Question Tag: chargeable income

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  • 20 Marks

AT – April 2022 – L3 – Q5 – Business income – Corporate income tax | Tax planning

A trainee accountant is tasked with correcting errors in the tax computation of Prime Shea Ltd. The tasks include determining allowable financial costs, preparing a revised tax computation, calculating the tax payable, and recommending a process for appeal against a tax audit assessment.

a) You are a Trainee Accountant, and your manager has asked you to correct a company tax
computation which has been prepared by the Managing Director of Prime Shea Ltd, a
manufacturing company located in Batanyili, a suburb of Tamale in the Northern Region.
The company commenced business on 1 January 2014. The company tax computation is
for the year ended 31 March 2020 and contains a significant number of errors:

Required:
i) Determine the allowable financial cost for the year ended 31 December 2020. (4 marks)
ii) Prepare a revised tax computation to determine the chargeable income for the year ended
31 December 2020. (4 marks)
iii) Calculate the tax payable by Prime Shea Ltd under the Income Tax Act 2015 (Act 896) as
amended. (2 marks)

 

b) You are a final level CA student who has been helping Naagode Ltd on tax issues. Naagode Ltd has been doing business in the international space, importing and exporting products. You have been told that when you qualify, you would manage their Tax Department.

What has baffled the company lately is an audit outcome by the Ghana Revenue Authority. The audit was done in two-folds. One by the Post Clearance Audit Department of the Customs Division and the other by Tax Audit and Quality Assurance (TAQA) Department of Domestic Tax Revenue Division.

The audit findings are as follows:

Post Clearance Audit Department of the Custom Division:
Import Duties GH¢10,000,000
Value Added Tax (VAT) GH¢12,000,000
National Health Insurance Levy (NHIL) GH¢4,000,000
Ghana Education Trust Fund (GET/Fund) GH¢4,000,000

TAQA Department of Domestic Tax Revenue Division:
Corporate Tax GH¢230,000,000
VAT GH¢29,000,000
NHIL GH¢29,000,000
Withholding Tax (WHT) GH¢105,000,000

The management of Naagode Ltd has asked you to assess the chances of the Company if an objection to the assessment is raised as it considers the assessment quite excessive.

Required:
Recommend the process that the management should adopt to ensure success in its appeal.

 

 

a) i

Allowable financial cost:
Financial gain + 50% of the adjusted chargeable income
= 20,000+ (50%*33,650)
=36,825
The amount of GH¢36,825 represents the allowable financial cost for the 2020 year
of assessment. The excess financial cost of GH¢13,175 (50,000 – 36,825) that is not
allowed as a deduction may be carried forward for the next five years of
assessment.

ii) Computation of Chargeable Income and tax payable by the company:

iii) Tax Payable Calculation:

As Prime Shea Ltd is a manufacturing business located in Batanyili, Tamale, it qualifies for a tax rebate of 50%, meaning its tax rate is 12.5%.
Therefore, tax payable = 12.5% * GH¢16,825 = GH¢2,103.13

b)
To object to the tax decision by the Ghana Revenue Authority (GRA), Naagode Ltd must follow these steps:

  1. Objection submission: Submit the objection in writing to the GRA within 30 days, stating the grounds for the objection.
  2. Payment of non-disputed taxes and partial payment: Naagode Ltd must pay all taxes not in dispute, plus 30% of the disputed tax amounts from the Domestic Tax Revenue Division (DTRD) assessment.

TAQA Department:

  • Corporate Tax GH¢230,000,000
  • VAT GH¢29,000,000
  • NHIL GH¢29,000,000
  • Withholding Tax GH¢105,000,000

Total: GH¢393,000,000
30% of GH¢393,000,000 = GH¢117,900,000

The company must pay GH¢117,900,000 plus any undisputed amounts before the objection is considered.

  1. Full payment of customs duties and taxes: Naagode Ltd must pay all taxes assessed by the Post Clearance Audit Department (GH¢30,000,000) in full.

Post Clearance Audit Department:

  • Import Duties GH¢10,000,000
  • VAT GH¢12,000,000
  • NHIL GH¢4,000,000
  • GET/Fund GH¢4,000,000

Total: GH¢30,000,000

The objection will not be entertained unless the payments are made. Management may appeal to the Commissioner-General for a waiver or suspension of the 30% payment, but the final decision rests with the Commissioner-General.

