UNIVERSITY OF ZIMBABWE

2020 JULY/AUGUST EXAMINATIONS

FACULTY : COMMERCE

DEPARTMENT : ACCOUNTANCY

PAPER CODE AND TITLE : AC405 TAX LAW AND PRACTICE I

DURATION : 3 HOURS

EXAMINER : MR T. KAPESA

AUTHORISED MATERIALS : NON-PROGRAMMEABLE CALCULATOR

INSTRUCTIONS FOR CANDIDATES

1. This question paper consists of 4 questions on 9 printed pages.

2. Answer all questions
3. Full marks will be awarded to candidates who show relevant workings and support their
arguments with the relevant tax law.
4. Start each question on a new page

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Question 1 (25 marks)
This question consists of five independent scenarios. You should respond to each scenario by
referring to the relevant legislation and/or applying appropriate case law to support your answers.
Your answers do not need to be in any specific format.

a) Scenario 1
Jameson is employed as a tour operator by Afro Safaris (Pvt) Ltd, a Zimbabwean company
operating tours into Zambia and Namibia. Jameson earns a fixed monthly salary of $12,000.
Jameson currently works on a month-on/month-off basis, that is, for one month he is out of
Zimbabwe leading a tour, and for the subsequent one month he is at home in Harare were he resides
with his wife and children, and works at his office at Afro Safaris planning his next tour. Jameson’s
son Harry is studying Tax Law and Practice as part of his Bachelor of Accountancy degree, and
recently told Jameson about the residence basis of taxation. Jameson is now considering discussing
with his employer whether he can spend more time outside Zimbabwe each year, in the hope that
this will exclude him from the definition of a resident and reduce his taxable income.
Required
Advise Jameson on whether his plan will exclude him from the definition of a resident, and how
else he might reduce the Zimbabwean income tax on his salary. (5 marks)

b) Scenario 2
In-Fitness gyms and Tenderfoot shoes intend concluding a deal, whereby In-Fitness will offer free
gym access to all Tenderfoot employees, in return for which Tenderfoot will supply free training
shoes to In-Fitness, who will in turn provide the shoes to its employees. The two companies believe
that this will result in no gross income for either company, since no money has changed hands,
and what has been received is for the benefit of their respective employees. A regular annual gym
membership at In-Fitness costs $600, while the retail price of a pair of Tenderfoot shoes is $500.
Required
Advise In-Fitness, whether its understanding of gross income is correct, and if not, how ZIMRA
will view this transaction. (5 marks)

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c) Scenario 3
Mikel runs a used car business. Mikel pays a small firm of accountants to keep his accounting
records and file his tax returns. Mikel’s daughter Abbie, who has recently qualified as a chartered
accountant, recently sold her car, and Mikel was surprised to hear that Abbie does not believe that
she will pay any tax on the sale, even though she made a profit on the sale. “I pay a fortune in tax
on my car sales,” muttered Mikel. “Perhaps I should get better accountants!”
Required
Explain to Mikel why his car sales are included in gross income, while his daughter’s sale is not,
and any deductions of cost available to Mikel or Abbie in respect of their sales. (5 marks)

d) Scenario 4
Indo-Japan Cafeteria is a local sushi restaurant. Sushi lovers who enjoy taking a risk flock to Indo-
Japan Cafeteria for its potentially toxic sushi made from poisonous blowfish. The blowfish is
considered a delicacy, and an expert sushi chef removes the poisonous part of the fish during
preparation. A customer at Indo-Japan Cafeteria recently died after having eaten some blowfish
sushi that had been incorrectly prepared. Following a claim for damages, the restaurant was
compelled to pay the customer’s family $2,000,000 in compensation.
Required
Advise Indo-Japan Cafeteria, with reasons, whether the compensation payment for damages is an
allowable deduction for income tax purposes. (5 marks)

e) Scenario 5
Agritech (Pvt) Ltd sells farming equipment to commercial farmers subject to a two-year warranty.
If the machinery breaks for any reason within two years of the date of purchase, Agritech is obliged
to repair or replace the item. Agritech recognises a provision for repairs and returns in its
accounting records based on the historical rate of returns and cost of repairs over the last five years.
During the current year, Agritech sold its business to a rival company, AgriZim Supplies Ltd. In
terms of the agreement, AgriZim Supplies agreed to take over responsibility for the repair or
replacement of any items still under warranty at the date of the transaction, in return for which
Agritech agreed to reduce the selling price of the division by the amount of the provision for repairs
and returns in its accounting records.

