Answers

Applied Skills, TX – BWA June 2020 Answers

Taxation – Botswana (TX – BWA) and Marking Scheme

Section A

1 The correct answer is P577,650

P
Salary 550,000
Net rental income 27,650
Medical aid refunds 0
Building society interest 0
Mileage claims 0
––––––––
577,650
––––––––
Company contributions and interest from a bank or a building society are specifically excluded from taxable income.
Reimbursements of costs are not included in taxable income.

2 The correct answer is 3 March 2020

The time of supply is the earlier of cash received or invoice issued.

3 The correct answer is P54,747

P
Sales commission 0
Administration fees 18,629
Technical fees 36,118
Rent of premises 0
–––––––
54,747
–––––––
Deductions of tax from payments to non-residents in respect of interest, royalties and management and consulting
fees are a final charge to tax.

4 The correct answer is P50,000

P
Employer’s provident fund 0
Voluntary personal pension scheme 50,000
Voluntary employer’s savings scheme 0
–––––––
50,000
–––––––
No deductions for contributions to provident funds and savings schemes.

5 The correct answer is (2) and (4) only

In order to be liable to tax in Botswana, the international company must be carrying on business in Botswana.

6 The correct answer is P2,594,113

P
Cost 1,750,000
Indexation 155,887
––––––––––
(1,750,000 x 1892·6/1737·8) 1,905,887
Sale price 4,500,000
––––––––––
2,594,113
Rollover relief 0
––––––––––
Net disposal gain 2,594,113
––––––––––
Rollover relief cannot be claimed because the new property was purchased before the sale of the old property.

3
7 The correct answer is P47,696
P
Tax at 22% on 3,472,900 764,038
Less: SAT paid (650,000 )
––––––––
114,038
Less: credits
Bank interest received (28,926 )
Dividends received 0
Commission received (37,416 )
Exempt interest received 0
––––––––
SAT still to be paid 47,696
––––––––
Credits to include SAT and various withholding taxes.

8 The correct answer is P13,683

P
Discount on goods exported 0
Price reduction on goods sold locally 36,819
Goods returned by local customers 77,208
Residential rent received 0
––––––––
Post-sale adjustment 114,027
––––––––
VAT on post-sale adjustment – 12% x 114,027 13,683
VAT on the credit note must mirror VAT on the original invoice.

9 The correct answer is P842,054

P
Original cost of machinery (839,903 + 1,166,084) 2,005,987
Rollover relief granted (467,228 )
Annual capital allowances claimed (125,985 + 104,828) (230,813 )
––––––––––
1,307,946
Sales price 2,150,000
––––––––––
Balancing charge 842,054
––––––––––
Rollover relief previously granted must be deducted in calculating the subsequent sale of the asset.

10 The correct answer is (2) and (4) only

Tax avoidance is a deliberate action to create rights and obligations which do not normally exist with a view to
reducing a tax liability.

11 The correct answer is P505,000

P
Royalties paid to a resident 150,000
Marketing fees paid to a non-resident (25,500/15%) 170,000
Management fee paid to a non-resident 0
Interest paid to a resident 185,000
––––––––
505,000
––––––––
The deductibility of expenses liable to WHT is only affected in the case of payments to non-residents. Payments to
residents are always deductible whether the WHT has been paid or not.

4
 Marks
12 The correct answer is P59,820
Cost
P
100 shares 60,000
20 bonus shares 0
5 shares 3,250
–––––––
125 shares 63,250
–––––––
Cost per share 506
–––––––
Sale of 30 shares 75,000
Less: cost of 30 shares (15,180 )
–––––––
Gross disposal gain 59,820
–––––––
The cost must first be determined when calculating a disposal gain.

13 The correct answer is P364,423

P
Interest received 579,384
Dividends received 723,061
––––––––––
1,302,445
Less: expenditure (483,229 x (579,384/1,302,445)) (214,961 )
Less: dividends received (723,061 )
––––––––––
364,423
––––––––––
The expenditure deduction must be proportionate to the assessable income earned. Dividends received do not
constitute assessable income and so some of the expenditure incurred to earn that income must be disallowed.

