THE COPPERBELT UNIVERSITY

SCHOOL OF BUSINESS
ACCOUNTING & FINANCE DEPT
BS 327 TAXATION
TEST TWO
25/06/2020

INSTRUCTIONS:
1. Time Allowed: 1hr 30 minutes
2. This Paper consist of Two questions
3. Attempt all questions

DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO

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QUESTION ONE
Justin Mining Corporation (JMC) Plc is a Zambian resident company engaged in the
mining of copper in Copperbelt province of Zambia. JMC Plc prepared the following
sumarised statement of profit or loss for the year ended 31 December 2020:
Justin Mining Corporation Plc
Statement of profit or loss for the year ended 31 December 2020

K
Revenue (Note 1) 32,490,000
Cost of sales (Note 2) (19,494,000)
Gross profit 12,996,000
Operating expenses (Note 3) (3,898,800)
Other income (Note 4) 200,000
Finance costs (Note 5) (2,274,300)
Profit before tax 7,022,900
Income tax expense (Note 6) (2,106,870)
Profit for the period 4,916,030

The following additional information is relevant:

1. The amount shown in the statement of profit or loss is the norm value for the
purposes of mineral royalty tax. The average norm price of copper during the
year was US$5,500 per metric tonne.

2. Cost of sales includes mineral royalty tax paid by JMC Plc during the year. Other
expenses included in cost of sales are depreciation of non-current assets of
K2,582,575, impairment of goodwill of K423,000, construction of community
hospital of K2,700,000 and construction of roads for the haulage trucks of
K1,500,000. The balance consists of revenue expenses which are all allowable
for tax purposes.
3. Included in operating expenses are total salaries for three directors of
K1,900,000, penalty for late submission of provisional income tax return of
K80,000, donation to an amateur sports club of K700,000 and entertaining major
suppliers of K200,000. The balance consists of revenue expenses which are all
allowable for tax purposes. The three directors are provided with free residential
accommodation in company owned houses for which they pay no rent.

4. Other income include bank interest of K100,000 (gross), rental income of

K60,000 (gross) and profit on disposal of old plant of K40,000. Withholding tax
has already been paid where appropriate.

5. The finance costs represent interest paid on the company’s borrowings obtained

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 from the related companies. The interest rate was equivalent to the arm’s length
borrowing interest rate in Zambia.
6. Income tax expense in the statement of profit or loss represents provisional
income tax paid during the tax year 2020.

7. The income tax values of assets at 1 January 2020 were as follows:

Income Tax Values
K
Old plant (original cost- K1,200,000) Nil
Toyota Fortuner cars (Original cost- K1,710,000) 1,026,000
Office Equipment (Original cost- K800,000) 400,000

The Toyota Fortuner cars are used by the three directors on personal-to-holder
basis. The cars cost K570,000 each. The cylinder capacity of each car is 2900
cc.

During the year, JMC Plc entered into the following transactions:

Cost/ (proceeds)
K
Purchase of new plant 2,000,000
Purchase of haulage trucks 2,100,000
Sale of old plant (400,000)

All the above assets were acquired within Zambia and paid for in Zambian kwacha.

Required

(a) Compute the amount of the taxable mining profit for the tax year 2020.
(20 marks)
(b) Advise the company of the amount of company income tax payable for the tax year
2020.
(5 marks)
[Total: 25 Marks]
QUESTION TWO

The following information relates to Wangu for the tax year 2020:
Wangu holds various investments from which he received following income in the
tax year 2020:

Copyright royalties 20,400

Interest from Fixed Deposit bank account 850

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Dividends from Eden Plc, a LuSE listed company 17,000

Dividends from HVN Ltd a private limited company 30,600

Income from letting of property 43,200

These were the actual amounts received in all cases.

Wangu had been employed by TMN Ltd as a sales representative for many years. He
was retrenched on 31 May 2020 as part of a restructuring programme undertaken
by the company. On his retrenchment, he was paid repatriation pay of K21,000 and
a salary in lieu of notice of K31,500. He also received a total sum of K70,000 as
pension refunds. Half of this amount was a refund of employee’s pension
contributions and the remainder was employer’s pension contributions. He had
accrued 21 leave days which were commuted at K350 per day.

His annual basic salary in the final year of employment was K126,000. He was also
entitled to a housing allowance of 12% of his annual basic salary, and a utility
allowance of 5% of his annual basic salary.

He was entitled to a sales bonus which was payable whenever he met his monthly
sales target at the end of that particular month. In December 2019 he met his sales
target, and his bonus of K5,250 was paid on 5 January 2020. He also met his sales
target for January 2020 and his bonus of K6,500 was paid on 2 February 2020.

In March 2020, the company paid for the medical treatment of his sick daughter
amounting to K8,000. The company additionally paid life insurance premiums of K800
per month on behalf of Wangu throughout his employment.

The following payments were made from his employment earnings during the tax year
2020:
K

Pay As You Earn 13,163

NAPSA contributions 7,200

Golf club subscription 1,600

Donation to approved public benefit organisation 7,000

Donation to political party 5,000

Transactions in capital assets

During the tax year 2020, Wangu had the following transactions in capital assets:

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 (1) On 2 March 2020, he sold two acres of land for K192,000, before deducting
estate agents fees of K5,000. He had originally purchased the land on 4
August 2005 for K50,500.

(2) On 29 April 2020 he sold his Ford Ranger motor van for K194,000. He had
purchased the motor van on 17 January 2016 for K267,000.

(3) On 14 January 2020, he disposed of 5,000 K1 ordinary shares out of 15,000

shares he holds in Eden Plc a LuSE listed company, when the shares were
quoted at K3.50 per share. He acquired the entire holding in April 2013 at a
total cost of K30,000.

(4) On 5 May 2020, he transferred 3,000 out of the 20,000, K1 ordinary shares
he holds in HVN Ltd, a private Ltd company, to his niece Charissa at nil
consideration as a wedding gift. On that date the shares were valued at K5.50
each using valuation techniques approved by the Commissioner General. He
acquired the shares 10 years ago at a price of K3.20 per share.

(5) On 14 May 2020, he bought 2,000 acres of arable land in Central Province at
a discounted price of K1,200,000, when the market value of the land was
K1,350,000.

(6) On 10 June 2020, he sold a residential house at a discounted price K250,000,

the Market value of the property on that date being K300,000. The property
was acquired in January 2005 at a cost of K90,000.
Required:

(a) Explain using supporting computations the amount of any property transfer
tax arising on each of the transaction in capital assets in notes (1) to (6)
above during the tax year 2020. (9 marks)

(b) Calculate the total withholding tax paid at source on the investment income
received by Wangu for the tax year 2020. You should clearly show the amount
of withholding tax paid on each type of investment income. (5 marks)

(c) Calculate the final income tax payable by Wangu for the tax year 2020. (11
marks)

[Total=25 marks]