Answers

Fundamentals Level – Skills Module, Paper F6 (MWI) December 2016 Answers

Taxation (Malawi) Marking Scheme

Section B Marks

1 (a) An input tax credit can be claimed for value added tax (VAT) which has been paid on expenditure incurred
before registration, if on the date of registration:
(1) the goods on which VAT has been paid are still in stock, and 1
the supply or import occurred not more than four months prior to the date of registration; or 1
(2) the goods are capital goods, which have been held for a period not exceeding six months from the date
of registration. 1
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(b) Dekani Limited

Output VAT and input VAT claimable for April 2016
Value of VAT
supply at 16·5%
K K
Output VAT
Taxable supplies 806,500 133,073 ½
Zero rated supplies 225,000 0 ½
–––––––––– ––––––––
1,031,500 133,073
–––––––––– ––––––––
Input VAT
Stocks bought 15 January 2016 400,000 66,000 ½
Stocks bought 30 November 2015 0 0 ½
Machinery bought 1 December 2015 650,000 107,250 1
Purchases (taxable) 465,000 76,725 ½
Purchases (exempt) 0 – ½
Salaries (out of scope of VAT) 0 0 ½
Passenger carrying motor vehicle (input disallowed) 0 0 1
Rent (325,000 – 80,000) 245,000 40,425 1
Water (exempt) 0 0 ½
–––––––––– ––––––––
1,760,000 290,400
–––––––––– –––––––– –––
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2 (a) The income of a farmer growing timber is determined as follows:

(1) The cost of growing the timber is carried forward until the timber reaches maturity. ½
(2) The cost of growing the timber is increased by an annual fixed percentage, calculated at 5% of the cost,
until the timber reaches maturity. 1
(3) When the timber is sold, a proportionate amount of the cost of planting and growing the timber,
including the fixed percentage, is deducted from the proceeds of sale and the difference included in
assessable income. ½
(4) In each year of assessment the following are added to the taxable income or deducted from the assessed
loss:
– the fixed percentage (of 5%) added to cost; and ½
– the expenditure on the maintenance and upkeep of the timber. ½
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(b) Joseph Mafuta
Taxable income for the tax year ended 30 June 2016
Cost of growing timber
Cost No of years Fixed percentage
(5%)
K K
2000 650,000 16 520,000 ½
2001 280,000 15 210,000 ½
2002 110,000 14 77,000 ½
2003 145,000 13 94,250 ½
–––––––––– ––––––––
1,185,000 901,250
–––––––––– ––––––––
K
Total cost of growing timber 1,185,000
Fixed percentage 901,250
––––––––––
Total cost of growing 300 hectares of timber 2,086,250 ½
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Taxable income
K K
Tobacco sales (5,000*650) 3,250,000 ½
Timber sales 3,500,000 ½
––––––––––
6,750,000
Less:
Cost of timber sold (2,086,250*100/300) 695,417 1
Drilling of boreholes 325,000 ½
Tobacco nurseries 800,000 ½
Wages and salaries (3,680,500 – 650,000) 3,030,500 1
Timber maintenance 185,000 ½
––––––––––
(5,035,917)
––––––––––
Taxable income 1,714,083
––––––––––
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3 (a) Peter – PAYE for the tax year ended 30 June 2016
K
Salary 5,000,000 ½
Gratuity 500,000 ½
Pension contribution by employer 0 ½
––––––––––
5,500,000
––––––––––
First K300,000 9,000
Excess of K5,200,000 at 30% 1,560,000
––––––––––
1,569,000 ½
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2
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(b) Peter and Nelia
Taxable income for the tax year ended 30 June 2016
Peter Nelia
K K
Salary 5,000,000 2,500,000 ½
Gratuity 500,000 115,100 ½
Bonus – 650,000 ½
Pension contributions (employer) 0 0 ½
Director’s fee 125,000 ½
Interest on fixed deposit (110,000 + 65,000) 175,000 1
Less exempt portion (10,000) ½
Rental income (working) 211,300 ½
–––––––––– ––––––––––
Taxable income 6,001,300 3,265,100
–––––––––– ––––––––––
Working: Rental income
K
Gross rents 600,000 ½
Less expenditure
Mortgage interest (85,500) ½
Insurance (65,000) ½
Repairs (75,000) ½
Town rates (118,200) ½
Agent’s commission (45,000) 1
––––––––
211,300
–––––––– –––
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4 Nelson Manda

