216 / 312
 4

SECTION B

ANSWER THREE QUESTIONS ONLY FROM THIS SECTION

3. (a) The two types of clubs are:

(i) Clubs which are formed or are operated solely or principally for:
- social welfare
- civic improvement
- other similar purposes
- and which do not distribute any income.

(ii) Those which are formed or operated solely or principally for:

- pleasure or
- recreation.

(b) Income treatment

(i) The income of clubs and associations which are formed or operated solely
or principally for social welfare or civic improvement are exempt from
taxation.

(ii) Certain types of incomes for clubs formed or operated for pleasure and
recreation are taxable.

(c) The taxable income of clubs or associations which are subject to tax is deemed to
be an amount equivalent to 6¼% of all receipts by or accruals to or in
favour of the club or association from:

- sales of goods
- cinematograph performances
- stage plays
- gambling machines

(d) (i) Chawaka Club

K’000
Gambling machine 315
Live band performances 416
Sales of food 250
Video shows 85
Sale of drinks 320
1,386
Taxable income (1386000 x 6¼%) = K86,625

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

217 / 312
 5

(ii) Tax payable = 86,625 x 30%

= K25,987.5
(iii) Taxable in the year 2012/13

(e) Turnover tax:

- Business whose turnover for the year is more than 2 million but les s than
6 million.
- Tax is payable monthly on turnover realized.
- Withholding tax suffered by the taxpayer will be credited on assessment.

- Turnover tax is not payable by registered companies even if their turnover

is below 6 million.
- Not payable on income which is subject to a final withholding tax.

(f) Turnover tax was introduced

- to simplify the tax system

- to encourage compliance

4. (a) (i) Foreign currency liability means a liability denominated in or

amount of which is otherwise determined by reference to a
foreign currency and includes notes and coins of such foreign currency.

(ii) Calculations September 2011

Foreign currency = $320,000

Exchange rate $1 = 150
Total amount = K48,000,000

(iii) Formula ar1 – ar2

Where
a = amount of foreign currency received or paid
r1 = official rate of exchange on the date of establishing the liability
r2 = official rate of exchange on the date of satisfying the transaction.

1. Payment March 2013 - $95,000

(95,000 x 150) – (95,000 x 365)

= 14,250,000 – 34,675,000
= (20,425,000) Loss

2. Payment June 2013 - $125,000

(125,000 x 150) – (125,000 x 420)
= 18,750,000 – 52,500,000
= (K33,750,000) Loss

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

218 / 312
 6

3. Payment September 2013 – $100,000

(100,000 x 150) – (100,000 x 480)
= K15,000,000 – 48,000,000
= (33,000,000) Loss

(iv) Whole amount paid in March 2013

(320,000 x 150) – (320,000 x 365)

= 48,000,000 – 116,800,000
= 68,800,000

Saving = (20,425,000 + 33,750,000 + 33,000,000 – 68,800,000)

= K18,375,000

(b) Capital gains arising from the following are exempt from taxation:

- Transfer of assets between spouses or former spouses;

- Transfer of assets to a spouse from the estate of a deceased spouse;
- Transfer of assets from deceased parent to a child;
- Disposal of an individual’s principal residence;
- Disposal of personal and domestic assets not used in connection with any
trade.
5. (a) (i) No other business should be conducted on the entered premises except
with the permission of the controller.

(ii) No other excisable goods may be kept on the entered premises except
those manufactured on the premises.

(iii) All rooms, stores, plant, equipment and warehouses must be given
distinguishing marks and numbers.

(iv) The licensee must provide office, sanitary or living accommodation for an
officer or facilities for proper excises of the officer’s functions as the
Commissioner may require.

(v) The name of the licensee must be exhibited on a conspicuous place outside
the entered premises.

(b) (i) Finance institutions are not available at the border.

(ii) Need to facilitate trade.

(iii) Carriers not being the owners of the goods and may not possess necessary
documents for clearance at the border.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

219 / 312
 7

(iv) No customs clearing agents at the border.

(v) Security reasons.

(c) (i) CIF = cost ½

= insurance ½
= freight ½

of the imported goods.

(ii) Cost of 5,000 cards = 5000 x $2 = $10,000

Malawi Kwacha = 10,000 x 450 = K4,500,000
Value for duty purposes = K4,500,000
Customs duty = 4,500,000 x 30% = K1,350,000
Value for excise purposes = K5,850,000
Excise tax = 5,850,000 x 25% = K1,462,500
Value for VAT purposes = K7,312,500
Value Added Tax = 7,312,500 x 16½% = K1,206,562.5
Customs duty 1350000
Excise tax 1462500
VAT 1206562.5
4019062.5

(d) Chikoko Limited

K
Penalty for provisional tax for 2012/2013
Actual tax = 30% x 245,600,000
= 73,680,000
Provisional tax liability = 100% x 73,680,000
= K73,680,000
Unpaid provisional tax as a percentage of tax liability = 73,680,000 1
73,680,000 = 100%
The amount of penalty as percentage exceeds 50% of unpaid
amount is 30%

Penalty = 30% x 73,680,000 = K22,104,000

6. (a) A taxpayer is registrable for VAT when that person makes taxable supply of
goods and services and whose business turnover is or exceeds K6 million per
annum.

If a person makes taxable supply of goods or services but sales turnover does not
exceed the prescribed limit may apply for registration.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

220 / 312
 8

(b) (i) VAT on expenditure

K’000
Security expenses (16.5%/116.5% x 81,550) 11,550
Legal expenses (16.5%/116.5% x 17,475) 2,475
Stationery (16.5%/116.5% x 13,980) 1,980
Office furniture (16.5%/116.5% x 18,640) 2,640
Office rentals (16.5%/116.5% x 45,435) 6,435
Electricity (16.5%/116.5% x 87,375) 1,237.5
Salaries 0
Water 0
Postal services ____ 0__
26,317.5

(ii) Sales value

Net VAT Gross

Expert 5,000,000 0 5,000,000
Local 425,000,000 70,125,000 495,125,000
Total 430,000,000 70,125,000 500,125,000

(iii) Amount payable

K
Output VAT 70,125,000
Input VAT 26,317,500
Net payable 43,807,500

(iv) The time of supply of goods or services in the normal course of

business occurs at the earliest of the times:

1. the goods are removed from the premises of the taxable person or
2. the goods are made available to the person to whom they are
supplied; or
3. the services are supplied or rendered
4. a payment is received for all or part of the supply
5. a tax invoice is issued.

7. (a) (i) Any four types of expenditure incurred by farmers:

- the stumping, leveling and clearing of lands

- works for the prevention of soil erosion
- sinking of boreholes
- digging of wells
- carrying out aerial of geophysical surveys
(ii) Water control work includes any canal, channel, dyke, furrow, and any
other flood control structure, whether of a permanent nature or otherwise.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

221 / 312
 9

(b) Tax payable year ended 30/6/13

K’000
Salary K2.6m x 12 31,200
House allowance K2.6m x 50% x 12 15,600
School fees K600,000 x 4 2,400
Domestic servants 75,000 x 12 900
50,100
Tax payable
First 180,000 0% = 0
Next 60,000 15% = 9,000
Balance 49,860,000 30% = 14,958,000
14,967,000

(c) Five offences listed under Section 112 of the Taxation Act:

(i) Failure to comply with any notice served on the taxpayer by the
Commissioner under the Taxation Act or any rules made thereunder.

(ii) The taxpayer gives any incorrect information or omits any relevant
information from any statement required to be made to the commissioner.

(iii) Failure to keep records, books or accounts required to be kept under

Section 54.

(iv) Being a public officer of a company, fails to furnish to the Commissioner

documents and particulars relating to the notification of dividend declared,
as required under Section 69.

(v) Failure to furnish the Commissioner returns or particulars relating to

persons employed by him as required under Section 69.

(vi) The taxpayer or his agent fails to furnish any other persons with a
certificate as required under Section 87(3).

(vii) Tax payer or his agent fails to deduct tax due, or to remit to the
Commissioner tax deducted, under Section 76A.
(d) Expenditure on research and experiments will be allowed as a deduction from a
taxpayers assessable income if the following conditio ns are met:

(i) Expenditure must not be of capital nature;

(ii) Expenditure must be incurred by the taxpayer during the year of

assessment on research and experiments relating to the taxpayers trade.
(iii) any sum contributed by the taxpayer during the year of assessment to any
scientific or educational society or institution or other body of a public
character approved by the Minister if the taxpayer has stipulated that the
sum must be utilized by such society, institution or body as the cas e may
be, solely for the purpose of industrial research or scientific experimental
work connected with the trade of the taxpayer.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

222 / 312
 10

END

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

223 / 312
 EXAMINATION NO.___________________

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2012 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 10(B): TAXATION

WEDNESDAY 5 DECEMBER 2012 TIME ALLOWED: 3 HOURS

9.00 AM - 12.00 NOON

INSTRUCTIONS:

1. You are allowed 15 minutes reading time before the examination begins during
which you should read the question paper and, if you wish, make annotations on the
question paper. However, you are not allowed, under any circumstances, to
open the answer book and start writing or use your calculator during this reading
time.

2. Number of questions on paper – 7.

3. The paper is divided into TWO Sections, A and B. BOTH questions to be

answered in Section A and ANY THREE from Section B.

4. Each question carries 20 marks.

5. Use of non-programmable calculators is allowed.

6. You are provided with the following:

(i) A set of tables containing rates of tax on taxable income (Table 1).
(ii) Rates of capital allowances (Table 2).
(iii) Penalty rates for underpaid provisional tax (Table 3).

7. Begin each answer on a fresh page.

8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY

THE INVIGILATOR.

This question paper contains 8 pages

This question paper must not be removed from the examination hall.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

224 / 312
 1

SECTION A

ANSWER BOTH QUESTIONS IN THIS SECTION

1. (a) Mention and briefly describe each of the three main principles of a rational
tax system. 6 Marks

(b) State two merits and two demerits of a progressive tax system. 4 Marks
(c) Madengu Limited is a manufacturer and the tax written down values of its
business assets as at 1 July 2011, together with the agreed rates for annual
allowances, are given below.

Item Tax written down value Rate of annual allowance

K’000
Factory building 9,000 5%
Plant and machinery 6,200 10%
Motor vehicles 4,100 20%
Furniture and fittings 1,200 10%

During the financial year to 30 June 2012 the following transactions were
recorded:

Fencing A fence to protect the factory building was

erected at a cost of K1,650,000.

Plant and Machinery Some machinery, whose tax written down value
as at 1 July 2011 was K920,000, was sold at
K450,000.

Other machinery which had to be replaced

was sold at K2,500,000 resulting in a
capital loss of K320,000. New replacement
machinery was acquired at a cost of K2,400,000.

Motor vehicles Two motor vehicles were acquired as follows:

one saloon at a cost of K4,200,000 and a double
cabin pick- up at K9,000,000.

Furniture and fittings Additional furniture was acquired at a cost of

K960,000.

Required:

Calculate the capital allowances available to Madengu Limited for the

financial year to 30 June 2012. 10 Marks
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

225 / 312
 2

2. (a) (i) Define the term ‘withholding tax’. 1 Mark

(ii) State four benefits of withholding tax to tax authorities and two
benefits to the taxpayer. 3 Marks

(iii) Apart from salary, mention five other types of receipts which are
subject to withholding tax. 2½ Marks

(b) An individual taxpayer produced the following information for the year to
30 June 2012 and requires assistance from you to enable him submit a return
of income to the Malawi Revenue Authority.

Profit and loss account for the year to 30/6/2012

Note K’000 K’000
Turnover 6,450
Add: Sundry income (2) 150
6,600
Less: Depreciation 460
Salaries 2,500
Legal costs (3) 80
Motor vehicle expenses 220
General expenses (4) 150
Fringe benefits tax 315
Repairs and maintenance (5) 450
Accountancy services 90
Bad and doubtful debts (6) 400
Rent payable (7) 180
Travel costs (8) 210
Professional fees (9) 120 5,175
Profit before tax 1,425

Notes

(1) The taxpayer is a general supplier.

(2) Sundry income : K150,000 was K

made up of the following:
Proceeds from sale of gift 35,000
Rental income (net of WHT) 85,000
Bank interest (gross) 30,000
150,000

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

226 / 312
 3

(3) Legal costs : K80,000 were in respect of the following:

Debt collection 35,000
New lease agreement 15,000
Fine for sale of expired goods 30,000
80,000
(4) General expenses : K150,000
Include:
Donations to local churches 70,000
Office refreshments 50,000
School fees for own children 30,000
150,000

(5) Repairs and maintenance : K450,000

Decoration of office reception area 150,000
Computer maintenance 150,000
Repairing air conditioner at taxpayer’s residence 150,000
450,000
(6) Bad and doubtful debts : K400,000 were arrived at as follows:
Bad debts written off 250,000
General provision 150,000
Specific provision 200,000
600,000
Less: recoveries of debts previously written off
and allowed for tax purposes. 200,000
400,000
(7) Rent payable : K180,000
Includes K75,000 in respect of the taxpayer’s residence.
No portion of his residence was used for business purposes
during the year.

(8) Travel costs : K210,000

Include K90,000 to enable taxpayer’s wife travel to South
Africa for family shopping

(9) Professional fees : K120,000

Revaluation of plant and machinery 45,000
Subscription to the Malawi Chamber of Commerce 55,000
Taxpayer’s child June ACCA subscription 20,000
120,000
(10) Capital allowances agreed with the Malawi Revenue Authority for the
year was K1,900,000.00.

Required:
Compute the taxpayer’s taxable income for the year ended 30 June 2012.
13½ Marks
(TOTAL: 20 MARKS)
Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

227 / 312
 4

SECTION B

ANSWER THREE QUESTIONS ONLY FROM THIS SECTION

3. (a) Define the term ‘wife’s earned income’ as stipulated by the Taxation Act.
4 Marks

(b) State the situations under which the Commissioner may estimate the taxable
income or assessed loss of any taxpayer. 3 Marks

(c) Mr Zondaninge, a taxpayer, failed to produce a return of income in the year to

30 June 2011. As such, the tax authorities gave him an estimated assessment
and was asked to pay K755,200. Since no information had been provided, no
credit for advance taxes paid was given.

The taxpayer is asking for your assistance in contesting this assessment and
has furnished you with the following information:

(1) A PAYE certificate showing K2,300,000 as total salary and K641,400

as PAYE deducted for the year under review.

(2) A statement that during the year under review, the taxpayer received
rentals amounting to K780,000. City rates of K14,000 and repairs of
K26,000 were the only expenditures incurred against the rental
income.

(3) Withholding tax amounting to K46,000 was recovered from the rental
income in (2) above.

