QUESTION ONE

Kabwe Manufacturing Company (KMC) plc is a Zambian resident company engaged in

manufacturing operations which is registered for Value Added Tax. The company listed
its shares on the Lusaka Securities Exchange two (2) years ago when it offered 25% of
the ordinary shares to indigenous Zambians. In March 2020, the company issued a further
20% of its ordinary shares to indigenous Zambians and as a result 45% of the shares of
the company are now held by indigenous Zambians.
KMC plc made a profit for the year, as per accounts, of K5,702,080 for the year ended
31 December 2020. This profit figure was arrived at after taking into account the
following:
(1) Investment income comprising rental income of K180,000, royalties amounting to
K136,000, dividends from shares of non-mining companies listed on the LuSE
amounting to K124,000, fixed deposit interest K23,800 and management and
consultancy fees of K289,000. These were the actual amounts received in each
case, withholding tax was deducted at source and paid on the appropriate due
dates.

(2) Staff costs which included an annual salary for the Marketing Director of K650,000
who is accommodated in a company owned house for which he does not pay rent,
employee training costs of K160,000, employee relocation costs of K340,000,
loans to employees written off amounting to K380,000, employees golf club
subscriptions of K18,000, employees professional subscriptions of K60,000,
wages for casual workers of K56,000, fines of K25,000 for breaching labour laws
and other employee’s salaries of K29,274,000.

(3) Legal fees which included legal fees in connection with the issue of ordinary shares
to indigenous Zambians of K13,800, legal fees for trade debt collection of K14,400,
legal fees for recovery of loans from former employees of K10,500, a premium paid
to acquire the right of use of a popular brand name for a period of 20 years,
 amounting to K300,000 and legal fees incurred on the renewal of a lease of
business premises of K18,500.

(4) Bad debts expenses which included:

K
Trade debts written off 88,000
Increase in specific provision 16,000
Decrease in general provision (36,800)
Trade debts previously written off subsequently recovered (17,500)
49,700
(5) Miscellaneous operating expenses which included:
K
Selling and marketing expenses 275,600
Theft of money by the finance director 320,000
Theft of goods by the company’s security guards 50,000
Depreciation of tangible non-current assets 168,000
Loss on disposal of assets 60,000
Christmas gifts to employees 18,000
Gifts to customers of Kabwe plc’s branded wall clocks
(costing K250 per customer) 30,000
Provisional income tax 2,023,000
2,944,600
The provisional income tax is the amount of provisional income tax paid
during the tax year 2020.
Other information:
Implements, plant and machinery

On 1 January 2020, company held the following implements, plant and machinery
which were acquired at the following VAT inclusive costs and brought into use on
the following dates:
Date Asset VAT inclusive cost
K
10 March 2017 Delivery van (2,000cc) 104,400
20 April 2017 Old manufacturing equipment 928,000
16 October 2018 General plant and equipment 580,000
19 March 2019 Pool car (1,600cc) 127,600

During the year ended 31 December 2020, the following purchases and disposals
of assets took place:

Date VAT inclusive

Cost/(Proceeds)
K
4 March 2020 Purchased Toyota Camry car (1,700cc) 174,000
16 July 2020 Purchased Toyota Fortuner motor car 270,000
(2,600cc)
18 August 2020 Purchased new manufacturing Plant 1,044,000
12 October 2020 Sold the delivery van (58,000)
15 November 2020 Sold old Manufacturing equipment 348,000
20 Dec 2020 Sold pool car 150,600

The Toyota Camry car is the Human Resources Manager’s personal to holder
motor car and the Toyota Fortuner motor car is the Marketing Director’s personal
to holder motor car.

Buildings
On 1 February 2020 the company completed the construction of a building at VAT
exclusive cost of K5,000,000 which was brought into use immediately. The building
comprised the following items:
K
 Land 1,500,000
Engineering drawing office 400,000
Showroom 200,000
Factory 2,600,000
Administration offices 300,000
5,000,000

Required:
a) Calculate the provisional income tax paid by the company for the tax year 2020,
clearly showing the amount paid on each due date. 8 Marks
b) Calculate the maximum capital allowances claimable by Kabwe Plc on the
following assets held in the tax year 2020:
i. The capital allowances on implements, plant and machinery. 12 Marks
ii. The capital allowances on buildings 6 Marks
c) Compute the final taxable business profit after capital allowances for Kabwe Plc
for the tax year 2020. 14 Marks
[Total: 40 Marks]
QUESTION TWO

a) Explain the meaning of property in the context of property transfer tax and give
any two (2) examples of categories of property under the Property Transfer Tax
Act. 3 Marks
b) Explaining the consequences for late submission of returns and late payment of
income tax. 2 Marks
c) Write notes on the following with examples:
i. Farm works. 5 Marks
ii. Farm improvements 5 Marks
iii. Farm development. 5 Marks
[Total:20 Marks]
QUESTION THREE

You are employed in the Tax department of a firm of Chartered Accountants. Your firm
is preparing a training workshop for newly recruited trainee accountants. The Tax
Manager has asked you to develop notes including enough details on the following topics
which will be used in a training workshop for newly recruited trainee accountants which
your firm will be conducting soon.
(1) The qualities of a good taxation system

(2) The criteria used to determine the residence of taxable persons

The Tax Manager has additionally asked you to deal with the tax affairs of Koma limited,
a new client of your firm. The Directors of Koma Ltd wish your firm to represent the
company in an income tax dispute with the ZRA, which is before the Tax Appeals Tribunal.
The company appealed against the Commissioner General’s revised income tax
assessment for the tax year 2019. You have just discovered that the Managing Director
of Koma Limited, Mulisha Chishala is a close friend of yours. Mulisha has suggested that
if Koma Limited wins the case the company will pay you a personal token of appreciation
of K70,000, for the work you will do on the assignment.

Required:

Prepare notes to be used in the training workshop:

a) Explain any five (5) qualities of a good taxation system. 5 Marks
b) Explain the criteria used to determine the residence of both individuals and
companies for tax purposes. 5 Marks

In relation to Koma Ltd:

c) Explain the fundamental principle of objectivity and discuss how it will apply in the
provision of the services requested by Koma Limited. 5 Marks
d) Explain the threats to compliance with the fundamental principle of objectivity you
may face in the provision of services requested by Koma Limited. 5 Marks
 [Total: 20
Marks]
QUESTION FOUR

a) Explain the circumstances under which income from farming may be averaged.
2 Marks
b) Outline two advantages of making provisional income tax payments. 2 Marks
c) Discuss the importance of capital allowances to both government and
businesses. 6 Marks
d) Explain the possible causes of and the differences between tax evasion and
tax avoidance and discuss the practical consequences of practicing each of
them. 6 Marks
Explain the consequences of:

e) Submitting the self-assessment company income tax return in respect of the

year ended 31 December 2018, on 20 September 2022. 2 Marks
f) Paying the final company income tax in respect of the tax year ended 31
December 2022 on 20 September 2023. 2 Marks
[Total: 20 Marks]

END OF EXAMINATION