Professional Documents
Culture Documents
TUTORIAL 1
Prepared by:
Maxwell Ngorima
Dumisani Ngwenya
Tutorial Letter 1-CAZ 2 2015
6.3 Supplies
TESTS TIMETABLE
STUDY UNIT 1
The final examination will be based on legislation in force as at 31 December 2014. For
planning type questions, candidates should also be aware of the legislative changes which
have recently been promulgated, following the parliamentary approval of the National
Budget presented by the Minister of Finance to Parliament in December 2014
Key Concepts
The following key concepts are underlying to this study unit:
TYPES OF TAXES
There are two broad categories of taxes namely, direct and indirect taxes.
Direct taxes:
These are taxes levied on income and wealth of individuals and companies. The
burden of these taxes is borne by the person or organisation responsible for paying
taxes i.e.
o Corporate tax tax on business income (profits)
o Pay as you earn- tax earned by individuals from employment.
o Investment income tax on dividends and interest
o Capital gains tax- tax on sale of immovable property and shares
o Estate duty tax- on the property of a deceased person etc.
Are levied on one set of individuals or organisations, but may be partly or wholly
passed onto others and are largely related to consumption.
For example, sales tax, value added tax, custom & excise duty etc.
Key difference between direct and indirect taxes
Indirect taxes tend to be regressive. In other words they have a relatively greater
impact on the poor. Yet direct taxes are progressive in nature. The more you earn
the more tax you pay.
Tax planning this involves the organizing of a tax payers affairs in a way that legally
minimizes the impact of taxation imposed by statutes.
Therefore in light of the need for tax planning the following issues become pertinent:
o Tax avoidance: this is the arrangement of ones affairs in a legal manner
which results in minimization of tax liabilities. (Sect 98 of the income tax act)
o Tax evasion: this is minimization of tax liability by means which are outside
the law e.g. falsification of records, misrepresentation etc.
Individuals: PAYE
Employers who have been placed on the final deduction system for their employees
have the responsibility to deduct the correct amount of PAYE for the year.
Such PAYE deducted from the employees remuneration should be remitted to
ZIMRA within 10 days from the end of the month to which such PAYE refers.
The penalty for late payment of PAYE is 100% of the tax payable, and interest also
accrues for any unpaid amounts at a rate of 10%.
Therefore if an individual is earning only income from employment they would not
have an obligation to file tax returns with ZIMRA.
Taxpayers who are earning income from trade and investment activities are required
to be on the Quarterly Payment Dates (QPDs).
Under the QPD system taxpayers are required to prepare tax assessments/returns
and pay estimated tax liabilities in four instalments on dates allocated throughout
the year, as follows
GROSS INCOME
The objective of this study unit is to define what constitutes gross income and
the application of case law in interpreting the gross income concept.
KEY CONCEPTS
The following key concepts are underlying to this study unit:
Definition of gross income in accordance with section 8 of the Income
Tax Act
Apply case law to interpret the definition of gross income
Concept of source in determining taxable income
Distinguish between capital receipts and revenue receipts
Deemed received or deemed accrued Sect 10 of the Income tax Act
1. Overview
Section 8 of the income tax Act defines Gross Income and identifies the following key
elements to the definition
o Amount
o Received by or accrued to or in favour of a person
o Deemed to be received or accrued
o In any year of assessment
o From a source within or deemed to be within Zimbabwe
o Excluding amounts proved to be of a capital nature
NB: Please refer to the prescribed study material for further information
Our Zimbabwe tax system is source based, which means that for income to be
taxable in Zimbabwe it should be from a source within or deemed to be within
Zimbabwe
The definition also specifically excludes all amounts which are capital in nature; this
therefore follows similar principles to IFRS in identifying items which are capital in
nature.
The definition of gross income in the Income Tax Act (Chapter 23:06) can further be
clarified by application of case law as identified in the prescribed study material.
Question 2.1
You are a tax consultant. The following information has been presented to you:
Midlands (Pvt) Ltd (Midlands), a resident company, owns a hotel in Gweru. Midlands had a
contract with a resident company called Nashen Ltd (Nashen) to provide accommodation
and meals for a period of six months for students from a country which does not have a
double tax agreement with Zimbabwe. Nashen had a contract to train the students.
During September 2014, after staying at the hotel for only two months, the students left the
hotel without giving any reasons for their departure. They had caused extensive damage to
the hotel rooms they had occupied. Midlands sought legal advice on the matter and, based
on that advice, threatened to sue Nashen unless it settled a claim for damages of $400,000.
On 15 November 2014 the parties agreed to settle the matter out of court.
Nashen paid Midlands $200 000 and Midlands undertook to abandon any rights it may have
had for the damages and any pending or contemplated court action against Nashen. The
parties agreed that the $200 000 represented 50% of each of the three items in the claim.
Midlands incurred legal expenses of $30 000 in respect of this matter, which it settled
during December 2014.
It is also incurred $140 000 to effect repairs to the hotel rooms which it claimed as a
deduction in terms of section 15 (2) (b) and this amount is included in the net income of
$500 000 (see below).
In the completion of the tax return of the company for its 2014 year of assessment ended 31
December 2014, the accountant of Midlands adjusted its accounting net income that
included the $200 000 received for damages and $30 000 legal expenses paid as, as follows:
$
Net income 500 000
Less: Loss of goodwill received (a capital receipt) (100 000)
400 000
Add: Legal expenses of a capital nature (50% of 30 000) 15 000
Taxable Income 415 000
However, The Zimbabwe Revenue Authority (ZIMRA) queried the above treatment and
stated that it was treating the full $200 000 damages received as being of a revenue nature
and thus taxable, but that it would allow the legal expenses in full in terms of section
15(2)(a).
