CUAC 408 Group Assignment 1 2021

Due Date: Friday 11 June 2021

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QUESTION 1

Makorokoza Mines (Pvt) Ltd (Makorokoza) is a 70% subsidiary of an Australian mining

conglomerate Mineral Giants Holdings Limited Headquartered in Sydney, Australia.
Makorokoza operates a gold mine in the Kwekwe area of Zimbabwe.

During the year ended 31 December 2020, Makorokoza borrowed ZWL$800 million
from the holding company to finance an expansion programme for the mine. The
parent company assigned a mining engineer from the Head office in Sydney to oversee
the expansion programme.

The income statement for the year ended 31 December 2020 reflected a net profit
before tax figure of ZWL$1,457,000. The income and expenses to the income
statement included the following:

Income Note ZWL$ ZWL$

Gross profit 6,000,000

Dividend income 1 150,000

Interest from POSB Zimbabwe 745,000
Sale of mining claim (initially held as an 218,000
investment)
Foreign bad debts recovered during the year 1,015,000

Profit on sale of an asset 8 184,000

8,312,000
Expenditure
Interest payable to the parent company 1,920,000
Management fees payable to the parent company 1,600,000
Bad debts and Doubtful Debts 3 84,000
Purchase of mining claims 79,000
Depreciation 2 611,000
General expenses 4 191,000
Lease premium for heavy-duty machinery 56,000
Experiments 5 34,000
Salaries, wages and benefits 1,000,000

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Survey costs and sinking of boreholes 1,280,000 (6,855,000)
Net Profit 1,457,000

Additional Information/Notes

1. The following dividends accrued to the company during the 2020 tax year:
ZWL$
From Econet Zimbabwe Ltd, listed on the Zimbabwe Stock Exchange 50,000
From a German company, based in Berlin. ZWL$10,000 Non-Resident tax on 100,000
dividends was paid in Germany.
150,000

2. Depreciation was claimed on the following assets:

ZWL$
Construction of a Mine School Block 800,000
Construction of house for a local shareholder who holds 5% of the shares 500,000
House for Operations Manager 550,000
House for the Senior Teacher employed at the Mine School 670,000
Construction of a Mortuary at the Mine Hospital 760,000
Purchase of shaft sinking equipment 450,000
Extension of the House for Sister-in-Charge at the Mine Hospital 480,000
Purchase of Toyota Hilux Double Cab for use by Plant Manager, engine 160,000
capacity: 3,500cc

3. Bad and doubtful debts written off consisted of:

ZWL$
The full amount for major trade debtor who died during the year. The 16,000
estate promised to pay 20% of the amount outstanding
Loan to a shareholder who has now sold his shares 20,000
5% Provision for Doubtful Debts 48,000
84,000

4. General expenses included the following:

ZWL$
The scholarship paid to the Majority Shareholder’s cousin 50,000
Donation to the Ministry of Local Government for the construction of a 60,000
bridge
Bribes paid to facilitate immediate customs clearance of Mining Equipment 70,000
Medical Aid Contributions paid by the company on behalf of the employees 11,000
191,000

5. Scientific experiments were carried on some mineral deposits discovered during the
year.
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6. The company had an assessed loss of ZWL$500,000 on 31 December 2020 that arose
during the 2011 tax year. This was not included in the financial statements above.

7. Capital Structure
An extract from the Statement of Financial Position of the company showed the
following in its capital structure in addition to long term debt:

ZWL$
Issued Share capital 80,000,000
Retained Earnings 48,000,000
Revaluation Reserve 32,000,000

8. Profit on sale of an asset

A Ford Ranger Double Cab vehicle which was purchased by the company for business
use by the Marketing Manager for ZWL$300,000 in March 2017 was sold during the year
for ZWL$480,000.

9. The unredeemed balance of capital expenditure as of 1 January 2020 amounted to

ZWL$700,000. The life of the mine was estimated to be 5 years from 1 January 2020.
10. The company made all the relevant elections to minimise tax liability following
the tax acts.

Required:
(a) Explain, any two tax incentives that miners have which are not available to other
traders. (4 marks)
(b)
(i) Compute the Capital Redemption Allowance (CRA) for the year ended 31 December
2019 using the method in paragraph 2 of the 5th schedule. (8 marks)
(ii) Compute the allowable and prohibited portions of the interest and management
fees paid by Makorokoza per the Income Tax Act. (6 marks)
(iii) Calculate the minimum tax payable by the company for the year ended 31
December 2020. Assume Makorokoza made all relevant elections to minimise tax
liability. (12 marks)
(c) The issued ordinary share capital of Makorokoza was held as follows throughout
the December 2020 tax year:
 70% by Morales Mula, an Australian business tycoon;

 10% by Zim Mines Ltd, a company registered in Zimbabwe;

 15% by Tipson Chipson a resident of Zimbabwe and the managing director; and

 5% by Munya Pakamisa, a resident of Zimbabwe.

Tipson and Munya are full-time employees as well as executive directors of the
company and as such receive salaries from Makorokoza. Morales is a non-executive
director.
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On 25 October 2020, the company declared a dividend of ZWL$500,000 to its
shareholders. This was distributed to shareholders on 10 December 2020. Morales was
paid ZWL$100,000 for meetings he attended as a director during the year. This was
paid to him on 31 December 2020 as director’s fees. All the payments were
appropriately accounted for in the financial statements.
Required:

Explain and calculate the withholding taxes applicable to Makorokoza. Indicate the
dates by which Makorokoza should pay the withholding taxes. (15 marks)

(d) Advise Makorokoza Ltd on the due dates and rates of income tax to be paid on
Quarterly Payment Dates (QPDs). (5 marks)

[Total: 50 marks]
1. Employment Income: 1 January to 31 December 2020
Segment of Income Amount Rate within Tax (ZWL$) Cumulative
per annum (ZWL$) (ZWL$) segment (%) Tax (ZWL$)
Up to 3 500 3 500 0% 0 0
3 501 to 15 000 11 500 20% 2 300 2 300
15 001 to 50 000 35 000 25% 8 750 11 050
50 001 to 100 000 50 000 30% 15 000 26 050
100 001 to 150 000 50 000 35% 17 500 43 550
150 001 and above 40%

2. Deemed motoring benefit per annum

Engine capacity Benefit
(ZWL$)
Up to 1 500cc 28 800
1 501 to 2 000cc 34 400
2 001 to 3 000 cc 57 600
3 001 and above 76 400

3. Rates of capital allowances

Special Initial Allowance (SIA) 25%
Accelerated Wear and Tear 25%
Wear and Tear on:
Immovable Assets (general rate) 5%
Commercial buildings 2.5%
Motor Vehicles 20%
Movable assets (general rate) 10%

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SOLUTION

QUESTION 1

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(a) Explain, any two tax incentives that miners have which are not available to other
traders. (4 marks)
Incentives available to miners:
- 100% deduction allowable in respect of certain capital expenditure such as , exploration cost,
development cost, etc.
- There is no restriction on carryover of tax losses; they can be carried forward for an indefinite
period.
- CRA on capital equipment is allowed at a rate of 100%
- Taxable income of holders of a special mining lease is taxed at a special rate of 15%.
b)
(i) Compute the Capital Redemption Allowance (CRA) for the year ended 31 December
2019 using the method in paragraph 2 of the 5th schedule