CHARTERED ACCOUNTANTS EXAMINATIONS

LICENTIATE LEVEL
________________________
L3: INTEGRATED TAXATION
_______________________
THURSDAY 17 DECEMBER 2015
_________________________
TOTAL MARKS 100: TIME ALLOWED: THREE (3) HOURS
________________________
INSTRUCTIONS TO CANDIDATES
1.

You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question. You will be told when to
start writing.

2.

This paper is divided into TWO sections:

Section A:
Section B:

Two (2) Compulsory questions.

Three (3) Optional Questions. Attempt any TWO (2) questions.

3.

Enter your student number and your National Registration Card number on the front of
the answer booklet. Your name must NOT appear anywhere on your answer booklet.

4.

Do NOT write in pencil (except for graphs and diagrams).

5.

Cell Phones are NOT allowed in the Examination Room.

6.

The marks shown against the requirement(s) for each question should be taken as an
indication of the expected length and depth of the answer.

7.

All workings must be done in the answer booklet.

8.

Present legible and tidy work.

9.

A Taxation Table is provided on pages 2, 3 and 4 of this paper

TAXATION TABLE
1. Standard personal income tax rates
(a) Income band
K1 to K36,000
K36,001 to 45,600
K45,601 to K70,800
Over K70,800

Taxable amount
first K36,000
next K9,600
next K25,200

Rate
0%
25%
30%
35%

(b) Income from farming for individuals

K1 to K36,000
Over K36,000

first K36,000

0%
10%

(c) Gratuity(Qualifying)
K1 to K36,000
Over K36,000

first K36,000

0%
25%

(d) Terminal benefits

K1 to K35,000
Over K35,000

first K35,000

0%
10%

2. Company Income Tax rates

On income from manufacturing and other
On income from farming
On income of Banks and other Financial Institutions
On income from processing of purchased mineral ores, concentrates and other
semi-processed minerals
On income from Tolling
On income from mining operations of industrial minerals
(Variable profit tax rate industrial metals) y = 30% + [a - (ab/c)]
Where:
y = the tax rate to be applied per
annum
a = 15%
b = 8%
c = Assessable Income x 100%
Gross sales
3. Mineral Royalty
Underground Mining operations
Opencast Mining operations
Mining of industrial minerals

35%
10%
35%
30%
30%
30%

8%
20%
6%

4. Capital Allowances
(a)
Implements, plant and machinery and commercial vehicles:
Wear and Tear Allowance

Plant used normally

Used
in
Manufacturing,
Leasing
2

Farming,

25%
50%

(b)

(c)

Non-commercial vehicles
Wear and Tear Allowance

20%

Industrial Buildings:
Wear and Tear Allowance
Initial Allowance
Investment Allowance

(d)

Low Cost Housing

5%
10%
10%
(Cost up to K20,000)

Wear and Tear Allowance

Initial Allowance
(e)

(f)

10%
10%

Commercial Buildings
Wear and Tear Allowance

2%

Farming Allowances
Development Allowance
Farm Works Allowance

10%
100%

Farm Improvement Allowance

100%

5. Presumptive Taxes
(a) Turnover Tax
(b)

3%

Presumptive tax for transporters

Seating capacity

Tax per annum

K
1,200
2,400
4,800
7,200
9,600
12,000
14,400

Less than 12 passengers and taxis

From 12 to 17 passengers
From 18 to 21 passengers
From 22 to 35 passengers
From 36 to 49 passengers
From 50 to 63 passengers
From 64 passengers and over

Tax per day

K
3.20
6.60
13.20
20.00
26.00
32.80
39.40

6. Property Transfer Tax

Rate of Tax on Realised Value of property other than mining rights
Rate of Tax on Realised Value on a transfer or sale of a mining right

10%
10%

7. Value Added Tax

Registration threshold
Standard Value Added Tax Rate (on VAT exclusive turnover)

K800,000
16%

8. Customs and Excise

Duty rates on:
(i)

Motor cars and other motor vehicles (including station wagons)

principally designed for the transport of less than ten persons, including
the driver:
Customs Duty:
25%
Excise Duty:
Cylinder capacity of 1500 cc and less
Cylinder Capacity of more than 1500 cc

20%
30%

(ii)

Pick-ups and trucks/lorries with gross weight not exceeding 20 tones:

Customs Duty
Excise Duty

15%
10%

(iii)

Buses/coaches for the transport of more than ten persons

Customs Duty:
Excise Duty:

(iv)

Seating Capacity of 16 persons and less

Seating Capacity of 16 persons and more
Trucks/lorries with gross weight exceeding 20 tonnes
Customs Duty:
Excise Duty:

15%

25%
0%
15%
0%

The minimum amount of Customs Duty on Motor Vehicles in categories from (i) up
to (iii) above is K2,000

