Copyright Reserved Serial No Institute of Certified Management Accountants of Sri Lanka Managerial Level May 2016 Examination Examination Date : 8 th May 2016 Number of Pages : 06 Examination Time: 9.00 a:m. 1.00 p:m. Number of Questions: 10 Instructions to Candidates 1. Time allowed is four (4) hours. 2. Total: 200 Marks. 3. Answer any four (4) questions in Section A, all questions in Part I and any three (3) questions from Part II in Section B. 4. Section A: Corporate Law and Section B: Advanced Taxation 5. The answers should be in English Language. Subject Subject Code Corporate Law & Advanced Taxation (CLT / ML 4-304) SECTION A: Corporate Law Answer any four (4) questions Question No. 01 (25 Marks) Ben, who is 65 years of age, has just retired from his employment with a pension and a lump sum payment of Rs.50 million. He thinks that Limited liability company structure is the most popular business organization structure and is keen to invest his money in forming a company. Ben wishes to know the defining characteristics and disadvantages of forming a company. Advise Ben. Question No. 02 (25 Marks) Lalith, a successful sole owner of a handloom textile store, with an intention to expand his store into a company sells his business to Handylooms (Pvt) Ltd; a company that he incorporated. As purchase price for the store he receives Rs.10 Million preference shares and secured debentures issued by the company. Lalith is appointed as the managing director of the company and its shareholders are his children, his wife and Lalith himself. He seeks your advice on the followings: The meaning of the term the doctrine of separate legal entity. (10 Marks) The meaning and consequences of the following terms when found at the end of the name of company: (i) "(Private) Limited"; (ii) "Limited". (07 Marks) (c) The rights of a company to alter its Articles of Association. (08 Marks) Institute of Certified Management Accountants of Sri Lanka 1
Question No. 03 (25 Marks) Explain the term solvency test focusing the statutory provisions stated in the Companies Act 7 of 2007. Further discuss the different circumstances where the solvency test required to be met under the Companies Act 7 of 2007. (20 Marks) Explain the particulars the Registrar of Companies should specify in the certificate of incorporation on receipt of a properly completed application for incorporation. (05 Marks) Question No. 04 (25 Marks) John is a non-executive director of a public company called ComTec Ltd. The business of ComTec Ltd. is to develop computer parts to facilitate the quick and proper functioning of latest computer machines. John never attends meetings and does not understand the business of ComTec Ltd. He is a financial expert with little understanding of issues relating to computer machines. Explain whether John can be held liable by the company for damages suffered as a result of bad financial decisions taken in his absence by the other directors. (10 Marks) Explain the followings: (i) Power of a company to make loans to its directors. (07 Marks) (ii) Insolvent trading and directors duty on insolvency. (08 Marks) Question No. 05 (25 Marks) Write notes on the followings: Derivative Action (10 Marks) Minority buyout rights (07 Marks) (c) Resolution in lieu of meetings (08 Marks) End of Section A Institute of Certified Management Accountants of Sri Lanka 2
SECTION B: Advanced Taxation Part I Answer all questions Question No. 06 (40 Marks) CCL Private Limited is well reputed engineering entity which was incorporated in year 2000 with the funding assistance of a venture capital firm. As the business is carried on by Engineers, the company does not maintain proper accounts and the managing director (MD) Mr. Nishantha has given you the following information and asked you to advise them on the income tax for the year ended 31 st March 2015. (1) The gross revenue made by the entity for the year is Rs.653,549,200/-. This is inclusive with the NBT paid on revenue amounting Rs.13,071,000 /-. (2) In addition, the sundry income earned by CCL by scrap selling is Rs.234,533 /-. (3) The distribution expense includes the following: - As a result of a massive expansion plan executed in the year under review, they have recruited 30 employees for few job roles. The expense incurred for the paper advertisements was Rs.460,000/-. In addition, the advertisement expense incurred to promote their company is Rs.1,100,000 /-. - The Company donated a