  • 14 Marks

TF – May 2018 – L3 – Q2a – Capital Allowance

Calculate the capital allowances and chargeable income of Sekyiwaa Annam Industries Ltd for the year 2017.

Sekyiwaa Annam Industries Limited manufactures personal hygiene soaps and related products at their factory in Takoradi. The company commenced business operations on 1 April 2016 and had an assessed loss of GH¢150,200 for the period ended 31 December 2016.

The company recorded a net profit of GH¢762,800 for the year ended 31 December 2017 after taking into account the following transactions in the income statement:

Gross rental income of GH¢180,000 received from the leasing of one wing of the office building. The rental income portion constitutes 10% of the office building.
Net interest received on bank deposits from Ghana Commercial Bank of GH¢10,028. Withholding tax of 8% has been deducted.
The registration of Trademarks at a total cost of GH¢75,000 in respect of the Company’s personal hygiene soaps that is to last for 10 years. The research and development expenses incurred in connection with these soaps amounted to GH¢15,000 and the company intends to expense it. The legal costs incurred to complete the registration of the Trademark was GH¢5,000.
A donation of GH¢120,000 worth of furniture was made to a local government-assisted school as part of the Company’s corporate social responsibility program, which was duly acknowledged by Ghana Education Service (GES).
Depreciation of fixed assets of GH¢57,000.
Replacement of two motor vehicle engines costing GH¢51,000.
Exceptional costs amounting to GH¢150,000 as a result of the production manager sustaining an injury while working on one of the production lines in the factory. GH¢35,000 of the costs relate to a payment made to the production manager as severance pay. GH¢110,000 was used to acquire additional computers. The remaining GH¢5,000 of the costs represent fines imposed by the Factory Inspectorate Department of the government following the incident.
Purchases of a Computer Server for accounting and human resource needs at a cost of GH¢20,000.
Additional Information:
Details of the Company’s other fixed assets, at cost, are provided below. These were all acquired/constructed during the year to 31 December 2016:

Asset Cost (GH¢)
Factory Building 800,000
Plant and Machinery 510,000
Office Building 420,000
Furniture and Office Equipment 60,000
Motor vehicles (Goods Vans) 130,000
Computers 30,000

Required:
i) Calculate the capital allowances claimable by Sekyiwaa Annam Industries Limited for the year ended 31 December 2017 using all the available information.
(8 marks)

ii) Calculate the chargeable income of Sekyiwaa Annam Industries Limited for the year ended 31 December 2017 and the tax payable.
(6 marks)

Sekyiwaa Annam Industries Ltd

(8 marks evenly spread using ticks)

ii) Sekyiwaa Annan Industries Ltd Computation of Chargeable Income for the Assessment year 2017


(6 marks evenly spread using ticks)

Repairs and Improvement

  • 20 Marks

AT – April 2022 – L3 – Q4 – Capital allowance | Business income – Corporate income tax

Calculate capital allowance and chargeable income for Joefel Company Ltd. Explain sources of revenue from upstream petroleum operations in Ghana.

a) Joefel Company Ltd, manufacturer of fruit juice for local consumption commenced business on 1 October 2019, with accounting year-end at 31 December each year. The company submitted its accounts for 2019 and was assessed accordingly. The company submitted its tax returns for 2020 year of assessment to the Ghana Revenue Authority on 30 April 2021. Below are the details:

Additional information:
1) Advert and publicity
Radio and television 3,300
Newspaper advert 2,400
Permanent signboard at the company’s entrance in 2020 18,000

2) Installation of plant and others
Installation of plant 21,500
Heavy duty Generator bought in 2019 to support Plant and Machinery 20,500
General maintenance before the use of the plant 18,000

3) Staff Welfare
Staff medical bills 3,700
Safety wear for staff 10,500
Canteen Equipment purchased on 30 November 2020 12,000

4) Donation and Subscription
Goods given as gratis to customs officials 13,000
Donation of goods to SOS Children Village 10,000
Subscription to Association of Ghana Industries 5,000

5) Wages and Salaries
Old staff 120,000
Fresh graduates employed by Joefel Company Ltd. (Fresh graduates
constitute 1% of total workforce) 26,000

6) Other Income
Compensation from a customer for cancellation of a sale order 8,000
Compensation for loss of trading stock of the company 10,000
Compensation for cancellation of purchase order by supplier 5,000

Note 2) above has not been included in the plant and machinery acquired.

