QUESTION ONE (a) Taxable turnover If a business is making taxable supplies, the value of these supplies is called taxable turnover. All goods are taxable except those listed in the second schedule of VAT Act as exempt. Taxable services are listed in the third schedule of VAT Act. All other services are exempt. If a business supplies taxable goods or services and the turnover is above 3 million p.a. then the person is taxable and should register for VAT. The above limits are not applicable if: One is a supplier of designated jewellery One is a supplier of prerecorded cassettes One is a saw miller One sells 4 or more motor vehicles in a year. One is a supplier of accountancy services One is an auctioneer One is a lawyer One is a supplier of motor vehicle spare parts accessories and electrical appliances. (b) (c) Deregistration for VAT: A registered person can apply for deregistration for VAT if: He/she ceases to make taxable supplies. The value of taxable supplies in any 12 months does not exceed 2.0 million. The business is liquidated. The business is sold as a going concern. Assessment for VAT The commissioner of VAT may issue an assessment if: The taxpayer fails to keep proper books of accounts, records or documents. Fails to make a return Fails to apply for registration
(d) Appeals An appeal is made to the tribunal under the following conditions: (e) If a taxpayer is aggrieved by the commissioner s decision. The appeal should be made within 30 days from the date of the assessment provided the taxpayer has fulfilled the following conditions: Made all VAT returns Paid all the tax shown on the returns not in dispute Pay 50% of tax in dispute Tribunals decision is final and conclusive. Tax Invoices Whenever a taxpayer supplies goods or services, the registered person must furnish the purchaser with a Tax Invoice on his sales, in order that they (the customers) may claim relief on the tax they pay. It should show Pin No., VAT registration number, value of taxable supplies, amount of VAT etc. It should be issued within 14 days of making taxable supply. (f) Rules: Payable on or before 20 th of following month Submitted with a return Penalty 2% of VAT payable + Ksh.10,000 QUESTION TWO (a) MEHTA BROTHERS TAXABLE PROFIT (LOSS) FOR THE YEAR ENDED 31.8.2005 Loss for the period Add: Nonallowable expenses Partners drawings Loss on sale of investment Depreciation Partners salaries Donations 360,000 15,000 650,000 20,000 (250,000)
Purchase of computer Interest on capital Wife s salary Less: Total Wear and Tear Allowance Taxable profit 40,000 120,000 1,605,000 1,355,000 (638,125) 596,875 WEAR AND TEAR COMPUTATION WDV 1.9.2004 Additions (computers) Wear & Tear Allo. WDV 31.8.2005 Class I 37.5% 1,250,000 1,250,000 468,750 781,250 Class II 30% 60,000 140,000 Class III 25% 250,000 250,000 62,500 187,500 Class IV 12.5% 375,000 375,000 46,875 328,125 Total 1,875,000 2,075,000 638,125 1,436,875 Distribution of Profits S. MEHTA M. MEHTA N. MEHTA TOTAL Salaries Interest Balance Taxable Profit Wife s salary from the partnership (note) Taxable income 50,000 20,000 118,958 188,958 120,000 308,958 50,000 20,000 118,598 188,598 188,598 100,000 118,959 218,959 218,958 40,000 356,875 596,875 716,514 (b) The selfassessment returns for sole proprietors, individuals and partnership are due by 30 April of the following year i.e. 30/4/2006. The tax law was amended in 1998 to have 31 December as the year end for all unincorporated businesses. The management of Mehta Brothers do not seem to know this and should do the following to correct this situation.