(4) Evidence of payment of K59,000 and K75,000 as professional

subscriptions and donations to approved organisations was produced.
These have been allowed for tax purposes in the past.

Required:
(i) Advise the taxpayer whether or not withholding tax on rentals has
been correctly operated by the taxpayer’s tenant. If not, state the
consequences that are likely to follow on both the operator and the
taxpayer. 5 Marks

(ii) State the disadvantages resulting from an under deduction of PAYE

tax by an employer. 1 Mark

(iii) On the basis that withholding tax and PAYE schemes that were
correctly operated, calculate and advise the taxpayer, the net amount of
tax payable by him. Indicate by what amount the tax on the estimated
assessment will be reduced or how much additional tax will need to be
paid. 7 Marks
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

228 / 312
 5

4. (a) State four circumstances under which an individual taxpayer may be

exempted from paying provisional tax. 4 Marks

(b) An original notice of assessment for the tax year to June 2011 which was
issued to a corporate taxpayer had the following details:
K’000
Tax charged at 30% of taxable income 3,600
Add 30% penalty on underpaid provisional tax 720
4,320

An appeal was lodged against this original assessment and resulted in an

amended assessment being issued. Excluding penalties, the basic tax
discharged amounted to K620,000.

Required:

Calculate:

(i) the amount of taxable income in the original assessment. 2 Marks

(ii) the amount of provisional tax paid by the taxpayer for the year under
review. 3½ Marks

(iii) the amount of penalty for the underpaid provisional tax in the
amended notice of assessment, using the table provided. 6 Marks

(c) A Malawian businessman imported trade goods whose value was $10,000 in
January 2011. On the day of the initial transaction, the rate of exchange was
$1 to K165. Payment for the goods was made in June 2011 and on the day of
settlement, the rate of exchange was $1 to K158.

Required:

Using the formula provided in the Taxation Act, calculate the exchange gain
or loss realized on the day of the payment for the goods. 4½ Marks
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

229 / 312
 6

5. (a) (i) How are the taxable values for housing accommodation under the
Taxation Act (Fringe Benefits Tax) (information and payment)
determined? 6 Marks

(ii) Mention the penalty for failure to register or for delaying in the
payment of fringe benefits tax, according to the regulation. 1 Mark

(iii) When is the fringe benefits tax due for payment to the Malawi
Revenue Authority? 1 Mark

(iv) Mr Chikho who was working as marketing manager for Mange

Limited in the year to 30 June 2011 received a salary of K8,500,000
per annum payable monthly. He worked for a full year. Mange
Limited also provided the following benefits:

(1) A motor vehicle with unrestricted use which was acquired at a cost
of K7,900,000.

(2) A fully furnished house rented at a cost of K70,000 per month.

(3) School fees for his two children amounting to K350,000 per term
for both children payable to Mr Chikho together with his salary.

(4) Water and electricity paid to the providers at a total cost of

K25,000 monthly.

(5) A gardener, cook and watchman at K12,000, K15,000, K10,000

per month respectively.

Required:

Calculate the total annual fringe benefits tax payable. 8 Marks

(b) You have been approached by a group of local community leaders who are
planning to form a club through which they want to channel community
initiatives. As they are not aware of the taxation consequences of running a
club, they have asked for a briefing on the types of clubs and their direct
taxation treatment.

Required:

Mention two types of clubs and their taxation treatment under the information
and benefit of the community leaders regulations. 4 Marks
(TOTAL : 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

230 / 312
 7

6. (a) Define the following terms:

(i) Customs duty;

(ii) Tax period in relation to value added tax;
(iii) Input value added tax;
(iv) Output value added tax. 4 Marks

(b) In relation to value added tax:

(i) When is the time of supply (taxpoint) of goods and services for value
added tax? 4 Marks

(ii) What business records should a registered taxpayer keep? 2 Marks

(c) Amos Joshua, a business person registered for VAT, imported a consignment
of dutiable goods whose value for customs purposes was £2500. The
following information is also provided:

Rate for duty applicable 35%

Rate for VAT applicable 16.5%
Exchange rate £1 = K270

Required:

Calculate:

(i) the total value of duty and VAT payable by Amos Joshua on the
imported consignment of goods. 4 Marks

(ii) the selling price of the consignment if the business puts on a 50%
mark up. 3 Marks

(d) How does liability to non-resident tax arise and at what rate is the tax
charged? 3 Marks
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

231 / 312
 8

7. (a) Section 6 of the Taxation Act stipulates the rule of secrecy and penalties for
failure to observe secrecy.

Required:
(i) State the penalties for failure to observe secrecy. 3 Marks
(ii) Highlight any three main exceptions to this rule. 2½ Marks

(b) Petro and Ludia are partners in an unincoporated general supplier business
operating in Malawi. Their partnership accounts for the year to 30 June 2011
showed the following:

(1) Profits were shared equally between the two partners and these
amounted to K1,450,000.

(2) The share of profits in (1) above was calculated after Petro and Ludia
had drawn salaries of K450,000 and K320,000 respectively during the
year under review.

(3) The share of profit in (1) above was also net of interest on capital of
K65,000 for Petro and K45,000 for Ludia and also a total depreciation
of K125,000.

(4) Ludia received a rental income of K260,000 from his other house in
Chilobwe in the year under review.

(5) All other expenses were allowable for tax purposes.

Required:

Calculate:

(i) Ludia’s taxable income and the income tax thereon. 8½ Marks

(ii) the tax that would have been payable had the business been operated
by a sole trader. 3 Marks

(c) State three situations where a foreign exchange gain or loss arises. 4 Marks
(TOTAL: 20 MARKS)

END

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

232 / 312
 STRICTLY CONFIDENTIAL

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2012 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 10(B): TAXATION

(DECEMBER 2012 MAIN)

TIME ALLOWED: 3 HOURS

SUGGESTED SOLUTIONS

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

233 / 312
 1

SECTION A

ANSWER BOTH QUESTIONS IN THIS SECTION

1. (a) A rational tax system should contain among others three main
principles namely:

- Equity 1 Mark
- Efficiency 1 Mark
- Administrative feasibility 1 Mark

(i) Equity

- Persons who are similarly situated should be taxed

equally (horizontal equity). ½ Mark

- Those who are differently situated should be taxed

differently (vertical equity). ½ Mark

- The tax system should be impartial. ½ Mark

- The tax to be paid should be certain. ½ Mark

- The tax system should be fair (reasonable and just).
½ Mark
- The tax amount should be related to the taxpayer’s
ability to pay. ½ Mark
3 Marks

(ii) Efficiency
- Efficiency means that taxation should not impose
avoidable and unnecessary costs on the community
(the taxpayer). 1 Mark

(iii) Administrative feasibility

- The tax revenue should be collected without excessive
cost for the tax collection Agency or Government.
1 Mark

(b) Merits of a progressive tax system

- It is considered more equitable because every taxpayer is called upon

to pay according to his ability to pay. 1 Mark

- It can be used to reduce income inequality so that they gap between

the ‘rich’ and ‘poor’ is narrowed. 1 Mark

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

234 / 312
 2

Demerits of a progressive tax system

- It can act as a serious setback to production as workers may be

reluctant to work more as most of their income will be deducted at
higher tax rates. ½ Mark

- It may reduce people’s ability to save as it leaves them with less

disposable income and this may impair enterprise development.
½ Mark

(c) Capital Allowances for Madengu Limited Year to 30 June 2012

Factory Plant & Motor Furniture &
Buildings Machinery Vehicles Fittings
K’000 K’000 K’000 K’000
WDV 1/7/2011 9,000 6,200 4,100 1,200
Additions 1,650 ½ 2,400 ½ 13,200 ½ 960 ½
Disposals -___ (3,740) 1 -__ _-___
10,650 4,860 17,300 2,160
Investment Allowance (1,660) 1 (960) 1
Initial allowance - - - (192) 1
Annual Allowance (532.5) ½ (486) ½ (3,460) ½ (216) ½
9,457.5 3,414 13,840 1,752
8 Marks
Notes

(1) WDV for machinery

K
Proceeds 2,500,000 ½
Capital loss 320,000 ½
WDV 2,820,000

(2) Total cost of motor vehicles

Saloon 4,200,000 ½
Pick- up 9,000,000 ½
13,200,000
10 Marks
(TOTAL : 20 MARKS)

2. (a) (i) Withholding tax is a method of collecting tax in advance on specified

payments by the person who makes a payment. 1 Mark

(ii) Benefits to authorities

– It brings in revenue faster as tax is collected as source. ½ Mark

– Easy and cost effective to collect – use Agents for free. ½ Mark
– Discourages and check tax evasion – encourages compliance.
½ Mark
– Provides constant flow of revenue. ½ Mark

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

235 / 312
 3

Benefits to taxpayers

– It is convenient to pay while money is available. ½ Mark

– The taxpayer is able to settle tax liabilities in advance and in
instalments. ½ Mark

(iii) Any five of the following:

– Royalties
– Rent
– Commissions
– Payment for carriage and haulage
– Payment for any supplies to traders and institutions for foodstuff
and other
– Payment to contractors and subcontractors
– Payment for public entertainment
– Payment for services
– Fees
– Payment for tobacco sales
– Payment of over K12,000 for casual labour.
½ Mark for any five = 2½ Marks

TAXABLE INCOME OF A TAXPAYER

K’000 K’000
Profit before tax 1,425 ½
Add back:
Depreciation 460 1
Withholding tax on rent 15 1
Legal costs 30 1
General expenses (70 + 30) 100 1
Repairs & maintenance 150 1
Bad and doubtful debts – general provision 150 1
Rent payable 75 1
Travel costs 90 1
Professional fees (45 + 20) 65 1
Fringe benefits tax 315 ½ 1,450
2,875
Less: Capital allowances (1,900) ½
Bank interest (10) ½ (1,945)
Taxable income 930 ½
Proceeds from gift (35) ½
12 Marks
Notes
Rent 85000 = 85% ½
100% = ? more
½
Withholding tax = 100,000 – 85,000 1½
= 15,000 ½
13½ Marks
(TOTAL: 20 MARKS)

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

236 / 312
 4

SECTION B

ANSWER THREE QUESTIONS ONLY FROM THIS SECTION

3. (a) (i) Wife’s earned income is the income derived from a business carried on
by the wife in her own right in which the husband is neither an
employee nor a partner; or 1
emoluments from employment received or accrued to or in favour
of the wife where the employer is not :

- her husband 1
- a partnership in which the husband is a partner 1
- a company in which the husband is a director who controls d irectly
or indirectly more than 5% of the voting rights attaching to all
classes of shares of the company and in which the husband is
employed or is also a director; or
- A company on which the wife is a director who controls directly
more than 5% of the voting rights attaching to all shares of the
company and in which the husband is employed or is also a
director. ½
4 Marks

(b) Where a taxpayer makes default in furnishing any return or information or 1

(ii) the commissioner is not satisfied with the return or information

furnished by the taxpayer; or a 1

(iii) Where the commissioner has reason to believe that a taxpayer is about
to leave Malawi without furnishing a return or satisfactory return.
1
3 Marks

(c) (i) WITHHOLDING TAX

Rent payable 780,000
Amount of withholding tax 15% x 780,000 = K117,000 1
Therefore it was not correctly operated as the tenant was supposed to
deduct K117,000 but only K46,000. 1

Penalties

There are penalties applicable to the tenant and not the landlord i.e. 1
- failure to deduct tax make one personally liable to pay the tax ½
which was not withheld; plus 20% additional tax if paid late. ½

- failure to operate a withholding tax scheme makes one guilty of an

offence punishable by a fine of K1,000. 1
5 Marks

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

237 / 312
 5

(ii) Penalties for under-deduction of PAYE are

- 20% of the tax payable. ½
- a further additional 5% per month or part thereof. ½
1 Mark

(iii) Income tax computation

K’000
Rent 780 ½
Salary 2,300 ½
3,080
Less:
City rates 14 ½
Repairs 26 ½
Professional/subscription 59 ½
Donations 75 174 ½
2,906

Tax payable
1st 144,000 @ 0% = 0 ½
Next 36,000 @ 15% = 5,400 ½
Balance 2,726,000 @ 30% = 817,800 ½
823,200 4½

Additional tax or reduction

Tax payable K823,200 ½

Less: Withholding tax 46,000 ½

PAYE Tax 641,400 ½ 687,400
135,800
Tax on estimated assessment 755,200 ½
Tax reduction 619,400 ½_
2½
7 Marks
(TOTAL: 20 MARKS)

4. (a) The following are the four circumstances for exemption from provisional tax:

Where the taxable income for the year of assessment is estimated:

- not to exceed K144,000 1
- to exceed K144,000 but the whole of the income is from employment or
pension or from both employment and pension and in relation to which
PAYE tax is being deducted. 1
- to exceed K144,000 and to include non-employment pension income of
not more than K144,000. 1
- Registered for turnover tax. 1
4 Marks

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

238 / 312
 6

(b) (i) Amount of taxable income in the original assessment.

Tax charged at 30% = K3,600,000 ½
Taxable income = 3,600,000 x 100
30 1
= K12,000,000 ½
2 Marks
(ii) Amount of tax paid
Penalty charged at 30% = K720,000 ½
of underpaid provisional tax
Underpaid provisional tax = 720,000 x 100
30 1
= K2,400,000 ½
Total tax charged = 3,600,000 ½
Less underpaid provisional tax 2,400,000 ½
Provisional tax paid = 1,200,000 ½
3½ Marks

(iii) Calculation of penalty for underpaid provisional tax in the amended

assessment.
K
Tax charged in the original assessment 3,600,000 ½
Less: Tax discharged 620,000 ½
Tax in the amended assessment 2,980,000 ½
Less provisional tax paid 1,200,000 ½
Underpaid provisional tax 1,780,000 ½
% of unpaid tax on total tax 1,780,000 x 100 1
2,980,000
= 60% ½
 rate to be used for penalty = 30% ½
Amount of penalty = 1,780,000 x 30% 1
= 534,000 ½
6 Marks____

(c) Foreign exchange gain or loss computation

Formula a x r1 – a x r2 1
Where a is the amount of the asset or liability on the day of
establishing the transaction. ½
r1 is the rate of exchange on the date of establishing the asset
or liability ½
r2 is the rate of exchange on the date of settlement of the asset
or liability ½
Therefore ($10,000 x 165) – ($10,000 x 158) 1
= 1,650,000 – 1,580,000 ½
= K70,000 gain ½
4½ Marks
(TOTAL: 20 MARKS)

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

239 / 312
 7

5. (a) (i) Determination of taxable values for housing accommodation.