14 The correct answer is P489,056

P
Total commission income 854,620
Less: motor vehicle expenses (176,935 )
Less: hotel accommodation (73,629 )
Less: rental of property (60,000 )
Less: capital allowances, car (350,000 x 25%) (87,500 )
Add: motor vehicle benefit (10,000 + (150,000 x 15%)) 32,500
––––––––
Chargeable income 489,056
––––––––
A self-employed person can claim all expenses incurred in the production of his/her income.

15 The correct answer is P1,591,083

P
Preliminary taxable income 2,386,117
Inventory (367,230 )
Investments 0
Non-current assets 0
Accounts receivable (427,804 )
––––––––––
1,591,083
––––––––––
Inventory impairments are specifically deductible. An impairment of accounts receivable can also be claimed.
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2 marks each 30
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Section B Marks

1 Lesedi Products (Pty) Ltd

(a) Value added tax (VAT) calculation

Standard Zero Exempt Non-taxable
rated rated
Notes P P P P
Outputs
Sales 1,472,972 0·5
Proceeds on sale of single cab bakkie 1 157,000 1
Commission received 2 48,206 0·5
Impaired trade receivable recovered 3 17,573 1
Technical fees received 4 20,000 0·5
–––––––––– ––––––– ––––––– –––––––
1,678,178 20,000 0 17,573
–––––––––– ––––––– ––––––– –––––––
Inputs
Purchases – local 376,100 0·5
Purchases – imported 569,226 0·5
Credit notes issued for sales returns 12,739 0·5
Depreciation 65,182 0·5
Discount allowed for early payment 8,628 0·5
Salaries and wages 217,030 0·5
Pension fund contribution 32,555 0·5
Provision for future costs 30,000 0·5
Interest on overdraft 18,729 0·5
–––––––––– ––––––– ––––––– –––––––
966,693 0 18,729 344,767
–––––––––– ––––––– ––––––– –––––––
Excess of outputs over inputs 711,485
––––––––––
VAT thereon at 12% 85,378
–––––––––– –––
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Tutorial notes:
1. The proceeds on sale of the single cab bakkie are liable to VAT.
2. Even though life insurance is an exempt supply, any commission received on the sale is still liable to VAT.
3. An input has not yet been claimed for the irrecoverable debt and so there is no output.
4. Fees received from non-residents are zero rated.

(b) If the return and payment are submitted late, the penalties would be:
(i) Late return – 10% per month of VAT payable. 1
(ii) Late payment – 10% per month of VAT payable. 1
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2
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10
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2 Kamanga Communications (Pty) Ltd

(a) Withholding tax (WHT) payable

Payment WHT
P P
Payments to non-residents
Rental of IT equipment and software 276,118 41,418 0·5
Loan guarantee fees 42,000 6,300 0·5
Insurance premiums 582,031 0 0·5
Marketing fees 86,229 12,934 0·5
Payments to residents
Interest paid to lender 142,996 14,300 0·5
Royalties 54,287 0 0·5
Rental of commercial premises 354,603 17,730 0·5
Brokerage 92,020 9,202 0·5
––––––––
101,884
–––––––– –––
4
–––

(b) Deduction disallowed if WHT not paid

P
Rental of IT equipment and software 276,118 1
Loan guarantee fees 42,000 1
Marketing fees 86,229 1
––––––––
404,347
–––––––– –––
3
–––

(c) Purpose of withholding tax

(i) Non-residents
Most countries consider payments of interest, royalties and dividends to be from a local source of
income. Accordingly, the recipients are liable to tax in the paying country but because of the difficulties of
subjecting foreign persons to tax in the local country, the tax is to be withheld by the payer. Tax withheld
is then considered to be a final charge to tax. 2
(ii) Residents
Withholding tax imposed on residents is usually a means of receiving the tax quicker but also is usually
imposed on those items of income which are susceptible to tax evasion. 1
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3
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10
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3 Marshall Supplies (Pty) Ltd

