year under defined benefit provisions of registered funds shall be limited to the amount by which the lesser of -

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Maximilian Banks
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1 QUESTION ONE REGISTERED PENSION SCHEME AND IMPLICATIONS Registered Pension Scheme is a retirement benefit scheme registered under rule 4 of the Income Tax Act and the following are the main rules relating to a registered Pension Scheme Sec.22: (i) Deduction in respect of contributions of an employee in a year shall be limited to the lesser of: The sum of the contributions made by the employee to registered funds in the year or, Thirty percent of the employee s pensionable income in the year, or Two hundred and ten thousand per year or seventeen thousand five hundred shillings per month of the funds. (ii) (iii) The deduction in respect of the contributions made by an employer in a year under defined contribution provisions of registered funds shall be limited to the sum of the deductible contributions of the employer in the year under defined contribution provisions of registered funds on behalf of the funds. The deduction in respect of the contributions made by an employer in a year under defined benefit provisions of registered funds shall be limited to the amount by which the lesser of - The sum of the contributions made by the employer and by the employee in the year to registered funds in respect of members of the defined benefit registered funds of the employer, or Thirty per cent of the sum of the pensionable incomes from the employer in the year of members of defined benefit registered funds of the employer; or Two hundred and ten thousand shillings per annum times the number of fullyear members of defined benefit registered funds of the employer, exceeds the sum of - The deductible contributions made in the year to the registered funds of the employer by the members of registered funds of the employer, and

2 The amounts deducted by the employer for the year for contributions made under defined contribution provisions of registered funds under subsection (2) in respect of the members of the defined benefit registered funds. (iv) (v) Pension funds in respect of an employee may be transferred to another registered fund or registered individual retirement fund and not be treated as a withdrawal under Sec.3 (2)(c) Where registered fund is wound up, any surplus funds therein shall be deemed to be the funds of the employer and shall be immediately withdrawn by the employer unless the trust deed in respect of such registered fund specifies the contrary. Other rules: - Funds must be registered - Contribution cannot be withdrawn before 5 years have expired neither can contributions be used as security. (i) (c) Payment of pension from a registered scheme to a pensioner will be based on the following rules: The first Ksh.180,000 received by a resident individual in a year of income in respect of pensions or retirement annuities is exempted and is not chargeable to tax Sec 58(4). Lump sum payment of first Ksh.480,000 is exempted from income tax upon maturity of employment. The amount withdrawn on termination of employment is exempted from tax to a limit based on the lesser of: The first Ksh. 48,000 per full year of service with the employer for first 10 years. The first Ksh. 480,000 for period of service is more than 10 years. (ii) Payment to widow or widower of a pensioner will be treated as follows: - the first Ksh.1,400,000 of such a lump sum payment will be considered as income not chargeable to tax as income of the beneficiary. MR. KIPLIMO INCOME CHARGEABLE TO TAX YEAR 2001

3 Self Employment income salary Less pension contribution the lesser of: 30% x 600,000 = 180 or Actual contribution 50 or set limit (Yr.2001) 210 Owner occupied Mortgage interest Lower of: Actual interest 62,000 Set limit 100,000 Wife s income Employment income salary (Sh.25,000 x 12 months) Clinical loss (registered clinical officer) Total income chargeable to tax 600,000 (50,000) (62,000) 300,000 (240,000) 488,000 60,000 (c) TAX PAYABLE Chargeable income split as follows: Tax thereon 10%) + (114,912 x 60%) (488,000 30% Less: PAYE Personal relief Net tax liability (refund) MR. KIPLIMO SH.488,000 81,144 6,389 87,533 (142,500) (13,944) (68,911) Sh.60,000 x 10% Less: PAYE = Personal relief Tax refund WIFE SH.60,000 6,000 (93,600) (13,944) (101,544) (d) (i) Value Added Tax on his purchases is not deductible against incomes provided hence ignored. (ii) Pension contribution by the employer on behalf of Mr. Kiplimo is a non-taxable benefit for Mr. Kiplimo. (iii) Dividend received suffers 5%withholding tax as final tax assumed qualifying type.

