John Kabuswe, a Zambian resident, retired from employment in 2021. He will commence business as a wholesaler on 1 January 2022, using his retirement benefits and borrowedfunds. He wishes to involve his son Jordan Kabuswe in running the business. He is unsure whether his son should be engaged in the business as an employee, a partner or whetherhe should form a limited company and run it together with his son as directors.

On 1 January 2022 the business will purchase two (2) motor vehicles, These will include a Toyota Camry car (2200 cc) at a cost of K200,000 and a Ford Ranger (double cab) van, having a cylinder capacity of 2,400cc, also at a cost of K200,000, He will also acquire three (3) Mitsubishi Light trucks at a cost of K240,000 each and office equipment at a cost of K80,000. The Toyota Camry car will be used by John Kabuswe whilst the Ford Ranger van will be used by Jordan Kabuswe. Each individual will use each vehicle both for business and private purposes. It is estimated that the private use of each individual of each car will be 40%, Each of the above assets will be brought into use immediately after purchase.

The annual turnover of the business for the tax year 2022, is expected to be K6,900,000.

The following additional information is available:

Sole Trader

Under this option John Kabuswe will run the business as a sole trader and engage Jordan as an employee. Jordan will be entitled to annual basic salary amounting to K300,000. He will also be entitled to an accommodation allowance amounting to 20% of his basic salary. John Kabuswe will deduct employees' NAPSA contributions of 5% of Jordan's gross employment earning.

He will also be required to contribute, on behalf of Jordan, employers' NAPSA contributions of 5% of the gross employment earnings.

John will additionally pay 0.5% of Jordan's gross employment earnings as a skills development levy. John will draw an all-inclusive salary amounting to K400,000 per annum.

The net profit as per accounts for the year ended 31 December 2022 is estimated to be

K1,900,000. This profit figure is before taking into account any expenses relating to John and Jordan, NAPSA contributions, and the skills development levy. All the expenses deducted in arriving at the profit of K1,900,000 are allowable for tax purposes,

Partnership

If Jordan is engaged as a partner, then the business will be run as a partnership. John and Jordan will draw annual salaries amounting to K400,000 and K300,000 respectively. Jordan will draw an accommodation allowance amounting to 20% of his salary.

Under this option, NAPSA contributions will not be payable by either John or Jordan. The skills development levy will also not be payable,

The tax net profit as per accounts is expected to be K1,900,000 for the year ending 31 December 2022. This net profit figure is before taking into account any expenses relating to John and Jordan. All the expenses deducted in arriving at the profit of K1,900,000 are allowable for tax purposes.

Any balance of the profit and losses will be shared in the ratio 3:1 between John and

Jordan.

Limited company

If John and Jordan run the business as a limited company, they will incorporate a company known as JOJO Limited. John will hold 70% of the issued equity share capital of JOJO Limited while Jordan will hold 30% of the issued equity share capital of JOJO Limited. They will personally run the company and manage it as full-time working directors. They will draw annual directors' salaries amounting to K400,000 and K300,000 for John and Jordan respectively. Jordan will draw an additional 20% of his basic salary as accommodation allowance. The company will deduct employees' NAPSA contributions of 5% of each individual's gross employment earnings.

The company will contribute the employer's NAPSA contributions of 5% of each individual’s gross employment earnings. The company will additionally pay a skills development levy of 0.5% of each individual’s gross employment earnings.

The net profit as per accounts is expected to be K1,900,000for the year ended 31 December 2022. This profit figure is before taking into any expenses relating to John and Jordan but after all relevant tax adjustments have been made. All the expenses deducted in arriving at the profit of K1,900,000 are allowable for tax purposes.

Required:

(a) Calculate the amount of income tax and NAPSA contributions payable by John and Jordan for the tax year 2022 if John runs the business as a sole trader. 

(b) Calculate the amount of income tax payable by John and Jordan for the tax year 2022, if the business is run as a partnership. 

(c) Assuming the business is run as a limited company:

(i) Calculate the amount of income tax, and NAPSA contributions payable by John and Jordan for the tax year 2022. 

(ii) Calculate the amount of income tax payable by JOJO Limited for the tax year 2022. 

(d) Advise John and Jordan whether it will be beneficial to run the business as a sole trader, partnership, or as a limited company. Your answer should be supported by a computation of the net income after tax, NAPSA contributions and other relevant expenses for each option.

Answer rating: 100% (QA)

Under the limited company option the net profit as per accounts is expected to be K1900000 for the year ending 31 December 2022 This net profit figure ... View the full answer