(1) For property owned by the employer
- the open market value for the use (rental value) of such
Property; or 1
- 12% of the employee’s salary where furnished ½
accommodation is provided and 10% for unfurnished ½
whichever is greater ½

- provided that the taxable values so determined under this

subparagraph may be reduced by 50%. 1

(2) For property rented by the employer, the taxable value shall be:
- The rental paid by the employer or, 1
- 10% of the employee’s salary where ½
Unfurnished housing accommodation is provided; or ½
- 12% of employees salary where furnished housing is
provided, whichever is greater. ½
6 Marks

(ii) Any employer who fails to register or delays or fails to pay fringe
benefits tax due in accordance with the regulations is liable to a
penalty of 20% of the fringe benefits tax due. 1 Mark

(iii) Fringe benefits tax is due 14 days after the end of every quarter.
1 Mark
(iv) Fringe Benefits Tax Calculation
Taxable value
Motor vehicle 7,900,000 x 15% = 1,185,000 1
House benefit
12% of salary x 8,500,000 = 1,020,000 ½
Monthly value = 1,020,000/12 = 85,000 ½
Rent paid = 70,000 ½
 greater value 85,000 x 12 = 1,020,000 ½
School fees = No fringe benefit since paid
to Mr Chikho 1

Water and electricity = 25,000 x 12 = 300,000 1

Gardener, cook and watchman
Gardener 12,000 x 12 = 144,000 ½
Cook 15,000 x 12 = 180,000 ½
Watchman 10,000 x 12 = 120,000 ½

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

240 / 312
 8

Total benefits

Motor vehicle 1,185,000

Accommodation 1,020,000
Water and electricity 300,000
Cook 180,000
Gardener 144,000
Watchman 120,000
2,949,000 ½
Tax payable x 30% K884,700 1
8 Marks
(b) There are two types of clubs and these are as follows:

(i) Clubs which are formed or are operated solely or principally for:
- social welfare ½
- civic improvement; or ½
- other similar purposes and their proceeds are not distributed
among the members ½

(ii) Those which are formed or operated solely for - pleasure or ½

- recreation ½

Taxation treatment
The income of clubs, societies and associations which are formed or
operated solely or principally for social welfare or civic improvement
are exempt from taxation, while. 1

Certain types of income of clubs formed or operated solely or

principally for pleasure or recreation is subject to tax. ½
4 Marks
(TOTAL : 20 MARKS)
6. (a) Definitions

Customs duty
This is a form of tax used to collect duties only on certain imported goods. 1

Tax period
Means one calendar month i.e. from the first day to the last day of the month. 1

Input VAT (Input Tax)

This is VAT paid on goods or services imported into or supplied in Malawi. 1

Output VAT (Output Tax)

This is tax on sales. It is charged when taxable goods or services are supplied.
1
4 Marks

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

241 / 312
 9

(b) (i) (1) A supply of goods or services occurs:

- where goods or services are appreciated to own use, on the date

which the goods or services are first applied to own use; ½
- where the goods or services are supplied by way of gift, on the date on
which ownership in the goods passes or the performance of the
services is completed, as the case may be; ½
- in any other case, the earliest of the date in which:

(i) the goods are removed, from the premises or from other
premises of the taxable person where the goods are under the
control of the taxable person; or ½

(ii) the services are supplied or rendered, or; ½

(iii) the payment is received for all or part of the supply; or ½

(iv) the goods are made available to the person to whom they are
supplied; ½

(v) a tax invoice is issued. ½

(2) Where supplies are made on a continuous basis or by metered

supplies, the time of supply shall be the determination of the
supply or the first meter reading following the introduction of VAT
and subsequently at the time of each determination or meter
reading. ½

(3) The supply of goods under a hire purchase agreement or finance

lease occurs on the date the goods are made available under the
hire purchase or lease finance as the case may be. ½

(4) Where :

(a) Goods are supplied under a rental agreement; or

(b) Goods or services are supplied under an agreement or
written law which provides for periodic payment, the goods
or services shall be treated as successively supplied for
successive parts of the period of agreement or as determined
by law. ½

(5) Where the supply of goods or services is ancillary to another

supply, the time of supply of the ancillary supply shall be deemed
to be the same as the time of supply of the main goods or services.
½
Any eight points, ½ Mark each = 8 Marks

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

242 / 312
 10

(ii) Every taxable person shall

(a) Keep such records and books of accounts as the minister may
prescribe or as the Commissioner General may direct; and
1 Mark
(b) Produce such records and books at such place and time as the
Commissioner General may by general notice publish in the
gazette, any newspaper in general circulation, or in writing to
taxable person, 1 Mark
Any three, 1 Mark each = 3 Marks

(c) (i) Cost of consignment

Value in £ = 2500 ½
Rate of exchange £1 = 270 ½
Cost in Malawi Kwacha = 2500 x 270 ½
= 675,000 ½
Add duty @ 35% = 236,250 ½
911,250
VAT @ 16.5% = 150,356.3 ½
Duty + VAT = 236250 + 150356.3 ½
= K386,606.3 ½
4 Marks
(iii) Selling price for consignment at 50% markup
K
Total cost 911250 + 150,356.3 = 1,061,606.3 1
50% mark up 1,061,606.3 x 50% = 530,803.2 1
1,592,409.50 1
3 Marks

(d) Liability to non-resident tax arises where:

(i) Income is payable to a person, not being a person resident in Malawi.1
(ii) The income is from a source in Malawi. ½
(iii) The income is not attributable to a permanent establishment belonging
to the recipient of the income. 1

(iv) The tax is calculated at the rate of 15% of the gross amount of the
income. ½
3
(TOTAL: 20 MARKS)

7. (a) (i) Fine of K1,000 and to imprisonment of 2 years. 2

(ii) The three situations where information can be disclosed are

- it is required for double taxation agreements with another country

so that the implementation of relief is possible. 1

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

243 / 312
 11

- where the Auditor general or any officer duly authorized by him

needs the information for purposes of performance of their duties.
1
- where it is necessary to carry the Taxation Act into effect or for
the purpose of any prosecution of an offence committed in relation
to the tax on income. 1

- taxpayers request or authority. 1

6 Marks

(b) K K
Net profit as per accounts 1,450,000 ½
Add back: Depreciation 125,000 ½
Salaries 770,000 ½
Interest on capital 110,000 ½ 1,005,000
2,455,000

DISTRIBUTION OF PROFITS
Total Petro Ludia
K K K
Salary 770,000 450,000 ½ 320,000 ½
Interest on capital 110,000 65,000 ½ 45,000 ½
Balance 1,575,000 787,500 ½ 787,500 ½
2,455,000 1,302,500 1,152,500
5 Marks
(i) LUDIA
Total income 1,152,500 + 260,000 = K1,412,500 1
1st 144,000 @ 0% = 0½
Next 36,000 @ 15% = 5,400 ½
Balance 1,232,500 @ 30% = 369,550 ½
375,150 1 3½ Marks

(ii) Total income K2,455,000 ½

1st 144,000 @ 0% = 0½
Next 36,000 @ 15% = 5,400 ½
Balance 2,275,000 = 622,500 ½
687,900 1 3 Marks

(c) The three foreign exchange gain or loss arise:

- when one has a foreign asset or liability in the course of business. 1
- which arose in a specific date but is settled on a different date. 1
- the exchange rate at the time of satisfying the transaction might not be
the same as when the transaction was established. 1
3 Marks
(TOTAL: 20 MARKS)
END

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

244 / 312
 EXAMINATION No._______________________

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2011 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 10(B): TAXATION

MONDAY 6 JUNE 2011 TIME ALLOWED: 3 HOURS

9.00 AM - 12.00 NOON
INSTRUCTIONS:

1. You are allowed 15 minutes reading time before the examination begins during
which you should read the question paper and, if you wish, make annotations on the
question paper. However, you are not allowed, under any circumstances, to
open the answer book and start writing or use your calculator during this reading
time.

2. Number of questions on paper – 7.

3. The paper is divided into TWO Sections, A and B. BOTH questions to be

answered in Section A and ANY THREE from Section B.

4. Each question carries 20 marks.

5. Use of non-programmable calculators is allowed.

6. You are provided with the following:

(i) A set of tables containing rates of tax on taxable income (Table 1).
(ii) Rates of capital allowances (Table 2).
(iii) Penalty rates for underpaid provisional tax (Table 3).

7. Begin each answer on a fresh page.

8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY

THE INVIGILATOR.

This question paper contains 10 pages

This question paper must not be removed from the examination hall.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

245 / 312
 1

SECTION A

ANSWER BOTH QUESTIONS IN THIS SECTION

1. Mr Khangamwa runs a transport business and produced the following information for
the tax year to 30 June 2010:

Mr Khangamwa – Income and Expenditure Account

Year Ended 30 June 2010
Notes K’000 K’000
Transport revenue 12,700
Add: Sundry income (1) 425
13,125
Less: Salaries and wages 1,100
Depreciation 560
General expenses (2) 455
Fuel and lubricants (3) 920
Electricity and water 150
Road permit and licences (3) 75
Vehicle maintenance (3) 1,250
Repairs to equipment 125
Advertising 420
Rent payable 320
Penalties and fines (4) 70
Legal expenses (5) 120
Fringe Benefits Tax 60 5,625
Profit before tax 18,750

Notes

1. Sundry income: K425,000

This is made up of the following: K’000
(a) Bank interest recorded net of 20% withholding tax 250
(b) Gross rental for subletting office space 175
425

2. General expenses: K455,000 K,000

Donation to local church 75
Office refreshments 125
Transport licence 15
Donation to University appeal fund 240
455
3. Private Motoring
In addition to vehicles specifically designated for private use, Mr Khangamwa
and his family made use of business vehicles for private purposes. Because of
practical difficulties in tracking such private use, it was agreed by the Revenue
Authorities to estimate such private use at 30% and therefore disallow relevant
expenses to that extent.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

246 / 312
 2

4. Penalties and fines : K70,000

These were as follows: K’000
Late submission of tax return 37
Traffic offence fines 33
70
5. Legal Expenses: K120,000
These were incurred as follows: K’000
Debt collection 55
Transport contracts documentation 45
Defending a case against Mr Khangamwa’s traffic offence 20
120

6. Capital allowances of K625,000 were to be allowed as a deduction by the

Revenue Authorities instead of depreciation.

Required:
(a) (i) Compute Mr Khangamwa’s taxable income for the tax year to
30 June 2010. 14 Marks

(ii) Compute the amount of net tax payable assuming that:

(1) Withholding tax was already deducted from the bank interest at
the rate of 20% as stated.

(2) Withholding tax was deducted from the rentals receivable at

20% (see note 1).

(3) Provisional tax of K1,450,000 was paid within the tax year
under review.

(4) Computed taxable income was K19,636,000. 3 Marks

(b) The breakdown of general expenses in note 2 above shows that a donation of
K75,000 was made to a local church.

Required:

State how you have dealt with this expenditure in the tax computation. Give
reasons for such treatment. 1 Mark

(c) A return of income of a limited company requires that a declaration is made

as to the company’s country of incorporation.

Required:

State the significance of this declaration? 2 Marks

(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

247 / 312
 3

2. The tax written down value of business assets of a manufacturer as at 30 June

2009, together with the agreed rates for annual allowances, are given as
follows:

Item Tax written down value Rate of annual allowance

K’000
Factory building 7,600 5%
Plant and machinery 5,200 10%
Motor vehicles 2,700 20%
Furniture and fittings 940 10%

During the financial year to 30 June 2010, the following transactions were
recorded:

(1) Fencing
A fence to protect the factory building was erected at a cost of
K1,400,000.

(2) Offices
Two new offices were added to the factory building at a cost of
K1,500,000.

(3) Plant and Machinery

Some machinery, whose tax written down value as at 30 June 2009
was K420,000, was scrapped as the machinery was obsolete. No sale
proceeds were received.

Other machinery which had to be replaced was sold for K1,700,000

resulting into capital gain of K250,000. New replacement machinery
was acquired at a cost of K2,200,000.

(4) Motor vehicles

Two motor vehicles were acquired. One saloon and a double cabin
pick up costing K2,200,000 and K4,200,000 respectively.

(5) Furniture and fittings

Additional furniture was acquired at a cost of K750,000.

Required:

(a) Calculate the capital allowances available to the manufacturer for the tax year
to 30 June 2010. 9 Marks

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

248 / 312
 4

(b) Why has the capital allowance been claimed or not claimed, as the case may
be, in respect of the cost of erecting a fence around the factory building and
constructing two offices which were attached to the factory building?
(Support your answer by a calculation assuming the original cost of the
factory building was K12,000,000). 6 Marks

(c) To what extent can a capital loss be deducted in arriving at the taxable
income of a business in relation to assets on which capital allowances are
claimable? 2 Marks

(d) Define the term ‘disposal’ in relation to an asset, for purposes of the Taxation
Act. 3 Marks
(TOTAL: 20 MARKS)

SECTION B

ANSWER THREE QUESTIONS ONLY FROM THIS SECTION

3. (a) (i) What term is used to describe the levying of income tax by more than
one country on the same income of a taxpayer? 1 Mark

(ii) How does this arise and how can it be mitigated or prevented in
Malawi? 4 Marks

(iii) State the circumstances under which emoluments received by or

accrued to a wife in respect of services rendered or to be rendered may
not qualify to be wife’s earned income. 5 Marks

(b) Kayuni General Suppliers is a firm operating in Malawi. In January 2010 the
firm became indebted to a supplier Tom and Associates based in Australia in
the sum of $650,000 on account of merchandise supplied.

$25,000 was paid in April 2010 and another $125,000 in October 2010 and a
further $200,000 in December 2010. The balance of $300,000 was included
in the accounts for 31 December 2010 at K46,500,000 using an exchange rate
of $1 = K155.

Required:

(i) Using the formula specified in the Taxation Act, calculate the fore ign
exchange gains or losses on the transactions given the above to be
claimed for the year of assessment to 30 June 2011. Assume the
following exchange rates were in use.

Jan 2010 : $ = K145

April 2010 : $ = K150
Oct 2010 : $ = K152
Dec 2010 : $ = K155
6½ Marks

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

249 / 312
 5

(ii) State whether the foreign exchange loss on the outstanding $300,000
which has been converted to K46,500,000 and included in the accounts
to 31 December 2010 is an allowable deduction. Give reasons for
your answer. 1½ Marks

(d) How are annuities taxable according to Section 14 of the Taxation Act.
2 Marks
(TOTAL: 20 MARKS)

4. (a) Chiphazi and Chimwendo are partners in an unincorporated timber business

operating in Malawi. Their partnership accounts for the year to 30 June 2010
showed the following:

(1) Profits were shared 2:1 respectively between the partners and these
amounted to K777,000.

(2) The share of profits in (1) above was calculated after Chiphazi and
Chimwendo had drawn salaries of K450,000 and K270,000
respectively during the year under review.