The 2014 assessment which ZIMRA accordingly issued on 15 February 2015 reflected
taxable income of $470 000
Should the receipt (or part thereof) be of a capital nature it is excluded from the
gross income definition but may have capital gains tax (CGT) consequences? 1
It is submitted the receipt of $200 000 can be separated into its component parts as
contractually agreed by the relevant parties. Each component of the claim therefore 1
needs to be considered.
The courts have held that damages and compensation receipt will be of a capital 1
nature if the payment is for the loss or sterilisation of the taxpayers capital asset (i.e
his income producing machine). However if the payment is made for the 1
compensation of loss of profits it will be of a revenue nature in the hands of the
recipient. As was said in the Burmah Steam Ship Co case (bonus mark for mentioning 1
the case) is the receipt to fill a hole in profits or in fixed capital assets.
The part of the receipt relating to meals and accommodation is compensation for loss
of profits and of a revenue nature and included in gross income. 1
It is submitted that goodwill is generally an asset of a capital nature and the proceeds
from disposal of goodwill will be of a capital nature. 1
Thus it is submitted that the damages receipt relating to the loss of goodwill is of a 1
capital nature.
Thus the accountant has correctly excluded $100 000 of the damages receipt from 1
gross income.
Legal expenses
The accountant has correctly added back 50% of the legal expenses as section 15 (2)
(a) disallow expenses of a capital nature. 1
The balance of the legal expenses represents legal expenses actually incurred in
respect of a claim made by the taxpayer for payment to him for an amount which 1
would be included in his income.
13
Max 13
Key Issue
Employment income and income from trade and investment activities
are taxed under different tax regimes therefore it is important that
students are able to distinguish the two sources of income.
Key Concepts
The following key concepts are underlying to this study unit:
Define employment Income (Sect 8 (1) (b)) The identification
and taxation of employment income
Tax concessions for the elderly (Tax payer of the age of 55years)
Also taxable under employment income are benefits accruing from employment. Some of
the benefits are as follows,
Motoring benefits
School fees benefit
Loan benefit
Housing benefit
Passage benefit
Entertainment allowance
2013 2014
$ $
Basic Salary sec 8 (1) (b) (2400*12) 28,800.00 (2800*12) 33,600.00
Commission sec 8 (1) (b) 12,000.00 1,500.00
Medical Aid Contributions - -
Motoring Benefit Sect 8
(f) 600p.m 7,200.00 7,200.00
Fuel Allowance- Part of
motoring benefit NIL NIL
Taxable Income 48,000.00 42,300.00
Credits
Medical Aid contributions
(own) $150*12*50% 900 $150*12*50% 900
A pension, from the South Africa social security system of $1,600 per month. No tax was
deducted from the pension and the amount was paid into a bank account in South
Africa.
Interest on a fixed deposit investment in a South African bank account. The monthly
gross interest is $1,000 per month. In terms of South African domestic law, the interest
is subject to a withholding tax of 10%. The interest accrues monthly in arrears and is
transferred to Vuyos Zimbabwean bank account on the last day of each month.
Rentals from a building situated in South Africa for the period 1 January 2014 to 31 May
2014 at a monthly rental of $4,800. The building was sold for 2 500 000 Rands to a Swiss
company on 1 June 2014. The building had originally cost 1 800 00 Rands in 1998 and
had a market value of 2 000 000 Rands when Vuyo immigrated to Zimbabwe in 2002.
The rentals and the capital gain of 700 000 Rands were not subject to any South African
taxes.
A net dividend of $5 400 from an Irish company in which Vuyo holds 8% of the equity
shares. The dividend was subject to a withholding tax of 10%.
Vuyo incurred the following expenditure during the 2014 year of assessment which may be
relevant for his normal tax liability.
$
Medical aid contributions ($250 per month) 3 000
Vuyo is married with no other dependants
All medical expenses were recovered from the medical aid society
REQUIRED
Calculate Vuyo taxable income for 2014 year of assessment. Confine your answer to the
available information and ignore the possible impact of any double tax agreement.
NB: Also highlight any available credits
Vuyo Mathebula
$ $
Vuyos taxable Income
Pension from South Africa( Not from Zimbabwean source) -
Interest from South Africa(taxed gross) 12,000
Rent from South Africa not from Zimbabwean source -
Disposal of building Specified assets, therefore consider CGT
Dividend from Irish company (taxed gross) 6,000
Fee for preparation of tax return (300)
Taxable income 17,700
Available Credits
Medical Aid Contributions ($3,000 * 50%) 1,500
Elderly persons credit 900 2,400
Timothy Guyo is a qualified geologist with several years working experience in geological
surveys. He also sits on the boards of a number of reputable mining conglomerates
including the company he currently works for, Ngoda Limited. Due to his extensive
knowledge in geological work, Timothy is often subcontracted by Ngoda Limited to offer
training services to other unconnected mining companies.
During the year ended 31 December 2014, Ngoda Limited established an office in Harare
and Timothy was transferred to work at the new office. He was offered a fully furnished
company house for his accommodation. The company house is located in Dawning Park just
outside the municipality of Harare. The household furniture was bought by Ngoda Limited at
a total cost of US$35 000.