Required:

a
i) Compute the appropriate capital allowance for 2019 and 2020 years of assessment.
(8 marks)
ii) Calculate the chargeable income of the company for the 2020 year of assessment.
(6 marks)
b) Explain of the following sources of revenue accruing to the Government of Ghana from the upstream petroleum operations in Ghana:
i) Royalty.
ii) Carried Interest.
iii) Additional Interest.
iv) Additional Oil Entitlement.
(6 marks)

a

i) Computation of Capital Allowance for 2019 and 2020 years of assessment

 

ii) Computation of Chargeable Income

 

b) Explanation of sources of revenue accruing to the Government of Ghana from upstream petroleum operations:

i) Royalty: This is a payment made by the oil company to the government for the right to extract petroleum resources. It is usually calculated as a percentage of the gross value of oil produced.

ii) Carried Interest: This refers to the government’s participation in petroleum operations without making upfront financial contributions. The government’s share of costs is ‘carried’ by the oil company and later recovered from production revenues.

iii) Additional Interest: This is an optional equity participation by the government in a petroleum project, beyond the carried interest. The government pays its share of costs for this additional interest.

iv) Additional Oil Entitlement: This is a progressive resource rent tax that allows the government to receive a larger share of profits as the profitability of a project increases. It ensures the government benefits from windfall profits in highly successful projects.

 

  • 20 Marks

AT – May 2021 – L3 – Q4 – Minerals and mining

Compute the capital allowance and chargeable income for Kanawu Mine Resources Ltd for 2020.

Kanawu Mine Resources Limited was incorporated on 1 January 2017 to mine gold and diamonds at Prestea in the Western region of Ghana. Various reconnaissance and prospecting activities took place from 2017 to 2019. Actual production started on 1 January 2020.

The following were the cost and revenue relative to reconnaissance and prospecting activities and costs from 2017 to 2019:

Activities 2017 (GH¢) 2018 (GH¢) 2019 (GH¢)
Analyzing historical exploration data 250,000 – –
Purchase of motor vehicles 1,000,000 – –
Exploratory drilling and sampling – 2,500,000 –
Purchase of surveying infrastructure 500,000 – –
Construction of office building – 3,700,000 –
Conducting market and finance studies – – 300,000
Renting of office space 400,000 – –
Sinking shafts and underground drifts – – 5,400,000
Purchase of land – 460,000 –
Permanent excavations – 400,000 3,000,000
Constructing roads and tunnels – 2,200,000 1,100,000
Purchase of drilling machines – 700,000 900,000
Purchase of office equipment 50,000 550,000 120,000
Legal fees for acquisition of lease – 130,000 –
Purchase of software – 230,000 –
Removal of overburden and waste rock – – 470,000
Acquisition of rights to explore 300,000 – –
Protocols to chiefs of Prestea 10,000 5,000 23,000
Topographical and geophysical studies 25,000 56,000 –
Geological and geochemical studies 35,000 300,000 –
Sale of surveying software – – (130,000)
Trenching and sampling expenses – 400,000 100,000
Sale of drilling equipment – – (50,000)
Revenue from pre-production gold – – (500,000)

The following transactions took place from 1 January 2020 to 31 December 2020:

  1. The company received compensation of GH¢3,500,000 from their insurers for destruction of some gold mined.
  2. Mining and processing cost, including wages and salaries incurred during the year, was GH¢120,345,000.
  3. Sales of gold and diamonds: GH¢378,532,900.
  4. Ground rent paid to the Administrator of Stool Lands: GH¢321,500.
  5. Further research and development studies at the cost of GH¢374,300.
  6. Royalties paid to the government: GH¢11,355,987.
  7. Acquisition of a new mineral right: GH¢5,000,000.
  8. Bonus payment for the new mineral right: GH¢300,000.
  9. Legal and other professional fees for the acquisition of the new mineral right: GH¢121,800.
  10. Stope preparation and development cost: GH¢1,021,700.
  11. Business operating permits: GH¢5,563,200 (includes GH¢400,000 provision for 2021).
  12. General and administrative expenses: GH¢190,467,100 (includes GH¢421,600 for a new iron gate).
  13. Selling and distribution costs: GH¢172,554,700.
  14. Finance charge, including interest on loans and bank charges: GH¢211,500,000.

