GZU TAXATION PRACTICE QUESTIONS: MINING

Question 1
A company starts mining operations in year 1 which was not productive. The life of the mine is
estimated at 6 years from beginning of year 2 when the mine begins to produce minerals. The
following expenditure was incurred in year 1: $
Buildings 90,000.00
Computers 10,000.00
Plant 85,000.00
Neon sign 1,000.00
Shaft sinking 20,000.00
Goodwill written-off 9,000.00
Salaries and wages 15,600.00
Administration expenses 10,000.00
Mazda 626 sedan 11,500.00
252,100.00

In year 2 minerals are sold for $910,000.00 and old plant equipment was disposed realizing
$17,200.00. The following expenditure was incurred in year 2:
$
Machine 12,000.00
Passenger motor vehicle 12,500.00
Goodwill written-off 9,000.00
Running expenses 35,000.00
Depreciation 15,000.00
Entertainment of business clients 5,000.00
Protective clothing 13,000.00
Shaft sinking 25,000.00
Administration costs 23,500.00
Salaries and wages 18,900.00.
Required:
a) Compute the company’s capital redemption allowance (CRA) using the following
methods:
i) Life of mine method
ii) Mixed basis
iii) New mine or current basis (20 marks)
b) Compute the company’s tax payable if CRA was computed using Mixed basis.
(5 marks)
[Total: 25 marks]
Question 2
Mushongandini Mining Corporation Limited is into gold mining business. Exploration work
started in 2015 and the company became productive on 1 January 2016. The Unredeemed balance
of Capital Expenditure (UBCE) brought forward from 2015 was US$540,700.00:

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GZU TAXATION PRACTICE QUESTIONS: MINING

During the year 2016, the company made a net loss of $233 000 which was arrived at after charging
the following expenses:-
$
Loss on disposal of a dumb truck 50 000
Purchase of Mazda 626 sedan 25 000
Amortization of goodwill 15 000
Wages and salaries 255 000
Rentals 15 000
Purchase of shares from the Zimbabwe Stock Exchange 122 000
Depreciation 32 000
Other Administration expenses (Allowed by ZIMRA) 137 120

The composition of the company’s income during the year 2016 was made up of the following:-
$
Gold sales 2 530 000
Proceeds from disposal of dumb truck 150 000
Dividend from OK Zimbabwe Ltd 6 400
Dividend from Zambian company 11 500
Rentals from Malawi 12 200
Interest from FBC Bank Ltd 1 200

The company acquired the following non-current assets during the year 2016:-
$
Modern mine generator 162 500
Toyota Camry sedan for the Accountant 18 000
Mercedes Bus 75 Seater 230 000
Staff housing 124 000
Shaft sinking 541 000

Required
a) Calculate the Capital Redemption Allowance for the company using each of the following
methods:-
i) Life of Mine Basis (5 Marks)
ii) New Mines basis (5 Marks)
iii) Mixed Basis (5 Marks)

Calculate the company’s tax liability/(assessed loss) for the year when using New Mines basis
for the purpose of calculating Capital Redemption Allowance. (5 Marks)
[Total: 20 Marks]

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