delivery lorry to the State Engineering Corporation of Sri Lanka. It was purchased at Rs.1,000,000/- on 31/03/2015 and donated on the same date. - Other distribution expenses, which are fully allowed for tax purposes is Rs.33,780,000/- (4) As per Mr. Nishantha, CCL has incurred the following administrative expenses. - The training programme conducted for the new crew cost of Rs.1,230,500/- to the company. - The management fee paid to the venture capital company is Rs.2,400,000/-. - During the year a research and development programme was successfully completed incurring a cost of Rs.3,400,000/-. - During the year, two executives and three senior engineers resigned due to reaching their retirement age. Company paid a total of Rs.5,500,000/- as the gratuity payment. The gratuity provision expense to be debited to Profit & Loss as per the auditors is Rs.3,352,897/-. - CCL pays a rent of Rs.3,400,000/- for the houses given to two site managers whose monthly remunerations are Rs.400,000/- & Rs.350,000/- respectively. - The total salary and wages paid by the company including the employer s portion of EPF is Rs.78,987,500/-. (5) Mr. Nishantha has given you the following summary of the Property, Plant and Equipment of CCL based on the last year financial accounts and the current year acquisitions and disposals. Cost, as at 01/04/2014 Additions Disposals 31/03/2015 Land 6,000 500-6,500 Buildings 10,000 5,000-15,000 Equipment 25,000 5,000 4,000 26,000 Motor Vehicles 6,000-4,000 2,000 Computers and Software 1,500 400-1,900 Office Furniture 1,000 150-1,150 Total 49,500 11,050 8,000 52,550 Institute of Certified Management Accountants of Sri Lanka 3
Depreciation, as at 01/04/2014 Charged Disposed 31/03/2015 Buildings 1,000 200-1,200 Equipment 8,000 2,000 3,500 6,500 Motor Vehicles 2,400 480 2,375 505 Computers and Software 950 600-1,550 Office Furniture 400 - - 400 Total 12,750 3,280 5,875 10,155 Carrying Amount 36,750 7,770 2,125 42,395 - Other than the additions during the year all other assets are fully depreciated for tax purpose. - Out of the buildings constructed during the year, a site manager has been given a house to reside in. Cost of this residence amounts to Rs.2,000,000/-. - The disposed equipment has been sold for Rs.1,100,000/-, and the addition includes new equipment purchased to replace the old one. - The disposal of motor vehicles includes the motor car disposed within the year at Rs.2,500,000/- which was purchased six (6) years before. (6) Since the company mainly depends on bank overdrafts (ODs) in managing the cash flows, they had to incur Rs.2,455,874 /- as OD interest for the year ended. (7) Further the company pays the personal loan of the Chairman of the company and the interest paid on that loan is Rs.455,530/- for the current year. (8) As per the previous year tax return, the brought forward tax loss of CCL is Rs.178,524,800/-. For the current year they have paid the income tax of Rs.35,500,000 /- on self-assessment basis. Based on the above information, you are required to calculate: Adjusted taxable business profit / loss of CCL for the year of assessment 2014/2015 (Hint: you are advised to use the top bottom approach starting from the revenue). (30 Marks) Total Statutory Income and Total Taxable Income of CCL for the year of assessment 2014/2015. (06 Marks) (c) Balance tax payable by the company accordingly for the year of assessment 2014/2015. Any assumptions made should be clearly stated. (Total 40 Marks) End of Part I Part II Answer any three (3) questions Question No. 07 (20 Marks) The tax system is not delivering the potential revenue in Sri Lanka. Sri Lanka s per capita income has increased from US$ 720 in 1995 to US$ 3,625 in 2014 but our tax revenue has declined from 20.4 % GDP to 12.8 % GDP during this period. Almost 90% of revenue comes from taxes (10% is accounted by non-tax sources). Briefly describe three fundamental problems of the present tax system in Sri Lanka that results in lower tax revenue compared to other peer countries. (09 Marks) Institute of Certified Management Accountants of Sri Lanka 4
