Paper 2.

3(MWI)
Business Taxation
(Malawi)

PART 2

WEDNESDAY 8 DECEMBER 2004

QUESTION PAPER

Time allowed 3 hours

This paper is divided into two sections

Section A BOTH questions are compulsory and MUST be

answered

Section B THREE questions ONLY to be answered

Tax rates and allowances are on page 2

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examination

hall

The Association of Chartered Certified Accountants

The Public Accountants Examination Council of Malawi

 The following tax rates and allowances are to be used when answering the questions
Malawi Income Tax: Individual
Cumulative
K K
36,000 – 36,000 0
36,000 – 54,000 10% 1,800
54,001 – 72,000 20% 5,400
72,001 – 1,200,000 30% 343,800
1,200,000+ 40%
Company rate
Locally incorporated 30%
Externally incorporated 35%

Annual Allowance – Rates

(Guidelines laid down by the Commissioner of Taxes)
5% – Industrial buildings
– Railway lines
– Farm improvements
10% – General plant and equipment
– Trailers
– Farm fencing
15% – Mobile cranes
17·5% – General plant and equipment on double shift
20% – Motor cycles
– Cars
– Pick-ups
– Light lorries (for light work)
– Cement mixers
25% – Light lorries (for heavy work)
– Tippers
– Tracked tractors
– Tree-dozers
– Scrapers
– Graders
– Bulldozers
– General plant and equipment working 24 hours a day
– Tractors (for heavy work)
– Transport services

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Section A – BOTH questions are compulsory and MUST be attempted

1 Madimba Limited is a company incorporated in Malawi which is involved in the production and distribution of plastic
products mainly for use in the agricultural sector.
Madimba Limited prepares its accounts to 31 March each year.
A summary of the results of Madimba Limited for its most recent financial year ended on 31 March 2004 were :
K K
Turnover 16,050,000
Less:
Manufacturing costs 10,695,100
Distribution cost 980,200 11,675,300
–––––––––– –––––––––––
Gross Profit 4,374,700
Administration & finance 2,860,175
Marketing 845,755 3,705,930
–––––––––– –––––––––––
Operating profit 668,770
Other income
Interest receivable 120,505
Sundry income 62,175 182,680
–––––––––– –––––––––––
Profit before taxation 851,450
–––––––––––
–––––––––––
The following additional information on the financial results of the business is available.
(a) Manufacturing costs include: K
Depreciation 285,600
Exchange losses on raw materials – unrealized 765,100
Stock write off 65,200
Salaries and wages 2,365,100
(b) Distribution costs include: K
Depreciation 160,100
Salaries and wages 450,000
Traffic fines 26,000
(c) Administration and finance costs include: K
Legal fees
– New lease of general manager’s house 36,500
– Debt collection 144,100
Salaries and wages 1,200,500
Pension costs 60,100
Professional fees
– Increase in share capital 16,000
– Audit fees 82,000
– Marketing consultancy 76,000
Interest payable
– Bank overdraft 144,100
– Late payment of tax 6,150
Subscriptions and donations
– Malawi Red Cross Society 150
– SDA Church 16,000
– Economist magazine 24,600
– Malawi Council for the Handicapped 2,500