(a) Capital gains for the tax year ended 30 June 2016
K K
Sale of land in September 2015
Cost
Six hectares bought in July 2007 645,000 ½
Indexation adjustment
174,279·78/51,945·52 3·355 1
––––––––
Adjusted cost 2,164,007
Four hectares bought in October 2010 600,000 ½
Indexation adjustment
174,279·78/67,412·14 2·585 ½
––––––––
Adjusted cost 1,551,173
––––––––––
Total adjusted cost for land 3,715,180
Sales proceeds 6,500,000 ½
––––––––––
Capital gain on land 2,784,820
––––––––––
Holiday house bought in 1999 95,000 ½
Indexation adjustment
174,279·78/19,104·26 9·123 1
––––––––
Adjusted cost 866,643
Sales proceeds 5,000,000 ½
––––––––––
Capital gain 4,133,357
––––––––––
Total capital gains 6,918,177
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(b) Other asset disposals
The warehouse is a business asset qualifying for capital allowances. Therefore, the disposal will result in a
balancing charge equal to the difference between the sales proceeds and the tax written down value, i.e.
K16,300,000 (18,500,000 – 2,200,000). The balancing charge will reduce any capital allowances
claimed in the year. 2
The motor vehicle is a personal use vehicle, which is not used in connection with a trade. As such, it is an
exempt asset for capital gains purposes. 1
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(c) The calculation of the capital gain would only change if Nelson replaced the holiday house. In this case under
the involuntary conversion provisions, the taxable gain would be restricted to the excess of the insurance
proceeds over the cost of the replacement house. 2
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5 Handiwelo Mutata

(a) Fringe benefits tax payable by the Mafikeng Engineering Company for the year ended 30 June 2016
Value of benefit
K K
Housing
Rental for the year 1,500,000 ½
Less contribution (150,000) ½
––––––––––
1,350,000
––––––––––
12·5% of K6,850,000 salary 856,250 ½
Higher of two 1,350,000 ½
School fees (50%*600,000) 300,000 ½
Telephone and water 0 ½
Motor vehicle (15%*5,000,000) 750,000 ½
Subscription to Dstv 365,000 ½
Air ticket 0 ½
––––––––––
2,765,000
––––––––––
Tax at 30% 829,500 ½
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(b) Tax payable by Handiwelo Mutata for the tax year ended 30 June 2016
K K
Income from employment
Salary 6,850,000 ½
Gratuity 685,000 ½
Telephone and water (45,000 x 12) 540,000 1
––––––––––
8,075,000
Other income
Bank interest 365,000 ½
Director’s fee (145,800/0.9) 162,000 1
Dividends 0 1
Profit from business 650,000 1,177,000 ½
–––––––– ––––––––––
9,252,000
Less exempt portion of interest (10,000) ½
––––––––––
Taxable income 9,242,000
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K
Tax payable
First K300,000 9,000
Excess of K8,942,000 at 30% 2,682,600
––––––––––
Total tax payable 2,691,600 1
Less
PAYE (working) (2,341,500) ½
Withholding tax – interest (365,000*20%) (73,000) 1
Withholding tax – director’s fee (162,000*10%) (16,200) 1
––––––––––
Final tax payable 260,900
––––––––––
Working: Calculation of PAYE
K
First K300,000 9,000
Excess of K7,775,000 (8,075,000 – 300,000) at 30% 2,332,500
––––––––––
Tax payable 2,341,500 1
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6 Mulingo Limited

(a) Taxable income for the year ended 31 December 2015

K’000 K’000
Profit before taxation 9,435 ½
Add items not allowed for taxation
Depreciation 8,250 ½
Marketing expenses:
Provision for doubtful debts 650 1
Bad debts written off 0 ½
Damaged stock written off 0 ½
Staff costs – FBT 875 ½
Rental expense 0 ½
Repairs and maintenance 0 ½
Donations 500 ½
Bank interest paid 0 ½
Other operating expenses 0 ½
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10,275
Less items allowed or adjustments to profit
Profit on sale of assets 65 ½
Bank interest received 0 ½
Balancing charge (85) 1
Capital allowances: K
Fixtures and fittings (20,500*10%) 2,050 ½
Light motor lorries (38,500*20%) 7,700 ½
General plant and machinery ((25,000 – 0)*10%) 2,500 12,250 1
–––––– –––––––
(12,230)
–––––––
Adjusted profits for tax 7,480
–––––––
Tax at 30% 2,244 ½
Less
Withholding tax – interest (345,000*20%) (69) 1
Withholding tax – customers (475) 1
Provisional tax (1,500) ½
–––––––
Tax payable 200
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(b) The tax rate applicable to branches of foreign companies is 35% (instead of 30%). 1
Therefore, if Mulingo Limited were a branch of a foreign registered company, the tax payable for the year
ended 31 December 2015 would increase by K374,000 (7,480,000*5%). 1
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