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- 7 Marks
Question
b) At a tax seminar organised by The Institute of Chartered Accountants (Ghana) in December 2016, the issue of tax implications for finance lease arrangement dominated the discussion. The facilitator said that both the lessor and the lessee shall be denied capital allowance under the tax law.
The facilitator intimated that capital allowance is granted to persons who acquire assets and own them and use such to generate business income. Both the lessor and the lessee, consequently do not qualify for capital allowance under the Income Tax Act (Act 896), 2015 and its regulations, he added.
Required:
As a tax advisor, submit a response to the above based on the tax provisions. The response is to be published in the Institute’s Journal. (7 marks)
Answer
- Finance lease arrangement is an arrangement where a lessor leases or transfers an asset to the lessee in return for a lease rental payment by the lessee. The risk and reward associated with the leased asset is transferred to the lessee. The lease term exceeds 75% of the useful life of the asset.
- Capital allowance is an incentive that is given to a person who acquires a depreciable asset and uses the depreciable asset in generating income for the business. The property under finance lease for accounting purposes is the property of the lessor, but for the effect of substance over form, the asset belongs to the lessee for which depreciation is enjoyed and shown in the books of the lessee.
- For capital allowance purposes, the payment of the lease rental payment shall be apportioned between capital repayment and the interest component in accordance with section 31 of the Income Tax Act, 2015 (Act 896) and LI 2244 Regulation 17. The capital repayment shall be subject to capital allowance for the benefit of the lessee, and the interest component shall be an allowable deduction for the lessee for tax purposes. In effect, the treatment of capital allowance and depreciation shall be the same except for the amount that shall be different.
- In summary, the following shall be the treatment:
The lessee shall be granted capital allowance on the principal repayment, and the interest shall be an allowable deduction. In the case of a vehicle that is not a commercial vehicle, the amount shall be restricted to an amount of GH¢75,000.
The lessor shall not be granted capital allowance but may be granted a capital amount to be determined in accordance with guidelines to be issued by the Commissioner-General
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- Topic: Tax planning
- Series: MAY 2019
- Uploader: Cheoli