Answers

Paper F6MWI
8J–MWIIX

Fundamentals Level – Skills Module, Paper F6 (MWI)

Taxation (Malawi) June 2008 Answers

1 (a) (i) The taxable income or assessed loss of an insurer in respect of short-term insurance business, other than life assurance,
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is determined by charging losses, expenses and deductions in respect of the short-term insurance business against:
(a) Premiums received in Malawi from carrying on short-term insurance.
(b) Amounts, other than premiums received in Malawi, from the carrying on of short-term insurance business.
(c) An amount of a reserve allowed as a deduction in the previous year of assessment for unexpired risks at a
percentage that relates to the risks adopted for the short-term insurance business.
The losses, expenses and deductions which are allowable deductions from such income are:
(i) Premium paid on re-insurance.
(ii) Actual losses in Malawi recoverable on re-insurance.
(iii)Commissions paid in Malawi, net of commission on re-insurance.
(iv) Expenditure other than of a capital nature incurred in Malawi in the production of income.
(v) An allowance for expenditure incurred in respect of premiums incurred outside Malawi which the Commissioner
has approved.
(vi) Reserve for unexpired risks at a percentage of the risks adopted by the insurer.
(ii) Milambe Insurance Company Limited
Computation of taxable income for the year ended 31 December 2007
K
Profit before taxation 1,606,063
Add: Items disallowed for tax purposes
Provision for premium income (625,725 x 1%/2%) 312,863
Depreciation 365,100
Donations – Masinkha church 10,000
Fringe benefit tax 125,000
Interest on loans 335,850
Write off of loan 85,000 1,233,813
––––––––– ––––––––––
2,839,876
Less:Dividends 325,000
Profit on sale of plant and equipment 865,400
Capital allowances 385,450 1,575,850
––––––––– ––––––––––
1,264,026
Add: Capital gain 486,500
––––––––––
Taxable income 1,750,526
––––––––––

(b) Maliba Limited

Capital allowances for the year ended 31 December 2007
TWDV Allowances Total TWDV
1 January Additions Disposals Total Investment Initial Annual Allowances 31 December
2007 (100%) (20%) 2007
K K K K K K K K K
Factory building 8,500,600 1,844,500 10,345,100 1,844,500 425,030 2,269,530 8,075,570
Motor vehicle (saloon) 2,800,800 – (633,333) 2,167,467 – 433,493 433,493 1,733,974
Plant and equipment 6,750,250 865,500 7,615,750 865,500 675,025 1,540,525 6,075,225
Computers 2,500,000 465,000 2,965,000 93,000 1,186,000 1,279,000 1,686,000
Motor lorries 3,681,465 1,265,000 4,946,465 253,000 989,293 1,242,293 3,704,172
––––––––––– –––––––––– ––––––––– ––––––––––– –––––––––– ––––––––– –––––––––– –––––––––– –––––––––––
24,233,115 4,440,000 (633,333) 28,039,782 2,710,000 346,000 3,708,841 6,764,841 21,274,941
––––––––––– –––––––––– ––––––––– ––––––––––– –––––––––– ––––––––– –––––––––– –––––––––– –––––––––––
Note: As the cost of the office (K620,500) is more than 20% of the cost of the industrial building (2,465,000 x 20% =
K493,000), it is excluded from the qualifying cost of the industrial building. (2,465,000 – 620,500 = K1,844,500)

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 Balancing allowance K
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Motor vehicles sold Tax written down value of motor vehicle K

Sale proceeds 350,000 Cost January 2006 791,666
Tax written down value 633,333 Annual allowance (20%) (158,333)
–––––––– ––––––––
Balancing allowance 283,333 633,333
–––––––– ––––––––
Summary of allowances K
Investment 2,710,000
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Initial 346,000
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Annual 3,708,841
Balance allowance 283,333
––––––––––
Total allowances 7,048,174
––––––––––

2 (a) Maziko Tebulo

Calculation of income tax payable or refundable for the year ended 30 June 2008
K K
Profit from minibus business 43,500
Salary 6,663,600
Director’s fees 125,000
Interest (working below) 51,250
Rental (35,000 x 12) 420,000
Less: Expenses
City rates (65,000)
Repairs and maintenance (45,000)
Mortgage interest (13,000 x 12) (156,000) 154,000
––––––––– ––––––––––
Taxable income 7,037,350
––––––––––
Calculation of tax
K K
First K84,000 – Nil 0
Next K36,000 at 15% 5,400
Balance K6,917,350 at 30% 2,075,205
––––––––––
2,080,605
Less:
PAYE 1,968,480
Withholding tax:
– Director’s fee (10%) 12,500
– Interest (working below) 6,250
– Rental (420,000 at 10%) 42,000
Minibus tax 90,000 (2,119,230)
––––––––– ––––––––––
Refundable (38,625)
––––––––––
Taxable profit on the minibus business
K K
Net profit for the year 343,500
Add: Disallowable items
Depreciation 390,000
Minibus tax 90,000 480,000
–––––––– –––––––––––
823,500
Less: Capital allowances (working below) 780,000
–––––––––––
Adjusted profits for tax 43,500
–––––––––––
Capital allowances working
Buses bought (650,000 x 3) 1,950,000
Less: Capital allowances
Initial (20%) 390,000
Annual (20%) 390,000 780,000
–––––––– –––––––––––
Taxable written down value 1,170,000
–––––––––––

