SOLUTION PRINCIPLES & PRACTICE OF TAXATION NOVEMBER 2010

Transcription

1 SOLUTION 1 Employment SOLUTION PRINCIPLES & PRACTICE OF TAXATION NOVEMBER 2010 Salary Add: Rent Allowance Transport Allowance Benefit from purchase of buses Less: 5% Social Security (5% x 9,600) Chargeable employment income Transport Add: Depreciation Vehicle Income Tax Less: C/Allowance (20,000 x 30% x 9 mths) Assessment Employment Transport Total Assessable Income Less: Marriage Relief 35 Child Allowance , , , , ,515 9,600 9,080 18, , ,720 1, ,880 4, ,380 SOLUTION 2 Capital Expenditure and revenue Expenditure The following statements will be found helpful in distinguishing between capital expenditure and revenue expenditure:- a) Capital expenditure is something that is going to be spent once and for all and income expenditure is a thing that is going to recur every year. (Lord Dunedin) b) The distinction is between expenditure that is to meet a continuous demand and expenditure made once and for all. (Rowlatt J.) c) Fixed capital is what the owner turns to profit by keeping it in his own possession, circulating capital is what he makes profit of by parting with it and letting it change masters. (Adams Smith)

2 d) The cost of additions or improvements to assets acquired for long term use in the trade and not for resale, plus the incidental costs thereof. From the above, it becomes clear that capital expenditure involves, for example, the cost of a vehicle, plant, machinery, equipment, a building constructed or purchased for long time use in the business and not for resale. On the other hand, revenue expenditure involves the cost of raw materials to be converted into finished products for sale or direct purchses of goods for sale. Revenue expenditure also includes such incidental expenses as electricity and water, repairs and maintenance, bank charges, salaries and wages etc. It should also be noted that what may be regarded as a capital expenditure in one business could be a revenue expenditure in another business. This distinction in income taxation is important because in the computation of chargeable income for tax purposes:- Revenue expenditure is allowed as deductible in arriving at the adjusted profit for tax purposes, capital expenditure is not deductable but capital allowances are granted. In quite a number of cases, to determine whether a particular expense is capital or revenue is so complex that it is finally settled at the courts. Some decided tax cases are:- i. Bullcraft Main Collieries Ltd vrs O Grady (Capital Exp) ii. Law Shipping Co. Ltd vrs C. I. R. (Capital Exp) iii. Samuel Jones & Co (Devondale Ltd vrs C. I. R. (Revenue Exp) iv. Odeon Associated Theatres Ltd vrs Jones (Revenue Exp) v. Green vrs J. Gliksten & Son Ltd (Revenue Exp) SOLUTION 3 Add Back: Maintenance Sundry Expenses Salaries & allowances etc (Partners 6 mths) Depreciation Adjusted Profit Less: Capital allowance Cheargeable Income Distribution of Profits 14,500 3,100 24,725 2,200 92, ,275 70,675 16,880 53,795

3 Living allowance Transport allowance Interest on Capital Child Education Risk allowance Profits Add Backs A.I 38,275 CA 70,675 C.I 53, Sharing (6 months) Rudolf Justin 17,932 8,966 14,500 10,225 32,432 19,191 26,897 1/11/07 31/10/08 59,329 1/11/07 30/4/08 26, Capital Allowance Computation Rudolf 6,000 2,500 14,500 29,433 43,933 Justin 6, ,225 5,887 16,112 Pool.2 Pool.4 30% 20% B/F 28,000 6,400 Adds 24,000-52,000 6,400 Dep. Allowance 15,600 1,280 = 16,880 36,400 5,120 DISTRIBUTION JUSTIN1/3 RUDOLF2/3 8,966 17,932 10,225 14,500 C.I. 19,191 32,432 C.A. Granted C.I. 59,329

4 SOLUTION 4 Less: Dividend Received Rent Income Add: Repairs (Vehicles & Farm Equipment Defalcation Legal & Professional Depreciation Fines and Penalties Genral Provisions (Bad Debts) Donations Adjusted profit Less: Loss b/f Utilised (Profit) Capital Allowance: b/f Current Rent Income: Less: 8% Final Tax 3,600 32,000 16,500 4, ,000 2,800 6,400 2, ,500 38,200 32,960 71,160 32,000 2, ,900 35, , , ,500 NIL C.I. 209,500 C.A. 71, ,340 Capital Allowance Computation Pool.1 40% b/f Adds... Allowance ,440 Pool.2 30% 18,000 9,000 27,000 8,100 18,900 Pool.4 20% 12,000 7,500 19,500 3,900 15,600 Pool.5 10% Total 120, ,000 20,000 32, ,000

5 SOLUTION 5 (a) Consideration Received Less: Cost Base Chargeable Gain Assessable Less: Roll-Over Relief: Cost of Replacement Cost Base Chargeable Gain Less: Exempt Amount Tax at 5% = 7,475 60,000 46,800 75,000 46,800 28,200 13,200 15, ,950 Comments Part of the proceeds of sale was used to acquire a similar chargeable asset within a year of realisation hence he qualifies for roll-over relief. (b) The Commissioner may reject an application if: a) He is satisfied that the person has no fixed place of abode or business; or b) He has reasonable grounds to believe that that person:- i. will not keep proper accounting records relating to any business activity carried on by him; or ii. iii. will not submit regular and reliable tax return as required by or under the VAT Act; or is not a fit and proper person to be registered.