QUESTION ONE (a) Self MR. KIOGORA TOTAL TAXABLE AND TAX PAYABLE YEAR 21 Sh.p.a. Sh. Employment income Earnings (Sh.16, x 12 months) End year bonus Road licence and insurance (private expenses) Maintenance and repair (private expenses) Insurance premium by employer House benefit rent paid (5, x 12 months) or 15% x 86, (Higher of two) Other Incomes: Rental income: Gross 43, Less mortgage interest 8, Total taxable income Wife s Income: Salary (Sh.72, x 12 months) Free lunches (Sh.2,4 x 12 months) Part time Business (Sh.1, x 12 months) Total taxable income Taxable income split as follows: 72, 2, 28, 14, 24, 864, 28,8 12, 86, 12,9 35, 961,9 1,12, MR. KIOGORA Kshs. 961,9 Tax thereon (121,968 x 1%) + (114,912 x 6%) (961,9 466,74) @ 3% 148,559 (1,12, 466,74) MRS KIOGORA Kshs. 1,12,8 81,144 81,144 163,589 Gross tax liability 229,73 244,733
Less: Tax at source (PAYE) (192,) (3,) Personal relief (13,944) (13,944) Net tax liability (refund) 23,759 (69,211) Therefore net tax refund to couple = (69,211) + 23,759 = (45,452) (b) (c) Tax Position of Mrs. Kiogora She has the option to file her own selfassessment return with respect to her employment and business income at arms length. Her employment and business income qualify for separate taxation. A tax refund is due to her for the year of income. Information Not Used in the Computation Above Mr. Kiogora is denied owner occupied interest deduction since it appears he does not live in his house. In arriving at taxable rental income cost of building extension and painting extension are capital in nature hence not deductible against gross rent. Entertainment and petrol reimbursements are not taxable employment benefits (they are business expenses). Contribution by the employer on behalf of Mr. Kiogora to approved pension scheme is not taxable. Interest from Post Office Savings Bank is tax exempt Interest from Euro and National Bank are qualifying and W/T @ 15% is final. QUESTION TWO MR S SHAH CAPITAL DEDUCTIONS YEAR 25 (a) (i) Investment Deduction ASSET QUALIFYING COST I.D 1% @ RESIDUE
New building Processing machines 1,75 2,4 1,75 2,4 4,15 Industrial Building Deduction NATURE BUILDING RESIDUE OF QUALIFYING COST RESIDUE B/FWD I.B.D @ 2½% C/FWD Old Building Total I.B.D 6,25 5, 156.25 156.25 4,843.75 WEAR AND TEAR ALLOWANCE Class I @ 37½% Sh. WDV 1/1/25: Office furniture Computers Tractors Lorries (1 ton) Processing machine Saloon cars Additions Office furniture Lorries (1 ton) Saloon cars Micro computers Milking machinery Disposals Office furniture Computers Tractors Lorries (1 ton) 12, (2,5) 9,5 (3,562.5) II @ 3% 2 3 III @ 25% Sh. 2,5 3,2 3, 1, R (8) 42 (126) IV @ 12½% Sh. 3, (5) (2) 9, (2,25) Sh. 3,3 4,8 1,9 22 (7) (1,8) 7,72 (965)
Processing machines Saloon car 5,937.5 294 6,75 6,755 WDV 31/12/25 Total WTA Farmworks Deduction ASSET QUALIFYING FWD @ 33⅓% P.A. COST FOR 3 YRS Farm house (⅓ x 6 2, 6) Cattle dip 12 4, 24, SUMMARY OF CAPITAL DEDUCTIONS Investment Deduction Industrial Building Deduction Wear & Tear Allowance Farmworks Deduction 4,15, 156,25 6,93,5 24, 11,449,75 (b) Information not use in (a) above 1. Cost of land does not qualify for any capital allowance 2. Cost of two cars disposed off was not used since on acquisition the cars cost was restricted. 3. Building inherited was valued at Sh.5 million and this valuation figure is irrelevant for industrial building deduction computation. 4. Goodwill and patents do not attract capital allowance hence ignored. QUESTION THREE A, K & M PARTNERSHIP (a) TAXABLE INCOME (LOSS) YEAR 25
NET LOSS REPORTED Add disallowable expenses: Rent for partners residence Legal costs personal dispute resolution Salaries and wages A s daughter Donations Turkana Food relief fund Motor vehicle expenses personal use Advertising New sign board A s birthday expenses Depreciation car & building Salaries K M A Interest on capital K M A Bad debts: General provision A s son (defaulter) Loss on sale of shares Political membership K Withdrawals by M Dresses taken by A for her own use School fees paid for A s children. Deduct non taxable income; income taxed separately: Dividends from KCB shares Rental income Gain on sale of furniture Wear and tear deductions Adjusted partnership profit 8 15 3 5 45 5 23 43 24 24 36 8 8 12 1 1 8 6 5 12 55 (1,8) 1,517 437 19 22 13 16 (7) 367 DISTRIBUTION AMONG PARTNERS Salaries Interest on capital A K M Total 24, 24, 36, 84, 8, 8, 12, 28,