SECTION A
Attempt BOTH questions in this section
QUESTION ONE
You should assume that todays date is 1 December, 2014 and that the earnings
ceiling for the purposes of NAPSA contributions is K191,088 per annum.
Henry Maliwatu, a Zambian resident individual, has received two offers of employment from two
different Zambian resident companies, Elite Plc and Delite Plc, as a Sales and Marketing
Manager. Henry is required to commence employment on 1 January 2015, under each offer.
Elite Plc
Under the offer of employment from Elite plc, his annual salary will be K360,000, with a utility
allowance of K4,000 per month and a fuel subsistence of K5,000 per month. He will be provided
with free meals at the staff canteen at a cost of K2,500 per month. The company will lease a
house with a market value of K350,000 on 1 January, 2015, on his behalf and will pay annual
lease rentals of K108,000 on his behalf.
As he will be required to travel out of town in performance of the duties of his employment, the
company will pay his board and lodging fees on his behalf which will amount to K10,000 per
month.
He will use his own motor car which he acquired at cost K170,000 and has a cylinder capacity
of 3,000cc for the duties of the employment. His total mileage is expected to be 30,000
kilometres per annum out of which 2,500 kilometres will be travel from his home to the
premises of Elite Plc, 22,500 kilometres will be travel for promotional campaigns of Elite Plcs
products and 5,000 kilometres on personal trips. He will incur motor car running expenses of
K4,000 per month.
He will be required to pay annual subscription fees of K1,200 to the Institute of Marketing and
he will make NAPSA contributions of 5% of his basic salary. Elite Plc will also pay employers
NAPSA contributions of 5% of his basic salary on his behalf.
He will be entitled to a gratuity of 25% of the cumulative salary earned under the contract.
Half of this gratuity, will be paid after he has served eighteen months on the contract and the
other half will be paid at the expiry of the contract. In the event that he resigns before the
contract term expires, he will only be entitled to a gratuity of 25% of his cumulative basic salary
up to the date of resignation. However, this gratuity will only be paid on condition that he must
have served a period of at least eighteen (18) months on the contract before resigning.
His annual basic salary and all the other conditions of service will remain constant throughout
the three year term of the contract.
Delite Plc
Under the offer of employment from Delite Plc, his annual salary will be K250,000. He will be
entitled to a housing allowance of K9,000 per month, transport allowance of K6,000 per month
and lunch allowance of K2,500 per month. The company will pay his professional subscriptions
to the Institute of Marketing, which will amount to K1,200 per annum. As he will be required to
5

travel out of town for promotional tours each month, the company will pay him subsistence of
K10,000 per month in respect of boarding and lodging.
He will be provided with a petrol driven personal to holder car with a cost of K170,000 with a
cylinder capacity of 3000cc capitalise. It is estimated that he will have private usage in the
motor car of 30%. The company will pay all the motor car running expenses and these are
expected to be K15,000 per month.
He will make NAPSA contributions of 5% of his basic salary. Delite Plc will also pay employers
NAPSA contributions of 5% of his basic salary on his behalf.
He will be entitled to a gratuity of 35% of the cumulative basic salary earned under the contract
which will all be paid at the expiry of the contract. In the event that he resigns before the
contract term expires, he will only be entitled to a gratuity of 35% of his cumulative basic salary
up to the date of resignation. However, this gratuity will only be paid on condition that he must
have served a period of at least eighteen (18) months on the contract before resigning.
Under this offer of employment, Maliwatu will be entitled to annual basic salary increments of
10% of the basic salary, whilst all the other conditions of service will remain constant
throughout the three year term of the contract.
Required:
(a)
(b)

(c)

Advise both Elite Plc and Delite Plc of the tax implications of their offers to Maliwatu.
(6 marks)
Compute the income tax payable by Maliwatu and his net income after tax, NAPSA
contributions and other relevant expenses for the tax year 2015 if;
(i)

He accepts the offer of employment from Elite plc.

(7 marks)

(ii)

He accepts the offer of employment from Delite plc.

(6 marks)

Assuming that Maliwatu serves three years under each contract, calculate the total
amount of tax that will be paid on the gratuity under each offer of employment and the
net gratuity (after tax) receivable under each offer. You should assume that the personal
income tax rates for the tax year 2015, will apply throughout the next three years.
(9 marks)

(d) Based on your computations of net income after tax in parts (b) and (c) above, advise
Maliwatu on which offer of employment he should accept.
(2 marks)
[Total: 30 marks]

QUESTION TWO
You are a Tax senior in a Tax Practice. The Tax Manager has presented the following
information about two (2) of the clients of your firm in respect of which you should prepare
appropriate responses in the form of computations and explanation as required.
Muntanga and Co.
Muntanga has been in business for many years trading as Muntanga and Co and preparing
accounts to 31 December each year. On 1 April 2015, she invited her manager, Kayuni to join
her in partnership. As a result, Muntangas annual proprietors salary of K240,000 became her
annual partnership salary and Kayunis annual salary as an employee of K180,000 became her
annual partnership salary. Profits and losses were to be shared between Muntanga and Kayuni
in the ratio of 3 to 2 respectively.
The profit for the year ended 31 December 2015 was K540,000. This profit figure was arrived at
after deducting the following expenses: Muntangas annual proprietors salary of K240,000,
Kayunis annual salary of K180,000, depreciation of K90,000, cost of entertaining customers of
K80,000 and cost of gifts of Muntanga and Co calendars of K3,000, with each calendar costing
K90. All other expenses charged in the accounts were of a revenue nature and therefore
deductible for income tax purposes.
Mumbuna
Mumbuna has been in business for many years trading as Mumbuna and Co. At the start of the
tax year 2014, he calculated his provisional taxable profits to be K650,000. He calculated and
paid provisional income tax correctly on the due dates. At the end of the tax year 2014, his final
taxable profit was K725,000. He calculated the balance of income tax for the tax year 2014 and
he also calculated the provisional taxable profit for the tax year 2015 of K720,000 in January
2015.
Due to a downturn in business activity in February 2015, Mumbuna revised the provisional
taxable business profit for the tax year 2015 from the original estimate of K720,000 to only
K620,000. As a result of the downturn in business, Mumbuna also experienced serious cash
flow problems such that he paid the provisional income tax for the quarter ended 31 March
2015 on 13 June 2015 and he submitted the return of provisional income for the tax year 2015
on this date. In addition, he paid the provisional income tax for the quarter ended 30 June 2015
together with the balance of income tax for the tax year 2014 on 31 August 2015. Mumbuna
submitted the self-assessment income tax return for the tax year 2014 on 31 August 2015.
Cash flow problems were fully resolved after 31 August 2015 and Mumbuna is certain that all
the outstanding taxes thereafter would be paid properly.
Mumbuna has heard that the Commissioner General may request further information about the
taxpayers affairs even where all the tax returns have been submitted. The Commissioner
General may even make enquiries into returns.
Required:
(a) In respect of Muntanga and Co:
(i)

