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 Added Tax on all his purchases for the year He was an employee of Bomet Tea Limited and was paid an annual salary of 600,000 (P.A.Y.E deducted was 142,500). Pension contribution to a registered scheme were 100,000 by his employer and 50,000 from his pay. Dividend received was 40,000 gross. (Withholding tax was deducted as appropriate). Gross interest received was sh.18,000 of which 10,000 was from Post Office Savings Bank. 2. Mr. Kplimo s expenses for the year: Personal accident insurance premium of 9,000 paid to American Life Insurance Company Life insurance premium on self life of 15,000 paid to world Life Union Insurance of the United Kingdom. Alimony to his first wife of 6,000 per month Mortgage interest of 62,000 on his house where he stays with his wife and children. The mortgage is from Savings and Loan Kenya Limited. 3. Mrs. Kiplimo s income: She was an employee of Macadamia Limited who paid her a salary of 25,000 per month. P.A.Y.E of 7,800 was deducted per month from her salary. She made a profit of 900,000 from the sale of a plot in Nairobi inherited from her father. She used the money to start a private clinic. She is a registered clinical officer. In the year of income 1997, she made an assessed loss of 240,000. (a) What is a registered pension scheme and what are its implications? ( 5 marks) (b) Compute the income chargeable to tax of Mr. Kiplimo for the year 2005. ( 8 marks) (c) Calculate the tax payable (repayable) by him for 2005. (d) Identify and comment on any information you have not used in calculations in
(b) and (c) above. ( 5 marks) (Total: 22 marks) QUESTION TWO (a) Explain any FOUR effects of Value Added Tax on business. ( 8 marks) (b) Specify the rules relating to appeal against the Commissioner s decision under the Value Added Tax Act. (c) A company had VAT due amounting to 300,000. It was late in making the payment for six weeks. What late payment penalty will be charged? (d) Inland Limited imported goods whose landed value is 400,000. The duty chargeable on them is at the rate of 35%. There is to be made a provision for transport to the interior amounting to 50,000. A commission is to be paid of 2% dutable value. Value Added Tax is charged on those goods at 16%. Determine the amount of VAT payable. QUESTION THREE With reference to Pay As You Earn (PAYE) system: (a) Write explanatory notes on the following: (i) Taxation of pension income for a retired employee; (ii) Allowable deductions for contributions to a registered pension scheme; ( 2 marks) (iii) Procedure for the end of year Return; ( 6 marks) (b) Give a list of statutory deductions. (c) Give a list of three omissions which amount to failure to comply with PAYE regulations and indicate the penalty there on. QUESTION FOUR The following balances are extracted from the books of Wendani Limited for the year ended 30 April 2006.
Share capital: 3,000,000 ordinary shares (fully paid) 800 8% redeemable preference shares Share premium account General reserves Preference share redemption Block capital (at cost less depreciation) Net profit for the year (before tax) Debtors (unsecured, considered good) Creditors Profit and Loss Account (Cr 1 May 2005) Interim dividend Unpaid dividend Other current assets Investments Preliminary expenses Income tax paid, under dispute for the year ended 30 April 2005 Advance payment of income tax 3,000,000 80,000 50,000 200,000 96,000 1,910,000 842,000 60,000 50,000 20,000 150,000 18,000 1,150,000 390,000 12,000 200,000 440,000 You are provided with the following additional information: 1. Market value of the investment is 355,000. Investment which cost 40,000 had been sold in the year and realized a profit of 12,500 which is included in the above profits. 2. The disputed income tax of the year ended 30 April 2005 is per revised assessment. Original self-assessment indicated an amount of 96,000 which had been paid. 3. Preference shares are redeemable on 1 April 2007, at a premium of 20% but no entries were recorded in the books for giving effect thereto except for the payment standing to the debit of preference share redemption account. 4. Preliminary expenses represent the balance after amortisation. The original amount incurred to pay wages before commencement of business was 20,000 and is being amortised over 5 years. The amortisation charge is debited to the profit and loss account.
5. Other current assets include stocks of 90,000 which had been written down by 10% as provision for future plans decline. The amount was debited to the profit and loss account. (a) Comment on reasons why a tax payer may appeal to the Local Committee. (b) How does each of the five issues above affect the tax position of Wendani Limited? (10 marks) (c) Compute revised taxable profits of Wendani Limited for the year ended 30 April 2006 and show tax payable. ( 5 marks) (d) Is it prudent to raise an objection on revised assessment? Explain. ( 3 marks) QUESTION FIVE (a) Define the term capital allowances. (b) Cindera Enterprises is a partnership manufacturing timber pallets. The partners are L, M and N. The business has an account in the balance sheet entitled Property. The account had been used to record a variety of expenditures. At the end of the year, the property account contained the following entries: Debit entries: Purchase by cash of building site Cost of removing old building from site to build factory Paid contract price for new factory building completed on 1 January 2005 Insurance, inspection fees and other costs directly related to construction of new building. New machinery brought to use on 1 January 2005 Cost of fixing machinery and testing Credit entries: Proceeds from sale of salvaged material from demolition of old building 30,000 490,000 2,000,000 80,000 5,600,000 180,000 4,000,000 400,000 12,260,000 520,400
Depreciation for the year completed at 4% of 12,260,000 Total credits Balance in property account as at 31 December 2005 11,739,600 (i) Determine the correct balance for each account. (4 marks) (ii) Show the capital allowances due to the partnership in 2005. (9 marks) (iii) If the profits, before capital allowances and salaries, made by the partnership was sh.2,860,000, show its allocation among partners if each receives a salary of 120,000 per annum. The adjusted profit is after adjusting for these salaries. (3 marks)