Answers

Fundamentals Level – Skills Module, Paper F6 (BWA) December 2010 AnswersTaxation (Botswana) and Marking Scheme

Marks1 Jerome Pascal

(a) Calculation of taxable income

Working 1 – Rent from Plot 27639 Gaborone

P PGross rents received 56,000 Less: repairs 18,927 0·5Less: mortgage interest 29,601 0·5Less: insurance 3,729 0·5Less: council rates 1,993 (54,250) 0·5

––––––– –––––––Net rents 1,750

–––––––

Working 2 – Capital gain on sale of shares in Darinton

Total proceeds 2,500,000 0·5Less: cost of shares (85,000) 0·5Less: loan account (560,000) 1

––––––––––Gross disposal gain 1,855,000 Moveable property allowance at 25% (463,750) 1·5

––––––––––Net disposal gain 1,391,250

––––––––––

Working 3 – Capital gain on sale of Plot 27639 Gaborone

Original cost 220,000 0·5Indexation (1242·3 – 439·7)/439·7 x 220,000) 401,574 1·5

––––––––621,574

Sale price 610,000 0·5––––––––(11,574)

Sales commission (45,750) 1––––––––

Net disposal loss (57,324)––––––––

Taxable income

PEmployment incomeSalary from Darinton Industries for ten months 375,000 0·5Balance of leave pay due 42,500 0·5Ex gratia bonus 100,000 1Motor vehicle benefit for ten months (10,000 + 15% x 30,000) x 10/12 12,083 1·5Interest incomeInterest received from Barclays Bank (22,840 – 6,000) (Note 1) 16,840 1Darinton Industries 47,850 0·5Occupational interest from purchaser of Plot 27639 Gaborone 15,250 1Dividend incomeDividends from Sefalana Holdings Ltd (Note 2) 0 0·5Dividends from Darinton Industries (Note 2) 0 0·5Rental incomeRent received from Plot 27639 Gaborone – see working 1 1,750 Capital gainsSale of shares in Darinton – see working 2 1,391,250Sale of shares in Sefalana (Note 3) 0 1Sale of Plot 27639 Gaborone – see working 3 (57,324)Sale of own residence (Note 4) 0 1Sale of own furniture (Note 5) 0 1

––––––––––1,333,926–––––––––– –––

Taxable income 1,945,199 19–––––––––– –––

Notes1. There is a P6,000 exemption only in respect of interest received from a bank.

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Marks2. Dividends received are not included in gross income.3. Shares listed on the BSE are exempt from capital gains tax.4. Gains arising on the sale of a principal private residence are exempt.5. The sale of private assets is not liable to tax.

(b) Calculation of tax payable

P PTaxable income above 1,945,199 Less: capital gains (1,333,926)

––––––––––611,273

––––––––––Tax on above 10,875 + (25% x [611,273 – 120,000]) 133,693 1 Capital gains tax on P1,333,926 318,481 1·5

––––––––––Total tax payable 452,174 Less: PAYE deducted 112,600 0·5Less: withholding tax on interest 6,069 1Less: withholding tax on dividends 0 (118,669) 1

––––––– –––––––––– –––Net tax payable 333,505 5

–––––––––– –––

(c) Date of filing tax return

The tax returns of individuals should be filed no later than 30 September 2010. 1–––25–––

2 (a) Calculation of taxable income

(i) calculation of balancing charge

PCost 198,500 Capital allowances (85,240)

––––––––113,260

Proceeds 220,000 ––––––––

Balancing charge 106,740 2––––––––

(ii) tax computation

PNet profit per accounts 6,495,424 Add: depreciation 763,764 0·5

amortisation 320,000 1bad debt (237,813 – 67,813) 170,000 2 balancing charge 106,740 0·5provision for loss on contract 2010 250,000 1,610,504 1

––––––––––Less: capital allowances 923,906 0·5

dividends received 282,679 1fair value adjustment 2,000,000 1·5profit on disposal of assets 111,293 1provision for loss on contract 2009 400,000 (3,717,878) 1