Discuss whether the admission of Kayuni as a partner would amount to cessation of

Muntangas business for income tax purposes
(4 marks)

(ii)

Calculate the taxable income of Muntanga and Kayuni and the amounts of income
tax paid by Muntanga and Kayuni for the tax year 2015.
(8 marks)

(b) In respect of Mumbuna:

(i)

Assuming that the income tax rates and bands for the tax year 2015 apply
throughout and that the Bank of Zambia discount rate is 12.75% per annum, advise
Mumbuna of the amounts of penalties and interest charged on overdue taxes on all
payments made up to and including 31 August 2015.
(9 marks)

(ii)

Identify the date when the returns were submitted late and calculate the amounts of
penalties for late submission of those returns.
(3 marks)

(iii)

Explain what action a trader should take after determining the amount of provisional
income that proves to be less than the taxable income that is expected for the tax
year 2015 and why such action should be taken. (3 marks)

(iv)

Explain the reasons why the Commissioner General may make enquiries into a tax
return.
(3 marks)
[Total: 30 marks]

SECTION B
Attempt any TWO (2) out of the THREE (3) questions in this section
QUESTION THREE
Robby Kasenga who is resident and ordinarily resident in Zambia has run an unincorporated
farming business for many years. On 1 January 2015, he decided to purchase shares in a
company that is resident in a country known as Southland. The currency of Southland is the
Southland Dollar (SL$). He received his first dividends of SL$6,500 from this investment on
1 July 2015. This amount was net of withholding tax at the rate of 35% deducted in Southland.
Kasenga also owns residential flats in Southland which have been let out to residents in that
country in the past three years. The total annual rental income received by
Kasenga in the tax year 2015, in respect of the flats was SL$50,000, net of withholding tax
at the rate of 20% deducted in Southland. He additionally owns a fixed deposit account in
Southland from which he received interest of SL$ 2,100 net of withholding tax at the rate of
30% deducted in Southland. There is no double taxation agreement between Zambia and
Southtland. When computing Zambian Income Tax payable, credit is available for any foreign
tax paid in Southland. An exchange rate of K6.50 per SL$ should be used were relevant.
Additional information
The following additional information relates to Kasengas other activities in the tax year
2015:
(1) He made final tax adjusted business profits of K825,000 from his unincorporated Zambian
farming business.
8

(2) He received gross emoluments of K90,000 from part-time employment as an agricultural

extension officer in Zambia. Income tax paid under the Pay As You Earn system from these
emoluments amounted to K31,500.
(3) Kasenga received investment income from Zambian sources in form of building society
interest of K3,000 (gross).
(4) Kasenga intends to sell the residential flats he owns in Southland on 1 January 2016 for
gross proceeds equivalent to K7,800,000. He will use 25% of these proceeds, net of taxes if
any, to buy shares in a Zambian company that is listed on the Lusaka Stock Exchange. He
estimates that he will receive annual gross dividends of not less than K25,000, from the
shares.
He will then use the remaining proceeds from the sale of the flats to buy properties in
Zambia, all of which will be let on a commercial basis. He anticipates that the gross annual
rental income from these properties will be K250,000.
Required:
(a) Calculate the income tax payable by Kasenga for the tax year 2015.

(11 marks)

(b) Describe two other possible ways (besides the method described in the scenario above)
of giving double taxation relief to a Zambian resident person receiving income from
foreign sources.
(4 marks)
(c) Advise Kasenga of the income tax implications of his planned transactions given in note
(4) above. (You should ignore VAT and assume that the tax rates for the tax year 2015
apply throughout.)
(5 marks)
[Total: 20 marks]
QUESTION FOUR
(a)

There has been a lot of debate in the recent past as to the best taxation regime for the
mining sector that will maximise revenue collection from the sector but at the same time
encourage and attract huge investment in the sector.
Required:
Compare and contrast the following methods of taxation that are used by the Zambian
Government to tax the mining sector:

(b)

(i)

Variable profit tax

(ii)

Mineral royalty

(8 marks)

River Ltd and Stream Ltd are 90% owned subsidiaries of Ocean Plc. All three companies
are Zambian resident and are engaged in manufacturing. Ocean Plcs sales are all
standard rated, whilst River Ltds and Stream Ltds are zero-rated and exempt
respectively. Ocean Plc and River Ltd are accordingly registered individually for VAT,
whilst Stream Ltd is not.
9

Since the three companies are not currently registered for Value Added Tax as a group,
the groups Chief Operating Officer is of the view that substantial savings in Value Added
Tax can be made by the three companies if they were to register for VAT as a group. He
has provided you with the following information relating to the sales and purchases of
each company for the year ended 31 December 2015:

