M I D L A N D S S ' I A I L LJ N I V E H s i n

* A C U I T Y OK C O M M E R C E

D E P \K T M E M J (>!■' A C C O U N T I

T A X l . A W A M ) l*RAC 1 [(,!•; 11: A C 212

S E S S IO N A L l-.XAMTN.VJ H )>

JU L Y 2008

3 HOUKS

IO T A ! M ARKS: 100

i mtractions ! -i ( ami :■!-=. tits

I, A nsw er nil questions

i. £ h a w a l! workings.
r>, Lin Lir.:-.'^L:r b.: a new queil-Oti on a new ptig-
4. Sileat non-program mabls calculators may be used.
5. Credit ’.vLli bti y.;\ sji for acal dtv.1 ^riidrly picsctiUUiyiis.
■

]\L‘L]ULri.'IILCjHa-:

I. '['lie Income Tax A lt (Chapter 23:06)

2, Thi Fijiance Act (Chapter 2 .VO4)
j The Capital Gains [ un Act {Chapter 23:01)
4. Ehc Vat ill- A ddecl fax Ac i (C hapter 23:12)

Thi?i pii|HT consists c f l? |jri4it-crt p : i ^

Thf following lax rates und allowances a:u to be used in ansvvorin^ the questions

Income T ax: Individuals

Employment [neomc
\ a \ Y e a r : 1 J a n u a r yr to 30 Juni*

Tax on $290 000 000 * $80 750 000 per month

Above S190 000 000 = 47,5%
Aid levy ■ 3% of tax after tax credits.

Pcnsiim ( ’o n t r i b u t i o n * :

2007 2008

* Individual contribution to Pension Fund S9QQ 000 $ 11 500 000 pa.

* Individual contribution to Retirement Annuity Fund 900 000 11 500 000
* Combined contribution to E'i7 and RAF ^00 000 11 500 000
* Employer's contribution to employees' pension 900 000 Ll^oQOOO

M o t o r i n g UcrirfilM
Kngine Capucity licensed taxable benefit
2fJf>“ 2003
Up to 1 500 cc S7 200 000 *4 SO 000 000 p.a
1 50 1 to 2 000 cc 12 000 000 720 000 000
2 00 Eto 3 000 ce 14 400 000 900 000 000
3 001 and above 19 200 000 1 200 000 000

T«s C redits ,

2U07 2008
Elderly person -^■■l 000 S j OO 000 000 p.a
Blind person ■ ^00 j OU 000 000
Disabled person 120 000 300 000 000
Medical expenses 50% 50%

0> J'|m r:iiim i [ A\'r 30"o plus A id s J.CVV

\ alue A d d e d ‘I m : S ta n d a r d rated supplies 15%
Zero rated supplies O'/d
Special rate 22.5%

2
( upitAl Ciuin* I'j \;

| iLuns S ■000 • : I. - N il
Gains nbovt: 15 000 0% fo ,princip lI p riv a te re iid en ces sold b \ d d t r l y persons
20% for all othei coses,

The following arc *.hc AlS Items Cons umer Price Indices provided h\ th-i Ccr.ii
statistical office;

M'mtli unit Year Ml

1■ 1U-irL
"+•■n... H.i^ri&ra---
»i■ --»•-* ■■;. 1 !n! r.t
Cmi'iLiniL-r
January 20Q4 200 OOOl
(August 2004 300 UOOl
February 2005 .—-■ 5flo c-oq
April 200 ;■ 600 00q
u ■ 800 OOCj
August 2(M>6
January 2007 (Actual) U-..... ——968 338.9(1
1;bniaj^ 2007 1 33.4 521J&
March 2007 oos 932,ig
Ar-ri! 2007 4 032 t.o3-7j
Vtoy 2007 6 265 734 j
June 2007 -----i----- . i L066 ft2b. j
IJuly 2007 I S 35B 172.1
'Aunust 2007 17 17] 512 1

nucmiun 1 i2 ' n w k i) _

{a.i OritLint: The circumsta]nets in which a Ll^.spayer in t itemed to h t vt disputed

o f a specified asset -inv. TIk:-.C

deemed L'.iip^i.il ’ -M'iJ v alued ^:j : in clu sio n in the tB^pttyeL*’ rons capital
am ount. (5 murks)

(hi Shawn (rvt) Ltd was ijjcorporated nri ' January "004 with aulhori/=<J

i'-.are capital ol' 2 001 000 imJinu y stii*.yts e:'$l each | h 1 500 000
wcit issued ar-il paid for in tVJ] at a price at S2 per share in Mnutary of lKc;

lianvc yea i the ^u-mpi 1,v issued ]000 10% debentures ofSLOj each at par.

Interest (in debenture p:.iyuhII- LL'uiually in arrears on j] ectim ber o f

■*i
J
 each cLilendar year and -he debentures are redeemable ^Itcr thLny-t>i>; i "6J

from the date o f issae.

