This article is relevant to those of you sitting the TX-MWI exam in June 2023 or December 2023 and is based on tax legislation as it applies to the tax year 2022–23.
Please note: Students should be aware that exams in June and December 2023 will be based on legislation passed by the previous September (ie September 2022) and so will incorporate the changes made to the tax rules in Malawi in April 2022 but not those changes which have been enacted in April 2023.
In the TX-MWI exam a candidate can improve their chance of a pass if they are able to complete computational questions for traders, partners and companies. Where candidates have not been able to attend a formal class there are certain key principles which should help to gain marks.
Where a question requires the adjustment of profits, the following will often be included as a note to the requirements:
This approach has been adopted so that candidates maximise available time, and to help them score full marks.
In this article we will look at an example of this type of question for a sole trader. The example shown is based on an extract from a published sample exam updated to reflect the legislation applicable for exams in June and December 2023.
The following information is available for John for the year to 31 March 2023.
John’s business
John operates an unincorporated business as an agricultural merchant. As he is not involved in its operations daily, he employs a manager to run the business.
The results for the business for the year to 31 March 2023 are as follows:
K | |||||
---|---|---|---|---|---|
Turnover | 55,500,000 | ||||
Cost of sales | (20,821,500) | ||||
34,678,500 | |||||
Less expenditure | Note | ||||
Depreciation | 855,000 | ||||
Fringe benefits tax | 1 | 175,000 | |||
Travel expenses | 2 | 1,256,000 | |||
Bad debts | 3 | 275,500 | |||
Rent and rates | 4 | 1,550,000 | |||
Transport costs | 5 | 685,000 | |||
School fees | 6 | 1,450,000 | |||
Drawings by John | 750,000 | ||||
Other expenses (all allowable) | 9,455,400 | 16,451,900 | |||
18,226,600 | |||||
Add | |||||
Bank interest (gross) | 7 | 45,000 | |||
Profit before tax | 18,271,600 |
Notes:
Additional information
(i) The business has the following assets which were bought during the year:
(ii) Provisional tax paid was K4,900,000
John’s employment
John was employed as a chemist at a laboratory. His earnings for the year ending 31 March 2023 including housing allowance was K49,500,000.
PAYE of K14,625,000 was deducted and paid over to the tax authorities by John’s employer.
John’s rental income
Net rental from house let out: K500,000
No withholding tax was deducted on this rental income
(a) Calculate the taxable income of John’s agricultural merchant business for the year ending 31 March 2023.
Note: You should start your computation with the profit before tax of K18,271,600 and indicate by the use of zero (0) any items in the scenario relating to the business which do not require adjustment.
(8 marks)
Taxable income for John’s agricultural merchant business for the year ended 31 March 2023 |
|||
|
K |
K |
Marks |
Profit before tax |
|
18,271,600 |
|
Adjustment for expenses: |
|||
Depreciation |
855,000 |
|
½ |
Fringe benefits tax |
175,000 |
|
½ |
Travel expenses |
800,000 |
|
½ |
Bad debts |
175,500 |
|
½ |
Rent and rates (1,800,000 – 1,550,000) |
(250,000) |
|
½ |
Transport costs |
275,000 |
|
½ |
School fees |
1,450,000 |
|
½ |
Drawings |
750,000 |
|
½ |
|
|
4,230,500 |
|
Capital allowances (W1) |
|
(2,295,000) |
½ |
Adjustment for income -Bank interest income |
|
0 |
½ |
Taxable profit |
|
20,207,100 |
|
W1 Capital allowances |
K |
Initial allowance K |
Annual allowance K |
Total |
Marks |
Lorries |
4,500,000 |
900,000 |
900,000 |
1,800,000 |
1 |
Computers |
500,000 |
100,000 |
200,000 |
300,000 |
1 |
Furniture |
650,000 |
130,000 |
65,000 |
195,000 |
1 |
|
|
|
|
2,295,000 |
|
(b) Calculate the tax payable by John for the year ended 31 March 2023.
(7 marks)
The tax payable by John will be on his total income. This will include the income from his agricultural merchant business already calculated at part (a), note that candidates will be given ½ mark for their own figure from part (a) even if it was not the correct amount. To this will be added John’s employment income and his rental income.
The rates at which this will be taxed must be calculated and these are given to you in the exam. See this article outlining how these tax tables can be used.
From that figure of tax due, the tax already paid (the provisional tax given in the scenario) and the PAYE deducted, and the tax already suffered (the withholding tax on the bank interest) will be deducted to give the tax which will be payable by John.
The detailed answer is shown below.
Tax payable by John for the year ended 31 March 2023 |
|||
|
K |
K |
Marks |
|
Employment income |
Other income |
|
Taxable profits from part (a) |
|
20,207,100 |
½ |
Employment income |
49,500,000 |
|
½ |
Rental income |
|
500,000 |
½ |
Total taxable income |
49,500,000 |
20,707,100 |
|
Tax |
|
|
|
First 1,200,000 |
0 |
|
½ |
Next 2,760,000 at 25% |
690,000 |
|
½ |
Next 32,040,000 at 30% |
9,612,000 |
|
½ |
13,500,000 (49,500,000 – 36,000,000) at 35% |
4,725,000 |
|
½ |
Non employment income at 30% |
|
6,212,130 |
½ |
Total |
15,027,000 |
6,212,130 |
|
Combined total |
21,239,130 |
|
|
Less: PAYE deducted |
(14,625,000) |
½ |
|
Less: Provisional tax paid |
(4,900,000) |
½ |
|
Less: Withholding tax suffered W2 |
(6,000) |
½ |
|
Total tax payable |
1,708,130 |
|
W2 Bank interest income for the year ended 31 March 2023 |
||
|
K |
Marks |
Total interest taxable |
45,000 |
½ |
Less amount accrued |
(15,000) |
½ |
Interest actually received |
30,000 |
|
Withholding tax suffered at 20% |
6,000 |
½ |
This amount of withholding tax will be deducted from the total tax payable by John. |
Written by a member of the TX-MWI examining team