Sales
Ocean plc
River Ltd
Stream Ltd

K
2,400,000
1,650,000
920,000

Purchases

K
1,100,000
720,000
510,000

The purchases for all three companies are standard rated. In addition to the sales and
purchases figures shown above, Ocean Plc incurred standard rated overhead
expenditure of K220,000 that cannot be directly attributed to any of the three
companies sales. Ocean Plc charges both of its subsidiary companies a management fee
of K46,000 per annum each in respect of the services of its finance and administration
department. This figure has not been included in any of the figures for sales and
purchases shown above.
All of the above figures are exclusive of Value Added Tax (VAT) where applicable.
Required:
(i)

Calculate the VAT position of Ocean Plc Ltd, River Ltd and Stream Ltd for the
year ended 31 December 2015.
(7 marks)

(ii)

Advise the group, using appropriate supporting calculations, of what the VAT
position would have been for all companies if they had been registered for VAT
as a group for the year ended 31 December 2015.
(5 marks)
[Total: 20 Marks]

10

QUESTION FIVE
For the purposes of this question you should assume that todays date is 15 October
2015.
Nalwamba has been in business as a sole trader since 1 January 2001. Throughout the period
of her business, she has been registered for VAT purposes.
On 31 December 2015 she is going to sell her business for K3,000,000 to an unconnected
person. The following information is available:
(1) Nalwamba has tax adjusted business profits of K265,800 for the year ended 30 September
2015, and will have profits of K129,700 for the period from 1 October to 31 December 2015.
These figures are before taking account of capital allowances.
(2) The income tax value of the general plant at 1 January 2015 was K145,600 and the income
tax value of the only Commercial Building was K452,400.
(3) Nalwamba has unused overlap profits brought forward of K80,900. This arose when she
changed her accounting date from a 31 December year end to a 30 September year end.
(4) The sale proceeds figure of K3,000,000 is made up as follows:
Goodwill
Land and buildings (including K250,000 for the land)
General plant
Net current assets

K
600,000
1,650,000
300,000
450,000
3,000,000

The goodwill has been built up since 1 January 2001, and has a nil cost. The land and
buildings cost K700,000 (including K120,000 for the land) on 10 August 2004. The buildings
have always been used for business purposes and therefore treated as Commercial
Buildings. The general plant was bought for K291,200.
(5) Nalwamba and the purchaser of her business are both registered for Value Added Tax
(VAT).
(6) Nalwamba knows that instead of selling the business as whole, she can also sell the
individual assets.
(7) Nalwamba needs advice relating to the taxation implications of making investments in the
available investments opportunities. She wishes to invest the proceeds from the sale of her
business in a tax efficient manner.
Required:
(a) Calculate Nalwambas taxable business profit and her income tax payable for the tax
year 2015.
(4 marks)
(b) Briefly discuss, from a property transfer tax perspective, the main advantage for
Nalwamba of disposing off the business as a whole compared to a disposal of individual
assets.
(2 marks)
11

(c) (i)
(ii)

Explain the VAT implications arising from the sale of Nalwambas business.
(3 marks)
Explain what the VAT implications could have been if Nalwamba had disposed off
the individual assets instead of disposing off the business as a whole.
(3 marks)

(d) Advise Nalwamba of the taxation implications of investing in:

(i)

Ordinary shares of a company that is listed on the Lusaka Stock Exchange and

(ii)

Republic of Zambia Government bonds (GRZ bonds)

(iii)

Certificates of Deposit (CDs)

(iv)

Ordinary shares of a private company that she could form with other people.
(8 marks)
[Total: 20 Marks]

END OF PAPER

12

L3: INTEGRATED TAX

SUGGESTED SOLUTIONS
DECEMBER 2015 EXAMINATIONS
SOLUTION ONE
(a)

The taxation implications of the offers of employment are as follows:

Taxation implications for Elite Limited
1.
2.

3.

4.
5.

6.
7.
8.

The salary payable to Maliwatu of K360,000 will be allowable when computing

taxable business profits.
The annual utility allowance of K48,000 (K4,000 x 12) and annual fuel
subsistence of K60,000 (K5,000 x 12) are deductible in the computation of the
company's taxable profit.
The employers NAPSA contribution of K9,554 (5% K191,088) that Elite
Limited will make on Maliwatus behalf will be an allowable deduction when
computing the companys taxable profit.
Staff canteen costs incurred by the company will not be allowable when
computing taxable business profits.
Leasing of a house by Elite plc will result in an accommodation benefit being
assessed on the company. The amount which will be disallowed when computing
taxable business profits will be K140,400 (30% x K468,000).
The gratuity payable to Maliwatu under the contract will be an allowable
deduction when computing taxable business profits.
The annual lease rental of K180,000 will be an allowable deduction when
computing the taxable business profits.
Board and lodging expenses paid by the company of K120,000 (K10,000 x 12)
will be allowable when computing taxable business profits.
( a mark for each valid point up to a maximum of 3 marks)

Taxation implications for Delite Limited

1.
2.

3.

4.