–––––––––– –––––––––– –––Taxable income 4,388,050 12

–––––––––– –––

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Marks(b) Calculation of withholding tax payable

PFinal dividend 2009 4,000,000 0·5

––––––––––15% withholding tax thereon 600,000 1Less: ACT brought forward (637,826) 1

––––––––––ACT carried forward (37,826)

––––––––––

Interim dividend 2010 800,000 0·5––––––––––

15% withholding tax thereon 120,000 1Less: ACT brought forward (37,826) 1

–––––––––– –––Withholding tax payable 82,174 5

–––––––––– –––

(c) Income tax refundable

PTaxable income as above 4,388,050 0·5

––––––––––Ordinary tax at 15% 658,208 0·5Additional company tax at 10% 438,805 0·5Less: withholding tax paid (82,174) 356,631 1·5

–––––––––– ––––––––––1,014,839

Less: SAT paid 1,500,000 0·5withholding tax on interest 35,236 0·5withholding tax on dividends 0 (1,535,236) 1

–––––––––– –––––––––– –––Tax refundable (520,397) 5

–––––––––– –––

(d) Withholding taxes

(i) There are no withholding taxes on the importation of goods. 1

(ii) Rental of equipment falls within the definition of a commercial royalty in that it gives the lessee the ‘right to use’ the equipment. Commercial royalties are liable to withholding tax at the rate of 15%. 1·5

(iii) A payment for marketing services is considered to be a payment of a managerial, administrative or technical nature and therefore liable to withholding tax of 15%. 1

(iv) Management fees is a payment of a managerial nature and is liable to withholding tax at the rate of 15%. 1

(v) Royalties are liable to 15% withholding tax. 1

(vi) Transport charges do not constitute a payment for managerial, administrative or technical services and so are not liable to withholding tax. 1

(vii) Spare parts are goods and are not liable to withholding tax. 1

(viii) Interest paid to a non-resident is liable to withholding tax at the rate of 15%. 0·5–––

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Marks3 Morgan Ramalepa

(a) Tax calculation

NgwatoSouthern Diamond

Bank IndustriesP P

Salary 500,000 400,000Bonus 0 50,000 0·5Company car (10,000 + 15% x 20,000) 13,000 0 0·5Housing benefit (435 x 250 x 8%) 0 8,700 1Utilities 0 15,000 0·5Medical aid – company contribution 0 0 0·5Pension – company contribution 0 0 0·5Loan benefit (12% – 5% x 350,000) 24,500 0 1School fees 0 80,000 0·5

–––––––– ––––––––Chargeable income 537,500 553,700Less: pension – personal contribution (20,000) (10,000) 0·5

Medical aid – personal contribution 0 0 0·5–––––––– ––––––––

Taxable income 517,500 543,700–––––––– ––––––––

Tax thereon:First P120,000 10,875 10,875Remainder at 25% 99,375 105,925

–––––––– ––––––––110,250 116,800 1–––––––– –––––––– –––

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(b) Calculation of take-home remuneration

NgwatoSouthern Diamond

Cashflow Bank IndustriesP P

Salary 500,000 400,000Bonus 0 50,000 0·5Own car 0 (40,000) 1House rent (45,000) 0 0·5House utilities (15,000) 0 0·5School fees (80,000) 0 0·5Medical aid (6,000) 0 0·5Pension contribution (20,000) (10,000) 1Additional interest on loan (12% – 5% x 350,000) 0 (24,500)Income tax (110,250) (116,800) 1

–––––––– ––––––––Take-home remuneration 223,750 258,700

–––––––– ––––––––

Morgan would receive a P34,950 better take-home remuneration from Ngwato Diamond Industries. 0·5–––

6–––

(c) Medical aid

A medical aid contribution paid by an employer is specifically excluded as an employment benefit – s.32(2)(a). However, there is no relief for the contribution paid by the employee. 2

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Marks4 Kopong Engineering

(a) Explanations of value added tax (VAT) treatment of transactions

1. Sales made in Botswana are standard rated, but sales that are exported are zero-rated. 1

2. A deposit that is made in respect of future sales is liable to VAT only at the time that the actual sale ismade. The time of supply for the forfeit of a deposit is when the deposit is forfeited (Note 1). As the deposit has not yet been forfeited there is no supply in this VAT period. 1·5