Timothys earnings and deductions from employment for the year ended 31 December
2014:
Notes US$
Salary from Ngoda Limited 80 000
Earnings from subcontracted work (1) 95 000
Passage benefit (2) 5 000
Directors fees for acting as a director of Ngoda Limited (3) 40 000
Thirteenth cheque 7 000
Conference allowance (4) 15 000
Fuel allowance (5) 12 000
Leave pay 6 700
Performance bonus 9 500
Rental paid to Ngoda Limited for company house (3 000)
Funeral policy contributions (2 000)
Subscriptions paid by Timothy to the Institute of Geological Surveys (4 000)
Pension and NSSA contributions paid by Timothy (8 000)
PAYE (6) (23 000)
Other earnings
Rental income from principal private residence 95 000
Contract fees (7) 65 000
Notes
(1) The amount is calculated based on 5% of the amount invoiced by Timothys employer
whenever he is subcontracted to offer training to other mining companies.
(2) The amount refers to the cost of Timothys relocation to Harare. The amount was paid in
full by his employer. His place of ordinary residence before his engagement with the mining
company has always been Mutare in Manicaland province.
(3) The amount was paid by Ngoda Limited for the year ended 31 December 2014.
(4) The amount detailed below was paid by Ngoda Limited for his participation at a week-
long mining managers conference held in the resort town of Victoria Falls during the year:
US$
Travelling expenses (amount incurred) 2 000
Spouses shopping 5 000
Accommodation, meals and related direct expenses 8 000
15 000
(5) Fuel allowance for the year refers to the amount paid by Ngoda Limited to Timothy to
cover the fuel expenses for his company allocated vehicle, a Nissan Navara, engine capacity
3300cc. The total mileage for the year was 30 000km of which 20 000 km was directly
related to the business of the employer.
(6) The PAYE was wholly paid by Ngoda Limited on behalf of Timothy as part of the agreed
engagement terms, such that Timothy received his full gross salary.
(7) The contract fees were paid by one of the two companies which engaged Timothy as an
independent contractor during the year. The other company paid Timothy for his services by
giving him 30 000 listed shares valued at US$150 per share on 31 March 2014. On 5 August
2014, Timothy disposed of 10 000 of the shares at a market value of US$7 a share and used
the proceeds to set up a business for his spouse.
Additional information
While analysing the chemical composition of a mineral deposit in the laboratory on 30 June
2014, Timothy was accidentally permanently blinded in one eye. The medical expenses were
covered by Ngoda Limited and NSSA also paid Timothy a total amount of U$20 000 as
compensation for the occupational accident. Ngoda Limited also increased his monthly
medical contributions from US$1 000 to US$1 200 per month in order to ensure his
adequate medical cover. The amount was paid by Ngoda limited in full as part of the
contractual agreement.
Required:
(a) Identify ANY TWO factors which determine an engagement is treated as employment
and ANY TWO factors which indicate self-employment; (2 marks)
(c) (i) Calculate the value of the taxable benefits arising from Timothy Guyos usage of the
company house; (2 marks)
(ii) Calculate the taxable income and tax arising from the share transactions detailed in
note (7) above; (3 marks)
(iii) Calculate the taxable income and tax payable by Timothy Guyo for the year ended
31 December 2014.
Note: Indicate any amounts not taxable or not deductible by the use of a zero. (13 marks)
NSSA compensation
The amount is specifically exempt from gross income in terms of the 3rd
schedule.
(d) Calculation of the taxable income and tax arising from the share transactions
Taxable income corporate tax rate
30 000 x 150 US$45 000
Tax at 2575% US$11 588
(e) Calculation of the taxable income and tax payable by Timothy Guyo for the year
ended 31 December 2014
Employment Income $ $ $
Salary 80,000
Earnings from subcontracted work 95,000
Passage benefit - exempt -
Directors fees executive director therefore employment Income 40,000
Thirteenth Cheque 7,000
Less exempt 3rd schedule (1,000) 6,000
Conference allowance- see above 5,000
Fuel allowance Included in motor vehicle deemed benefit -
Car benefit based on engine capacity 3300cc 9,600
Leave pay - 6,700
Performance bonus 9,500
Housing benefit see above 7,000
Furniture benefit see above 2,800
PAYE Benefit 23,000
NSSA compensation exempt (3rd Schedule) -
Funeral policy contributions not allowable -
Subscriptions to the Institute of Geological Surveys (4,000)
NSSA & Pension contributions Limited to $5,400 (5,400)
Taxable Income 275,200
Key Issue
The purpose of the Value Added Tax Act is to prescribe the levying
of VAT
KEY CONCEPTS
The following key concepts are underlying to this study unit:
Interpretation of Key terms and definitions
General operational Aspects of VAT
Define and identify taxable supplies
Apply the concept of deemed supplies
Identify exempt and zero rated supplies
Importation of goods and services
Accounting and calculation of VAT
Input tax and Documentation
VAT Registration
Students should understand and be able to apply the following key terms
o Connected person
o Consideration
o Entertainment
o Financial services
o Fixed property
o Goods
o Imported Service
o Input Tax
o Instalment Credit Agreement
o Open Market Value
o Output Tax
o Person
o Trade
Supplies
o Apply the definition of supply in terms of the VAT act to identify taxable
supplies
o What constitutes the supply of services
o When is a supply deemed to take place
o How to quantify the value of supply
There three distinct types of supplies
o Zero rated
o Standard rated
o Exempt
a) Goods exported to an address in an export country. To qualify for zero rating, the
operator must have consigned the goods to an export country or must have
delivered the goods to a foreign going courier for onward delivery to an export
country. There must be documentary evidence to prove that the goods have actually
been exported. Such proof could be in the form of bills of entry export or customs
export documents CD1s. Zero rating will not apply where the goods are purchased in
the country by a non-resident who will in turn export the goods on his own to his
home country.