The salary payable to Maliwatu will be allowable when computing taxable

business profits.
The housing allowance of K108,000 (K9,000 x12), transport allowance of
K72,000 ((K6,000 x 12), lunch allowance of K30,000 (K2,500 x 12) professional
subscription fees of K1,200 and board and lodging expenses will be allowable
when computing taxable business profits.
The employers NAPSA contribution of K9,544 (5% K191,088) that Delite plc
will make on Maliwatus behalf will be an allowable deduction when computing
the companys taxable profit.
The company will claim capital allowances at the 20% on the personal to holder
motor car provided to Maliwatu. The capital allowances will be allowable when
13

5.

6.
7.

8.

(b)

(i)

computing taxable business profits and will amount to K34,000 (K170,000 x

20%).
The employers NAPSA contribution of K9,554 (5% K191,088) that Elite
Limited will make on Maliwatus behalf will be an allowable deduction when
computing the companys taxable profit.
The gratuity payable to Maliwatu will be an allowable deduction when computing
taxable business profits.
Provision of a personal to holder motor car will give rise to a motor car benefit
which will be assessed on Delite plc. As the motor car will have a cylinder
capacity of 3000cc K20,000 will be disallowed when computing taxable profits of
the company.
Motor car running expenses of K180,000 (K15,000 x 12) will be allowable when
computing taxable business profits.
ELITE OFFEER
COMPUTATION OF INCOME TAX PAYABLE FOR THE TAX YEAR 2015
K
K
Salary
360,000
Utility allowance (K4,000 x 12)
48,000
Fuel subsistence (K5,000 x 12)
60,000
Gross income
468,000
Less allowable deductions:
Motor car running expenses
(K4,000 x 12) x 22500/30,000)
36,000
Capital allowances on motor car
(K170,000 x 20%) x 22,500/30,000
25,500
Professional subscriptions
1,200
NAPSA contribution (restricted to maximum)
3,060
(65,760)
402,240
Income tax
On the first K70,800
9,960
On excess K331,440 x35%
116,004
125,964

14

COMPUTATION OF NET INCOME

K
468,000

Total income
Less
Income tax
Motor car expenses
Subscriptions
Employee NAPSA contributions
Net income

(ii)

(125,964)
(48,000)
(1,200)
(9,554)
283,282

DELITE OFFEER
COMPUTATION OF INCOME TAX PAYABLE FOR THE TAX YEAR 2015
K
K
Salary
250,000
Housing allowance (K9,000 x 12)
108,000
Transport allowance(K6,000 x 12)
72,000
Lunch allowance (K2,500 x 12)
30,000
Boarding and lodging subsistence
120,000
Gross income
580,000
Less allowable deductions:
NAPSA contribution (restricted to maximum)
(3,060)
576,940
Income tax
On the firstK70,800
9,960
On the excess K506,140 x35%
177,149
187,109
COMPUTATION OF NET INCOME
K
Total income
Less
income tax
Employee NAPSA contributions
Net income

580,000
(187,109)
(9,554)
383,337

15

(b)

COMPUTATION OF NET GRATUITY AFTER TAX UNDER THE ELITE PLC OFFER
The whole gratuity payable under the Elite plc offer will be treated as qualifying
gratuity and will be taxed as follows:

Total qualifying gratuity (K360,000 x 3) x 25%

Less tax free amount
Taxable amount
Income Tax on Gratuity
K234,000 x 25%
Total gratuity
Tax on gratuity
Net income after gratuity

K
270,000
(36,000)
234,000
58,500
270,000
(58,500)
211,500

COMPUTATION OF NET GRATUITY AFTER TAX UNDER THE ELITE PLC OFFER
The gratuity payable under the Delite plc must be divided into qualifying and
non-qualifying gratuity as it exceeds 25% of the cumulative basic salary.
K
Tax on qualifying gratuity
(K206,875(W) -K36,000) x 25%
Tax on non- qualifying gratuity (W)
(K82,750 x 35%)

42,719
28,963
71,682
K
289,625
(71,682)
217,943

Total gratuity (W)

Total tax on gratuity
Net Gratuity after tax
WORKINGS
Cumulative basic pay

Basic
Salary
K
250,000
275,000
302,500
827,500

Year
2015
2016 (K250,000 x110%)
2017 (275,000 x 110%)
Total cumulative basic pay

16

Total gratuity
(K827,500 x 35%)
Qualifying gratuity
K827,500 x 25%)
Non- qualifying gratuity
(d)

289,625
206,875
82,750

The annual net income under the Delite offer will exceed the annual net income under
the Elite offer by K100,055 (K383,337 K283,282). This difference will increase over the
next two years due to the salary increments of 10% of the annual basic salary under the
Delite offer.
The net gratuity after tax payable under the Delite plc offer will also be higher by a
minimum of K6,443 (K217,943 K211,500).
From a taxation point of view the offer of employment from Delite plc appears to be
more beneficial than the offer of employment from Elite plc as it gives a higher annual
net income and a higher net gratutity after tax payable on the expiry of the contract.

SOLUTION TWO
(a)

Muntanga and Co
(i)

For income tax purposes, a business ceases when it is closed down permanently
with the trader having no intentions of setting up the same operations in a
different location or after a few years.
When there is a change in the ownership of a business, would amount to
cessation of the business by the previous owner or owners. This could be where
a sole trader sells a business to a company or to a partnership or a sale of any
unincorporated business to a company.
When a sole trader admits a partner, there would be no cessation of business as
it would only increase the number of owners of that business.
In the light of the above, therefore, the admission of Kayuni as a partner does
not amount to cessation of Muntangas business as the effect is only that of
increasing the number of owners of the business.