3. The sale of the truck is liable to VAT because the input had been allowed in a previous period. 0·5

However, the sale of the saloon car is not liable to VAT because the original input had been denied. 0·5

4. The VAT on purchases, including the VAT on the trucks, are allowable inputs. 0·5

5. Salaries and wages, including pension and medical aid payments do not fall within the VAT Act. 0·5

However, the VAT on workshop overalls is an allowable input. 0·5

6. The property is to be used in the furtherance of making taxable supplies and accordingly the VAT is an allowable input. 1

7. Hotel costs, even if incurred for business purposes, fall within the definition of ‘entertainment’ and are a prohibited input. 1

8. A credit note issued in respect of goods returned is a post-sale adjustment and is an allowable input. 1–––

8–––

Note 1: Section 8(16).Note 2: Section 21(1).

(b) VAT return

POutputs:Local sales (3,682,972 – 691,624) 2,991,348 0·5Export sales 0 0·5Sale of truck 75,000 0·5Sale of saloon car 0 0·5

––––––––––3,066,348––––––––––

Inputs:Purchases (2,872,659 – 220,500) 2,652,159 0·5Purchase of trucks 220,500 0·5Salaries and wages 0 0·5Pension contribution 0 0·5Medical aid contribution 0 0·5Workshop overalls 17,938 0·5Purchase of land 280,000 0·5Hotel bills 0 0·5Credit notes goods returned 29,715 0·5

––––––––––3,200,312––––––––––

Net inputs (133,964)––––––––––

Refund at 10% (13,396) 0·5–––––––––– –––

7–––15–––

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Marks5 Mobedi Resources (Pty) Ltd

(a) Capital gains

P POriginal cost August 2001 382,000Indexation to November 2009 (382,000 x (1,239·5 – 603·0)/603·0) 403,222 785,222 1·5

––––––––Additions June 2003 483,900Indexation to November 2009 (483,900 x (1,239·5 – 715·0)/715·0) 354,973 838,873 1·5

–––––––– ––––––––––Tax Cost 1,624,095Sales proceeds November 2009 2,700,000

––––––––––Disposal gain 1,075,905Less: rollover relief (550,000 + 300,000) (850,000) 2

––––––––––Net disposal gain 225,905

–––––––––– –––5

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NoteFor capital gains purposes the land and building are both taken into account.

(b) Balancing charge or allowance

P(i) Building

Cost of new building 550,000 0·5Balancing charge limited to allowances granted – rollover relief (86,238) 1·5

––––––––Tax cost of building 463,762

––––––––

Note1. For capital allowance purposes only the building is taken into account. There are no capital

allowances on the cost of land.2. When immoveable property is disposed of the balancing charge is limited to the allowances

actually granted – Third Schedule Part IV paragraph 3.

P(ii) Machine

Cost of new machine 600,000 0·5Less: balancing charge – rollover relief (33,450) 1·5

–––––––– –––Tax cost of machine 566,550 4

–––––––– –––

In both cases there is a balancing charge, but these have been applied to reduce the cost of the new asset.Accordingly, there is no balancing charge or allowance.

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Marks(c) Taxable income

PWorkings capital allowances:Capital allowances as given 197,472Add: on commercial building (2·5% x 463,762) 11,594 1Add: on machine (15% x 566,550) 84,983 1

––––––––Total capital allowances 294,049

––––––––

P PNet profit per accounts 3,232,539Add: depreciation 387,204 0·5Add: balancing charge (Note) 0 1Add: loss on disposal of machine 58,921 446,125 0·5

––––––––––Less: capital allowances (294,049) 0·5Less: profit on sale of immoveable property (1,937,906) (2,231,955) 0·5

–––––––––– ––––––––––Chargeable income from business 1,446,709Disposal gain 225,905 1

–––––––––– –––Taxable income 1,672,614 6

–––––––––– –––

Note Rollover relief has been claimed and the balancing charges applied to reduce the tax cost of the assets.

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