Taxation (Lesotho) Thursday 8 June 2017
Time allowed: 3 hours 15 minutes This question paper is divided into two sections: Section A – ALL 15 questions are compulsory and MUST be attempted Section B – ALL SIX questions are compulsory and MUST be attempted Tax rates and allowances are on pages 2–3. Do NOT open this question paper until instructed by the supervisor. Do NOT record any of your answers on the question paper. This question paper must not be removed from the examination hall.
Paper F6 (LSO)
Fundamentals Level – Skills Module
The Association of Chartered Certified Accountants The Lesotho Institute of Accountants
SUPPLEMENTARY INSTRUCTIONS 1 2 3
Calculations and workings need only be made to the nearest M. All apportionments should be made to the nearest month. All workings should be shown in Section B.
TAX RATES AND ALLOWANCES The following tax rates and tax allowances are to be used in answering the questions: Second Schedule (Section 9(1)) Resident individual income tax rates Chargeable income First M56,964 Over M56,964
Rate of tax 20% 30%
Personal tax credit
M6,466
Withholding tax rates Payments to resident contractors Payments of interest by a resident to a resident Payments of Lesotho services contract to a non-resident Payments of international transactions (A lower withholding tax rate may apply under a double tax treaty entered into by the government of Lesotho)
Rate of tax 5% 10% 10% 25%
Third Schedule (Section 10) Resident company income tax rates Nature of income 1. Manufacturing income derived from a manufacturing activity of an industrial, scientific or educational nature which promotes industrial, scientific, educational or other development within Lesotho. 2. Other manufacturing income 3. Other income
1. 2.
Fourth Schedule (Sections 109 and 116) Tax rate for trustees, fringe benefits and electing non-residents The applicable rate is 30% Tax rate on persons undertaking commercial farming is 10%
2
Rate of tax
10% 10% 25%
Fifth Schedule (Section 16(2)) Minimum chargeable income The multiplication factors are: Air travel amount Electricity amount Principal residence amount Schooling amount Secondary home amount Vehicle amount
100% 100% 5% 100% 5% 25%
The amounts specified are: Air travel amount Electricity amount Principal residence amount Schooling amount per child Secondary home amount Vehicle amount
M2,500 M3,000 M150,000 M1,000 M20,000 M20,000
Sixth Schedule (Section 41) Declining balance depreciation rates: Group 1
Depreciation rate 25%
2
20%
3
10%
4
5%
5
100%
Assets included Automobiles, taxis, light general purpose trucks, tractors for use over-the-road, special tools and devices. Office furniture, fixtures and equipment, computers and peripheral equipment and handling equipment, buses, heavy general purpose trucks, trailers and trailer mounted containers, construction equipment. Any depreciable asset not included in another group. Railroad cars and locomotives and railroad equipment, vessels, barges, tugs, and similar water transportation equipment, industrial buildings, engines and turbines, public utility plant. Mining
Value added tax (VAT) Standard rate Supplies of electricity and telephone calls Basic foods and agricultural inputs Exports
14% 5% 0% 0%
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Section B – ALL SIX questions are compulsory and MUST be attempted Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet. 1
Ukefu, a pharmacist, is a Nigerian national who is married to a citizen of Lesotho. The couple resides in Maseru and has two children aged 22 and 12 years. Ukefu operates a chain of pharmacy outlets across Lesotho. For the past four years Ukefu has been declaring recurring losses from his businesses. The tax return for the year ended 31 March 2017 shows a loss of M22,700. Given the luxurious life style of Ukefu and his family, the Lesotho Revenue Authority (LRA) conducted an intensive investigation into his private life in May 2017. The following information was revealed: (1) Ukefu owns an upmarket house where he spends most of the time with his family. The house was professionally valued at M2,100,000. The adjusted cost base (ACB) of the house amounted to M1,800,000. (2) Ukefu’s children attend most prestigious schools in Cape Town, South Africa. For the year ended 31 March 2017, Ukefu spent a total of M250,000 in relation to the tuition fees. M140,000 was for the first born, and M110,000 for the last born. The children stay together in a four-roomed house which is fully furnished. Ukefu pays a discounted annual lease rental of M145,000. The fair market value of the house amounted to M150,000 per annum. The rented house is also available for use by Ukefu and his spouse every time they visit Cape Town. (3) Ukefu owns two brand new private motor vehicles. The first vehicle is valued at M850,000 and the second one at M610,000. The two vehicles are available for use by Ukefu and his spouse. There is also a motor car valued at M140,000, which is used by the elder child during school holidays. (4) In June 2015, Ukefu, went for a holiday in France with his entire family. The total amount spent for air tickets was M240,000. Required: (a) Calculate the minimum chargeable income of Ukefu for the year ended 31 March 2017.