(ii)

Personal Income Tax computations for the tax year 2015

Business profit as sole trader
Share of partnership profit
Emoluments from employment
Income Tax
17

Muntanga
K
237,500
499,500
______
737,000

Kayuni
K
348,000
45,000
393,000

On the first K70,800 of income

On the balance:
35% x (K737,000 K70,800)
35% x (K393,000 K70,800)
Income Tax

9,960

9,960

233,170
_______
243,130

112,770
122,730

Workings
(1)

Computation of tax adjusted profit for the tax year 2015

K

Net profit as per financial statements

Add:
Muntangas salary
Kayunis salary
Depreciation
Entertaining customers

240,000
180,000
90,000
80,000

Tax adjusted profit

(2)

Muntanga
3 months
K

Partnership
9 months
K

282,500

847,500

45,000
237,500

_______
847,500

Division of partnership profit for the nine months period from 1 April 2015 to 31
December 2015 between the partners:
Total
K
315,000
532,500
847,500

Partners salaries
Share of balance (3 to 2)
(b)

590,000
1,130,000

Division of the tax adjusted profit between Muntanga and the Partnership

Tax adjusted profit

3/12 x K1,130,000
9/12 x K1,130,000
Less Kayunis salary
3/12 x K180,000
Taxable profit
(3)

K
540,000

Muntanga
K
180,000
319,500
499,500

Kayuni
K
135,000
213,000
348,000

Mumbuna and Co
(i)

Penalties for late payment of taxes and interest on overdue taxes

(1)

Provisional Income tax for the quarter ended 31 March 2015

The amount of K50,545 (W2) was delayed by 2 months from 14 April
2015 to 13 June 2015.
Penalty for late payment of tax

= 5% x K50,545 x 2
= K5,054

18

Interest on overdue income tax

= 14.75% x K50,545 x 2/12

= K1,243

(2)

Provisional Income Tax for the quarter ended 30 June 2015

The amount of K50,545 (W2) was delayed by one and a half months from
14 July 2015 to 31 August 2015.
Penalty for late payment of tax

= 5% x K50,545 x 2
= K5,054

Interest on overdue income tax

= 14.75% x K50,545 x 1.5/12

= K932

(3)

Balance of income tax for the tax year 2014

The balance of income tax for the tax year 2014 of K26,250 paid on 31
August 2015 was delayed by 2 months from its due date of 30 June
2015.
Penalty for late payment of tax

= 5% x K26,250 x 2
= K2,625

Interest on overdue income tax

= K645

Workings
(1)

= 14.75 x K26,250 x 2/12

Computation of the balance of income tax for the tax year 2014
Final taxable profits for the tax year 2014
Less provisional taxable income for the tax year 2014
Increase in taxable profit
Balance of income tax
35% x K75,000

(2)

Computation of Provisional Income Tax for the tax year 2015

Provisional Taxable profit
Provisional Income tax
On the first K70,800
On the balance of income: 35% x (K620,000 K70,800)
Provisional income tax payable
Amount of quarterly instalment payable
K202,180/4

(3)

Rate of interest on overdue taxes

19

K
725,000
(650,000)
75,000
26,250
K
620,000

9,960
192,220
202,180
50,545

= Bank of Zambia discount rate + 2%

= 12.75% + 2%
= 14.75%

(ii)

The tax returns that were filed (submitted) late are as follows:
(1)

The return of provisional income for the tax year 2015

This return must have been filed by 31 March 2015. When filed on 13
June 2015, it was delayed by two and a half months. The penalty is
chargeable for individuals at the rate of K180 (1,000 penalty units) per
month or part thereof.
Penalty chargeable is therefore

= K180 x 3
= K540

Alternatively:
Penalty chargeable is therefore

= 1,000 penalty units x 3

= 3,000 penalty units

(2)

The self-assessment income tax return for the tax year 2014
This return must have been filed by 30 June 2015. When filed on 31
August 2015, it was delayed by two months.
Penalty chargeable is = K180 x 2
= K360
Alternatively:
Penalty chargeable is = 1,000 x 2
= 2,000 penalty units

(iii)

(iv)

When a trader discovers that the amount of provisional income is less than the
taxable income that is expected for the tax year 2015, that trader must revise
the provisional income upwards to be line with the expected level of taxable
income.
Where provisional income tax paid is less than the amount of income tax for a
given tax year, a penalty is chargeable at the rate of 10% on the underpaid tax.
Therefore, a trader would take the action stated above in order to avoid this
penalty.
The Commissioner General needs to be satisfied that tax payers submit correct
returns. The Commissioner General may make enquiries into a tax return in
order to determine whether the tax return submitted is correct in all respects.
The Commissioner General may therefore make an enquiry where he suspects
that income has not been declared in full or some deductions which a taxpayer is
not entitled to have been claimed.
Enquiries may also be made into tax returns as a random check on the
correctness of the tax returns.