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 Salary income
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July 2007 to December 2007

US$24,000 at K139·40 3,345,600
January 2008 to June 2008
US$24,000 at K138·25 3,318,000
–––––––––––
Total salary 6,663,600
–––––––––––
PAYE
First K84,000 0
Next K36,000 5,400
Balance K6,543,600 at 30% 1,963,080
–––––––––––
1,968,480
–––––––––––
Grossing up of interest
Gross interest
K K
May 2008 received 35,000
Not applicable for withholding tax 10,000 10,000
–––––––
25,000 25,000
Withholding tax 25,000 x 20/ 6,250 6,250
80
––––––– –––––––
31,250 41,250
June 2008 receipt all exempt from withholding tax 10,000 10,000
–––––––
Total interest 51,250
–––––––
Withholding tax 6,250
–––––––

(b) PAYE must be paid by the 14th following the month the deductions were made.
Failure to remit will attract a penalty of 15% of the total tax due and a further additional sum of 5% per month or part thereof,
for the period the tax remains unpaid.

(c) An employer making a payment in excess of K84,000 per annum for services rendered by an employee, whether paid
monthly or weekly under a contract of employment or service or not, is required to deduct income tax in the form of Pay As
You Earn (PAYE) from such payment and remit it to the Commissioner General at the Malawi Revenue Authority.
Failure to deduct PAYE renders an employer liable for payment of the amount not deducted. The employer, however, may
recover this amount from the employee as a debt.

3 (a) (i) To register for value added tax (VAT) a company must be making taxable supplies.
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Further the taxable supplies turnover for the business should exceed K2 million per annum.
The company must apply for registration within 30 days of becoming qualified for registration.
The company, if it is not registered but is liable to be registered under the Act, becomes taxable from the beginning of
the tax period immediately following the period in which the duty to apply for registration arose.
The Commissioner may by notice require the company to register because the Commissioner believes the company in
this period has made taxable supplies:
(a) in excess of the limit;
(b) below that figure, but believes that the company is registrable.
(ii) If the company does not register when it is supposed to, it will not be able to claim the input tax paid on its inputs.
Further, there are penalties to be paid for non-registration as follows:
If the failure to register is deliberate or reckless, there is a fine of K100,000 and imprisonment for five years; if the failure
is for any other reason the fine is K20,000 and imprisonment for 12 months.

(b) A taxable supply of goods or services is deemed to have occurred as follows:

(i) Where goods or services are appropriated to own use, on the date when the goods are first applied for own use.
(ii) When the goods or services are supplied by way of gift, on the date on which ownership in the goods passes or the
performance of the service is completed.

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 (iii) In any other case, the earlier of the date on which:
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(a) the goods are removed from the premises of the taxable person; or
(b) the goods are made available to the person to whom they are supplied; or
(c) the services are supplied or rendered; or
(d) payment is received for all or part of the supply; or
(e) a tax invoice is issued.
Where supplies are made on a continuous basis or by metered supply, the time of supply shall be at the time of the
determination of supply or when the first meter reading is taken following the introduction of VAT, and subsequently at the
time of each determination or meter reading.
Where goods are supplied under a hire purchase agreement or finance lease the supply occurs on the date the goods are
made available under the hire purchase or finance lease agreement.
Where goods or services are supplied under a rental agreement or an agreement which provides for periodic payment, the
supply occurs on the earlier of the due date for payment or when payment is received.

(c) Under the new tax provisions introduced in the 2007 Tax Amendment Act, import duties and the value added tax payable
on imports will be deferred for two years on tourism related expenditure. The expenditure concerned is as follows:
– building materials;
– industrial catering equipment;
– motorboats, jet skis, kayaks, windsurfers and pedals; and
– linen, cutlery and similar goods for hotels’ use, indelibly marked with the hotel’s name.
After two years, if the proven items were indeed used for the intended purpose, the related duty and VAT will be removed and
will no longer be payable.
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4 (a) Every employer, other than Government, who provides benefits to any of its employees is liable to pay fringe benefits tax on
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the total taxable value of such fringe benefits at the rate specified in the Eleventh Schedule, currently at 30%, subject to the
regulations made under the Act.
The employer is required to calculate the total taxable value of the fringe benefits provided to its employees and pay the fringe
benefits tax on such value at the applicable rate by the 14th of the month following the end of each quarter.
The employer is required to make records available for inspection to an officer authorised by the Commissioner General, for
the purpose of verifying that fringe benefits tax is being correctly calculated.
The employer is liable to penalties for delayed payment of fringe benefits tax payable.
Provisional tax is not payable on benefits given to employees who earn less than K84,000 per annum.