1lie company utilised all the proceeds from th^ issue o f the debentures to
purchase land in January 2004. The proceeds i'rom the issue of shares were
applaud as follows:
(c) Construction of a luctory budding which was completed it; August 2004 at
a cost of $500 000.
(d; Parchase of a commercial building t’oi £300 000 in February 2Q05.
(e) Construction of a slatT canteen within the factory premises at a cost o f
5600 000 in April 2-005.
(fi Construction of a durawall around the factory building at a coat of $400
000 in August 2006.
(g) Hie balance ^ a s spent on the construction of a driveway on the industrial
premises in February 200?

The company incurred £ 100 000 on legal expenses to change the legal title of the Land
into its n.;!r7ic at the time of purchase.
The company sold all its immovable assets in August 2007 for a total consideration of
■

S!SfJ billion allocated as follows:

1.and $101

Factory bmlding 20

Commercial building 25

Staff canteen 15

Du raw all t

Drivuvvay j

Under the agreement ol‘sale, the purchaser agreed ‘o pay for die a s ^ t s as follows

Deposit (A ugust2007) $ 20billion

Instalment (December 2008) 40 billion

Instalment (December 2009) 20 billion.

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The sellm;-- expenses amounted to £5 i^iJLiu-n

R l-ii u.ii'td:

Calculate the capital gains |tax payable for the years o f asaessirfc■nt ended 3 i December
2007:2008 and 2009. {2l.l mark*)

Question I (25 m arks)

U) BaJoyl (Pvt) Ltd had the following transactions during the lax period endccl }0 June
200$:
SliIl-M

Si^ar SI 700 000 C00

Milk 2 500 000 ( oo

Fuel 4 000 000 ( 00
Potato chips 1 300 000 ( 00
Fr^sh beef 3 500 000 < 00
Celt phones 4 500 000 i 00
Cartned beef j 200 000 I 00
P o r th iise s:

Sugar 600 000 QfoO

Milk 900 000 * 0
Fuel 1 500 000 m
I-’otata cl*iips 400 000 CQO
Frcsh beci' 600 000 iJOO
Ce^i pnones I 200 000 CJ00

Canned heef 800 0 0 0 ( 0 0

A ;ld: tjonaj i n fontiaLion:

(a) Bad d^ l:cs in re g re t of standard rated products ;ini ounted to 5200 million
(b) Bad debts rUcovered in respect o f standard :aLed Products vvert Si 50

m i 11in n .
 (c) Debit notes received mid credit iwtcs icccivod all iri respect of standard
rated supplies amounted to i»'90 million andS&O million respectively,
(d) Tlie tell-phor.L-.-; v. clc purchased from unregistered operators.
(e) The company paid SI 20 million to Ecomet, being the cell-phone bill fur
the period.
Required:
(a) Calculate the Va T payable o: refundable for the tux period ended .’0 June 2'.'103,
(20 murks)
(b) L‘ruler what circumstances would the Commissioner refuse to register li person

who has made an application for voluntary registration? (3 marks)

(c) What is the significance o f differentia ir.;.; between zero-rated and exempt
supplies? (2 murks)

Qufscion 1 (25 m arks)

i.Mi Alexio (Pvt) Led bad ihc following capital structure at 33 December 2007:

Ordinary shares of SJ eacSi

r
i'2 000 000
10% Debentures 6 000 000
Reserves 1 000 QCK>
9 000 000

■ F

The company i* reviewing its financing for the year ending 3 December 200S and the
following options are being considered:

I. The Finance Manager, has proposed to financc ihe company's capital projects
' through the issue of 1 million ordinary shares of $! each at a premium of $2 per
share. Out: (l) million of these shares will be issued to the public in Zimbabwe
whilst the remainder will l>e uken up by the company's South African holding
company. The company will have to pay a total dividend at year-en-d of SL0 per
share. Under this scheme, the company will receive technical assistance from iis
South A-rican uni liug company and would be required to pay SI00 000 for the
services. In addition, the holding company will provide management services for
a fee of 550 000. Currently, the holding company ho id:- 75*n of Alexko (Pvt) Ltd.

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 7. I he Accountant is of the view 'hiil the expansion programme can better be
11minced from fcomowin is 1 nde: this scheme tht; company can issue 20%
Debentures with a nominal value ol S6 r;ii-!n?n r<> Ll? South African holding
I nder this arc anigemcnt.. the company will be give l ;j patent by the hoklirn:
company for (hi; production ol a product if v\<>uld noi m dly import and will have
to pay $ 150 U00 for the use o f the patent. In addition, he holding company w ould
have to pay for the cnmpany's advertising ;n South Af ica at a c^st of $60 IHJt) tbj
which Alexio (Pvt) Ltd has to reimburse the hold ng company. J he holding
■company currently holds 75% of Alexio's share capital . Alexio I.Pvt} Ltd ti.\|>:cts
!■.■ i :i- .. d . ‘-_d.: 1.1 -I

Required;
With Hie aid ,-l relevant calculations, evaluate the I'a-o prtipost Is highlighting the income
t:i\ consequences or'eau ! proposal Which one '.vo.ild you rec< mmtnd ;md why'/
115 murks)

(b) The following queries had been referred to you in yourca p icily as the head o f die
Tax Division o fa tom o#‘Chartered Accountants ;‘or your rev-, w.