(7 marks)
(b) State, giving a reason, the chargeable income (if any) of Ukefu for the year ended 31 March 2017. (1 mark) (c) Explain the circumstances in which the provisions for minimum chargeable income are not applicable. (2 marks) (10 marks)
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2
Mosa has been working as a finance director of Bolima Diamonds Ltd for the last five years. In addition to an annual salary of M780,000, Mosa is entitled to the following benefits: (1) A semi-furnished accommodation provided by her employer free of charge. The fair market rental of similar houses is M9,800 per month. Mosa pays M500 per month for use of the house. (2) Use of a company car for both business and private purposes. The car was availed to Mosa in April 2013 when its market value amounted to M420,000. The current market value of the car amounts to M240,000. Her employer pays for the service and running costs of the car. (3) Reimbursements of water and electricity utility payments which are substantiated by supporting documents to the maximum of M12,000 in total per annum. Mosa submitted documents to the value of M15,300. (4) A medical aid scheme into which her employer contributes M2,500 per month on her behalf. This benefit is available to every employee on equal terms. (5) On 1 April 2016, Mosa obtained a loan of M25,000 at an interest rate of 5% per annum, payable over a period 12 months, from her employer. The Central Bank of Lesotho interest rate averaged 20% throughout the year. Required: (a) Calculate the quarterly fringe benefits tax (FBT) payable by Bolima Diamonds Ltd in respect of the fringe benefits payable to Mosa. Your answer should indicate by the use of a zero (0) those items which do not give rise to any liability to FBT. (7 marks) (b) State, in general, by when the quarterly fringe benefits tax returns must be filed.
(1 mark)
(c) Explain how the tax position of Bolima Diamonds Ltd and Mosa would differ, if Bolima Diamonds Ltd were a public international organisation (PIO). Note: No calculations are required in this part.
(2 marks) (10 marks)
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3
Noko Enterprise is engaged in buying and selling of general merchandise to the general public. The company commenced its operations on 1 April 2014 without value added tax (VAT) registration. On 1 April 2016, the company was compelled to register for VAT as its turnover had increased beyond the registration threshold. The following information relates to the company’s transactions (inclusive of VAT at the rate of 14% where appropriate): Revenue Expenditure: Purchases Operating expenses
Note 1
M 95,500
2 3
62,600 18,500
Notes: 1.
Revenue is derived from the following: Zero-rated supplies Taxable supplies
2.
Purchases include M12,500 which relates to purchases for the last three months prior to registration, which were still held as opening stock on 1 April 2017 as tabulated below: January February March
3.
M 38,900 56,600 ––––––– 95,500 –––––––
M 3,100 5,600 3,800 ––––––– 12,500 –––––––
Operating expenses include the following: (i)
M4,500 for rent payable to Maseru Properties, a local vendor.
(ii) M500 in respect of the first finance lease instalment, payable at the beginning of April 2017, on a finance lease which will run for 36 months. This is in relation to the acquisition of a delivery van. The van would have cost M18,000 if purchased for cash. (iii) M2,300 for electricity consumption. (iv) The balance of the operating expenses is taxable at the rate of 14%. Required: (a) Explain the conditions necessary for a person to register compulsorily for value added tax (VAT). (2 marks) (b) Calculate the VAT payable by or repayable to Noko Enterprise for the month of April 2017, and state the due date for filing a VAT return for April 2017. Your answer should indicate items on which input VAT is not claimable or on which output VAT is not chargeable by the use of a zero (0). (8 marks) (10 marks)
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4
You are given the following transactions in relation to Sempe’s investment assets. (i)
In June 2016, Sempe sold 1,700 shares held in Bambo Investments Pty for M110,500. The selling expenses were 2% of the selling price. Sempe had purchased these shares in November 1999 from his brother for M38,000. The market value of the shares on the date of purchase by Sempe was M25 per share.