(b) Titanic Limited

Calculation of fringe benefits tax provided to the employees
Working K
House 1 342,000
School fees 2 232,500
Motor vehicle 3 675,000
Telephone cost 4 35,000
Interest on loans 5 700,000
––––––––––
Taxable value 1,984,500
––––––––––
Fringe benefits tax at 30% 595,350
––––––––––
Workings
1. House – As the house is furnished the taxable value for fringe benefits tax is worked out as the greater of rent paid by
the employer and 12% of the employee’s salary
K
Actual rental (35,000 x 12) 420,000
12% of salary (65,000 x 12 x 12%) 93,600
The higher is 420,000
Less contribution by employee (65,000 x 12 x 10%) 78,000
––––––––
Taxable value 342,000
––––––––
2. School fees
Actual fees paid 465,000
Taxable value is 50% of amount paid 232,500
––––––––

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 3. Motor vehicle
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Cost 4,500,000
Taxable value is 15% of cost 675,000
––––––––––
4. Telephone
Telephone costs paid to MTL 35,000
––––––––––
The whole amount is taxable as a fringe benefit
5. Loan interest
Loan interest at basic lending rate (5,600,000 x 22·5%) 1,260,000
Less: Actual interest charged at 10% 560,000
––––––––––
Benefit 700,000
––––––––––
Housing and electricity and water allowances, as these are paid to the employee, are not subject to fringe benefits tax
but are included in the income of the employee and subject to PAYE.
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The mileage claims are a reimbursement of expenses and not subject to any tax.

5 (a) Advice to Dulani and Phiso

(i) Partnership K K
Profit before taxation 1,037,420
Add: Items disallowed for taxation:
Salaries: Dulani 1,368,000
Phiso 1,260,000
Depreciation 975,000 3,603,000
–––––––––– ––––––––––
4,640,420
Less: Capital allowances 1,370,000
––––––––––
Taxable profits 3,270,420
––––––––––
Dulani Phiso Total
K K K
Salary 1,368,000 1,260,000 2,628,000
Share of profit 60% 385,452 40% 256,968 642,420
–––––––––– –––––––––– ––––––––––
1,753,452 1,516,968 3,270,420
–––––––––– –––––––––– ––––––––––
Tax up to K120,000 5,400 5,400
Excess over K120,000 at 30%
(1,753,452 – K120,000) 490,036
(1,516,968 – K120,000) 419,090
–––––––––– ––––––––––
495,436 424,490
–––––––––– ––––––––––
Total tax payable on partnership profits K919,926
–––––––––––
of which PAYE on salary
Dulani Phiso
K K
Salary 1,368,000 1,260,000
–––––––––– ––––––––––
First K120,000 5,400 5,400
Excess over K120,000 at 30%
(K1,368,000 – K120,000) 374,400
(K1,260,000 – K120,000) – 342,000
–––––––––– ––––––––––
379,800 347,400
–––––––––– ––––––––––
K727,200
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 (ii) Company K
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Adjusted profit for tax (as in (i) above) 3,270,420

Less: Salaries 2,628,000
–––––––––––
Profit adjusted for tax 642,420
Tax at 30% 192,726
–––––––––––
Profit after tax 449,694
Dividend 224,847
–––––––––––
Profit retained after dividend 224,847
–––––––––––
K
Tax payable by company
On company profits 192,726
Withholding tax on dividend (224,847 at 10%) 22,484
–––––––––––
215,210
Add: PAYE payable on salaries (as above) 727,200
––––––––––
942,410
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Based on the information in the question it would be better to operate as a partnership because the total tax payable on the
profits will be lower in this case (since PAYE is a factor common to both options).
K
Total tax on partnership profits 919,926
Less: PAYE 727,200
––––––––
Tax on profits 192,726
––––––––

(b) Other factors that should be taken into account are:

The availability of lower income tax rates (0%/15%) in the case of a partnership if profits are very low.
The additional withholding tax payable on dividends paid which is not available for offset in the case of a limited company.
The extent to which the actual personal tax situation (other income) of the individual partners/shareholders will affect the
overall cash available.
Expenditure which would be allowed in the case of a company but disallowed for a partnership, for example:
– Salaries paid to owners.
– Rental expenses paid for working owners.
– Expenditure deemed of personal nature (but will be subject to fringe benefits tax).