What are the tax rate/s for NBT and ESC for quarter ending 31 st December 2015? (c) Mr. Bindu, a reputed government officer, bought a 30 perch land from Colombo-05 few years ago to build up his house. However, few years later his family decided to leave the country permanently. As a result, he appointed an agent, a popular land sales company, to sell the land on his behalf, whenever a considerable amount can be obtained. After few months, he was able to sell all blocks of land making a considerable profit. Is the profit made from this transaction taxable as a profit from trade in the account of Mr. Bindu? Briefly explain. (07 Marks) Question No. 08 (20 Marks) Mr. Shalitha is the proprietor of SK Traders which is engaged in the business of mobile phone importing. He has paid NBT at the point of customs, but not paid any NBT on the sale. He received a letter of intimation from the Inland Revenue Department informing that an assessment will be issued on NBT on the turnover of phone sales. His understanding was that he has already paid NBT at the point of import and no more NBT is payable by himself. What is your opinion on such NBT liability within the meaning of the statutory provisions of the Nation Building Act No. 9 of 2009: Is he liable to pay NBT on the turnover of vehicle sales? (06 Marks) Manjula Trading Ltd had a turnover of Rs.250 million for the quarter ended 31/03/2015 and its income tax liability for the Y/A 2013/2014 was Rs.120,000/-. Does Manjula Trading Ltd need to pay ESC for the quarter ended 31/03/2015? Explain with reasons. (c) What is the time of supply in the following situations? (i) Services were performed on 14/11/2014 and the invoice was issued on 08/01/2015. (ii) Services were performed on 28/12/2014 and the invoice was issued on 06/01/2015. (iii) ¼ of the bill was received as an advance on 28/12/2014 and the services were performed on 28/01/2015. The final payment was received on 06/05/2015. (d) ABC Ltd, a VAT registered supplier, has provided following information for the Quarter ending 31 st March 2015. Rs. 000 Revenue (Including VAT) 22,200 Revenue (on Exempt Items) 10,000 Purchases (Including VAT) 19,980* *(Purchases utilized to generate all the revenue) You are required to calculate the VAT liability of ABC Ltd for the Quarter. (06 Marks) Institute of Certified Management Accountants of Sri Lanka 5
Question No. 09 (20 Marks) Ms. Sashikala, was a CEO of a reputed quoted company who has resigned on 31 st March 2015 after completion of successful 35 years of service at the same company. At the retirement she received the following retirement benefits. - She was paid a retirement gratuity of Rs.40 million. - She was entitled for an EPF payment of Rs.18 million and ETF payment of Rs.3 million. - At the time of retirement she was paid a monthly salary of Rs.1,000,000/- and for last two years her salary was increased by Rs.65,000/- (2014) and Rs.50,000/- (2013) respectively. You are required to: (i) Separate the retirement benefits received by Ms. Sashikala as exempted for income tax, benefits liable under concessionary rates and benefits liable under normal rates. (06 Marks) (ii) Calculate the amount of tax payable under concessionary rates. Mr. Chandika, a businessman, has three houses as follows. Location Way of acquisition Usage Rating Assessment (Rs.) Colombo-05 Purchased Lives Chandika & family 300,000 Kandy Inherited Let on rent 250,000 Kaduwela Built by Chandika Lives Chandika s parents 200,000 - The house in Kandy has been let on rent to a school friend of Chandika and he receives a nominal rent of Rs.10,000/- per month. The rates for all three houses are paid by Mr. Chandika at a rate of 30% on the Rating Assessment. You are required to: (i) What is the net annual value (NAV) should be taken as a part of the assessable income of Mr. Chandika? (02 Marks) (ii) Calculate the rent income of Mr. Chandika for income tax purposes. (03 Marks) (iii) Does any house create an occupier s income? If so what is the amount of occupier s income? (05 Marks) Question No. 10 (20 Marks) What is the main purpose of introducing international double taxation? (05 Marks) List three (3) obligations of an employer in operation of PAYE scheme. (05 Marks) (c) As a good citizen, state the legal requirements to be considered by an individual taxpayer in filing the return of income for the year of assessment 2014/2015? (05 Marks) (d) A company has distributed dividend of Rs.25,000,000/- on 13 th July 2014. (i) Determine the tax liability on the distribution of dividend; and (02 Marks) (ii) State the due date of the payment of such tax. (01 Mark) (e) State two (2) circumstances under which a refund may arise to a taxpayer. (02 Marks) End of Part II End of Section B End of Question paper Institute of Certified Management Accountants of Sri Lanka 6