b) Goods (including consumables) supplied to repair goods temporarily admitted into
Zimbabwe. Zero rating applies if the goods are essentially fixed to or incorporated
into the admitted goods or are consumed as a direct result of the repair,
modification or treatment process for the admitted goods.
c) Goods supplied under a rental agreement if used exclusively in an export country.
d) Goods supplied under a rental agreement if used in or paid for from an export
country. Only applies to foreign registered businesses.
e) The disposal of a business as a going concern. Where any part of a business capable
of separate operation is disposed of as a going concern to another registered
operator, the disposal of that part of the business may also be zero rated. However,
zero rating will be granted upon meeting the following requirements:
Both seller and buyer must be registered operators
The parties must agree in writing that the business is being disposed as a
going concern.
The assets necessary for carrying on the business must be disposed of by the
seller to the buyer
f) Gold supplied to the Reserve Bank or any other registered banks.
g) Regular agricultural inputs supplied to farmers e.g. animal feeds, animal remedy,
fertilizer, pesticides and seed.
h) Goods for disabled persons.
i) The supply by a registered operator of goods to an independent branch in an export
country is zero rated if that branch is separately identifiable and an independent
system of accounting is maintained for it.
j) Supply of gold coins issued by the Reserve Bank
k) Drugs as defined in the Medicines & Allied Substances control Act.
l) Building bricks
m) Basic food stuff, such as plain bread, plain buns, milk, cooking oil etc.
(b) Transportation of PASSENGERS from one place to another place in Zimbabwe by aircraft to
the extent that the travel constitutes international carriage
(c) Transport and ancillary transport services supplied within Zimbabwe in respect of imports and
exports of GOODS, if supplied by the same supplier responsible for the international transport of
those goods.
(e) Transportation services for the movement of goods through Zimbabwe from one export
country to another, when provided to a non-resident (non-registered operator), who does not
carry on a business in Zimbabwe (includes an ancillary transport services as defined).
(g) Services rendered in connection with movables situated in an export country: goods
temporarily admitted into Zimbabwe which are exempted from import duties, and certain
services relating to foreign going aircraft
(h) Services comprising handling, pilotage salvage, towage and operation or management of any
foreign going aircraft: where the services are supplied to a non-resident and a non-registered
operator.
(i) Services of arranging the supply of goods, services or transport of goods for a person who is
non-resident and a non-registered operator.
(j) Services rendered in connection with the repair of a train operated by non-residents, not
carrying on business in Zimbabwe
(k) Services rendered whilst physically outside Zimbabwe (other than telecommunication services
utilized in Zimbabwe).
(l) Services supplied to a non-resident who is outside Zimbabwe at the time the services are
rendered, except where related to land and improvements thereto, or movable property situated
inside Zimbabwe. (There are some exceptions to this rule)
(m) Patents and other intellectual property for use outside Zimbabwe.
(n) Deemed Services in terms of section 7 (5) supplied by a charitable organisation to a public or
local authority.
(o) The supply of services by a registered operator to his branch situated in an export country
Question 4.1
Kiddies World (Pvt) Ltd (Kiddies) trades from property which it owns in Graniteside. The
property had originally been acquired on 1 October 2010 for $2 million from a non-
registered operator. The property consists of a ground floor retail space, a first floor which
houses a small toy manufacturing plant and four further storeys of residential flats which
are rented out as residential accommodation. No tax allowances were claimed on the
building.
In the retail space, Kiddies sells a large variety of kids toys some of which it manufactures
on the first floor and others which are obtained from local and foreign suppliers. Kiddies is a
registered operator, has a two month tax period and has financial year which ends on 31
October.
The bookkeeper of the company who normally completes the VAT returns has been
tragically killed in a car accident and you have been asked to assist the company with its VAT
return for the tax period which ended on 31 October 2014 and to advise it on related issues.
The following information, relating to revenue of the company, has been extracted from the
books and records for the tax period. All amounts are inclusive of VAT where relevant.
$
1. This represents the sale of toys to a retail chain in Botswana. Kiddies contracted with a
local transport company to transport the toys to the retail chain. The invoice from the
transport company for the transport costs for the period under review amounted to $3
750.
2. The sale of the motor vehicle was to an employee of Kiddies at 20% below market value.
The vehicle was a Toyota Corolla which had been used as a general pool car.
4. Kiddies had acquired the computer on 1 November 2012 for $1 100 (including VAT) and
used it both in the toy business and rental activities. Kiddies sold the computer to a
computer shop, another registered operator, for $600 on 1 October 2014 in an arms-
length transaction. The open market value of the computer was $760.
5. The company is aware that it may not claim input tax deductions in respect of
expenditure which relates to the making of non-taxable supplies. In this respect an
apportionment on the turnover method reflects a ratio of taxable supplies to total
supplies of 85%. The following is a list of the other expenditure incurred in the two
month period. Kiddies is in possession of the relevant tax invoices where appropriate.
