QUESTION You are a Senior Tax Consultant in a Tax Consultancy firm. The Tax Manager has presented the following information relating to two (2) of your clients in respect of which you should prepare appropriate responses in the form of computations and explanations as required. You should assume that the 2021 tax rates were applicable. Pelekelo and Co. Pelekelo has been in business for many years trading as Pelekelo and Co and preparing accounts to 31 December each year. On 1 April 2020, she invited her manager, Mtonga to join her in partnership. As a result, Pelekelos annual proprietors salary of K260,000 became her annual partnership salary and Mtongas annual salary as an employee of K180,000 became her annual partnership salary. Profits and losses were to be shared between Pelekelo and Mtonga in the ratio of 3 to 2 respectively. The profit for the year ended 31 December 2020 was K550,000. This profit figure was arrived at after deducting the following expenses: Pelekelos annual proprietors salary of K250,000, Mtongas annual salary of K180,000, depreciation of K90,000, cost of entertaining customers of K80,000 and cost of gifts of Pelekelo and Co calendars of K2,880, with each calendar costing K90. All other expenses charged in the accounts were of a revenue nature and therefore deductible for income tax purposes. Mibenge Mibenge has been in business for many years trading as Mibenge and Co. At the start of the tax year 2019, he calculated his provisional taxable profits to be K750,000. He calculated and paid provisional income tax correctly on the due dates. At the end of the tax year 2019, his final taxable profit was K825,000. He calculated the balance of income tax for the tax year 2019 and he also calculated the provisional taxable profit for the tax year 2020 of K820,000 in January 2020. Due to a downturn in business activity in February 2020, Mibenge revised the provisional taxable business profit for the tax year 2020 from the original estimate of K820,000 to only K720,000. As a result of the downturn in business, Mibenge also experienced serious cash flow problems such that he paid the provisional income tax for the quarter ended 31 March 2020 on 13 June 2020 and he submitted the return of provisional income for the tax year 2020 on this date. In addition, he 2 paid the provisional income tax for the quarter ended 30 June 2020 together with the balance of income tax for the tax year 2019 on 31 August 2020. Mibenge submitted the self-assessment income tax return for the tax year 2019 on 31 August 2020. Cash flow problems were fully resolved after 31 August 2020 and Mibenge is certain that all the outstanding taxes thereafter would be paid properly. Mibenge 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 Pelekelo and Co: (i) Discuss whether the admission of Mtonga as a partner would amount to cessation of Pelekelos business for income tax purposes (ii) Calculate the taxable income of Pelekelo and Mtonga and the amounts of income tax paid by Pelekelo and Mtonga for the tax year 2020. (b) In respect of Mibenge: (i) Assuming that the income tax rates and bands for the tax year 2020 apply throughout and that the Bank of Zambia discount rate is 12.75% per annum, advise Mibenge of the amounts of penalties and interest charged on overdue taxes on all payments made up to and including 31 August 2020. (ii) Identify the date when the returns were submitted late and calculate the amounts of penalties for late submission of those returns. (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 2020 and why such action should be taken. (iv) Explain the reasons why the Commissioner General may make enquiries into a tax return.