3 [P.T.O.
 Other expenses
– Provision for doubtful debts (2% of debtors) 14,000
– Bad debts written off 62,000
– General expenses including fringe benefits tax 286,500
(d) Marketing costs include:
K
Depreciation 44,500
Advertising 100,000
Travel allowance 62,000
Donation of plastics to Ndirande Church 15,000
(e) Interest receivable comprises:
K
National Bank of Malawi 120,000
Interest on staff loans 505
––––––––
120,505
––––––––
Interest from the National Bank is stated gross of the withholding tax deducted at source.
(f) Sundry income comprises:
K
Sale of waste 15,175
Commissions 17,000
Profit on sale of fixed asset 30,000
–––––––
62,175
–––––––
(g) The company purchased the following assets during the year:
1. Carried out an extension to its factory building at a cost of K350,000 of which K50,000 related to the cost
of an office in the factory.
2. Purchased a secondhand lorry for during 2004 at a cost of K250,000.
3. Purchased computers for the first time for use in the accounting department at a cost of K175,000.
4. Purchased an addition to plant and machinery in form of a bag making machine at a cost of K525,000.
All these assets were brought into use during the year.
(h) The company sold the following assets during the year to 31 March 2004.
1. A motor lorry which had cost K80,000 and had a tax written down value of K42,000 at 1 April 2003 was
sold for K90,000.
2. Office furniture which had cost K30,000 and had a tax written down value of K6,000 at 1 April 2003 was
sold for K4,000.
(i) The tax written down values of the company’s fixed assets as at 1 April 2003 were:
K
Industrial building 850,000
Plant and machinery 650,000
Delivery vehicles 165,100
Motor vehicles 310,000
Office equipment & furniture 42,500
(j) The company provided furnished housing to its general manager and accountant at rentals of K25,000 and
K12,000 per month respectively. Their salaries are K60,000 and K35,000 per month respectively.

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(k) The company provides motor vehicles to its employees as follows:
General manager Nissan double cab –
original cost K680,000
Accountant 1600cc Toyota Corolla
saloon – original cost K300,000
(l) The school fees paid by the company for the general manager’s children were:
April 2003 K20,000
October 2003 K25,000
January 2004 K25,000

Required:
(a) Calculate the fringe benefits tax paid and accrued by Madimba Limited for the year to 31 March 2004.
(Note: this expense is already included in general expenses given in note (c)) (6 marks)

(b) Calculate the amount of capital allowances available to Madimba Limited for the year to 31 March 2004.
Your answer should include a schedule of assets and allowances, commencing with the tax written down
values on 1 April 2003 and ending with tax written down values on 31 March 2004. (14 marks)

(c) Calculate the tax payable by Madimba Limited for the year to 31 March 2004. (10 marks)

(30 marks)

5 [P.T.O.
2 James Bauleni is a trader, trading as Bauleni Enterprises, which is an unincorporated business. The following are his
abridged results for the year to 30 June 2003:
K
Net profit before tax 165,070
In arriving at this result the following items were charged to the profit and loss account:
(i) Depreciation for: K
Office equipment 16,500
Motor vehicles 32,100
(ii) Rent, water and electricity charges of K106,000 of which one-third relates to private use as James lives behind
the business premises.
(iii) Subscriptions to Blantyre Sports Club K40,000 being K20,000 for James and K20,000 for Banda who is
employed as business manager.
It has been agreed that the capital allowances to be allowed to the business for the year are:
K
Office equipment 18,000
Motor vehicles 22,500
James does not work full time in the business, which is why he employs Banda as his business manager. However,
James is employed full time as chemist at the Bilila Bottling Company and his wife Faith is a secretary at a local
hospital.
The following information is available regarding their earnings for the year ended 30 June 2004:
James Faith
K K
Salary 680,500 240,000
Housing allowance 120,000 60,000
House rents 72,000
Director’s fees 5,000 –
Interest – Stanbic Bank 26,000 –
Dividends – Old Mutual 3,500
Rents and interest are stated gross, but withholding taxes were duly deducted where appropriate. No tax had been
deducted from the director’s fees.
The following information is also available in respect of their outgoings for the year:
James Faith
K K
Mortgage payments (of which K35,000 is interest) 60,000
Repairs to the house 4,500
Donations & subscriptions CCAP, Blantyre Synod 600 100
Institute of Chemists 25,600 –
Save the Children Fund 150 450
James is employed on pensionable terms. He contributes 6% of his salary to the pension fund. Faith is also in
pensionable employment and she contributes 5% of her salary to the fund.
PAYE was duly deducted from both Mr and Mrs Bauleni’s salaries and remitted to the Malawi Revenue Authority.