(3) The share of profits in (1) above was also net of interest on capital of
K85,000 for Chiphazi and K42,000 for Chimwendo and also a total
depreciation of K143,000.

(4) Chimwendo received a rental income of K240,000 and Chiphazi a

dividend of K15,000 from a Malawian company in the year under
review.

All other expenses were allowable for tax purposes.

Required:

(i) Briefly explain how partnership income is assessed for purposes of the
Taxation Act. 2½ Marks

(ii) Calculate Chimwendo’s taxable income and the income tax thereon.
8½ Marks

(b) (i) Describe the two types of clubs or associations which are recognized
under the Taxation Act. 3 Marks

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

250 / 312
 6

(ii) Chikolo Sports Club, which is a taxable club, carried out the following
transactions in the year ended 31 December 2009:

Income : K2,375,000
This is made up as follows: K’000
Ground entrance fees 350
Sale of food 125
Sale of drinks 80
Club membership fees 120
TV shows 140
Live band performances 600
Gambling machine 960
2,375

Expenses : K1,250,000
The breakdown was as follows: K’000
Trading licence 55
Food licence 45
Salaries and wages 650
Cost of goods sold 275
Repairs and maintenance 225
1,250
Required:

(i) Compute the taxable income of Chikolo Sports Club for the financial
year to 31 December 2009. 3½ Marks

(ii) Calculate the amount of tax payable on the taxable income computed
in (i) above assuming that the taxable income was K119,062.50.
1½ Marks

(iii) State the tax year in which the taxable income computed in (i) above
will be assessed. 1 Mark
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

251 / 312
 7

5. (a) (i) What is a ‘fringe benefit’, as defined by the Taxation Act? 2 Marks
(ii) How does the liability to fringe benefits tax arise? 1 Mark
(iii) Who is liable to pay fringe benefits tax? 1 Mark
(iii) When is fringe benefits tax due for payment to the Commissioner
General? 1 Mark

(b) An employer has proposed to provide to an employee the following:

(1) A housing allowance of K62,500 per month payable to the landlord by

the employer.

(2) School fees of K120,000 per term of three months payable directly to
the employee.

(3) Unrestricted use of a motor vehicle which was acquired at a cost of

K5,500,000.

(4) Vehicle insurance and vehicle running costs estimated at K55,000 and
K72,000 per annum respectively. The insurance premium is payable to
the insurance company while the amount meant for vehicle running of
costs will be payable to the employee in cash.

(5) A cook will be provided at a cost of K30,000 per month.

Required:

(i) State who, between the employer and the employee, will bear the tax
burden of each of the employment benefits listed in 1 – 5 above.
6 Marks

(ii) Calculate the fringe benefits tax payable on the use of motor vehicle
for a period of three months. 2 Marks

(iii) The cost of watchman is a fringe benefit if the employer rents a house
for an employee, but not if the employer allows the employee use of
the house owned by the employer.

Required:

Why is this apparent fringe benefit ignored and can this approach be
said to be equitable? 2 Marks

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

252 / 312
 8

(c) The imposition of penalties under the Taxation Act is meant to achieve
certain objectives.

Required:

(i) State the most important objectives. 3 Marks

(ii) State the circumstances under which imposition of penalties may not
achieve the intended objectives. 2 Marks
(TOTAL : 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

253 / 312
 9

6. (a) The first and second schedules of the VAT Act specify the goods and services
which are exempt and zero rated, respectively.

Required:

(i) State one common feature between exempt and zero rated supplies
with reference to liability to VAT. 1 Mark

(ii) State the main differences between exempt and zero rated supplies.
2 Marks

(b) When does a taxable supply become a relief supply and what advantage, if
any, is enjoyed by the user of the goods and services that qualify as relief
supplies? 3 Marks

(c) Under what circumstances does a taxable person qualify for input tax
deduction in respect of taxable supply of motor vehicles or motor vehicle
spare parts? 4 Marks

(d) A taxpayer had the following transactions during the year to 31 December
2010.

Nature Cost VAT Paid

Telephone 225,000 37,125
Electricity 75,000 12,375
Security charges 340,000 56,100
Stationery 85,000 14,025
Rent 450,000 74,250

In addition, raw materials were purchased at a cost of K1,980,500 inclusive of

VAT.

During the same year, he sold his produce both locally and internationally, the
value of local sales were K3,400,000 and K1,400,000 respectively exclusive
of VAT.

Required:

(i) Calculate the amount of VAT paid on raw materials. 2 Marks

(ii) Calculate the amount of output VAT on total sales. 3 Marks

(iii) Calculate the amount of VAT (output tax payable) or recoverable, as

the case may be, taking into account the input tax paid. 5 Marks
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

254 / 312
 10

7. (a) A taxpayer has received an estimated assessment from the Tax Authorities
showing that he has been assessed for the year of assessment to 30 June 2010
in the absence of his return of income. Tax amounting to K725,240 is shown
to be due and payable. As no information has been provided, no credit for
advance taxes paid has been given.

The taxpayer has asked for your assistance and has given you the following
information as he wants your advice on how he can contest this assessment:

1. A statement that during the year under review the taxpayer received gross
rent amounting to K655,500. City rates of K45,000 were paid within the
year and mortgage interest of K140,000 and capital repayment of
K200,000 in relation to the property from which rental income was
received.

2. Withholding tax amounting to K55,000 was recovered from the rental in

(1) above. Assume the withholding tax rate on rents was 10%.

3. A payee certificate showing K7,200,000 as total salary and K2,000,000 as

PAYE deducted for the year under review.

Required:
(i) Advise the taxpayer whether or not withholding tax on rentals was
correctly operated by the taxpayer’s tenant. If not, what consequences
are likely to follow on both the operator and the taxpayer. 5 Marks

(ii) State the disadvantages resulting from an under deduction of PAYE by

an employer. 2 Marks

(iii) Assuming the tax payable amounted to K2,234,100, calculate and

advise the taxpayer, the net amount of tax payable by him. Indicate by
what amount the estimated assessment will be reduced or how much
additional tax will need to be paid. 6 Marks

(b) Explain the circumstances under which the following may be allowed as a
deduction from a taxpayer’s assessable income.

(i) Research and experiments 1 Mark

(ii) Bad debts 3 Marks
(iii) Doubtful debts 3 Marks
7 Marks
(TOTAL: 20 MARKS)
END

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

255 / 312
 STRICTLY CONFIDENTIAL

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2011 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 10(B): TAXATION

(JUNE 2011)

TIME ALLOWED: 3 HOURS

SUGGESTED SOLUTIONS

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

256 / 312
 1

SECTION A

ANSWER BOTH QUESTIONS IN THIS SECTION

1. (a) (i) Mr Khangamwa’s Taxable Income Tax Year to 30 June 2010

K’000 K’000
Profit before tax 18,750
Add back:
Withholding tax on interest 62.50
Donations to local church 75
Private motoring
- Fuel and lubricants 276
- Road permits and licences 22.5
- Vehicle maintenance 375
-
Penalties and fines
- Late submission of tax return 37
- Traffic offence fine 33

Legal expenses 20
Depreciation 560 1,521
Fringe Benefits Tax 60 20,271
Interest (10) 625
Less: Capital allowances 625 19,636

Notes for Markers

Workings under note 1 (not additional marks)

Determination of withholding tax on bank interest:
Net interest recorded : K250,000
Rate of withholding tax 20%
Grossing up = 250,000 x 100
80
Gross interest = 312,500
Less interest = 250,000 ½ interest 62,500

1. Under Note 3 K,000

Determination of private motoring:
(1) Fuels and lubricants
Total cost : 920,000
30% there on : 920 x 30
100
= 276,000

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

257 / 312
 2

2. Road permits and licences

Total cost : 75,000
30% thereon : 75,000 x 30
100
= 22,500

3. Vehicle maintenance
Total cost : 1,250,000
30% thereon : 1,250,000 x 30
100
= 375,000

(ii) Computation of net tax payable

Tax payable on K19,636,000

1st 120,000 @ 0% = 0½
Next 36,000 @ 15% = 5,400 ½
Balance 19,480,000 @ 30% = 5,844,000 ½
5,849,400
Total tax as above 5,849,400

Less: Withholding tax on interest 62,500 ½

Withholding tax on rent 35,000 ½
Provisional tax 1,450,000 ½ 1,547,500
4,301,900

(b) The donation to local church is disallowed because the local church is not
approved according to the Taxation Act.

(c) Declaration of a company’s county of incorporation is significant because the

Malawi tax law imposes an additional tax of 5% on companies that are
externally incorporated.
The declaration therefore helps the Revenue Authorities decide on whether to
impose the additional tax or not.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

258 / 312
 3

2. Computation of capital allowances – Year to 30/06/09

Factory Plant & Motor Furniture

Building Machinery Vehicles & Fittings
K’000 K’000 K’000 K’000
WDV 30/6/09 7,600 5,200 2,700 940
Less: disposals - __ (1,870) -___ -__
7,600 3,330 2,700 940
Additions 2,900 2,200 6,400 750
10,500 5,530 9,100 1,690

Less: investment (2,900) (2,200) - -

allowance
(150)
Less: Initial allowance - - - (169)
Less : Annual allowance (380) (333) (1,820) 1,371
7,220_ 2,997 7,280

Notes for markers

The following are not additional marks but for noting.

(1) Factory building

K
Additions are made up of fencing: 1,400
offices : 1,500
2,900
Investment allowance at
100% = 1,400
1,500
2,900

(2) Plant and machinery K’000

Proceeds 1,700
Gain 250
WDV 1,450 +
TWDV for scrap 420
Total TWDV 1,870

(3) Motor vehicles

Additions are made up of two vehicles

K’000
Saloon 2,200
Double cabin pickup 4,200
6,400

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

259 / 312
 4

(b) Why capital allowances are claimed in respect of fencing and offices.

Fencing

Fencing of an industrial building is deemed to be an essential

protective fencing and as such, such fencing becomes part of industrial
building and therefore eligible for capital allowances.

Offices

Expenditure in respect of offices is eligible for capital allowances

because:

- offices are attached to the factory building and therefore part of the
industrial building; and

- the expenditure in respect of the offices is less than 20% of the

cost of the whole structure, factory building includes offices.

Proof

Original cost of the factory building K12,000,000

Additions : fencing 1,400,000
offices 1,500,000
14,900,000

Proportion of expenditure in respect of offices to the expenditure of the

whole structure:
1,500,000 x 100
14,900,000
= 10.07%
This is less than 20%

(c) For the purposes of determining the taxable income of any taxpayer, there
shall be deducted from the assessable income of such taxpayer the amount
of any capital loss realized by the taxpayer in the year of assessment, but
to the extent only of either.

(i) the capital loss

(ii) any capital gain realized by the taxpayer in that year of assessment whichever
is lesser.

(d) ‘Disposal’ in relation to an asset means transfer of ownership of an asset

by whatsoever means including but not limited to:

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

260 / 312
 5

sale
gift
bequest
distribution or
exchange

SECTION B

ANSWER THREE QUESTIONS ONLY FROM THIS SECTION

3. (a) (i) It is called double taxation.

(ii) This arises because of:

- differences in bases of taxation in different countries

- some countries use source while others use residence when
taxing revenue.

This can be mitigated or prevented by:

- entering in Double Tax Agreements with other countries

- provisions in the Taxation Act, that allows deductions of

foreign tax.

(iii) Circumstances under which wife’s emoluments may not be treated as

wife’s earned income are:

(1) When income is not derived in her own right i.e. where
husband is the employer or partner.

(2) The emoluments from employment received or accrued to or in

favour of the wife where the employer is

- her husband
- a partnership in which the husband is a partner

- a company in which the husband is a director who

controls directly or indirectly more than 5% of voting
rights attaching to all classes of shares of the company.
- a company in which the wife is a director who controls
directly or indirectly more than 5% of the voting rights
attaching to all classes of shares of the company and in
which the husband is employed or is a director.

(b) (i) Exchange gain or loss on transactions. Calculation of gains or losses:

Formula ar1 – ar2
Where a – amount of foreign currency

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

261 / 312
 6

r1 – rate of exchange at the date of establishing liability

r2– rate of exchange at the time of settling the liability

April 2010 Payment

(25000 x 145) – (25000 x 152)
3,625,000 – 3,750,000
Exchange loss (125,000)

October 2010 Payment

(125000 x 145) – (125000 x 150)
18,125,000 – 19,000,000
Exchange loss (875,000)

December 2010 Payment

(200,000 x 145) – (200,000 x 155)
29,000,000 – 31,000,000
Exchange loss (2,000,000)

(ii) The loss is not deductible because it is unrealized.

(c) Annuity income is supposed to be included in the taxable income of a

taxpayer.
Excluding: in the case of an annuity which has been purchased, that part of the
amount of the annuity which represents the undeducted purchase price.

4. (a) (i) Persons carrying on any trade partnership shall:

- joint return in respect of such trade, together with such

particulars as may from time to time be prescribed.

- be separately liable for the rendering of the joint return.

- be liable to income tax only in individual capacities.
- have separate assessments made upon partners.

(ii) K’000 K’000

Net profit as per accounts 777
Add back: Depreciation 143 ½
Salaries 720 ½
Interest on capital 127 ½ 990
1,767
Less: Capital allowances ____
Taxable profits 1,767

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

262 / 312
 7

Distribution of Profits

Total Chiphazi Chimwendo

K’000 K’000 K’000
Salary 720 450 270
Interest on capital 127 85 42
Balance 2:1 920 613 307
1,657 92 619

Taxable income for Chimwendo

Profit Rental income

619+ 240,000 = 859,000

Tax On K859,000
1st 120,000 @ 0% = 0
Next 36,000 @ 15% = 5,400
Balance 703,000 @ 30% = 210,900
216,300

(b) (i) There are two main types of clubs and associations which are
recognized under the Taxation Act and they are as follows:

Clubs which are formed or are operated solely or principally for

- social welfare
- civic improvement
- other similar purposes
- and which do not distribute any income to members

Those which are formed or operated solely or principally for

- pleasure
- recreation

(ii) Computation of taxable income for Chikolo Sports Club – financial

year to 31 December 2009_________________________________
K’000
Sale of food 125
Sale of drinks 80
TV shows 140
Live band performances 600
Gambling machines 960
1,905
6¼% ½ thereon = 119,062.5

(iii) Tax payable

Taxable income K119,062.50
Rate applicable 30%
Amount of tax 119,062.5 x 30% = 35,718.75

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

263 / 312
 8

(iv) The income will be assessed in the tax year to 30 June 2010.

5. (a) (i) A fringe benefit is any asset, service or other benefit in kind provided
by or on behalf of an employer to an employee where such benefits
includes an element of personal benefit to the employee.