On the first day of your in i’s interim audit of a 1: Ti_e rnnnufa' iturirvg company in January
2008, the Zimbabwe Re r'cnxie \uihorit> (ZIMRA) h;ul dulivc ed a schedule o f demand
loi the ’.uj men i ot'S i4A 200 from the company (under audit}, seing 10% withholding (ax
on contracts :n>t deduct cd on payment of creditor* who did no have tax clearances in
terms of the provisions o f Section SO of the Income I :iv A cl f ’huptcr 23:06).

<^n examination of the * riled ule you determ ine llint die /J.V1K \ audit team had m anly
asked Inr a Usting -.if piiy men is to creditors in the preceding th ee months and calculated
10% of (he total paymet rs. in view o f rhe fact that the comp;ir|yy i:i.■bICto provi:h: Ihf
requisite tax clearance c ;rtjfLcaios
After sorting out and co lSOlidflting, the list o f pavm ents comp :ises the following;

s
Payments for manufacturing materials 400 000
Payments to ZINlKA
(monthly PAYE ,n . r. ,i ; i -w\ <M': >. n« ■;itc

tax iiabilrty due >tL 3t January 2008 and paid accordingly} I 250 000
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Value Added fax 650 000

Import duly 350 000

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 Utility payments (e lee ti ic tty Lind wii ter) M (.h)0
^ihirii's p:iii.:. In L'-OS 'Ail j r- hank invn.miN 0<:0
Chinyav&da Security (Pvt) LlU -security services 250 000
Payments to the company's bank {loans and service lees) 500 000
3 462 000

Required:
(i) briefly staLe mid explain the requirements of Ihe statutory provisions regarding
Llit- 10% withholding tax mi contracts lor ihe company’s tencfll.
(4 m arks)

(ii) Evaluate and explain the claim by ZLMRA and ascertain the correct
potential am ount to he negotiated with ZIMRA for payment. (6 m arks)

Question 4 (2^ m arks)

(a) Maple Leaf (Pvt) is a gold producing mint in the Midlands area, The company sold
gold worth S5 billion during the year en r.l II December 2007. The following
expenditure was incurred dui'iiu1.the same year:
5000
Steam generator 300 000 000
Mining buildings 450 000 000
I'arth moving plant ] 850 QUO 000
Staff d in k 1 160 000 000
Mine doctor's house 120 000 000
Shaft sinking 400 000 000
Renewal o f boiler ]00 000 000
Replacement of generator 250 000 000
Administration (note 4) 240 000 000
Interest (nole 5) 150 000 000
Salaries 1 350 000 000
insurance 150 000 000
nut> on imparted generator 20 000 000

Notes: *
I) The com puny is owned by three shareholders.

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 2) The company sold m ining claims (originally purchased J' .u result, i'oj $2';J0 billion)
i■>
i S \ 2: ■bil Lidmand cseess cq uipment for $360 bil Iion di ring the year.

3 ) T h e replaced g en et a(or had blo w n up w hen there was a nine exnlosi^Li liji J S3 00
billion was rccovcnsd from t.ie insurance com pany

4) Administration i^ xt-m.'s ircl.ided $28 million being pei ally i m p o s e d by Z1MRA

for late payment cri" Lelx due. Another $45 million was ;i <onation to a local soccer
leam.

5) The company paid interest o f $150 million on a bank nan, v\ Ilie 11 was used to
finance working capital.

6) The company had Si ,65 billion balance of unredeemed apital expenditure uri 3 I
Dcccmber 200£>.

7) The agreed life of be mine is 19 years from the end o 20-1)7, and the company
d air:ied allowances under paragraph 2 o f the J ’"' Schvciu € of the Inconic Tax Act
and any other relief? available.

Kinii i i'il,3;
C a l c u l a t e th e c o m p a n y ' u . i tabic income or assessed foss lor the ear ended 31 D ecem ber
2007. i; 15 marks)
(b)Costas Rflfl(Pvi) Ltd w lose farm was situated in a drouyht-sfl ;tckcn area was driven
by riie of drought conditions to reduce its livestock herd fri' m 12(10 bead to RQ0
herd during the year of assepmenl ended 31 December 2006. Ta;;abk income derived
from the disposal of (he Livestock was £860 million* out of its told taxabEe income for the
year of S 180 million before claiming any drought relief allowance.
Conditions improved during the cun/em. year of assessment ttidcc 31 Dcccmber 2007 and
Costas Raft (Pvt) Ltd restocked its farm from 800 to 1100 head a a cost u f $ 2 10 mi! lion.
The assessed carrying capacity ol the farm \< KiOQhcad.
The company's taxable inet me for (he year ended j 1 December I 007 before claiming
anv drouuht relief aUowanc ts was $550 million.
Required:
Assuming that the company made elections which would minimi; :e its tax liability in both
tax years* calculate its taxable income for the year of assessment i nded 31 December
2005. (10 m urks)

e n d o r q u e s t i o n r \r t: R

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