Share of loss Net profit or loss share (376,5) 56,5 (188,25) 131,73 (188,25) 291,75 (753,) 367, (b) TAXABLE INCOME OF EACH PARTNER Partnership profit(loss) Add rental income Taxable income A K M 56,5 131,75 291,7 11, 5,5 5,5 11, 137,25 297,25 QUESTION FOUR (a) (i) Specific import customs duty refers to customs duty charge based on units of imported item i.e change per unit e.g on each unit of vehicle. While advalorem import customs duty is duty levy based on value of item imported for example jewellery, medication, liquors, etc. (ii) Discriminatory policy is an international trade policy where a country charges different duties according to the source (country of origin) of the same kind of commodity. Nondiscriminatory policy refers to the charging of similar rates of customers duty on similar goods from different countries. (b) MR MARK MACKENZIE VAT PAYABLE FOR YEAR 25 INPUT TAX Purchases at zero rate Purchases at standard rate (Sh.9, x 16%) Purchases car (input tax capitalized) Total OUTPUT TAX Sales at standard rate (Sh.2,4, x 16%) Sales at zero rate Exempt sales 144 144 384 36
Compute Claimable Input tax Claimable input tax = Taxable supplies x total input tax Total supplies Sh.2,4, 6, = x144, 2,4, 6, 9, = Sh.11,769 Therefore VAT payable = Output tax less claimable input tax = 384, 11,769 = 273,231 (c) Comments on Accuracy of Entries and Possible Errors 1. Sales account entry posted on wrong side (debited) rather than credited 2. VAT received in Bank a/c of Sh.15, correctly posted. 3. VAT paid through Bank of Sh.14, is not posted to the VAT a/c. QUESTION FIVE (a) Tax Position on Tax Avoidance Tax avoidance is the arrangement of taxpayer s affairs in such a manner that tax liability is reduced without breaking the law. Tax avoidance is therefore legal method of reducing tax liability. However, where the commissioner is satisfied that the main objective of a given transaction was to avoid tax then he may direct that tax arising thereof be paid. This will also arise in areas of shortfall distributions of dividends by a company Sec.23 and 24 of Income Tax Act. (b) (i) Income and Expenditure After Cessation of Business The income or expenditure received or paid by a person after the cessation of his business is considered taxable income or allowable expenditure of the person for the year of income that the income of expenditure is received or paid, as the case may be. If the payment is not exhaustively set off in the year of income in which it is paid, the difference is deducted from taxable income for the year of income in which the business ceased. (ii) Accounting Periods Not Coinciding with Year of Income
Section 27 deals with accounting periods not coinciding with the year of income. The legal position is as follows: subject to such adjustments as the commissioner may deem necessary, such accounting periods is to be taken as the year of income: In the case of accompany for all chargeable income In the case of an individual for all chargeable income except employment income. Where a person makes up the accounts of his business for a period longer or shorter than twelve months, the commissioner may subject to such adjustments as he may consider necessary treat the income of any such accounting period as income of the year of income in which the accounting period ends and tax is charged accordingly. In the case of a partnership which makes up the accounts of its business to an accounting date other than 31 st December in any year, the accounting date of the partners of the partnership in respect of income of the business is considered to be that of the partnership, but the income from employment or services rendered elsewhere will fall within the normal year of income in which it was earned. (iii) (iv) Offences By Corporate Bodies Where, under the Act, any offence has been committed by any body corporate, then everyone who, at the time the offence was committed was a director, general manager, secretary or other similar officer, is also guilty of the offence, unless he proves that the offence was committed without his consent or knowledge and that he took reasonable precautions to prevent the commission of the offence, as he should have taken having regard to his company (S.116) Service of Notices S.128) The Commissioner is necessarily empowered to determine the form of any notice, return of income, or any other document required for the purposes of the Act shall take and once he has specified the form of any such document, that is the form it must take. Notice given by the commissioner under this Act may be signed by any officer authorized to do so, and any notice purporting to be signed by the commissioner, is assumed, unless proved otherwise, to have been signed by the authorized officer. Any document which has the name, or
title of the commissioner, or of the authorized officer who issued it, printed, stamped, or written thereon, is sufficiently authorized. (v) Interest On Underestimated Tax If a person files a provisional return/instalment return of income and later when he files selfassessment return, the tax assessed on the self assessment/final return turns out to be greater than instalment assessment by more than 1%, he will be liable for an interest at the rate of 2% per month on the difference i.e. 2% p.m. (understated tax + 2% penalty).