4 (iv) (v) Post office savings bank interest is tax exempt. Balance of interest assumed to originate from qualifying sources hence W/T final tax. Personal expenses such as personal accident policy premium, life insurance premium, alimony to first wife is not tax allowable. QUESTION TWO FOUR EFFECTS OF VALUE ADDED TAX ON BUSINESS VAT increases prices of goods or services hence may reduce sales and profitability VAT calls upon a registered person (trader) to maintain expensive elaborate records in addition to penalties, where VAT is not paid on time or a return has not been submitted, etc. In the case of credit sales the trader will be required to finance VAT whether customers have paid or not and in the case of capital assets input tax is not recoverable but is capitalized. VAT may create market imperfections because not all traders dealing in same supplies are required to charge VAT. (c) If the Commissioner of VAT makes a decision which still leaves the trader aggrieved, such a trader can appeal to the VAT appeals Tribunal within thirty days for an independent decision. However, such a person must pay to the commissioner the assessed tax not in dispute or such part thereof as the commissioner may require before the appeal is registered. It further aggrieved by the rulings of the tribunal he can seek redress from the High Court on payment of full amount of the tax disputed. Where VAT is not paid on time then there will be:- 2% per month interest on Cumulative basis on tax due. In this case one month has elapsed hence penalty would be: (Sh.300,000 x 2%) = Sh.6,000 In addition, failure to submit the return along with payment attracts Ksh.10,000 penalty or 5% of VAT due whichever is higher. (d) VAT PAYABLE INLAND CO. LTD Sh.

5 Goods landed value Duty 35% Value for duty plus duty Commission on dutable 2% x 400,000 Transport Value for VAT VAT 16% Total price 400, , ,000 8,000 50, ,000 95, ,680 QUESTION THREE (i) TAXATIONOF PENSION INCOME FOR A RETIRED EMPLOYEE Pension payment to retired employee may be a one-time lump sum regular payments for a specified period of a combination of the above. The following shall apply: The first Ksh.480,000 computed as a lump sum from registered pension is tax exempt; any amount in excess is taxable. Where contributions to a pension fund was for less than 10 years, then the exempt lump sum amount shall be Ksh.48,000 for year of pensionable service. Total pensions received by a resident from un-registered pension fund, where such contributions were not deducted for tax are tax-exempt. From 1/7/2004 pensions and retirement annuities up to Ksh.180,000 per annum (periodic payment) in total received by a resident individual is tax exempt. (ii) ALLOWABLE DEDUCTIONS FOR CONTRIBUTIONS TO A REGISTERED PENSION SCHEME An employee can claim relief in respect of his annual contribution to a registered retirement benefit scheme, limited to the lesser of: 30% of pensionable pay or;

6 Actual contribution made to the scheme or; Set limit of Ksh.210,000 p.a. (Sh. 240,000 w.e.f 1/1/2006) Note that pensionable income means employment income cash pay including non-cash benefits. (iii) PROCEDURE FOR END OF YEAR RETURN At the end of the year employers should fully complete the questionnaire on every tax deduction card showing: - Dates of commencement and leaving employment - Names and address of old and/or new employer - Details of benefits provided, if any, at the back of the tax deduction cards - The amounts and details of any pay from which tax was deducted which relates to an earlier period of e.g. gratuities, bonuses, compensation for loss of office, etc. Details of rent paid by employee towards housing. - Employees should also give details of normal monthly PAYE remittances, separately from other payments made at the Pay-Master General relating to tax on lump sum payments, audit tax, interest and penalty. Dates on which the relevant payments were made to the bank must also be shown. - In addition employers are required to show total tax paid in respect of: tax on lump sum payments, tax determined through PAYE Audit, Interest and penalty. Details of fringe benefits and tax paid thereon should not be reflected on the employee s tax deduction card. Employers should submit form P10B showing names of employees involved, loan amounts, rate of interest charged by employer, taxable fringe benefit values and amount of tax paid. (c) STATUTORY DEDUCTIONS PAYE tax National Social Security Fund (NSSF) National Hospital Insurance Fund (NHIF) OMISSIONS CONSTITUTING PAYE OFFENCES 1. Failure to deduct tax 2. Failure to remit PAYE deducted 3. Failure to remit PAYE deducted by due date