Prepare accounts for 4 months to 31 December 2005 or apportion the income for the four months from the 12 months accounts for the year ended 31 st December 2004 so as to bring to charge income for the period ended 31 December 2004. Prepare accounts for 12 months to 31 st December 2004 and use them to file self assessment returns for both years and for the partners for 2004 year of income. The returns and tax will be due by 30 th April 2006. (c) Tax position on S. Mehta and wife If the curio is the wife s business, the income is earned at arm s length and the net of 30,000 x 12 = 360,000 would be taxed on the wife. She would enjoy a personal relief of 13,944 p.a. Mr. Mehta would be taxed separately on the partnership income of Kshs. 308,958 and enjoy a personal relief of Kshs. 13,944 p.a. QUESTION THREE (a) Mrs. Jinny Ondemo Practice Income Year of Income 2000 Professional fees received Director s fees received Less Expenses Professional subscriptions Debt Collection expense Wages Clinic Rent for clinic premises Electricity and water clinic General expenses Car hire expenses Uniform for staff Contribution to Registered provident fund Terminal benefits receptionist Wages to cleaners and watchmen Wear and tear (120,000 x 12.5%) 60,000 18,000 360,000 420,000 120,000 210,000 150,000 115,000 180,000 150,000 150,000 15,000 3,000,000 360,000 3,360,000 (1,948,000)
Rental income Subrentals Less collection expense Taxable income 1,412,000 42,000 (6,000) 36,000 1,448,000 (b) Tax liability Ksh. 121,968 @ 10% Ksh. 114,912 @ (15% + 20% + 25%) Ksh. (1,448,000 466,704) @ 30% Less personal relief Net tax liability 12,196.8 68,947.2 294,389.0 375,533.0 (13,944.0)) 361,589.0 (c) (d) Tax should be paid through selfassessment by 30 th April 2006. The return should be filed by 30 th June 2006. Wife s income is deemed to be the income of the husband. However, employment income, professional and self employment are assessed separated on the wife unless: Husband or wife or both own more than 12½% of the voting power of the company Wife is an employee of a settlement/trust created by the husband Wife is employed by a firm where the husband is a partner. QUESTION FOUR (a) Gitoro Food Processing Industries Ltd. Investment Deductions year 2005 Factory building Machinery installed Qualifying Costs 10, 11,085,000 21,285,000 ID @ 100% Shs. 10, 11,085,000 21,285,000 Balance/residual
GITORO FOOD PROCESSING INDUSTRIES LIMITED CAPITAL ALLOWANCES YEARS ENDED 31 ST DECEMBER 2005 AND 2006 1. INVESTMENT DEDUCTION Item 2005 Conveyer and sorter Packaging machine Milling machine Crashing machine Building Qualifying Costs 3,120,000 2,625,000 2,580,000 2,760,000 10, ID @ 100% 3,120,000 2,625,000 2,580,000 2,760,000 10, 21,285,000 Residue for WTA & IBD
2. WEAR AND TEAR ALLOWANCE 2005 W.D.U 1/1/2005 Additions: Forklift Tractor Lorry Saloon cars Delivery van Furniture and partitions 2005 WTA WDV 31/12/2005 Class I @ 37.5% 1,800,000 8,940,000 (3,352,500) 5,587,500 Class II @ 30% 1,290,000 5,850,000 Class III @ 25% 585,000 1,350,000 1,935,000 (483,750) 1,451,250 Class IV 12.5% 4,080.000 4,080,000 (510,000) 3,570,000 Year 2006 Class I Class II Class III Class IV WDV as at 5,587,500 1,451,250 3,570,000 1.1.2006 Add: 2,655,000 Tractor Lorry Toyota Furniture and 3,900,000 450,000 1,000,000 R 894,000 partitions Computers Disposals: Forklift Saloon car Less WTA WDV 31/12/2006 (360,000) 11,782,500 (4,418,438) 7,364,062 450,000 (135,000) 315,000 (690,000) 1,761,250 (440,313) 1,320,937 4,464,000 (558,000) 3,906,000 (b) (i) Land at cost 15,000,000 and disposed. 4,290,000 Do not qualify for any deductions (ii) Professional valuation of the building at Ksh.12,600,000 does not qualify for industrial building deductions. Construction costs qualify.
QUESTION FIVE (a) (i) Economical: (ii) Equity Low cost of collection to the tax body Low compliance costs by the taxpayer. Horizontal equity: People with the same economic position should pay equal amount of tax. Vertical equity: Consideration is taken as to whether tax payable should be proportional to income i.e progressive or regressive. (iii) (iv) Certainty Clear to taxpayer what his liability actually is and how it arises To the tax body it is guaranteed of the amount of revenue its going to collect Convenience Taxpayer should pay when he has the ability to pay There is no administrative difficulties when collecting tax (b) Notes on Housing Benefit (HB) It is a taxable benefit on the employee where the employer provides accommodation For agricultural employees, HB is equal to 10% of pensionable pay For directors other than whole time service directors HB is the higher of: 15% of total income from all sources or fair market rental value or actual rent paid by employer. For employees provided with accommodation and meals, HB is equal to 10% of pensionable pay. For ordinary employees and whole time service directors, HB is the higher of: 15% of pensionable pay or
fair market rental value or actual rent paid In all the above cases, HB is reduced by amount of rent contributed by the employee.