20

SOLUTION THREE
(a)

KASENGAS
INCOME TAX COMPUTATION FOR THE TAX YEAR 2015
NonFarming
income
K

Farming
income
K

825,000
90,000

90,000

825,000
-

65,000

65,000

19,500
999,500
(36,000)
963,500

19,500
174,500
(36,000)
138,500

Total
income
K
Income from Zambian Sources
Farming profits
Employment income
Income from foreign Sources
Dividends ($L 6,500 x100/65) x K6.50)
Fixed deposit interest
(SL$2,100 x100/70) x K6.50)
Total income
Less Tax free income
Income Tax on non-farming income
K9,600 x 25%
K25,200 x 30%
K103,700 x 35%
Income tax on farming profits
K825,000 x 10%
Tax liability
Less Double taxation relief:
On foreign Dividends (W1)
On foreign fixed deposit interest (W2)

825,000
825,000
2,400
7,560
36,295
82,500
128,755

(8,373)
(2,512)
(10,885)
117,870
(31,500)
86,370

Less: PAYE
Tax payable

Workings:
1. Double taxation on the foreign dividend income will be the lower of:
-

Actual amount of foreign tax on the dividends which will amount to:
K65,000 x 35% = K22,750

And the Zambian tax charge computed as:

21




65,000
128,755
(999,500)
= K8,373
Double taxation relief will therefore be K8,373 as this is lower.
2. Double taxation on the foreign interest income will be the lower of:
-

Actual amount of foreign tax on the interest income, which will amount to:
K19,500 x 30% = K5,850

And the Zambian tax charge computed as:

19,500
128,755
(999,500)
= K2,512
Double taxation relief will therefore be K2,512 as this is lower.
Rental income from foreign sources is exempt from tax.
(b)

Other methods of giving Double Taxation Relief

Treaty relief
This applies when there is a treaty between Zambia and the foreign country. A double
taxation agreement may provide for full recovery of any foreign tax covered by the
agreement, by means of a tax credit to a Zambian resident individual, against the
Zambian income tax, as long as the relief does not exceed the equivalent Zambian tax
charge. In some cases the treaty may provide that income is only charged to income tax
in one of the two countries, or income is charged to tax in one country, with the tax
being apportioned between the two countries.
Unilateral expense relief
This relief applies when neither treaty relief nor unilateral relief is available. Relief is
given by deducting the foreign tax from the foreign income before including it in the
Zambian tax computation.

(c)

On the disposal of the house in the Southland, Kasenga will pay property transfer tax at
the rate of 10% on the realised value, if the disposal proceeds are remitted to Zambia.
22

Ignoring any double taxation relief that could be claimable, property transfer tax will
amount to: 10% K7,800,000 = K780,000.
There will be no taxation implications on the purchases of shares in the Zambian listed
company and no withholding tax will be payable on any dividends received from the
company, as the rate of withholding on dividends from companies listed on LuSE is 0%.
There will be no taxation implications on the purchase of properties in Zambia. However
the amounts of rent expected to be received from letting the property on a commercial
basis, will be subjected to withholding tax at the rate of 10% which will be a final tax.
He will not be subjected to any further tax on this income.
SOLUTION FOUR
(a)

(i)

Variable Profit Tax

Variable profit tax is based on the concept of a resource concept tax which is a
tax designed to extract the maximum possible revenue from mining companies
without damaging the incentives for investors, thus preserving the long term
viability of the industry.
Variable profit tax only applies to mining companies engaged in the mining of
industrial minerals and not base metals.
Under variable profit tax, mining companies pay company income tax at the rate
of 30% when the taxable profits are not more than 8% of the total revenue.
When a mining companys taxable profits exceed 8% of the total sales revenue,
then additional tax would be charged on the excess profits over 8% of the total
sales revenue.
The Variable Profit Tax uses the function y = 30% + [a - (ab/c)] to calculate the
tax rate applicable to mining profits.
Variable profit tax has two main advantages. Firstly, it does not significantly
affect the incentive to invest because unlike mineral royalty, it takes into
consideration business expenses as it is based on profit rather than revenue and
secondly, it is widely perceived by the public as being fair as it extracts a share
of exceptionally high profits.
The main disadvantage is that the taxable profits on which the tax is rate is
computed and applied can be defined in numerous ways and is susceptible to
manipulation, with many provisions that can be used to alter the amount of tax
payable.

23

(ii)

Mineral Royalty
This is a payment received as consideration for the extraction of minerals and is
chargeable on any person in possession of mineral rights. It is payable by
persons who hold large scale mining licences whether undertaking open pit or
underground mining operations , small scale mining licences, large scale
gemstone licences, small scale gemstone licences or artisan mining rights as at
different rates.
Mineral royalty is charged as fixed percentage of the norm value for open cast
and underground mining at 8% and 20% respectively and is a final tax in both
cases, whilst the rate of mineral royalty on mining businesses engaged in the
extraction of industrial minerals is 6% of gross value which is given as an
allowable deduction when computing taxable business profits.
Since mineral royalty is charged on the value of mineral extracted, it more
effectively compensates the resource owner for the loss of wealth as a result of
mineral extraction than variable profit tax.
Additionally mineral royalty is a more, reliable source of revenue when compared
to variable profit tax, because revenue can be generated as soon as production
commences and therefore the tax collected as long as the company generate
sales. With variable profit there may be many years in which the business suffer
tax losses and therefore will not pay any taxes in those years.
Mineral royalty is much easier to administer when compared to variable profit tax
as usually the only information required is the sale volume of the mineral and the
unit price.
However it is widely seen by investors as being unfair as the costs of running the
business are not considered when computing the tax.