(ii) Liability to fringe benefits tax arises where an employer provides

fringe benefits to an employee.

(iii) An employer who provides fringe benefits to employees is liable to

pay the fringe benefits tax.

(iv) Fringe benefits tax is due for payment not later than fourteen (14) days
after the end of each quarter.

(b) (i) (1) Employer is liable as the housing allowance is paid to a third
party.
(2) School fees will be taxable in the hands of the employee as it is
paid directly to him.

(3) Motor vehicle fringe benefit will be taxed in the hands of the
employer.

(4) The motor vehicle insurance is not a standalone benefit when

paid to a third party. It is a complement on the motor vehicle
benefit. No tax therefore arises whether to the employer or
employee.

However the amount for running cost which is payable to the

employee is taxable in the hands of the employee because it is
paid to the employee.

(5) The provision of a cook is a taxable benefit. The burden falls

on the employer.

(ii) Motor Vehicle fringe benefit

K
Cost of the vehicle 5,500,000
Taxable value 15%
 5,500,000 x 15% = 825,000
Quarterly value = 206,250
Tax at 30% = 206,250 x 30%
= 61,875

(iii) An employer will always provide security to business assets, like a

house even without occupation by an employee. Therefore the
employee’s security is seen as very secondary and therefore ignored.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

264 / 312
 9

This is considered equitable because the primary purpose of the

expenditure is being recognised.

(c) (i) The imposition of penalties under the Taxation Act is meant to achieve

- compliance by the taxpayers

- the collection of revenue by government
- and enforcement of rules and regulations contained in the
Taxation Act.

(ii) In certain circumstances, the taxpayers might not pay the penalties as
they will appeal against the penalty and therefore no money will be
received.

Some penalties are too low to have the effect of improved taxpayer
compliance. Taxpayers will choose not to pay them as they realize
that the benefits they get by deliberate non compliance by far outweigh
the possible penalties.
)

6. (a) (i) One common feature between exempt and zero rated supplies is that
VAT is not payable in respect of both supplies.

(i) Main differences are:

- Exempt supplies are not subject to VAT while
- Zero rated supplies are subject to VAT.
- Input tax is not claimable in respect of exempt supplies while

- Input tax is claimable in respect of zero rated supplies.

(b) A taxable supply becomes relief supply when it is made to:

Individuals
Organizations: and businesses specified in the third schedule to the
VAT Act.
The user of the goods and services that qualify as relief supply enjoys an
advantage that no VAT is payable because of the relief that is given.

(c) A taxable person qualifies for input tax deduction in respect of supply of
motor vehicles or motor vehicle spare parts if the taxable person is in the
business of:

- dealing in motor vehicles, or

- hiring of motor vehicles; or
- selling of motor vehicle spare parts

However, where the taxable person uses the motor vehicles or motor vehicle
spare parts,

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

265 / 312
 10

- wholly
- exclusively; and
- necessarily for business

Such taxable person shall qualify for input tax deduction in respect of such
motor vehicles and motor vehicle spare parts.

(d) (i) VAT on raw materials

Value inclusive of VAT K1,980,500
 VAT 1,980,500 x 100 = 1,700,000
116.5
VAT inclusive value 1,980,500
VAT exclusive value 1,700,000
VAT = K280,500

(ii) Amount of output VAT

No output tax on exports

output tax on local sales: 3,400,000
rate of VAT 16½%
 VAT = 561,000
Total value 3,961,000

Total VAT therefore is

VAT on exports = 0
VAT on local sales = 561000
K561000

(iii) Output VAT total on both local and exports 561,000

Less input VAT:
on telephone 37125
on electricity 12375
on security charges 56100
on stationery 14025
on rentals 74250
on raw material 280500 474375
Net VAT payable 86,625

7. (a) (i) Rent payable 655,500

Withholding tax rate given 10%
 Expected withholding tax 655,500 x 10%
= 65,550

No, it was not correctly operated as he was supposed to have been

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

266 / 312
 11

deducted K65,500 but only K55,000 was withheld.

Penalties

There are penalties applicable to the tenant and not the landlord these
are:

- failure to deduct tax makes one personally liable to pay the

tax which was not withheld; plus 20% additional
tax if paid late.

- failure to operate a withholding tax scheme makes one guilty of

an offence punishable by a fine of K1,000.

(ii) Penalties for under deduction of PAYE are:

- 20% of the tax payable

- and a further additional 5% per month or part thereof as it
remains unpaid.

(iii) Income tax computation

K’000
Rent received 655
Salary received 7200
7855
Less:
Rates 45
Interest 140
Donations 10
Subscription 75 270
7585

Tax payable

Tax payable as given 2,234,100

Less : withholding tax 55,000
PAYE tax 2,000,000 2,055,000
Net tax payable 179,100
Tax on assessment 725,240
Tax over-estimated 546,140

(b) (i) Research and Experiments

The expenditure should not be of capital nature.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

267 / 312
 12

The expenditure must be on experiments and research relating to the

trade of the taxpayer.

(ii) Bad debts

These may be allowed as a deduction where the debt has become bad
and therefore irrecoverable, during the year of asse ssment for various
reasons.

The Commissioner must be satisfied that the debt has become bad.

The amount of the debt must have been included in the income of the
taxpayer either for the current or previous year of assessment.

(iii) Doubtful debts

The doubtful debt may be allowed as a deduction if the debt is in

respect of a specific debtor where chances of recovery are uncertain.

The amount of the debt must have been included in the income of the
taxpayer for the current year or previous year of assessment.

Any doubtful debt allowed as a deduction in one year of assessment

must be included in the income of the taxpayer for the following year
of assessment.

END

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

268 / 312
 EXAMINATION NO.__________________

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2011 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 10(B): TAXATION

MONDAY 5 DECEMBER 2011 TIME ALLOWED: 3 HOURS

9.00 AM - 12.00 NOON

INSTRUCTIONS:

1. You are allowed 15 minutes reading time before the examination begins during
which you should read the question paper and, if you wish, make annotations on the
question paper. However, you are not allowed, under any circumstances, to
open the answer book and start writing or use your calculator during this reading
time.

2. Number of questions on paper – 7.

3. The paper is divided into TWO Sections, A and B. BOTH questions to be

answered in Section A and ANY THREE from Section B.

4. Each question carries 20 marks.

5. Use of non-programmable calculators is allowed.

6. You are provided with the following:

(i) A set of tables containing rates of tax on taxable income (Table 1).
(ii) Rates of capital allowances (Table 2).
(iii) Penalty rates for underpaid provisional tax (Table 3).

7. Begin each answer on a fresh page.

8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY

THE INVIGILATOR.

This question paper contains 9 pages

This question paper must not be removed from the examination hall.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

269 / 312
 1

SECTION A

ANSWER BOTH QUESTIONS IN THIS SECTION

1. Chawaka Estates Ltd is a company incorporated in Malawi and is involved in the

growing and processing of tea in the Mulanje area. Its profit and loss account for the
year ended 30 September 2010 is as follows:

K K
Sales 45,200,000
Less: cost of sales 16,300,000
Gross profit 28,900,000
Less: Indirect costs 4,265,000
Finance costs 5,225,000
Administrative costs 3,450,000 12,940,000
15,960,000
Add: Sundry income 2,600,000
Profit on sale of fixed asset 4,500,000 7,100,000
Net profit 23,060,000

The following information in connection with these accounts is also available:

(1) Included in indirect finance and administration costs are the following items
of expenditure.

K
Depreciation 4,200,000
Medical expenses for staff 1,100,000
Pension costs (not allowable) 2,350,000

Professional fees
Property revaluation 140,000
Debt collection 250,000
Audit fees 1,450,000

Interest and charges paid

Bank interest and charges 445,000
On PAYE late payment 260,000
On Directors loans 52,000

Subscriptions and donations

Trade to MCCI 120,000
Malawi Against Polio 15,000
Malawi Christian Church 25,000

Fringe benefits tax 600,000

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

270 / 312
 2

(2) Sundry income is made up as follows:

Dividends from Malawi companies 1,450,000
Interest from First Merchant Bank 1,150,000

(3) The company bought and sold the following assets during the financial year.
Purchased: K
New beater 2,500,000
Second hand tea sifting machinery 1,250,000
New lorry 5,000,000
Computers (New) 840,000
New saloon car 3,400,000
Sold
Sold saloon vehicle for K250,000. The car cost K1,500,000 and had a written
down value of K120,000 as at 1 October 2009.

(4) The company scrapped one of its production machines which cost K3,500,000
and had a tax written down value of K500,000 as at 1 October 2009.

(5) The company spent K2,500,000 during the year extending its factory building

(6) The tax written down values of the fixed assets as at 1 October 2009 were:
Rate of Annual
K allowances
Buildings 14,500,000 5%
Plant & machinery 7,500,000 10%
Motor vehicles 6,200,000 20%
Furniture & fittings 2,600,000 10%
Computers 1,500,000 40%

(7) Capital allowances agreed by the Revenue authorities was K3,500,000

Required:

(a) (i) Calculate the amount of capital allowances available to Chawaka

Estates Limited. 7½ Marks

(ii) Calculate the capital gain or loss on the disposals during the year.
3½ Marks
(b) Compute the taxable income of Chawaka Limited and compute the tax
thereon. 5 Marks

(c) State the circumstances under which a taxpayer is given additional investment
allowance. 2 Marks

(d) Who is a manufacturer? 2 Marks

(TOTAL: 20 MARKS)
Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

271 / 312
 3

2. (a) (i) Describe the two types of clubs, societies or associations which are
recognized under the Taxation Act. 3 Marks

(ii) How is the income of the two types of clubs, societies or associations
described in (i), above treated for tax purposes? 2 Marks

(b) Where a club or association is subject to tax, state how the taxable income is
computed. 2½ Marks

(c) The transactions of Katuku Club, which is a taxable club, for the year ended
31 December 2010 were as follows:

Income K2,500,000
Made up as follows:
K
Sale of food 600,000
Ground entrance fee 220,000
Sale of drinks 600,000
Video shows 460,000
Live band performances 560,000
Gambling machines 60,000
2,500,000

Expenses K1,720,000
Made up as follows:
K
Salaries and wages 700,000
Food licence 20,000
Repairs & maintenance 400,000
Cost of goods sold 550,000
Trading licences 50,000
1,720,000

Net surplus K780,000

Required:

(i) Compute the taxable income of Katuku C lub for the financial year to
31 December 2010. 5 Marks

(ii) Calculate the amount of tax assuming the taxable income computed is
K55,600. 1½ Marks

(iii) State the tax year in which the taxable income computed in (i) above
will be assessed. 1 Mark

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

272 / 312
 4

(d) Define the term “qualified re-organisation”, for purposes of the Taxation Act.
3 Marks

(e) In relation to the Taxation Act, who is a public officer? 2 Marks

(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

273 / 312
 5

SECTION B

ANSWER THREE QUESTIONS ONLY FROM THIS SECTION

3. (a) Define the term „foreign currency liability‟, for purposes of the Taxation Act.
1½ Marks
(b) A Malawian business obtained goods from a foreign company valued at
$200,000 in February 2010 and three payments for the goods were made
during the year as follows:
$
April 2010 40,000
October 2010 85,000
December 2010 75,000

Exchange rates for the relevant months were as follows:

February 2010 - US$1 = K152

April 2010 - US$1 = K154
October 2010 - US$1 = K150
December 2010 - US$1 = K159

Required:
(i) Calculate the value of goods in Malawi Kwacha at the time of
establishing the liability in February 2010. 2 Marks

(ii) Calculate the total amount of foreign exchange gain or foreign

exchange loss, as the case may be, realized on the loan transaction on
each of the repayments made during the year. 6 Marks

(iii) Calculate how much would have been saved in realized foreign
exchange losses or how much would have been realized as additional
foreign exchange gains had the whole of this foreign currency liability
been settled in April 2010. 3 Marks

(iv) What restriction, if any, is imposed on the deductibility of a realized

foreign exchange loss? 2 Marks

(v) In the event that the deduction of a realized foreign exchange loss is
restricted, state how the unallowed amount is treated. 1½ Marks

(c) Assume the business paid duty at 25% and VAT at 16.5% on the purchase of
the goods in February 2010 as indicated in (b), above.

Required:
Calculate the total cost of the goods bought. 4 Marks
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

274 / 312
 6

4. (a) (i) Explain the difference between direct taxes and indirect taxes.
3 Marks

(ii) Give two examples of direct taxes and three examples of indirect
taxes used in Malawi. 5 Marks

(b) Details of income of an individual who was employed for 9 months only
(October 2009 to June 2010) were as follows:

1. Basic salary
K220,000 per month to December 2009
K250,000 per month to June 2010.

2. Housing allowance
25% of basic salary, paid together with salary.

3. Christmas bonus K110,000 paid in December 2009.

4. Clothing allowance K75,000 every three months.

5. Motor vehicle maintenance allowance of K62,500 per month paid

together with salary.

PAYE tax deducted over the period was K45,000 per month from October
to December 2009 and K55,000 per month for the period January to June
2010.

Required:

(i) Compute the taxable income of the individual for the tax year to 30
June 2010. 7 Marks

(ii) Calculate the amount of tax due and payable on the income computed
in (i) above, assuming that the total income for the tax year to 30 June
2010 is K3,597,500. 3 Marks

(iii) Calculate the amount of additional tax payable or recoverable, taking

into account the tax paid by the individual through PAYE, as stated
above. 2 Marks
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

275 / 312
 7

5. (a) The imposition of penalties under the Taxation Act is meant to achieve certain
objectives.

Required:

(i) State any three such objectives. 3 Marks

(ii) Discuss the circumstances underwhich the imposition of penalties may

not achieve the intended objectives. 2 Marks

(b) (i) When may the Commissioner General accept the taxpayer‟s estimate
of his taxable income? 1 Mark

(ii) When may the Commissioner General estimate the taxpayer‟s income
or assessed loss? 3 Marks

(c) (i) Under what circumstances is an entity registrable for purposes of the
Value Added Tax? 3 Marks

(ii) A Malawian company, Goba Limited, has a wholly owned subsidiary,

Baba Limited, also incorporated in Malawi.

Explain the circumstances, if any, whereby the holding company,

Goba Limited, can apply for group registration for Income Tax and for
Value Added Tax purposes, so that only one tax return is required for
the group in each case. 3½ Marks

(d) (i) What conditions must be fulfilled by a taxable person, who is not a
motor vehicle dealer, to enable such a taxable person claim in-put tax
deduction in respect of motor vehicle spare parts? 2½ Marks

(ii) How are annuities taxed according to Section 14 of the Taxation Act?
2 Marks
(TOTAL : 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

276 / 312
 8

6. (a) An employer, who for a number of years, has given cash allowances to senior
employees, has decided to seek professional advice on how to provide fringe
benefits in a tax efficient manner.