VAT is included where appropriate. $
Water and electricity (piped water $300 and electricity $620) 920
Telephone 990
REQUIRED
1. Calculate the output tax for the VAT period ended 31 October 2014. Give reasons for
your determinations. (9 marks)
2. Calculate the input tax for the VAT period ended 31 October 2014 based on the available
information. (11 marks
Marks
Part 1
Output tax
The fringe benefit that arises as the sale of the motor vehicle is made at lower than market
value is taxable in the hands on the employee in terms of section 8(1)(f) of the Income Tax
Act. The vehicle was not used by the purchaser for private purposes prior to the sale hence
no motoring benefit arises in the hands of the employee who purchased it. Therefore no
deemed output tax as there was no motoring benefit.
1
Sale of computer - would have claimed partial input tax, however output tax must be
accounted for in full.
20 222.61 9
Input tax
Consideration.
Based on lesser of adjusted cost ($1 100) or open market value ($760)
14 579.16 11
Note 1: The delivery vehicle was used solely for delivering is produce whilst the Toyota Yaris
was used by the sales manager as his company vehicle.
Note 3: The company was of the opinion that 25% of the debtors amount will not be
recoverable and consequently wrote it off on 25 January 2014. The company did not charge
any interest on outstanding accounts.
REQUIRED:
Advise the company of the VAT implications of the cessation of trade. Calculate VAT
payable, if any and state the time of supply of the transaction. (10 marks)
Marks
Input Tax
Question 4.3
Agricultural Equipment (Pvt) Ltd a company incorporated in Zimbabwe selling a wide range
of agricultural equipment in Zimbabwe.
It also exports some equipment to Namibia and Botswana. The company is a registered VAT
operator and has a two month tax period. It only makes taxable supplies.
An inexperienced bookkeeper is currently completing the companys VAT return for the tax
period ended 30 September 2014 and seeks your assistance in respect of the following
transactions which may be relevant to the tax period.
The company acquired a brand new Mazda B1800 single cab, with an engine capacity of
1800cc, on 1 August 2014 for use by one of the salespersons, Tendai Makoma. Tendai
uses the vehicle for private and business purposes. The vehicle was acquired from Dulys
Zimbabwe a registered operator for a cash consideration of $18 400. The corporation
incurred the following expenses in respect of the vehicle in the tax period.
$
Insurance 1 140
Fuel 875
Repairs 1 425
3 440
On 31 August 2014 a Toyota Camry with an engine capacity of 2000cc which had a
market value of $14 000 was sold to the sales manager on his retirement at 60 years for
$10 000. This vehicle had been previously used by the sales manager as his company
car. It initially had cost $20 000 (including VAT) on 1 September 2009 and the free use
thereof was granted from that date onwards to him. From 1 August to 31 August the
only expenses incurred by the corporation on this motor car was fuel amounting to
$750.
On 15 August 2014 equipment with a selling price of $200 000 (excluding VAT) was sold
to a customer in Namibia. The equipment was consigned and delivered by the company
to the customers factory in Windhoek.
On 1 January 2014 equipment with a selling price of $120 000 (excluding VAT) had been
sold to a customer in Botswana. The equipment had been damaged while being
delivered to the customer and after a protracted dispute the company decided to write
off 50% of the cost as a bad debt in the current tax period. The customer settled the
other 50% in this tax period.
During the tax period, the following entertainment, subsistence and related expenses
were incurred (amounts include VAT where relevant).
$
An advance payment of $22 800 was received on 28 September 2014 from a customer in
respect of a tax invoice which was only issued on 5 October 2014 (the date the goods
were delivered to the customer.)
During a heavy storm on 24 August 2014 certain of the equipment for resale (trading
stock) was damaged. In terms of the companys insurance policy an indemnity payment
of $45 600 was received on 28 September 2014 from the insurer in respect of the
insurance claim.
An analysis of the bank statements for the months of August and September reflect the
following:
$
Goods purchased from a creditor amounting to $3 762 on 1 July 2013 remain unpaid.
The bookkeeper had also transferred this amount to sundry income.
REQUIRED:
Advise the bookkeeper how each of the above transactions must be treated in the VAT
return (if at all) for the tax period ended 30 September 2014. Support your advice with the
necessary calculations. All amounts include VAT where appropriate and the relevant tax
invoices have been obtained.
Marks
The single cab is not a passenger motor vehicle as defined and therefore 1
input tax is claimable.
$
Toyota Camry
However the free use of the motor vehicle for the month of
August 2014 results in the following deemed output tax
Export to Namibia
Thus an input tax deduction will be denied on the staff teas and - 1
coffee
The club subscriptions are specifically not allowed as an input
tax deduction (see section 16(2)(b))
- 1
Advance payment
The time of supply is the earlier of any consideration received
for the supply and the date the invoice is issued. 1
Thus, in this case, the receipt of $22 800 results in output tax of
$2973.91 (15 x 115 x $22 800) being accounted for in this tax
period 1
Indemnity payment
In terms of section 7(7) output tax must be accounted for on
receipt of the indemnity payment. (Please note, insurance is
exempt from VAT. In view of the fact that this provision was
not repealed, ZIMRA may apply it hence this claim but in
theory the transaction may not be subject to VAT as it is a
financial service as defined and hence exempt)
Debtor receipts
Receipts from debtors in respect of invoices relating to prior tax
period has no VAT implications as the VAT would have been
accounted for in a previous tax period - 1
Invoices issued during the tax period would have resulted in output
tax of 15/115 x $126 000
16 434.78 1
Overpayment
A deemed supply arises as a result of this overpayment which has
not been refunded.