(b)

(i)

Calculation of the groups VAT position for the year ended 31 December 2015

Ocean
Sales
Management charge
Output tax at 16% and 0%
Purchases
Overheads
Management charge
Total expenses

K
2,400,000
92,000
2,492,000
398,720
1,100,000
220,000

River

Stream

K
1,650,000
1,650,000
0
720,000

K
920,000
920,000

510,000

1,320,000

46,000
766,000

46,000
556,000

211,200

122,560

Input VAT at 16% and 0%

24

VAT payable/(repayable)
Net VAT payable

(ii)

187,500

(122,560)

K187,520 K122,560

K64,960

If group VAT registration had been applied throughout the year ended 31
December 2015, the VAT position of the group would have been determined as
follows:
(1)

In determining output tax any intra-group transactions which includes

the management fees charged by Ocean plc will be disregarded. In the
same way when computing input tax for the group the above intragroup transactions will similarly be ignored.
The total output tax to be charged by the group will therefore be
K384,000 (K2,400,000 x 16%)

(2)

Including Stream Ltd in the group registration will result in the group
being deemed to be making a mixture of both taxable and exempt
supplies. This will therefore make the group partially exempt. This will
in turn mean that the input tax relating to supplies that are wholly used
in making taxable supplies will be fully recoverable. The group would
therefore be able to fully recover the input tax incurred by Ocean plc
and River Ltd which will amount to K291,200 ((K1,100,000 +
K720,000) x 16%).

(3)

The input tax on purchases made by Stream Ltd will not be

recoverable. The irrecoverable input tax will amount to K81,600
(K510,000 x 16%)

(4)

The input tax relating to the general expenses incurred by Ocean plc
will not be fully recoverable. The recoverable input tax will be
determined by using the partial exemption method, being the
proportion that taxable outputs bears to the total supplies as:
2,400,000 + 1,650,000
= 81.5%
2,400,000 + 1,650,000 + 920,000
The recoverable input VAT on the general expenses will therefore
be:
(K220,000 x 16%) x 81.5%

25

= K28,688

(5)

It would appear that the overall VAT liability for the group will reduce
by K848, from the current K64,960 to K64,112(W). Group VAT
registration will therefore be beneficial as the VAT liability of the group
will decrease.
The computation of the VAT payable by the companies if they were
registered as a group for VAT purposes can be summarised as follows:
WORKING
K
Output VAT
Ocean plcs sales
(K2,400,000 @ 16%)
River Ltds Zero rated sales
(K960,000 x 0%)
Total output tax for group
Input tax
Oceans plcs purchases
(K1,100,000 x 16%)
River Ltds purchases
(K720,000 x 16%)
Overhead expenditure
(K220,000 x16%) x 81.5%

384,000
0
384,000

176,000
115,200
28,688
(319,888)
64,112

VAT payable

QUESTION FIVE
(a)

Nalwamba
Computation of taxable business profit and income tax payable for the tax year 2015
K
K
Tax adjusted profit for
Year ended 30/09/2015
265,800
Period ending 31/12/2015
129,700
Total tax adjusted profit
395,500
Capital allowances:
General Plant
Income Tax Value b/f
145,600
Disposal
(291,200)
Capital recovery (Balancing charge)
145,600
Commercial Building
Income Tax Value b/f
452,400
Disposal (K700,00 K1,200,000)
(580,000)
26

Capital recovery (Balancing charge)

127,600
668,700
(80,900)
587,800

Less overlap relief

Taxable business profit
Income tax
On the first K70,800
On the balance of income
35% x (K517,000 K70,800)
Income tax payable
(b)

9,960
180,950
190,910

The main advantage of disposing off the business as a whole is that property transfer
tax is not payable on the disposal of a business as a going concern. This is because a
business is not property for the purposes of property transfer tax.
If, instead Nalwamba disposed off the individual assets, then property transfer tax would
be payable on the disposal of the land and buildings. The property transfer tax would
amount to K165,000 (i.e., 10% x K1,650,000). This property transfer tax is avoided
when the business is sold as a going concern.

(c)

VAT matters:
(i)

The sale of Nalwambas business is a disposal of a going concern for VAT

purposes. As a result, the whole transaction is outside the scope of VAT.
Therefore, VAT would not be accounted for on the disposal of the business.
Due to the sale of the business, Nalwamba would be deregistered for VAT
purposes. The new owner of the business would need to apply for VAT
registration.

(ii)

(d)

If Nalwamba instead sold the individual assets, then output VAT would have
been charged on the sales of taxable assets. This is because a sale of individual
assets is within the scope of VAT, even if those assets were used in a traders
business.

Tax implications of making the relevant investments:

(i)

(ii)

(iii)

Taxation implications of investing in Ordinary shares of Lusaka Stock Exchange

Listed companies are as follows:
(1)

Dividends are tax free and they are therefore received gross.

(2)

On disposal of the shares, property transfer tax is not payable as such

shares are exempt from property transfer tax.

Taxation implications of investing in government bonds are:

(1)

Interest receivable is subjected only to withholding tax at the rate of 15%

as the final tax.

(2)

On the disposal of government bonds, property transfer tax is not

payable as government bonds are not property for the purposes of
property transfer tax.

Taxation implications of investing in certificates of deposit are as follows:

27

(iv)

(1)

Interest receivable is subjected only to withholding tax at the rate of 15%

as the final tax.

(2)

On the disposal of certificates of deposit, property transfer tax is not

payable as certificates of deposit are not property for the purposes of
property transfer tax.

Taxation implications of investing in the ordinary shares of a private company

are as follows:
(1)

Dividends receivable are subjected only to withholding tax at the rate of

15% as the final tax.

(2)

On the disposal of shares, property transfer tax is payable, based on the

realised value of the shares disposed off.

END OF SOLUTIONS

28