You have been asked to advise the employer on how fringe benefits in the
form of housing accommodation and school fees can be provided without
unnecessarily increasing the tax burden of either the employer or the
employee. The advise should be given in form of answering the following
questions:

(i) Does the provision of cash allowances constitute a fringe benefit for
taxation purposes? Give a reason for your answer. 2 Marks

(ii) Can the employer, who is the source of the cash allowance, be allowed
to shoulder the tax burden arising from the provision of the cash
allowance? If so under what condition? 2 Marks

(iii) Advise on the most tax efficient way of providing a housing fringe
benefit. 3 Marks

(iv) What other tax advantage is available as a result of the arrangement

recommended in (iii), above? 1½ Marks

(v) Can the tax liability arising from the cash allowance paid to the
employee for school fees be reduced? if so how? 4 Marks

(b) An employer provided fringe benefits to an employee during the months July
2010, August 2010 and September 2010 as follows:

(i) Housing accommodation

The employer rents a house at a monthly rent of K120,000. The
employee earns a monthly salary of K450,000. The house is
unfurnished.

(ii) Motor vehicle

The cost of the vehicle was K7,500,000 and its use is unrestricted.

(iii) School fees

K250,000 per quarter is paid direct to an educational institution and
was paid in July 2010.

Required:

Calculate the Fringe Benefits Tax payable for the quarter ended 30 September
2010. 7½ Marks
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

277 / 312
 9

7. (a) State any five offences listed under Section 112 of the Taxation Act, which
when committed by „any person‟, attract the imposition of a penalty.
5 Marks
(b) A taxpayer‟s first accounts are made up for a period ending on some day other
than 30 June.

Required:
Advise whether such accounts are acceptable for taxation purposes and if so,
what conditions, if any, are imposed in connection with the taxpayer‟s
accounts for subsequent years of assessments. 3 Marks

(c) Nobia Limited is a mining company which was incorporated in Malawi on

1 September 2009 with the aim of exporting minerals from Malawi.

During the period to 30 June 2010 the following expenditures were incurred:

K
Acquisition of proposed mining site 25,000
Construction of site buildings 52,000
Acquisition of machinery 122,000
Testing of samples 17,000
General administration and management 45,000
261,000

Mining operations commenced in July 2010 and during the year to June 2011,
the following expenditures were made:

K
Acquisition of mining rights from govt. 5,000
Additional site buildings 22,000
Motor vehicle and trucks 116,000
General administration and management 54,000
197,000

Required:
(i) Define the term „mining expenditure‟ as stipulated in part II of the
Second Schedule of the Taxation Act. 5 Marks

(ii) Calculate the amount of mining expenditure for the period to 30 June
2010 and the amount to be allowed for the same period. 4 Marks

(iii) Nobia transferred their full interest in the mine in January 2011 to
Kayera Minerals Limited. How much will each be entitled to claim in
respect of the expenditure incurred in the year to 30 June 2011.
3 Marks
(TOTAL: 20 MARKS)
END

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

278 / 312
 STRICTLY CONFIDENTIAL

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2011 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 10(B): TAXATION

MONDAY 5 DECEMBER 2011 TIME ALLOWED: 3 HOURS

9.00 AM - 12.00 NOON

SUGGESTED SOLUTIONS

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

279 / 312
 1

SECTION A

BOTH QUESTIONS TO BE ANSWERED IN THIS SECTION

1. (a) (i) Capital allowances

Plant & Motor Furniture

Buildings Machinery vehicles & Fittings Computers
K’000 K’000 K’000 K’000 K’000
B/fwd 1/10/09 14,500 7,500 6,200 2,600 1,500
Additions 2,500 3,750 8,400 - 840
Disposals _____ (500) (120) -__ _____
17,000 10,750 14,480 2,600 2,340
Investment (2,500) (3,000) -
Initial (1,000) (168)
Annual (725) (775) (2,896) (260) (926)
13,775 6,975 10,504 2,340 1,246

(ii) Capital gain or loss

Proceeds TWDV Gain/(loss)
Saloon 250,000 120,000 130,000
Production machine - 500,000 (500,000)
Net loss 370,000

(b)
K’000 K’000
Profit before tax 8,860
Add back: Depreciation 4,200
Pension costs 2,350
Property revaluation 140
Penalty for PAYE late payment 260
Interest on Directors loans 52
Donation Malawi Christian Church 25
Fringe benefits tax 600 7,627
16,487
Less: Tax free interest 10
Dividends from 1,450
Capital allowances 3,500 4,960
Taxable income 11,527
Tax at 30% x 11537 3,458.10

(c) Additional investment allowance, according to paragraph 4(2) of the Second

Schedule is an allowance that is given to a taxpayer who is eligible for the
investment allowance and who invests in an area designated for such
additional allowance by the minister by order published in the gazette.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

280 / 312
 2

(d) A manufacturer shall include the owner of a business carried on in buildings

with the definition of industrial building contained in paragraph 8 of Second
Schedule of the Taxation Act and the owner of a plantation producing tea,
coffee, tobacco, sugar, cocoa or such other crop as the Minister may approve.

(Paragraph 10(3) of Second Schedule to the Taxation Act)

2. (a) (i) There are two types of clubs and these are as follows:
(1) Clubs which are formed or operated solely or principally for
- social welfare
- civic improvement
- other similar purposes
and which do not distribute any of their income to the members

(2) Those which are formed or operated solely or principally for

- pleasure
- recreation

(ii) Income tax treatment

The income of clubs, societies and associations which are formed or
operated solely or principally for social welfare or civic improvement
are exempt from Taxation.
(Paragraph (iv) First Schedule of the Taxation Act)
Taxable income of clubs formed or operated solely or principally for
pleasure or recreation is subject to tax.
(Section 61(1) of the Taxation Act)

(b) The taxable income of a club or association which is subjected to taxation is

deemed to be an amount equivalent to 6¼% of all receipts of the club or
association from:

- sales of goods
- cinematograph performances
- stage plays and
- gambling machines

(c) (i) Computation of taxable income of Katuka club for the financial year
ended 31 December 2010.
K’000
Sale of food 600
Sale of drinks 600
Video shows 460
Live band performances 560
Gambling machines 60
2,280
Taxable income 6¼% thereon 142.50

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

281 / 312
 3

(ii) Tax on K55,600

Tax rate 30%
Tax payable 55,600 x 30% = 16,680

(iii) It will be assessed in 2010/2011 tax year.

(d) For purposes of the Taxation Act a qualified reorganization means:

- re-organisation pursuant to a written plan

- undertaken for valid business purposes
- does not have its purpose tax
avoidance by any person who is party to the reorganization

(e) A public officer is an employee who the company appoints to be responsible

for ensuring that all taxation matters are properly dealt with.

SECTION B

ANSWER THREE QUESTIONS ONLY FROM THIS SECTION

3. (a) The term ‘foreign currency liability’ means a liability which is denominated in
foreign currency.
or
the amount of which is determined by reference to a foreign currency and
include notes and coins of such foreign currency.

(b) (i) Total value of goods at time of establishing the transaction.

Value in foreign currency = $200,000

Rate $1 = 152
Therefore value $200,000 x 152
= K30,400,000 _

(ii) April 2010 payment

–
Amount of 1st repayment $40,000
 (40,000 x 152) – (40,000 x 154)
6,080,000 – 6,160,000
Loss (K80,000)

October 2010 payment

Amount of payment $85,000
 ($85,000 x 152) – ($85,000 x 150)
12,920,000 - 12,750,000

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

282 / 312
 4

Gain K170,000
Dec 2010 payment = $75,000
($75,000 x 152) – ($75,000 x 159)
= 11,400,000 – 11,925,000
Loss K525,000

(iii) Net gain loss from transactions above

= (K80,000) + 170,000 – (525,000)
= Net loss = K435,000
Gain or loss if paid in April
(200,000 x 152) – (200,000 x 154)
= 30,400,000 – 30,800,000
Loss = K400,000
 K435,000 – K400,000
= K35,000 savings

(iv) Realised foreign exchange losses are deductible in full except where
the taxpayer has unrealized foreign exchange gains.
Where there are unrealized foreign exchange gains, the realized
foreign exchange losses to be allowed as a deduction will only be
excess of the realized foreign exchange losses over the
unrealized foreign exchange gains.
(Section 28(5) of the Taxation Act)

(v) The amount of realized foreign exchange losses not allowed as a

deduction is carried forward to future tax years under similar
restriction provisions.
(Section 28(5) of the Taxation Act)

(c) Cost of goods as calculated in b(i)

= K30,400,000
Add duty at 25% = 30,400,000 x 25%
= 7,600,000
38,000,000

Add VAT @ 16.5% = 38,000,000 x 16.5%

= 6,270,000
Total cost  = K44,270,000

4. (a) (i) Direct taxes are assessed on income or property with the expectation
that the persons from whom the tax is collected lose purchasing power.

Indirect taxes or collected from producers or sellers in the expectation

that they will pass it on to consumers.
(Refer to MCA Taxation Manual)

(ii) Examples of direct taxes are:

- Income tax and
- property tax (city rates)

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

283 / 312
 5

Examples of indirect taxes are:

- Value added tax
- Customs duty
- Excise duty

(b) (i) Income for an individual

Basic salary (220,000 x 3) + (250,000 x 6)
660,000 + 1,500,000
= K2,160,000
Housing allowance (25% x 220,000 x 3) + (25% x 250,000 x 6)

165,000 + 375,000
K540,000
 Christmas bonus 110,000
 Clothing allowance 75,000 x 3 = K225,000
 Motor vehicle allowance 62,500 x 9 = K562,500
Total = K3,597,500

(ii) Tax payable: on K3,597,500

1st 120,000 @ 0% = 0
Next 36,000 @ 15% = 5,400
Balance 3,441,500 @ 30% = 1,032,450
1,037,850

(iii) Total tax payable K1,037,850 ½

Less tax paid under PAYE K
(45,000 x 3) + (55,000 x 6)
135,000 + 330,000 = 465,000
Balance 572,850

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

284 / 312
 6

5. (a) (i) The imposition of penalties under the Taxation Act is meant to achieve:
- compliance by the taxpayers
- collection of revenue by the government
- enforcement of rules and regulations contained in the taxation
Act.

(ii) In certain circumstances:

- the taxpayers will not pay the penalties as they will appeal against such
penalties and therefore money will not be realized
- some penalties are not adequate to motivate taxpayers to pay as some
taxpayers would appear to benefit more from the non-compliance.

(b) (i) If it appears to the commissioner that any taxpayer is

unable for any cause to furnish an accurate return of income, the
commissioner may accept the taxpayers estimate of the amount of his
taxable income.
(Section 89(2) of the Taxation Act)

(ii) The commissioner may estimate the taxpayers income in the following
cases.

1. where a taxpayer makes default in furnishing any return or

information; or
2. where the commissioner is not satisfied with the return or
information furnished by the taxpayer
3. where the commissioner has reason to believe that a taxpayer is
about to leave Malawi without furnishing a return or a satisfactory
return.
(Section 89(1) of the Taxation Act)

(c) (i) An entity is registable as taxable for purposes of the Value Added Tax
(VAT) Act where:

(i) the entity makes taxable supplies of goods or services

(ii) the business turnover is K6,000,000 or more.

Any entity which satisfies criterion (i) above and whose business
turnover is below the K6,000,000 mark stipulated in (ii) above may
apply for voluntary registration.

(ii) The VAT Act does allow group registration provided

- one company must control the other (as is the case here)

- the commissioner general approves registration

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

285 / 312
 7

- both companies remain jointly and severally liable for

VAT payable by the group.

However Income Tax Act does not allow group registration of a

company and its subsidiary.

(d) (i) Conditions to be fulfilled

The taxable person must:
- be in business of hiring motor vehicles
- be in the business of selling of motor vehicle spare parts, or

- use motor vehicle or motor vehicle spare parts

- wholly
- exclusively and necessarily in his or her business

(ii) According to Section 14 (i)

- Income of a taxpayer shall include any amount of annuity
received.
- Excluded will be the amount representing undeducted purchase
price in case of an annuity which has been purchased.

6. (a) (i) The provision of cash allowances does not constitute a fringe benefit
as is defined in the Taxation Act.
The allowance if paid in cash is taxable in the hands of the employee.

(ii) The employer can be allowed to shoulder the tax burden relating to
cash allowances.
In these circumstances then the employer will be required to pay extra
tax on the arrangement to have tax paid by the employer.

(iii) The house to be made available to the employee must belong to the
employer.

When this is so, the taxable value of the housing benefit is reduced by
50%.

Following this reduction, the fringe benefits tax payable by the

employer is similarly reduced.

(iv) In addition to the reduction in the taxable value of the housing fringe
benefit and fringe benefits tax payable the provision of gardener,
security guard and watchman does not constitute a taxable fringe
benefit.

(v) The tax liability arising from cash allowance paid to the employee for
school fees may be reduced if, instead of paying the allowance, in cash
direct to the employee, the money is paid direct to the institution.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

286 / 312
 8

The tax burden thus shifts from the employee to the employer.

The employer becomes liable to fringe benefits tax as he has provided

a taxable fringe benefit.

Additionally there is a 50% reduction in taxable value where the fees

is paid to the institution, resulting in reduced tax liability of the
employer.

(b) Fringe benefits tax computation

Housing accommodation
Taxable value calculation
Rental value = 120,000
10% of salary x 45,000 = 45,000 since unfurnished
Therefore taxable value = K120,000
3 months benefit = 120,000 x 3 = K360,000

Motor vehicle
15% of 7,500,000 = 1,125,000 p.a.
3 months = 1,125,000 x 3
12 = 281,250

School fees
K250,000 per quarter, taxable value = K250,000
Taxable value = 50% x 250,000 = K125,000
Summary of taxable values for quarter ended 30 September
K
Housing Accommodation = 360,000
Motor vehicle = 281,250
School fees = 125,000
766,250
Tax at 30% = K229,875

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

287 / 312
 9

7. (a) Five offences committed by (any person) listed under Section 112 of the
taxation Act.

(i) failure to comply with any notice served as the taxpayer by the
Commissioner under the taxation Act.

(ii) the taxpayer gives any incorrect information or omits any relevant
information from any statement required to be made to the
commissioner under Section 20.

(iii) failure to keep records, books or accounts as required to be kept under

Section 54.
(iv) being a public officer of a company, fails to furnish to the
commissioner documents and particulars relating to the notification of
dividends declared as required under Section 69.

(v) failure to furnish the commissioner returns or particulars relating to

persons employed by him as required under Section 85.