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 Fundamentals Level – Skills Module, Paper F6 (MWI)
Paper F6MWI
8J–MWIMS

Taxation (Malawi) June 2008 Marking Scheme

Marks
1 (a) (i) Taxation of insurance income
Determination of income 1
Premium received 1
Other income 1
Reserve for unexpired risks 1
Losses and deductions:
Premium paid 1/
2
Losses in Malawi 1/
2
Commissions in Malawi 1/
2
Expenditure other than of a capital nature 1/
2
Allowance for expenditure outside Malawi 1/
2
Reserve for unexpired losses 1/
2
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7
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(ii) Milambe Insurance Company Limited
Computation of taxable income
Profit before tax 1/
2
Premium income 1
Depreciation 1/
2
Donations – church 1
Fringe benefits tax 1
Interest on loans 1
Write off of loan 1
Dividends deducted 1
Profit on assets deducted 1/
2
Capital allowances deducted 1/
2
Add capital gain 1
–––
9
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(b) Maliba Limited

Capital allowances
Additions – buildings 1
Additions – other (1/2 mark each) 11/2
Disposal 1/
2
Investment allowances (1 mark each) 2
Initial allowances (1 mark each) 2
Annual allowances (1/2 mark each) 21/2
Total allowances 1
Tax written down values 1
Calculation of tax written down value of disposal 1
Summary of allowances 1/
2
Calculation of balancing allowance 1
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30
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19
 Marks
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2 Maziko Tebulo

(a) Calculation of income tax payable or refundable

Calculation of tax payable
Taxable income
Profits from business 1/
2
Salary 1/
2
Director’s fees 1
Interest 1/
2
Rental income 1
Expenses
City rates 1/
2
Repairs 1/
2
Mortgage interest 1
Taxable income 1/
2
Calculation of tax 1
Deduction from tax
PAYE 1/
2
Withholding tax: Director’s fees 1
Interest 1/
2
Rental income 1
Minibus tax 1
Taxable profits of minibus business
Disallowable – depreciation 1/
2
Disallowable – minibus tax 1
Capital allowances 1/
2
Capital allowances calculation
Initial 1/
2
Annual 1/
2
Salary income
Calculation July to December 2007 1
Calculation January to June 2008 1
PAYE 1
Grossing up of interest 2
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19
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(b) Penalties
Date of payment of PAYE 1/
2
Penalty for not paying 1
Additional penalty 1/
2
–––
2
–––

(c) Employer’s responsibilities

Payments in excess of K84,000 per annum 1
Requirement to deduct and remit 1
Liability for not paying 1
Recoverability 1
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4
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25
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20
 Marks
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3 (a) (i) Registration

Taxable supplies 1/
2
Turnover limit 1/
2
Period to register 1/
2
Liability for non-registration 1/
2
Requirement by Commissioner 1/
2
Circumstances 1/
2
–––
3
–––
(ii) Non-registration effect
No claim of input tax 1
Penalties – deliberate 1/
2
Penalties – other 1/
2
–––
2
–––

(b) Taxable supplies

Goods for own use 1/
2
Gifts 1/
2
In other cases the earliest of 1/
2
Removal of goods 1/
2
Goods made available 1/
2
Services supplied 1/
2
Payment received 1/
2
Tax invoice issued 1/
2
Supplies on continuous basis 1
Hire purchase/finance lease 1
Rental agreement 1
–––
7
–––

(c) Tourism expenditure

Deferment of duty and VAT 1
Items involved (four categories: 1/2 mark each, maximum 1) 1
Removal after two years 1
–––
3
–––
15
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4 (a) Fringe benefits

Administrative provisions
Liability of employer 1
Calculation and date of payment 1/
2
Records available for inspection 1/
2
Penalties for delayed payment 1/
2
Employees earning less than K84,000 1/
2
–––
3
–––

(b) Titanic Limited calculation of FBT

Summary of taxable values 1/
2
FBT at 30% 1/
2
Workings
House 2
School fees 1
Motor vehicles 1
Telephone costs 1
Loan interest 1
Treatment of allowances 1
Treatment of mileage claims 1
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9
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12
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 Marks
Paper F6MWI
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5 (a) Advice to Dulani and Phiso

Partnership:
Adjustment to profits:
Profit before tax 1/
2
Disallowable
Salaries (1/2 mark each) 1
Depreciation 1/
2
Capital allowances 1/
2
Taxable profits 1/
2
Allocation to partners
Salaries (1/2 mark each) 1
Share of profits (1/2 mark each) 1
Totals 1/
2
Calculation of tax
On profits (1 mark each) 2
PAYE (1 mark each) 2
Company:
Profit per partnership 1/
2
Less: Salaries 1/
2
Tax at 30% 1
Dividend 1
Tax payable
On profits 1/
2
On dividends 1
Adjustment for PAYE 1
Advice to go for partnership 1
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16
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(b) Each valid point 1/2 mark: maximum 2

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18
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