1
As the creditor has not been settled within a twelve month period
deemed output tax arises (see section 22(4))
490.70 1
35
Required
To advise Joseph whether he should accept the offer of employment from Newdawn (Pvt)
Limited. Base your answer on the following assumptions:
his choice will be influenced only by his after-tax income;
he will take up employment on 1 January 2014;
the full $6 000 travel allowance will be utilized for business purposes;
he joins both the medical aid and RAF as described above
assume LIBOR rate of 1%
Mark
$ $ s
After tax income for package from Musasa Limited:
Salary 54 000
Bonus 4 500
Less Exempt portion (1 000) 3 500 1
Allowable deductions
Pension contributions (own) $5 850 limited to lower of: 1
Amount paid and $5 400 (5 400) 1
Tax thereon
Tax on the first $24 000 4 800
Tax on ($55 700- $24 001) * 30% 9 510 14 310
ADD 3% Aids Levy ($14 310*0.03) 429
Normal tax liability 14 739
After tax income for package from New Dawn (Pvt) Limited:
Cash salary (5 200 x 12) 62 400
Employer contribution to RAF [ 300 x 12] 600 1
Add travel allowance ($500 x 12) 6 000 1
Less cost of business travel given) (6 000) - 1
Fringe benefit (Interest free loan) (25 000* 6%) 1 500 1
$ $ Marks
67 500
Allowable deductions
Contributions to RAF ($300 * 12) (3 600) 1
63 900
Tax thereon
Tax on first $60 000 15 600
Tax on ($63 900- $60 001) * 35% 1 365 16 905
Less Credits
Contributions to medical aid ($5 040 * 50%) (2 520)
14 445
Add 3% Aids Levy 433
Normal tax liability 14 878
The cash offer from New Dawn (Pvt) Limited, the after tax
income is favourable at $6 971($44 882 $37 911) less than his
present situation. 1
Mugoni Mukuru is divorced and is 60 years old. Mugoni had been employed by Vavaki (Pvt)
Ltd for the past 30 years and had been responsible for the development of software suitable
for the building industry. Mugoni was retrenched on 31 December 2014. The companys
Scheme of retrenchment was approved by the relevant Minister.
The following information relates to his year of assessment ended 31 December 2014:
Salary 36 000
Incentive bonus paid December 2014 3 000
Free use of motor vehicle 1 ?
Reimbursive travel allowance 2 1 500
Medical aid fund contributions paid by the company on 3 2 160
behalf of Mugoni
Contributions to a pension fund paid by the company on 2 700
behalf of Mugoni
Lump sums 4 34 500
Expenses
Own contributions to medical aid fund and extra medical 3 3 660
costs incurred (2 160 + 1 500)
Contributions to pension fund 8 200
1. Mugoni had the exclusive use of a company-provided 4 x 4 double cab Ford Ranger
as from 1 April 2014. Vavaki (Pvt) Ltd outsources the services of Mugoni to various
clients. There is a qualifying maintenance plan in respect of the Ford Ranger. The
company paid all expenses in respect of the vehicle. Mugoni kept accurate records
of all his travelling.
Further details are as follows:
Kilometres travelled for business purposes during the year 36 000 km
Kilometres travelled for private use 7 560 km
43560 km
The engine capacity of the Ford Ranger is 3000cc
2. During June 2014, Mugoni was involved in an accident with the Ford Ranger. The
vehicle was at the panel beaters from 15 June 2014 to 30 June 2014. During that
period Mugoni used his neighbours Ranger and Vavaki (Pvt) Ltd paid him $1 per
kilometre travelled for business (he travelled 1 500 kilometres for business
purposes).
3. Mugoni is the member of the medical aid fund with no dependants. In terms of the
rules of the fund, Mugoni and the company contributed equal amounts to the
medical aid fund. Other qualifying medical expenses paid by Mugoni amounted to $1
500, none of which were refunded by the medical aid fund.
4. Upon retirement, the following lump sums accrued to Mugoni from Vavaki (Pvt)
Ltd:
$
Accumulated leave 5 000
Gratuity 12 500
Severance Pay 5 000
Restraint of trade payment 12 000
34 500
6. With the permission of Vavaki (Pvt) Ltd, Mugoni conducted his own two businesses
after hours and during weekends. His businesses entailed the development of
specialised software for companies in Australia and software support services in
Zimbabwe. He operated these two businesses as two independent trades as a sole
proprietor. His net taxable income of $30 000 for the 2014 year of assessment was
correctly calculated as follows:
$
Taxable income from Zimbabwe 50 000
Taxable loss from South Africa (20 000)
Net taxable income 30 000
Question 2 continued
7. Mugoni earned the following other income during the 2014 assessment year.
$
Gross dividends from a Zambian company 8 000
(Zambian tax deducted at source $800)
Gross royalties from USA for a book he co-authored* 11 000
(USA tax deducted at source $1 000)
Rental from a house in Gweru 7 500
Total other income 26 500
*Mugoni co-authored the book whilst he was in Zimbabwe.
Required
Calculate the normal tax payable by Mugoni Mukuru for his 2014 year of assessment.
Where any income or deductions are not taken into account in calculating the taxable
income, provide reasons. Round off all amounts to the nearest $1.
Amounts Marks
$
Salary 36 000 (1)
Incentive bonus (3000 1000) (see tax tables for tax free bonus) 2 000 (1)
Free use of company vehicles ( 600 X 8.5) N1 5 100 (2)
Reimburse travel allowance - Par 15, 3rd Schedule exempts the portion - (1)
of allowances expended on the employers business.