(vi) the taxpayer or his agent fails to furnish any other persons with a
certificate as required under Section 87(3).

(vii) fails to deduct the tax due, or to remit to the commissioner tax
deducted, under Section 76.

(b) Where a taxpayer makes up his accounts for a period of 12 months ending on
some day other than 30 June, the Commissioner may in his discretion accept
such accounts for assessment in respect of the assessment year ending on 30
June prior or subsequent to the closing date of such accounts and no part of
such assessment shall be charged to tax in any other year of assessment.

All subsequent accounts of the taxpayer shall unless the commissioner

otherwise agrees, be made up for each succeeding period of 12 months ending
on such other date.

(c) (i) Mining expenditure is capital expenditure incurred in Malawi by a

person carrying out or about to carry out mining operations in Malawi.
The capital expenditure herein includes:

- Searching for or in discovery and testing or winning access to

deposits or minerals.

- In the acquisition of or of rights in or over such deposits, other

than the acquisition from a person who has carried on many
operations in relation to such deposits.

- In the provision of plant and machinery and industrial buildings

which would have little or no value to such person if the mine
ceased to be worked.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

288 / 312
 10

- On the construction of any buildings or works which would have

little or no value if the mine ceased to be worked.

- On development, general administration and management prior

to the commencement of mining operations.

(ii) Mining expenditure to 30 June 2010

K
Construction of site buildings 52,000
Acquisition of machinery 122,000
Testing of samples 17,000
General administration 45,000
236,000

The whole K236,000,000 would be deductible in the first year of

assessment.

(iii) Mining expenditure for the period to 30 June 2011

K
Acquisition of mining rights 5,000
Additional site building 22,000
Motor vehicles and trucks 116,000
General administration 54,000
197,000

The allowance in this year shall be apportioned normally based on time

of use by each of the mining companies Nobia and Kayera as follows:

K
Nobia July to Dec = 6 months = 50% x 197,000 98,500
Kayera Jan to June = 6 months = 50% x 197,000 98,500

END

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

289 / 312
 Examination No._________________

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2010 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 10(B): TAXATION

MONDAY 6 DECEMBER 2010 TIME ALLOWED: 3 HOURS

9.00 AM - 12.00 NOON
INSTRUCTIONS:

1. You are allowed 15 minutes reading time before the examination begins during
which you should read the question paper and, if you wish, make annotations on the
question paper. However, you are not allowed, under any circumstances, to
open the answer book and start writing or use your calculator during this reading
time.

2. Number of questions on paper – 7.

3. The paper is divided into TWO Sections, A and B. BOTH questions to be

answered in Section A and ANY THREE from Section B.

4. Each question carries 20 marks.

5. Use of non-programmable calculators is allowed.

6. You are provided with the following:

(i) A set of tables containing rates of tax on taxable income (Table 1).
(ii) Rates of capital allowances (Table 2).
(iii) Penalty rates for underpaid provisional tax (Table 3).

7. Begin each answer on a fresh page.

8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY

THE INVIGILATOR.

This question paper contains 10 pages

This question paper must not be removed from the examination hall.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

290 / 312
 1

SECTION A

ANSWER BOTH QUESTIONS IN THIS SECTION

1. Mr Kondwerani runs a haulage business and produced the following information for
the tax year to 30 June 2010:

Mr Kondwerani – Income and Expenditure Account

Year Ended 30 June 2010
Notes K‟000 K‟000
Transport revenue 22,500
Add: Sundry income (1) 468
22,968
Less: Salaries and wages 1,600
Depreciation 560
General expenses (2) 450
Fuel and lubricants (3) 1,450
Electricity 245
Water 95
Road permit and licences (3) 55
Vehicle maintenance (3) 945
Repairs to equipment 42
Rent payable 1,300
Penalties and fines (4) 85
Legal expenses (5) 475
Fringe Benefits Tax 520 7,822
Profit before tax 15,146
Notes

1. Sundry income: K468,000

This is made up as follows: K‟000
Bank interest recorded net of 20% WHT 360
Gross rental from subletting office space 108
468

2. General expenses: K450,000 K,000

Donation to Church 80
Donations to orphan care centres 170
Office refreshments 150
Transport licence 20
Donations to University Appeal Fund 30
450
3. Vehicles: Fuel, Licences and Maintenance

In addition to vehicles specifically designated for private use, Mr Kondwerani and

his family made use of business vehicles for private purposes. Because of
practical difficulties in tracking such private use, it was agreed by the Malawi
Revenue Authority to estimate such private use at 30% and therefore disallow
relevant expenses to that extent.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

291 / 312
 2

4. Penalties and fines K85,000

These were made up of the following: K‟000
Late submission of return for previous year 45
Traffic offences 40
85
5. Legal Expenses: K475,000
These were made up as follows: K‟000
Debt collection 175
Documentation and processing transport contracts 220
Defending a case against traffic offences 80
475

6. Capital allowances of K1,250,000 were allowed as a deduction by the Malawi

Revenue Authority.

Required:

(a) Compute Mr Kondwerani‟s taxable income for the tax year to 30 June 2010.
15 Marks

(b) Compute the amount of net tax payable assuming that:

(i) Withholding tax was deducted from bank interest at the rate of 20% as
already stated.

(ii) Withholding tax was deducted from the rentals receivable at 10%
(see note 1).

(iii) Provisional tax of K2,800,000 was paid within the tax year.

(iv) The taxable income was K15,146,000. 5 Marks

(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

292 / 312
 3

2. The tax written down values of business assets of Chako Manufacturing Limited as at
31 March 2009, together with the agreed rates of annual allowances, are given as
follows:

Item Tax written down value Rate of annual allowance

K‟000
Factory building 27,200 5%
Plant and machinery 18,500 10%
Motor vehicles 12,300 20%
Furniture & fittings 6,100 10%
Computers 4,800 40%

During the year to 31 March 2010, the following transactions took place:

1. A fence to protect the factory was constructed at a cost of K2,900,000.

2. Three more offices were added to the building at a cost of K4,200,000. These
offices were only occupied in August 2010.

3. Plant and Machinery

Some machinery whose tax written down value was K750,000, was sold for
K780,000.

Other machinery which had to be replaced was sold for K5,200,000 resulting
into a capital gain of K4,500,000. New replacement machinery was acquired
at a cost of K5,500,000.

4. Motor vehicles
One additional double cabin pickup vehicle was acquired at a total cost of
K7,500,000.

5. Furniture and fittings

Additional furniture for the new offices was acquired at a cost of K2,500,000.

6. Computers
Two computers with a tax written down value of K45,000 were scrapped. No
sales proceeds were realized.

Required:

(a) Calculate the capital allowances available to the ma nufacturer for the tax year
to 30 June 2010. (Initial and Investment allowances claimable where
appropriate). 7½ Marks

(b) Explain why capital allowances will be claimed or not as the case may be in
respect of the cost of erecting a fence around the factory building and
constructing three offices which were attached to the factory building.
3 Marks

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

293 / 312
 4

(c) (i) Under what circumstances does a taxpayer become eligible for
additional investment allowance?

(ii) State the rate at which the allowance is calculated. 4 Marks

(d) Describe how relief, by way of deduction from the taxpayer‟s assessable
income, is given in respect of capital expenditure incurred by the taxpayer as
provided for in the second schedule to the Taxation Act. 5½ Marks
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

294 / 312
 5

SECTION B

ANSWER THREE QUESTIONS ONLY FROM THIS SECTION

3. Daniel Damali is employed as Operations Manager by Mzakaka Mines Limited. He

is employed on a 36 months contract starting on 1 July 2007. His earnings for the
previous contract which was completed on 30 June 2010 were as follows:

K
1 July 2007 – 30 June 2008 5,200,000
1 July 2008 – 30 June 2009 6,100,000
1 July 2009 – 30 June 2010 7,200,000

Daniel signed a new 36 months contract on 1 July 2010 at a salary of K750,000 per
month. Under both contracts, he is entitled to a 25% gratuity on basic salary at the
end of the contract.

The following additional information is available in connection with Mr Damali‟s

affairs for tax year to 30 June 2010.

(1) During the month of December 2009, he received a Christmas bonus from his
employers amounting to K260,000.

(2) He also received other incomes from the following:

K
National Bank interest 60,000
Dividends 120,000
Rent from house in Zomba 550,000
Interest on loan to a friend 10,000

Interest from the bank and rent from the house are stated gross. The
appropriate withholding tax was deducted on payment.

(3) The following expenses were incurred on the house that he lets out:
K
City rates 22,000
Mortgage repayments (includes interest of K10,000) 25,000
Repairs and maintenance 55,000

(4) The employer provided the following benefits to Mr Damali in the year to
30 June 2010:

(i) A fully furnished house for which the employer pays K45,000 per
month as rent.

(ii) Electricity and water are paid for by the emplo yer at K8,500 and
K6,000 per month respectively.

(iii) A gardener, cook and watchman who receive K9,000, K8,000 and
K5,000 per month respectively.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

295 / 312
 6

(iv) School fees for his two children is paid directly to him as part of his
contractual salary amounting to K255,000 per annum.

(v) A new Toyota Double Cabin which cost K7,500,000 and is used for
both business and personal purposes.

(5) The employer deducts the appropriate PAYE tax from Mr Damali‟s salary
each month and remits this to the Malawi Revenue Authority.

(6) Mr Damali made the following donations during the year to 30 June 2009 :

K
Church 40,000
University Appeal Fund 15,000
Donations to orphanage 65,000
120,000

Required:

(a) Compute the total taxable income earned by Mr Damali for the year to
30 June 2010 and the tax payable thereon. 12 Marks

(b) Calculate the annual total of fringe benefits tax payable. 8 Marks
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

296 / 312
 7

4. (a) For purposes of the Taxation Act, define the term „amount realised‟ in
relation to an asset:

(i) that has been sold for cash 1 Mark

(ii) that has been exchanged for another. 1 Mark
2 Marks

(b) (i) In terms of Section 28 of the Taxation Act, how is the taxable
income of a taxpayer determined? 2 Marks

(ii) To what extent can an assessed loss of a business be deducted from

the assessable income of the same business in a different year of
assessment? 2 Marks

(iii) To what extent can a capital loss be deducted in arriving at the

taxable income of a business? 2 Marks
6 Marks

(c) How does a foreign exchange gain or loss arise? 4 Marks

(d) A Malawian businessman imported trade goods whose value was $25,000 in
March 2008. On the day of the initial transaction, the rate of exchange was
$1 to K142. Payment for these goods was made in September 2008 and on
the day of settlement, the rate of exchange was $1 to K155.

Required:

Using the formula provided in the Taxation Act, calculate the foreign
exchange gain or loss realized on the day of the payment for the goods.
4½ Marks
(e) A taxpayer‟s record for the year of assessment to 30 June 2009 had the
following information on foreign exchange transactions:

Realised foreign exchange losses amounted to K125,000.

Realised foreign exchange gains amounted to K220,000; and unrealized
foreign exchange gains amounted to K95,000.

Required:

Indicate whether each of the amounts given above will be taxable or allowed
as a deduction. 3½ Marks
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

297 / 312
 8

5. (a) Under what circumstances may a taxpayer make an appeal to the

Commissioner general under the Taxation Act? 3 Marks

(b) Where an appeal has been made by the taxpayer, how does the Commissioner
General respond to such an appeal? 2½ Marks

(c) A taxpayer who is aggrieved by the decision of the Commissioner General in

relation to an appeal may appeal to the Special Arbitrator.

Required:

How does the Special Arbitrator proceed? 4 Marks

(d) An original notice of assessment for the tax year to 30 June 2009 which was
issued to a corporate taxpayer had the following tax details:

K‟000
Tax charged at 30% of taxable income 2,040
Add 30% penalty on underpaid provisional tax __450
2,490

An appeal was lodged against this original assessment and resulted in an

amended assessment being issued. Excluding penalties, the basic tax
discharged amounted to K215,000.

Required:

(i) Calculate the amount of taxable income in the original assessment.

2 Marks
(ii) Calculate the amount of provisional tax paid by the taxpayer for
the year under review. 3½ Marks

(iii) Using Table 3, which is provided, calculate the amount of penalty for
the underpaid provisional tax chargeable in the amended notice of
assessment. 5 Marks
10½ Marks
(TOTAL : 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

298 / 312
 9

6. (a) The deduction of new business initial expenditure from assessable income is
provided for in Section 41 of the Taxation Act.

Required:

State the circumstances under which such deduction is made. 2 Marks

(b) State any four types of expenditure that a farmer is allowed to claim, as a
deduction, under Section 58 of the Taxation Act, in determining the taxable
income from pastoral, agricultural or other farming operations. 4 Marks

(c) Define the term “water control work” and „water conservation work”, for
purposes of Section 58(2) and Section 58(3) of the Taxation Act. 4 Marks

(d) Under Section 45 of the Taxation Act, the deduction of contributions to a fund
providing for sickness, accident, unemployment or other benefits other than
contributions to an approved pension or provident fund, is prohibited.

Required:

Mention five other types of expenditure whose deduction is similarly

prohibited. 5 Marks

(e) An investor proposes to pay K32 million being premiums for use of buildings
as warehousing facilities. Before making a final decision the investor asks for
advice.

Required:

Advise the investor

(i) whether expenditure on a building used as warehousing facilities is an

allowable deduction, if incurred. 3 Marks

(ii) how much will be allowed as a deduction each year if the building is
used for 20 years and 32 years respectively. 2 Marks
5 Marks
(TOTAL: 20 MARKS)

Continued/……

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

299 / 312
 10

7. (a) Under Section 94 of the Taxation Act, the register of assessments shall not be
open to public inspection.

Required:

(i) What are the contents of the register and where is it kept? 1½ Marks

(ii) Other than officials in the course of their duties, who may see the
register or have access to a portion of the information within it?
1 Mark

(iii) Why is it important that the register is not open to public inspection?
_ 1 Mark
3½ Marks

(b) A taxpayer imported a vehicle with the following charges:

$
Cost : 7,500
Insurance : 500
Sea freight : 1,200
Port charges : 600
9,800

Assuming that the exchange rate is $1 = K157, Customs duty is 40%, Excise
tax is 25% and VAT rate is 16.5%, compute the total cost of the vehicle in
Malawi Kwacha. 7½ Marks

(c) How does liability to non-resident tax arise and at what rate is the tax
charged? 4 Marks

(d) Non-resident tax is not payable on certain types of income.