(ii) Sempe inherited 15 hectares of land from his late father in May 1995. The market value of the land on the date of transfer was M350,000. The land was used for plantation of crops by Sempe. In September 2016, the Government took over 5 hectares of the land for construction of a public road. Sempe received M320,000 as compensation from the Government. (iii) Sempe had a factory building which caught fire in September 2016. The adjusted cost base (ACB) of the building on the date on which fire occurred was M1,300,000. In October 2016, Sempe received compensation of M1,380,000 from the insurance company. He reconstructed a similar building and incurred replacement costs totalling M1,320,000. Required: (a) Calculate Sempe’s chargeable gains for the year ended 31 March 2017. Note: The indexation numbers on relevant dates are: May 1995 November 1999 June 2016 September 2016 October 2016 November 2016
140 180 300 310 310 312
(6 marks)
(b) Explain the tax treatment of an asset which is destroyed and the resulting insurance proceeds are not wholly reinvested in a similar asset. (4 marks) (10 marks)
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5
Mofokeng is a marketing manager of Likuena Flours, a resident company. In addition, Mofokeng has other sources of income from different activities, in which he is engaged. The following information relates to Mofokeng’s different sources of income for the year ended 31 March 2017: Employment income Annual salary Housing allowance Bonus Education allowance Reimbursements Employer superannuation fund contributions Employee contributions Membership fees
Note
M
1 2 2 3
460,500 46,050 15,000 23,025 12,500 69,275 (42,000) (28,000)
The total withholding tax (PAYE) remitted to the Lesotho Revenue Authority (LRA) by Likuena Flours in respect of Mofokeng’s employment income amounted M144,022. Other sources (i) Consultancy Revenue Payments: Secretarial costs Purchase of new desktop computer on 1 November 2016 (ii) Sitting allowance
M 73,400
4
(23,600) (18,200) 76,000
Notes: 1.
Reimbursements were received from Likuena Flours in relation to the claims made by Mofokeng for use of his private car on business related matters. It is the policy of Likuena Flours to reimburse its employees on the basis of kilometres (km) travelled for business purposes.
2.
Likuena Flours contributed a total of M69,275 into an employer superannuation fund on behalf of Mofokeng. Mofokeng contributed M42,000.
3.
Membership fees are payable through a stop order. Mofokeng paid M4,000 to one of the local gymnasiums. The remaining M24,000 was paid to one of the research institutes in which Mofokeng is a member, for provision of trade journals relevant to his current employment.
4.
Mofokeng sits in board meetings for a number of companies. The sitting allowance of M76,000 is after deduction of 5% withholding tax.
Required: (a) Calculate the income tax payable by Mofokeng for the year ended 31 March 2017, and state the due date for payment of the tax liability. Clearly indicate any receipts which are not taxable or any expenses which are not deductible by the use of a zero (0). (13 marks) (b) Explain the tax treatment of the motor car expenses reimbursed as in note 1 above.
(2 marks) (15 marks)
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6
Soks Electrics Pty, trading as Soks, specialises in electrical installations for both domestic and industrial purposes. The following information summarises the trading results of Soks for the year ended 31 March 2017: Revenue Other income Operating expenses
Notes 1 2
M 620,000 75,000 –––––––– 695,000 (275,000) –––––––– 420,000 ––––––––
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Operating profit Notes: 1.
The revenue is inclusive of 5% withholding tax.
2.
Other income comprises the following: (i)
Net interest of M24,300 from the local financial institutions.
(ii) Dividends totalling M40,700. 25% of the dividends represents Lesotho source dividends. The remaining 75%, which is inclusive of withholding tax of M8,000 paid abroad, relates to foreign source dividends. (iii) Accounting profit of M10,000 realised from disposal of one of the company’s vans. The adjusted cost base (ACB) of the van and market value on the date of disposal were M120,000 and M132,000 respectively. The van was disposed of at its market value. 3.
Operating expenses include the following: (i)
Annuity payment of M40,000. This is payable to the dependants of a former employee who died accidentally while on duty. In compliance with the court ruling, the company is obliged to provide this compensation on an annual basis.
(ii) Maintenance and service of equipment totalling M42,500. Included in this amount is M5,500 for spare parts; and M22,100 for new equipment purchased on 31 December 2016. Additional information: (i)
The company paid dividends of M55,500 on 31 October 2016. The dividends were entirely paid out of unqualified income.
(ii) The tax paid for the previous year ended 31 March 2016 was M80,400. This amount is before deduction of the following: – –
Withholding taxes Advance corporation tax (ACT)
M 13,200 10,100
Required: (a) Calculate each income tax instalment payable by Soks for the year ended 31 March 2017.
(2 marks)
(b) Calculate the advance corporation tax (ACT) payable by Soks in respect of the dividends paid on 31 October 2016 and state by when it is payable. (3 marks) (c) Calculate the corporation tax payable by Soks for the year ended 31 March 2017. Your calculations should start with the operating profit of M422,000. (10 marks) Note: You should assume that income tax instalments calculated in (a) were paid up on their respective due dates. (15 marks) End of Question Paper
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