Medical aid contributions paid by company (3rd Schedule Para 8e - (1)
exempts medical contributions paid by the employer on behalf of the
employee)
Contribution to pension fund by employer - (no fringe benefit as is - (1)
below the allowed maximum contribution by employer of $3 600
Section 15, 2h,i)
Accumulated leave - (regarded as salary, only taxed when paid) 5 000 (1)
Gratuity 12 500 (3)
Severance Pay 5 000
7 500
1/3 X 17500 = 5 833 (Greater of 10 000 or 1/3 of up to $60 000) 3rd Sch
pa 4 (p)
Restraint of trade ( Capital nature ) - (2)
Lump sum from 80 000 (1)
pension fund
Less: 1/3 x 180 000 (60 000) 20 000 (1)
Section 8 (1) n 1/3 is
of a capital nature
Pension Received (600 X 8) - Exempt over 55years - (1)
Contribution to pension fund (Section 15, (2) h, i (2 700) (1)
Taxable Income 72 900
Credits
50 % Medical Aid Contributions (2 160 x 50%) (1 080) (1)
Other Medical Expenses (1 500 x 50%) (750) (1)
Elderly credits (900) (1)
17 385
Aids Levy (3% x 17 385) refer to tax tables 522 (1)
Total Tax Payable 17 907
Notes:
The motor vehicle is used for both business and private and all expenses are paid by the
company, the employee is getting the fringe benefit on the private use of the motor vehicle
paid by the company. The benefit per month is given on the tax table (3000cc - $600 per
month), multiplied by the number of months of use, 8 months (exclude the time the car
was in service) allocated between private and business based on the kilometres.
N2: The loss is not deductible from income other than from operations in South Africa (1)
You are a Zimbabwean tax practitioner registered with both the Institute of Chartered Accountants
of Zimbabwe (ICAZ) and the Institute of Certified Tax Accountants. You are a VAT registered operator
and your charge-out rate for services rendered is $130 per hour or part of an hour (inclusive of VAT).
You have received the following unrelated enquiries.
Enquiry 1:
Murray Lippy Estate (Pvt) Ltd, a Zimbabwean estate agent and a registered operator wants to
motivate its estate agents, both employees and independent agents, to work harder to find more
properties to sell in order to increase its profits. Murray Lippy Estate is considering offering the
person that brings in the highest amount of commission an overseas holiday.
The owner of Murray Lippy Estate, Murray Lippy, owns a house on the Spanish island of Majorca, in
Europe, and is prepared to allow the winner to stay in the house for two weeks and for Murray Lippy
Estate to pay for the winners air flight ticket. The winner will not be able to sell or exchange the
prize and if the winner cannot go within a period of twelve months, the winner will forfeit the prize.
The last condition relating to the prize will require the winner to give Murray Lippy Estate three
months notice to book and finalise the trip.
Murray Lippy wanted nothing in exchange from Murray Lippy Estate for the use of the house
because he is the main member of the company and only rents out the house during the holiday
seasons that he and his family are unable to use it.
Enquiry 2:
St Joseph Hotel (Pvt) Limited trades as the Lilly Hotel in Kwekwe in the midlands province and is a
VAT registered operator. Potential guests of the Lilly Hotel are required to pay a deposit with the
Lilly Hotel when they make a reservation to stay at the hotel. The accountant of the Lilly Hotel has
opened a special bank account for possible refund/deposit claims and always maintains a minimum
balance in the account of at least $10 000, deposits received are not paid directly into this account.
At the moment all deposits are forfeited should guests be unable to take up their holiday and stay at
the hotel. During the last two years the Lilly Hotels reservations outside of peak holiday seasons
during the year have declined and the accountant is convinced it is as a result of the fact that the
Lilly Hotel does not refund any deposits for cancelled reservations unless extraordinary events occur
for example in the case of death.
The accountant proposed a dual system of dealing with deposits that will work as follows:
During peak holiday seasons: Deposits paid will be forfeited in case of cancellation.
Outside of peak holiday seasons: Deposits will be refundable in case of cancellations made more
than 24 hours before the reserved date.
Lilly Hotel currently, during the 2014 year of assessment, received $114 000 in deposits.
The amount was calculated from the actual invoice totals and not the accounting records.
All answers should make reference to appropriate provisions of legislation and appropriate case law
where applicable.
Enquiry 1:
Advise Murray Lippy Estate on all possible tax implications for both Murray Lippy Estate and the
potential winner of the prize.
In answering this enquiry you may assume that neither the employees nor the independent agents
that could be potential winners are registered operators.
Enquiry 2
Advise the accountant of VAT implications relating to the deposits in the 2014 year of assessment.
Enquiry 1
No Vat consequences arise in the hands of the winner and the company as this constitute
entertainment.
Enquiry 2
The 2014 Deposits constitutes a taxable supply and therefore output tax should be
accounted for by applying the tax fraction to the invoice value
Time of supply is the earlier of receipt or invoice so Output tax should be calculated
for all the amounts received in relation to the deposits in 2014. Output tax should be
accounted for as follows: 15/115 *114000 = $14 870
Output tax should be accounted for on all deposits as they are received by Joseph
Hotel despite whether they are refundable or not.
However input tax will be claimed on the amount refundable to clients.
All references are to the Income Tax Act, unless stated otherwise.