Required:

State the types of income which do not attract the tax. 2 Marks

(e) Define the term „person resident in Malawi‟ as it refers to an individual,

partnership or company. 3 Marks
(TOTAL: 20 MARKS)

END

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

300 / 312
 STRICTLY CONFIDENTIAL

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2010 EXAMINATIONS

ACCOUNTING TECHNICIAN PROGRAMME

PAPER TC 10(B): TAXATION

(DECEMBER 2010)

TIME ALLOWED: 3 HOURS

SUGGESTED SOLUTIONS

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

301 / 312
 1

SECTION A

BOTH QUESTIONS TO BE ANSWERED IN THIS SECTION

1. (a) Mr Kondwerani Taxable Income Tax Year to 30 June 2010

K‟000 K‟000
Profit before tax 15,146
Add: Underreported interest 90
General expenses 250
Private motoring – Fuels & lubricants 435
– Road permit and licences 16.5
– Vehicle maintenance 283.5
Penalties and fines
– Late submission of return 45
– Traffic offences 40
Legal expenses 80
Depreciation 560
Fringe Benefits Tax 520
17,466
Less: Exempt bank interest 10
Capital allowances 1250 (1,260)
Taxable income 16,206

Note to Markers : Not additional marks but workings for awarded marks.

Under Note 1

Determination of withholding tax on bank interest

Net interest: K360,000
Rate of withholding tax : 20%
Grossing up = K360,000 x 100
80
Gross interest receivable = 450,000
Less: net interest received 360,000
Interest underreported 90,000

Under Note 3

Fuels & lubricants

Total cost: K1,450,000
30% thereon: 1,450,000 x 30
100
= 435,000

Note – Capital Allowances

30% of capital allowances in respect of motor vehicles is not deductible. This
represents private use element.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

302 / 312
 2

(i) Note for Markers

Markers should award an extra 1 Mark to any candidate who makes
reference to restricted capital allowances on account of motor vehicle
private use.

Road Permit & Licences

Total cost: K55,000

30% thereon: 55,000 x 30
100
= K16,500

Vehicle Maintenance

Total cost: K945,000

30% thereon: 945,000 x 30
100
= K283,500

(ii) Since MRA clarified on interest that the whole interest is taxable if
over K10,000 then full mark will be awarded if in both cases where the
candidates takes out or does not.

(b)
Tax
K K
Taxable income given 15,146,000
Less taxable at 0% 120,000 -
15,026,000 5,400
Less taxable @ 15% 36,000
14,990,000 4,497,000
Less taxable @ 30% 14,990,000
____-____ 4,502,400
Total Tax
Less: Withholding tax on interest 90,000
Withholding tax on rentals 10,800 (2,900,800)
Provisional tax paid 2,800,000 1,601,600
Net Tax payable

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

303 / 312
 3

2. (b) The cost of the factory fence will be eligible for Capital Allowances because
an industrial building is defined to include any protective fencing.

The three offices will not be eligible for capital allowances because they were
not brought into use during the year under review.

(c) (i) Additional investment allowance, according to paragraph 4(2) of the

second schedule to the Taxation Act is an allowance that is given to a
taxpayer who is eligible for investment allowance and who invests in
an area designated for the purpose of such additional allowance by the
minister by order published in the gazette.

(ii) The allowance is 15% of the investment in addition to the normal

allowance.

(d) The second schedule to the Taxation Act states that a taxpayer who incurs
capital expenditure may get relief by way of capital allowances. There are
three possible allowances.

Initial allowance given in respect of capital expenditure incurred in the year of

assessment on the construction of new farm improvements, farm fencing,
industrial buildings, railway lines, or additions or alterations to existing farm
improvements, farm fencing industrial buildings etc used by the taxpayer for
the purpose of his trade or for farming purpose.

Annual allowances claimed in respect of capital expenditure incurred in

respect of farm improvements, farm fencing, industrial buildings, newly
constructed commercial buildings, railway lines and articles, implements,
machinery and utensils belonging to and used by the taxpayer for the purposes
of his trade.

Investment allowances given to a taxpayer who is also a manufacturer on cost

of new and used industrial buildings and plant and machinery.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

304 / 312
 4

SECTION B

ANSWER TWO QUESTIONS ONLY FROM THIS SECTION

3. (a) Taxable Income of Mr Daniel Damali

For the year to 30 June 2010
K‟000 K‟000
Salary 7,200
Christmas bonus 260
Interest from National Bank 60
Rent from house in Zomba 550
Interest on loan to friend 10
Gratuity – see calculation below 4,625
Less Expenses: 12,705
City Rates 22
Mortgage repayments 10
Repairs & maintenance 55
Tax free interest 10
University appeal fund 15
Tax free gratuity 40 (152)
Taxable income 12,553

Tax Computation

Taxable income above K12,553,000

Less 120,000 @ 0% = 0
Next 36,000 @ 15% = 5,400
Balance 12,397,000 @ 30% = 3,719,100
Total 3,724,500

Working

Gratuity Calculation

Salary received to 30 June 2008 = 5,200,000

30 June 2009 = 6,100,000
30 June 2010 = 7,200,000
Total 18,500,000
25% thereon = 4,625,000

Note to Markers

Candidates will earn full marks in either case where they leave out tax free
interest or deduct.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

305 / 312
 5

(b) Calculation of Fringe Benefits Tax

Accommodation: greater of K45,000 x 12 = 540,000

and 12% x K7,200,000 = 864,000
Taxable value K864,000

Electricity and water = 8,500 + 6,000 = K14,500

Annual x 12 = K174,000

Cook, gardener and watchman = 9,000 + 8,000 + 5,000 = 22,000

x 12 = K264,000

School fees not taxable under fringe benefits tax as this was paid directly to
employee and PAYE applies.

Car benefit = 7,500,000 x 15%

= K1,125,000 Taxable value

Tax Payable
Accommodation = 864,000
Electricity & water = 174,000
Cook, gardener & watchman = 264,000
Motor vehicle = 1,125,000
2,427,000
Tax @ 30% = 728,000

4. (a) (i) It means cash received upon the sale of an asset.

(ii) It means the open market price of the other asset on the date of the
exchange.

(b) (i) For purpose of determining the taxable income of any taxpayer, there
shall be deducted from the assessable income of such a taxpayer the
amounts of any expenditure and losses (not being expenditure of a
capital nature) wholly and exclusively and necessarily incurred by
the taxpayer for the purposes of his trade or in the production of the
income.

(ii) An assessed loss of a business can be deducted from assessable

income of the same business in a different year where deductions
have been made in the year of assessment and the loss still remains, it
can be carried forward to the next year of assessment so long as the
person has not been adjudged bankrupt or has made conveyance or
assignment of his property for the benefit of his creditors. (Section
42 of the Taxation Act).

(iii) For the purposes of determining the taxable income of any taxpayer,
there shall be deducted from the assessable income of such taxpayer

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

306 / 312
 6

the amount of any capital loss realized by the taxpayer in the year of
assessment but to the extent only of either:

(1) the capital loss

(2) any capital gain realized by the taxpayer in that year of
assessment whichever is lesser.
(Section 28 of the Taxation Act)

(c) Foreign exchange gains or losses arise

- When one has a foreign asset or liability in the course of business

- Which arises on a specific date but is settled on a different date.

- The exchange rate at the time of settling the transaction would not be
the same as when the transaction was established.

- This would then bring in a loss or gain to a taxpayer.

(d) Foreign exchange gain or loss computation

Formula a× r1 – a× r2
Where a is the amount of the asset or liability on the day of
establishing the transaction.
r1 is rate at the date of establishing the asset or liability
r2 is the rate on the date of settlement.
Therefore ($25,000×142) – ($25,000×155)
3,550,000 – 3,875,000
Loss = 325,000

(e) Realised foreign exchange gain K220,000 – fully taxable

Unrealised foreign exchange gain K95,000 – not taxable
Realised foreign exchange loss K125,000 – see comment below

Only K30,000 of the realized foreign exchange loss will be allowed

95,000 will be carried forward to the next year of assessment for a
Maximum period of six years only.

5. (a) Under the Taxation Act, a taxpayer may make an appeal where such a
taxpayer is aggrieved by:

- any assessment made upon him by the Commissioner General under

the Taxation Act.
- any decision of the Commissioner General in relation to an
assessment; or
- the determination of a reduction of tax under a double taxation
agreement or under circumstances where there is no double Taxation
Agreement.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

307 / 312
 7

(b) After carefully considering the issues raised in the appeal, the Commissioner
General:

- May allow the appeal and amend the assessment, decision or

determination or;

- may disallow the appeal;

- shall, in either case, send to the appellant written notice of his decision
on the appeal
- shall record any amendment of the assessment in the assessment
register.

(c) Any taxpayer who is aggrieved by the decision of the Commissioner General
in relation to an appeal may appeal against such decision in the prescribed
manner, to the Special Arbitrator.

The Special Arbitrator:

- Shall have powers of the high court;

- Shall have the power to summon and enforce the prompt attendance of
witnesses to hear and take evidence;
- Where required, may appoint assessors who will act only in an
advisory capacity;
- Shall ensure that proceeds are not conducted in public and shall
exclude or withdraw any persons whose attendance is considered not
necessary;
- May allow the appeal and amend the assessment decision or
determination in respect of which the appeal is made;
- May disallow the appeal;
- Shall set out findings of fact and decisions on points of law in a written
judgement.
Findings of fact in a judgement of the Special Arbitrator shall be final and
conclusive.

(d) (i) Amount of taxable income in the original assessment:

Tax charged at 30% = K2,040,000

Taxable income = 2,040,000 x 100
30
= 6,800,000

(ii) Amount of provisional tax paid

Penalty charged at 30% = 450,000
of underpaid provisional tax
Underpaid provisional tax = 450,000 x 100
30
= 1,500,000

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

308 / 312
 8

Total taxed charged 2,040,000

Less underpaid provisional tax 1,500,000
Provisional tax paid 540,000

(iii) Calculation of penalty for underpaid tax in the amended assessment.

Tax charged in the original assessment 2,040,000

Less: Tax discharged 215,000
Tax charged in the amended assessment 1,825,000
Less provisional tax paid 540,000
Underpaid provisional tax 1,285,000
% of unpaid tax on total tax: 1,285,000 x 100
1,825,000
= 70.4%
 Rate to be used for penalty = 30%
Amount of penalty = 1,285,000 x30%
= 385,500
6. (a) According to Section 41 of the Taxation Act, there shall be allowed the
amount of any expenditure which:

- is incurred by the taxpayer, not more than eighteen months before

beginning the business, in the course of establishing the business, and;

- is incurred by a manufacturing business;

- would have been allowed as a deduction had it been incurred after the
beginning of the business;

(b) Deductions under section 58 of the Taxation Act:

(i) the stamping, leveling and clearing of lands;

(ii) works for the prevention of soil erosion;
(iii) boreholes;
(iv) wells;
(v) aerial and geophysical surveys;
(vi) any water control work in connection with the cultivation and growing
of rice, sugar or such other crop as the Minister may approve.
(c) “Water control work” includes any canal, channel, dyke, furrow and any flood
control structure whether of permanent nature or otherwise.

“Water conservation work” means any reservoir, water dam or embankment

constructed for impounding water.

(d) No deduction shall in any case be made in respect of any of the following:

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

309 / 312
 9

- the cost incurred by a taxpayer in the maintenance of himself, his

family or establishment;

- domestic or private expenses of the taxpayer including the cost of

travel, between the taxpayers residence and place of work;

- any loss or expense which is recoverable under any insurance contract

or indemnity;
- tax upon the income of the taxpayer or interest payable thereon
whether charged in terms of this Act or any law of any country
whatsoever;
- income carried to any reserve fund or capitalized in any way;

- any expense incurred in respect of any amounts received or accrued

which are not included in the term “income” as defined in this Act;

- any expense in respect of which a subsidy has been or will be

received;

- fringe benefits tax and any penalty chargeable thereon.

(e) The expenditure on a building used as a warehouse is allowable subject to

conditions below:

According to Section 34:

- An allowance shall be made in respect of any premium or

consideration in the nature of premium paid by any taxpayer for the
right of use or occupation of land or buildings, or for the right of use of
plant or machinery or for the use of any patent design, trade- mark,
copyright or any other property which in the opinion of the
commissioner is of similar nature, where such land, building, plant,
machinery, patent, design, trade-mark, copyright; or property is used
for the production of income is derived but such allowance shall not
exceed for any year of assessment such portion of the amount so paid
as is equal to the amount of the premium or consideration divided by
the number of years for which the right of occupation or use is granted.

Provided:

(a) Where the period for which the right of occupation or use is
granted exceeds 25 years the deduction shall be one twenty
fifth of such premium or consideration.

(b) Where the taxpayer acquires the ownership of land or

buildings, plant or machinery, patent, design, trademark or
copyright or other property in respect of which an allowance
has been made, then from the date he acquires such ownership
he shall cease to be entitled to any allowance under this
paragraph in respect thereof.

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

310 / 312
 10

(ii) 20 year lease = K32,000,000

20 = 1,600,000
32 year lease = K32,000,000
25 = 1,280,000

7. (a) (i) Complete copies of all notices of assessment made shall be filed in the
office of the Commissioner and shall constitute the register of
assessments for purposes of the Act.

(ii) Every taxpayer shall be entitled to copies certified by or on behalf of

the Commissioner of his own notice of assessment.

(iii) The information of taxpayers is supposed to be confidential and that is

why it is not open for public inspection.

(b) Calculation of cost of an imported car:

Total cost in $ = 9,800
Rate of exchange given = K157 to $1
Cost in Malawi Kwacha = 9800 x 157 = 1,538,600
Value for duty purposes (VDP) = K1,538,600
Customs Duty = 1,538,600 x 40%
= 615,440
Excise tax = (VDP + Duty) x 25%
= (1,538,600 + 615,440) x 25%
= 538510

VAT = (VDP+D+E) x 16.5%

= (1538600+615440+538510) x 16½%
= 444270.75

Total cost = (VDP+D+E+VAT)

= (1538600+615440+538510+444270.75)
= 3,136,820.75

(c) Liability to non-resident tax arises where:

(i) Income is payable to a person; not being a person resident in Malawi;

(ii) The income is from a source in Malawi;

(iii) The income is not attributable to a permanent establishment belonging
to the recipient of the income.

The tax is calculated at the rate of 15% of the gross amount of income.

(d) Types of income which do not attract non-resident tax are:

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

311 / 312
 11

- income and other amounts exempt from tax under the provisions of the
First Schedule to the Taxation Act; and

- any pension or annuity payment.

(e) „Person resident in Malawi‟ includes:
(i) Any individual present in Malawi for an aggregate of 183 days or
more in any twelve months period commencing or ending in the year
of assessment concerned;

(ii) A partnership established under any written law of Malawi;

(iii) A company which is incorporated in Malawi.

END

Compiled By: PRECIOUS DZINKAMBANI +265 996 423 510

312 / 312