7 4. Failure to submit end year PAYE returns to the commissioner. The general penalty for not observing PAYE rules is a fine not exceeding ten thousand shillings and/or imprisonment of up to six months. Where the employer fails to deduct tax from employees pay he will be liable to pay the outstanding tax as though it were due from him. Late payment of tax generally attracts a penalty of 20% plus interest at 2% per month simple interest. QUESTION FOUR A taxpayer may appeal to Local Committee for the following reasons: 1. The Commissioner of Income Tax has confirmed an assessment following an objection to it by the taxpayer. 2. The Commissioner has rejected a late objection. 3. The Commissioner has amended the assessment to the best of his knowledge not acceptable by the taxpayer (non-agreed assessment). WENDANI LTD. TAX POSITION REGARDING ISSUES RAISED 1. Profit realized on sale of investment which had cost Sh.40,000 amounting to Sh.12,500 is a capital gain. The law relating to capital gains is currently suspended hence the gain is not taxable and since included in profits, it must be deducted before tax. 2. The disputed income tax for year ended 30 April 2005 is per revised assessment by the CIT. Wendani Ltd if aggrieved by the CIT decision/assessment have a right to lodge an objection with the commissioner in writing within 30 days from date of service of the revised assessment stating clearly the grounds to the objection. Wendani has further right to Local Committee if the commissioner s response to the objection is not satisfactory. 3. Preference shares redemption at premium of 20% is non-taxable capital gain and since it was not reflected in the books as income no adjustment is required. 4. Payment of wages before commencement now being amortised over 5 years is allowable deduction since it is an expense which would ordinarily be allowable upon commencement as revenue in nature.

8 5. Writing down of stocks to cater for future price decline is not allowable and since already deducted, the amount of Ksh.10,000 must be added to net profit for the tax purposes. (c) WENDANI LTD REVISED TAXABLE PROFIT AND TAX PAYABLE YEAR 2006 Net profit for the year Add: Gain on sale of shares Stocks written down Revised profits Tax 30% x 864,500 12,500 10, ,000 22, , ,350 (d) A taxpayer must carry out cost/benefit analysis before raising objection against revised assessment. In addition he must be able to furnish evidence to provide that he has been unduly over assessed. It would be wise for the taxpayer to enlist services of a qualified accountant or agent for this purpose. QUESTION FIVE Capital allowances is a term that may be defined as tax relief in respect of certain types of capital expenditure by granting specific deductions in respect thereof as per section 15(2) such as deductions in respect to capital expenditure on industrial buildings; capital expenditure of machinery; mining operations; capital expenditure on agricultural land; investment deductions, etc. CINDERA ENTERPRISES CORRECT BALANCE FOR EACH ACCOUNT (i) LAND AND BUILDING ACCOUNT Cash purchase Land Old building demolition cost Cost of new building Other direct costs of Sh.000 2, , ,860 Proceeds from salvaged material Balance c/fwd Sh ,830 7,860

9 building (ii) MACHINERY ACCOUNT Cost of machinery Installation and testing Sh.000 4, ,400 Sh.000 Balance c/fwd 4,400 4,400 (iii) DEPRECIATION EXPENSE ACCOUNT Machinery (Sh.4,400 x 4%) Building (Sh.5,830 x 4%) Sh ,2 Sh. P & L A/c CAPITAL ALLOWANCES DUE TO THE PARTNERSHIP INVESTMENT DEDUCTION ASSET Factory Machinery Total I.D QUALIFYING COST SH ,830 4, % SH ,830 4,400 10,230 RESIDUE SH NB: No IBD and WTA since with 100% I.D, there is zero residual for IBD and WTA. (iii) Profit before capital allowances 2,860,000 Less: capital allowances (10,230,000) Adjusted loss (7,370,000) ALLOCATION TO PARTNERS Kshs. 000 Partner L M N Total Salary Profit (loss) share (2,576.6) (2,576.6) (2,576.6) (7,730) equally

10 Partnership loss (2,456.6) (2,456.6) (2,456.6) (7,370)

QUESTION ONE Required:

QUESTION ONE Required: QUESTION ONE Mr. Kiplimo is finalizing his tax affairs for the year of income 2005. He and his wife had the following income and transactions for 2005: 1. Mr. Kiplimo s income: He has paid 52,000 Value