Emerald Properties Ltd ('Emerald') is a listed property company. It has one million equity
shares in issue which are widely held. Emerald is a resident as defined and does not form
part of a group of companies as defined.
Emerald is a VAT registered operator and its financial year and tax year of assessment end
on the last day of December. Emerald obtained a ruling to determine input tax in
accordance with the turnover method where the ratio of taxable supplies to total supplies is
90: 100.
Debit adjustments
Credit adjustment
Other 2500
Recoupment of allowances previously granted 1200
Taxable income 1 367 610
Notes
ZIMRA query
After submitting its tax returns for the year, Emerald received a request for further
information from ZIMRA. ZIMRA wants the company to pay VAT of $560 000, based on total
rental income of $4 million.
Required
Discuss, with reasons, the correctness of the output VAT amount of $560 000 in terms of the
ZIMRA query with reference to the actual amount of output VAT payable. Include the effect
of all supplies in terms of the VAT Act. (10 marks)
Mr. Murphys remuneration for the period January 2014 to 30 April 2014 was as follows:
Salary 4 500
Bonus paid in March 2014 1 500
Medical aid [ 50 % paid by employer] 160
Total 6 160
Mr. Murphy had the use of a vehicle with an engine capacity of 1 500cc for the period
January to April 2014. On the termination of his services he was allowed to purchase this
vehicle for $900. The market value of the vehicle was $3 750 and the original cost to his
employer was equivalent of $2 700.
Mr. Murphy used this vehicle for business, and it was agreed with ZIMRA that 30% was for
business purposes and 70% was for private use.
He received a Zimbabwe pension which amounted to $12 250 for the 2014 tax year.
Required
Calculate Mr. Murphys taxable employment income (not his tax liability) for the tax year
ended 31 December 2014. In your solution you should provide brief reasons for the
inclusion/exclusion of accruals and/or expenses for the calculation of taxable income, even
in instances where in your own opinion there is no tax effect.
Mr. Murphy
Taxable Employment income $ $ $ MARKS
Salary 4,500 1
500 0.5
In December 2014, tax auditors from Zimbabwe Revenue Authority (ZIMRA), visited ABC
(Pvt) Limited, a food manufacturing company in Harare and carried out a tax audit in respect
of the year ended 31st December 2014.
In January 2015, the ZIMRA officials presented the following findings to the company:
1. The company advanced a loan of $10,000 to the accountant for him to seek medical
treatment for his father in South Africa. In addition to the loan of $10,000, the
company gave the accountant an additional $2,000 to cover travelling expenses
which would be incurred by the father while seeking medical treatment in South
Africa. The company has not made any tax adjustments in respect of this
transaction.
4 MARKS
2. The companys selling price is arrive at by adding a mark up of 20% to the cost of
production. The companys employees are offered a 15% discount on all purchases
of the firms products. It has been established that goods which cost the company
$5,000 were sold to employees for $5,100 instead of the normal retail price of
$6,000. ZIMRA officials contend that the discount of $900 should be treated as a
taxable benefit liable to employees tax (PAYE).
4 MARKS
3. On 29 December 2014, the company paid an amount of $12,000 being insurance
premiums for motor vehicles in respect of the period 1 January 2015 to 31
December 2015. The amount has not been debited to the income statement but is
shown in the balance sheet as a prepayment. The companys directors are not sure
on how to treat this amount for tax purposes.
3 MARKS
4. On 23 December 2014, the company received $20,000 from a customer whose
goods were only delivered after the annual shutdown in January 2015. The amount
has not been treated as a sale in the year ended 31 December 2014 but as a
prepayment. ZIMRA officials contend that the amount of $20,000 should be taxed
in the year ended 31 December 2014.
3 MARKS
Write a report to the directors of ABC (Pvt) Limited on the tax implications of the
ZIMRA findings
1. In terms of section 8(1)(f) of the Income Tax Act (Chapter 23 :06), a loan benefit
calculated at a rate of 5% plus LIBOR rate accrues on a loan granted directly or
indirectly to an employee, his spouse or child.
1 MARK
The loan benefit does however not extend to a loan granted for the purpose of
the education, technical training or medical treatment of such employee, spouse
or child. Since the loan is for the medical treatment of the father, a loan benefit
of 5% plus LIBOR accrues on the loan amount of $10,000.
1 MARK
Paragraph 8(1) of the 3rd Schedule to the Income Tax Act provides for an
exemption on the value of travelling to obtain medical treatment provided by an
employer for an employee or the dependent of such employee. Since the father
can be reasonably assumed to be a dependent of the employee, the $2,000 is
exempt from tax.
2 MARKS
2. Section 8(1)(b) of the Act brings into tax any amount so received or accrued in
respect of services rendered under a contract of employment. The discount can
be viewed as an amount accruing under this section and therefore be liable to
tax. 1 MARK
SECTION 8(i)(f) of the Income Tax Act brings into tax an advantage or benefit
accruing from the use or enjoyment of any property whatsoever
1 MARK
The word incurred does not mean paid ; if legal liability has risen such
expenditure is deductible even though payment occurs at some time later. The
insurance premium of $12 000 are therefore allowable.
2 MARKS
4. Section 8(1) of the Act brings into tax any amount so received by or accrued to or
in favour of a person or deemed to have been received by or accrued to or in
favour of a person in any year of assessment.
1 MARK
The income received in the year ended 31 December 2014 therefore constitute
gross income in that year and is therefore liable to tax in that year.
2 MARKS
THE END