(a) General deduction formula

A taxpayer is entitled to deduct certain expenses from his/her assessable income in order to arrive at taxable
income. The foundation for such deductions is contained in the ‘general deduction formula’ which lists the
following criteria: 1
(i) expenditure must be wholly, exclusively and necessarily incurred 0·5
(ii) by the taxpayer 0·5
(iii) during the tax year 0·5
(iv) in the production of assessable income. 0·5
–––
3
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Tutorial note: In practice, the general deduction formula covers the majority of business expenditure.

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(b) Specific deductions
In addition, there are specific deductions which are intended to enlarge the general deduction formula. Specific
deductions are those deductions which would not normally qualify under the general deduction formula. 1
E.g. capital allowances and irrecoverable debts. 0·5 per example, maximum 1
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2
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(c) Claims for tax deduction
(i) Impairment of intangible assets – any impairment does not meet the requirements of the general
deduction formula since no expenditure has been incurred. 0·5
Therefore one must look to the specific deductions, but there is no deduction for impairment of intangible
assets. A deduction cannot be claimed. 0·5
(ii) Impairment of trade receivables – these cannot be claimed under the general deduction formula because
an irrecoverable debt does not constitute ‘expenditure incurred’. 0·5
However, there is a specific section (41(1)(j)) of the Income Tax Act which allows for the deduction of
doubtful debts. A deduction can be claimed. 0·5
(iii) Inventory losses – inventory losses cannot be claimed under the general deduction formula because such
losses do not constitute ‘expenditure incurred’. 0·5
Inventory is usually shown as part of cost of sales and the excess of the value at the beginning of the year
compared with its value at the end of the tax year can be claimed as a specific deduction. 0·5
In valuing inventory, any amount lost due to damage, deterioration, obsolescence or other cause can be
deducted. 0·5
(iv) Interest on bank overdraft – can, in certain cases, be claimed under the general deduction formula.
However, there is a specific deduction which covers all cases including interest which is of a capital
nature or is not in the production of income. 0·5
New legislation now limits the interest deduction to 30% of tax earnings before interest, tax, depreciation
and amortisation (EBITDA) in respect of groups. 0·5
However, since Marshall Supplies (Pty) Ltd is not a member of a group, the legislation does not apply
and the interest would be deductible in full. 0·5
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5
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10
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4 Tau Holdings Ltd

(a) Chargeable disposal gains

P P
1. Sale of patent 350,000 0·5
Less: cost of patent (10,000 ) 0·5
––––––––
340,000
Less: 25% movable property allowance (85,000 ) 255,000 1
––––––––
2. Sale of goodwill 276,050 0·5
Less: 25% movable property allowance (69,013 ) 207,037 1
––––––––
3. Sale of debentures 80,000 0·5
Less: cost of debentures (100,000 ) 0·5
––––––––
(20,000 )
Less: 25% movable property allowance 0 (20,000 ) 1
––––––––
4. Sale of shares in Sheridan Equipment Ltd
Sale of 5,000 shares 842,675 0·5
Cost of 5,000 shares (5,000 x 106) (530,000 ) 0·5
––––––––
312,675
Less: 25% movable property allowance (78,169 ) 234,506 1
–––––––– ––––––––
676,543
Less: capital loss brought forward (362,817 ) 1
––––––––
Chargeable disposal gain 313,726
––––––––

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Working: Sheridan Equipment Ltd
P
Purchased 25,000
Cost 2,650,000
Cost per share 106 0·5
–––
9
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(b) Carry forward of capital loss

A capital loss can be carried forward for set-off against capital gains for one year. 1
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10
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5 Tlokweng Distributors (Pty) Ltd (TDL)