Required:
(a) Calculate the total income subject to tax for Mr & Mrs Bauleni respectively, clearly stating your treatment of
the house rents, interest and dividends received and the pension contributions paid. (19 marks)

(b) Calculate any additional tax to be paid by Mr & Mrs Bauleni. (6 marks)

(25 marks)

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Section B – THREE questions ONLY to be attempted

3 (a) Explain how the following are taxed and state the applicable taxes:
(i) individuals (4 marks)
(ii) companies (4 marks)

(b) Tax payers are required to submit a return of income to the commissioner of taxes.

State the provisions with regard to the submission of these returns. (5 marks)

(c) State the penalties for failure to pay income tax? (2 marks)

(15 marks)

4 (a) State the basis on which a capital gain can be included in the assessable income of a taxpayer? (4 marks)

(b) To determine the value of an asset for capital gain an inflation factor may be applied.

Explain the intention of applying the inflation factor? (2 marks)

(c) Involuntary conversion of assets may lead to a capital gain.

Explain what is meant by involuntary conversion of assets and state how any resulting gain will be taxed?
(5 marks)

(d) State, giving reason, when a capital loss can be deducted from the assessable income of a taxpayer?
(4 marks)

(15 marks)

5 Surtax is now administered under the Surtax Act 2001 which came into effect on 1 November 2002. This Act
replaced the previous provisions in the Customs and Excise Act. In accordance with this Act, a taxable supply is
defined as a supply of goods or services made by a taxable person for consideration in the course of, or as part of the
business activities.

Required:
In accordance with the Surtax Act:
(a) Explain the meaning of taxable supply giving a list of the activities that are included within it. (6 marks)

(b) State the provisions concerning the submission of returns and the payment of surtax. (5 marks)

(c) State the penalties that will be imposed for failing to register, failing to issue a tax invoice and for providing
false or misleading statements? (4 marks)

(15 marks)

6 (a) State the provisions with regard to the applicability of provisional tax as stated in s.84 of the Taxation Act.
(7 marks)

(b) State how the taxable income or assessed loss of a person carrying on the business of insurance other than
Life Insurance including funeral insurance will be determined? (8 marks)

(15 marks)
7 [P.T.O.
7 Chinthu Moyo has approached you for assistance. He is considering venturing into business manufacturing shaving
kits. To do this he anticipates incorporating a company to be called Shavers Limited, with an authorized capital of
K1 million. He intends to borrow K2 million from the National Bank of Malawi for use in the business. The issued
share capital will initially be K10,000.
He will purchase plant and equipment for K250,000 and a motor vehicle for K350,000 which he will use as
managing director. The company will rent him a house at K25,000 per month. His anticipated results for the first
year of trading will be:
K
Turnover 6,500,000
Manufacturing expenses 3,275,000
Administration expenses 2,500,000
Finance expenses 850,000
Loss for the year 125,000
Included in manufacturing expenses is a depreciation charge of K85,000 relating to the plant and equipment.
Administration expenses include a depreciation charge of K87,500 for the motor vehicle, the managing director’s
salary of K1,200,000 and also the rental cost of the house and the related fringe benefits tax.
The business is expected to make a profit of K500,000 in the second year.
Alternatively, he has been offered a job at Printers Limited as a general manager at a salary of K120,000 per month.
He will be paid a housing allowance of 40% of his salary and will be provided with a company car with unlimited
mileage. The cost of running this car is anticipated to be in the region of K18,000 per month. His employer will
also pay school fees at private schools totalling K100,000 a year for his two children.

Required:
Advise Chinthu whether it would be better for him to opt to run his own business or accept the offer of
employment with Printers Limited. Support your advice with calculations of his tax liability and net cashflow
position under each option, using the tax rates provided in the question paper.
(15 marks)

End of Question Paper