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Required
Explain the circumstances, if any, when Agritech may claim a deduction for the provision for
repairs and returns against its taxable income. (5 marks)

Question 2 (25 marks)

Nickson is the Chief Operations Officer of Nicks Investments (Pvt) Ltd and is a resident of
Zimbabwe. Due to the prevailing economic challenges, the company decided to layoff Nickson
with a retirement package at the end of the 2019 year of assessment. The following income was
received, and the respective expenditure incurred by Nickson during the year ended 31 December
2019:
$
Income
Salary 16,200
Production bonus for the year 1,000
Retirement package (see note 1) 36,000
Part-time lectureship remuneration 1,920
Subscription received 4,000
Housemaid paid by employer 7,200
Lumpsum payment from unapproved fund 5,000
Entertainment allowance 3,600
Interest received from KB bank 800
Interest received from POSB Zambia (net of tax deducted at source of $840) 3,200
Dividends from South African investment (after tax deducted at source of $640) 1,800
Royalties from South Africa (net of tax deducted at source of $1200) 4,000
Expenses
Wheelchair purchased for disabled son 5,400
Pension contributions to an approved pension fund 3,600
NSSA contributions for the year 1,400
Funeral insurance contributions 1,300
PAYE deducted during the year 13,358

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Additional information provided by the employer is as follows:
1. When Nicks Investments (Pvt) Ltd awarded Nickson the retirement package, he was also
given a Toyota twin cab with a market value of $12,000 as gratuity for long service award
to the company.
2. Nickson is a computer specialist and during the year, he was a part-rime lecturer at a local
university and was entitled to remuneration of $10 per hour for the four hours he was
conducting lectures per week over the year.
3. The company provided Nickson free use of a house in May for which similar properties
within the area were built at a cost of $28,000 during the year.
4. In September, Nickson was granted an interest free loan amounting to $9,600, of which
$3,600 was used to ferry his cousin to India for heart treatment and the balance was spent
on his son’s medical check-up in China during the year.
5. Nickson was entitled to the free use of a Mercedes Benz with an engine capacity of 3600cc
by the company starting in August 2019. The motor vehicle had been imported from
Singapore and a duty of $3,600 was paid in June 2019.
6. Nickson signed an agreement with Johnson for leasing his manufacturing building located
in Mutare at a monthly rental of $2,500 and the building had been acquired for $30,000 at
the start of the current year of assessment.

Required
a) Explain the modalities of the following payroll taxes and their due dates:
i) PAYE (2 marks)
ii) Social security (NSSA) contributions (3 marks)
b) Calculate Nicks’ tax payable from employment income for the year ended 31 December 2019,
assuming his income was earned evenly throughout the year. (14 marks)
c) Calculate the tax payable by Nicks from investment income for the year. (6 marks)

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Question 3
TK (Pvt) Ltd is a computer consumable and accessories retail enterprise, that commenced
operations at the beginning of the year ended 31 December 2019. An extract of TK (Pvt) Ltd’s
statement of profit or loss for the year ended 31 December 2019 is as follows:
Note $
Gross profit 450 000
Bank interest received 2 000
Dividends received from a local company 20 000
Foreign exchange gains 35 000
Motor vehicle expenses (14 000)
Insurance and licensing (7 000)
Marketing expenses (25 000)
Depreciation (37 000)
Salaries and wages (115 000)
Staff pension contributions (five employees) (35 000)
Staff medical aid contributions (40 000)
Entertainment expenses (10 000)
Repairs and maintenance 1 (30 000)
Legal fees 2 (3 000)
Donations to a local church (8 000)
Renewal of operating licences (9 000)
Other administration expenses (45 000)
Finance charges paid 3 (12 000)
Profit before tax 117 000

Notes
1. The repair and maintenance costs all relate to the purchase of permanent fixtures and
fittings.
2. The legal fees were in respect of employee contracts.
3. The finance charges paid were in respect of a loan to purchase shares in another company.