(a) Taxable income before any interest restriction

Working: balancing adjustment
P
Cost of assets 460,104 0·5
Capital allowances claimed to 30 June 2019 (148,294 ) 0·5
––––––––
Tax written down value 311,810
Sales proceeds (200,000 ) 0·5
––––––––
Balancing allowance 111,810
––––––––
P P
Profit before tax 115,818
Add: administration expenses 0 0·5
Add: salaries and wages 0 0·5
Add: amortisation 49,628 0·5
Add: depreciation 179,226 0·5
Add: impairment of investments 200,000 0·5
Add: loss on sale of non-current assets 51,373 480,227 0·5
––––––––
Less: capital allowances 226,802 0·5
Less: balancing allowance 111,810 0·5
Less: dividends received 61,004 (399,616 ) 0·5
–––––––– ––––––––
Taxable income (before interest restriction) 196,429
–––––––– –––
6
–––

(b) Calculation of tax-EBITDA

P
Taxable income as above 196,429 0·5
Add: interest paid (106,273 + 286,135) 392,408 1
Less: interest received (78,229 ) 1
Add: capital allowances 226,802 0·5
––––––––
Tax-EBITDA 737,410
–––––––– –––
3
–––

(c) Calculation of interest restriction

P
Net interest (392,408 – 78,229) 314,179 1
Restricted to 30% tax-EBITDA (30% x 737,410) 221,223 1
––––––––
Interest disallowed 92,956
–––––––– –––
2
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(d) Calculation of taxable income after interest restriction
P
Taxable income before interest restriction 196,429 0·5
Add: interest disallowed 92,956 0·5
––––––––
Taxable income after interest restriction 289,385

––––––––
–––––––– –––
1
–––
Tutorial note: TDL is part of a group and therefore it cannot claim exemption from the interest restriction.

(e) Rationale
The rationale behind the new legislation is that the interest deduction should be linked to economic activity or,
put another way, is determined by the profitability of the enterprise before the impact of interest. It is possible
with groups to introduce debt into an enterprise and thereby incur interest the purpose of which is purely to
shift profits to another jurisdiction. Base erosion profit shifting (BEPS) 4 and the interest restriction aims to
counter such profit shifting. 3
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15
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6 Agnes Sanga

(a) Partnership chargeable income

P P
Partnership loss per accounts (246,612 )
Add: administration expenses 0 0·5
Add: salaries and wages 0 0·5
Add: depreciation 56,228 0·5
Add: interest on partners’ capital accounts 38,448 1
Add: partners’ drawings 172,562 0·5
Add: partners’ house rent 120,000 0·5
Add: partners’ salaries 600,000 0·5
Add: value added tax (VAT) penalties 27,073 1,014,311 1
––––––––––
Less: capital allowances 83,926 0·5
Less: obsolete inventory 267,053 (350,979 ) 1
–––––––––– ––––––––––
Chargeable income from partnership 416,720
––––––––––
Agnes 50% share 208,360 0·5
–––––––––– –––
7
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(b) Net disposal gain

P
Gross gain on East Ltd shares: held more than one year (exempt) 0 1
–– –––

(c) Taxable income from all sources

P P
Interest received from a bank 0 0·5
Interest received from Agnes’ sister 19,062 0·5
Management fees 120,000 0·5
Net rental income 79,261 0·5
Less: rental loss brought forward (42,839 ) 36,422 0·5
––––––– ––––––––
175,484
Partnership chargeable income 208,360 0·5
Car benefit ((10,000 – 0) + (15% x 35,000)) 15,250 1·5
Net disposal gain (exempt) 0 0·5
––––––––
Taxable income 399,094
–––––––– –––
5
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 Marks
(d) Tax payable
P P
First 144,000 13,050
Next 255,094 (399,094 – 144,000) x 25% 63,774
–––––––
76,824
Less: withholding tax (WHT) interest – bank 0 0·5
Less: WHT interest – sister 1,906 0·5
Less: WHT rental 5,000 0·5
–––––––
(6,906 ) 0·5
–––––––
Tax payable 69,918
––––––– –––
2
–––
15
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