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Additional information
TK (Pvt) Ltd’s non-current asset registers shows the following assets which had been in use since
the commencement of trade:
Cost ($)
Furniture and fittings 40 000
Commercial vehicles 100 000
Office equipment 30 000
Two passenger vehicles 50 000
Total 220 000

Required:
a) Given that TK (Pvt) Ltd’s budgeted financial statements for the year ended 31 December 2019
showed a profit before tax of $88 000, how much provisional tax was payable and by when for
TK (Pvt) Ltd. (5 marks)
b) Calculate the corporate tax liability for TK (Pvt) Ltd for the year ended 31 December 2019,
making use of all available reliefs. (20 marks)

Question 4 (25 marks)

Part A
XYZ (Pvt) Ltd acquired/constructed and brought into use the following assets in the year 2018:
i) A Toyota Hilux twin cab for $65 000,
ii) 1 unit of staff residences at a cost of $24 000.
During the 2019 tax year XYZ (Pvt) Ltd sold the above stated assets at $26 000 and $45 000
respectively.

Required
Calculate the recoupment/scrapping allowance to be used in determining taxable income by XYZ
(Pvt) Ltd. Assume the taxpayer always claimed the maximum allowable deductions. (5 marks)

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Part B
Dzikamayi is the finance manager for Sunway Products (Pvt) Ltd, a licensed investor in an export
processing zone and during the 2019 year of assessment enjoyed the following benefits from his
employer:
i) He is entitled to a company car, an Isuzu D-Tec with a 3 200cc engine capacity, and a
monthly salary of $3 600. At the end of the year the employer purchased a new vehicle for
him and gave him the option to buy the Isuzu D-Tec for $10 000, when the market value
of the car was $20 000. He took the option.
ii) He was granted a loan amounting to $100 000 at the beginning of August 2019 at an interest
of 5% per annum. Dzikamayi is supposed to pay back the loan together with interest at the
end of the year. Assume Libor averaged 2.5% during the year.
iii) Dzikamayi was granted 10 000 shares under an employer’s share option plan at 60 cents a
share in January 2019. He exercised the option at its exercise date on 30 March 2019 when
the market price per share was 100 cents. The inflation indices were 10.5% and 17.5% on
the date of share offer and exercise, respectively.
iv) Starting on 1 August 2019 he was granted a benefit of staying in his employer’s house in
Kambanje. Rentals for similar houses in the neighbourhood averaged $2 000 per month.
Dzikamayi’s employer deducts $900 for accommodation from his monthly earnings. Just
before Dzikamayi could occupy the house his employer furnished it at a total cost of $5
600. The house was constructed at a cost of $56 000.
v) He was sent to a business trip to Wuhan in August 2019. He took advantage of the trip to
take his wife and son on holiday. Sunway Products (Pvt) Ltd incurred the following
expenses in addition to the airfare for Dzikamayi:
Hotel bookings and meals $12 500
Wife’s touring $2 500
Paid for jumping castles for his son $1 200
During his stay in Wuhan, Dzikamayi spent 3/5 of his time doing the employer’s business.
vi) Sunway Products (Pvt) Ltd paid school fees for Dzikamayi’s son amounting to $5 000 per
term during the 2019 tax year.
vii) Dzikamayi received airtime for his private cellphone line amounting to $500 each month.
viii) During November 2019, he received his annual bonus amounting to $7 500.

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ix) During 2019, Dzikamayi was a member of an approved pension into which he contributed
7.5% of his gross salary. In addition, he contributed to a Retirement Annuity Fund an
amount equal to 5% of his gross salary. Dzikamayi is also obliged to make contributions
to NSSA.

Required
Assuming this is the only income received and expenses paid by Dzikamayi calculate his taxable
income for the 2019 year of assessment. Assume all income was received and expenditure incurred
evenly during the year. (20 marks)

***END OF EXAMINATION PAPER***

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