Required:
a) Compute the capital allowance claimable in 2020.
b) Compute the chargeable income and tax payable for the 2020 year of assessment.
c) Comment on the tax treatment of royalty payments and the acquisition of new mineral rights.

a) Capital Allowance Computation:

Reconnaissance and Prospecting Expenditure as at 1 January 2020: GH¢24,906,000
Additional capital expenditure in 2020:

  • Iron Gate: GH¢421,600

Total capital expenditure: GH¢25,327,600
Capital Allowance (20% of GH¢25,327,600) = GH¢5,065,520

 

b) Chargeable Income and Tax Payable for 2020:

Description Amount (GH¢) Total (GH¢)
Sales of gold and diamonds 378,532,900
Compensation received 3,500,000
Total Revenue 382,032,900
Less: Allowable Expenses
Mining and processing cost (120,345,000)
Ground rent (321,500)
Royalties (11,355,987)
Stope preparation and development (1,021,700)
Business operating permits (excluding 2021) (5,163,200)
General and administrative expenses (excl. gate) (190,045,500)
Selling and distribution costs (172,554,700)
Finance costs (211,500,000)
Capital allowance (5,065,520)
Total Allowable Expenses (717,373,107)
Loss Carried Forward (335,340,207)
Tax Payable: No tax payable due to the loss carried forward.

 

c) Tax Treatment of Royalty Payments and New Mineral Rights:

  • Royalty Payments:
    Royalties are levied on production and are an allowable deduction for tax purposes. In this case, the royalty of GH¢11,355,987 paid by Kanawu Mine Resources Ltd is deductible when calculating the company’s chargeable income.
  • New Mineral Rights Acquisition:
    The acquisition of a new mineral right is considered a capital asset and should be capitalized. Capital allowances will be granted on this asset. Since the acquisition is related to a new mining operation, it will be treated as a separate mineral operation.
  • 20 Marks

AT – Aug 2022 – L3 – Q4 – Capital Allowance

Calculation of capital allowances, provisional tax, chargeable income, company tax, and additional tax liability for Zimbo Ltd for the year ended 31 December 2021.

Zimbo Ltd (Zimbo) specialises in the manufacture of personal hygiene soaps and related
products at their factory in the industrial area of Accra. Zimbo commenced business operations
on 1 April 2020 and had an assessed loss of GH¢112,000 for the period ended 31 December
2020 attributable to large start-up costs in the first period of trading.
Turnover for the year ended 31 December 2021 amounted to GH¢1,980,000 of which
GH¢700,000 relates to export sales. Zimbo is trying to increase its turnover from export sales
through participation in foreign market trade fairs as well as other marketing campaigns. The
gross profit margin for the year ended 31 December 2021 was 60%.
Zimbo recorded a net profit of GH¢315,000 for the year ended 31 December 2021 after taking
into account the following transactions:

Additional information:
i) The gross rental income earned was from leasing one wing of the head office building. The
wing constitutes 10% of the entire building.
ii) The registration of three trademarks, ‘Cleanex’, ‘Perfect’ and ‘Alfresh’ at a total cost of
GH¢30,000 in respect of Zimbo’s personal hygiene soaps that is to last for fifteen years. The
market research expenses incurred in connection with the development of these soaps
amounted to GH¢65,000.
iii) The donation was made to a local government assisted school as part of Zimbo’s corporate
social responsibility programme.
iv) GH¢25,000 of the marketing cost was incurred when the export market Development Manager
attended two trade conventions and one trade mission as part of Zimbo’s efforts to increase its
export sales. The trade mission was duly approved. The remaining GH¢63,000 of costs were
incurred in marketing Zimbo’s soaps to foreign markets.
v) GH¢28,000 of the general costs was incurred in underpinning the office building to strengthen
its foundations against sinking.
vi) The compensation cost was as a result of the production manager incurring an injury while
working on one of the production lines in the factory. The Production Manager was rendered
incapacitated as a result of the incident. Zimbo settled out of court. GH¢250 000 of the costs
relate to a payment made to the Production Manager in full settlement of the case. GH¢50,000
of the GH¢250,000 out-of-court settlement was paid in order to prevent the Production
Manager from setting up a similar business in competition with Zimbo. The remaining
GH¢40,000 of costs represent fines imposed by the Factory Inspectorate Division following
the incident. The production line was also condemned as a result.
vii)The interest paid was incurred in respect of Zimbo’s GH¢200,000 overdraft facility.
GH¢100,000 of the facility was applied towards recurrent expenditure while the other
GH¢100,000 of the facility was applied towards the cost of a new showroom.
viii) Ghana Revenue Authority considers 40% of other expenses to be prohibited for tax purposes.
ix) Zimbo’s projected taxable income for the year ended 31 December 2021 was GH¢360,000.
The Accountant remitted the provisional tax for the three quarterly payment dates (QPDs) on
time but, due to the pressures of year-end work, forgot to submit the return for the final QPD.
The Accountant also omitted the brought forward assessed loss from his computations of the
provisional tax.
x) During the year, a showroom was constructed in close proximity to Zimbo’s factory building.
The showroom is used to display the soaps from the factory as well as for storage purposes
pending shipment to various destinations. The showroom was constructed at a total cost of
GH¢100,000 and was wholly funded by Zimbo’s overdraft facility. The showroom was
brought into use on 1 August 2021. Zimbo has made all tax appropriate elections in connection
with the showroom.
xi) Details of Zimbo’s other fixed assets are provided below. These were all acquired/constructed
during the year to 31 December 2020:

 

Required:
a) Calculate the capital allowances claimable by Zimbo for the year ended 31 December 2021,
assuming all favourable elections are made. (6 marks)
b) Calculate the provisional tax which should have been paid by Zimbo for the year ended 31
December 2021, clearly indicating the due dates and the respective tax amounts. (3 marks)
c) Calculate the chargeable income and company tax payable by Zimbo for the year ended 31
December 2021. (10 marks)
Note: Your calculations should assume that the provisional tax paid was as calculated in
part b) of the question.
d) Compute any other tax liability apart from the company tax. (1 mark)
(Total: 20 marks)

a) Computation of Capital Allowance

b) Provisional Tax Payable

  • Projected Taxable Income: GH¢220,000
  • Less Assessed Loss B/F: GH¢112,000
  • Adjusted Taxable Income: GH¢108,000
  • Tax Rate: 25%
  • Tax Payable: GH¢27,000 (GH¢6,750 per quarter)

Due Dates:

  • End of March, June, September, and December 2021.

c) Zimbo Ltd
Computation of Chargeable Income for the Year Assessment 2021

d) other tax liability
Rental tax 15% x 280,000 = GH¢42000

 

  • 12 Marks

AT – Aug 2022 – L3 – Q1b – Business income – Corporate income tax | Tax planning

Discuss tax implications of holding voting power and tax payments made abroad by resident companies.

The following relates to information of two companies, both resident in Ghana, for 2021 year of assessment with the basis period January to December each year:

Company A (GH¢) Company B (GH¢)
Income 10,000,000 12,000,000
Cost of Sales (4,200,000) (4,400,000)
Gross Profit 5,800,000 7,600,000
Less: Operating Costs (4,900,000) (3,000,000)
Chargeable Income 900,000 4,600,000

Additional information:

  1. Dividend paid to each company by Company C, another resident company in Ghana, is as follows:
    • Company A: GH¢200,000
    • Company B: GH¢230,000
      Both companies hold shares in Company C:
    • Company A holds 25%
    • Company B holds 30%
  2. Contribution towards Kanzo Football Club, a local football club, amounted to GH¢80,000 (Company A) and GH¢100,000 (Company B). Both companies could not show government approval for the contribution.
  3. Two vehicle engines, each costing GH¢80,000, were purchased by both companies. Pool 2 had a written down value of GH¢200,000.
  4. Company B paid foreign employees’ tax to the UK, as the employees were from the UK.

Required:
i) What is the tax implication of holding 25% or more of the voting power of another resident company? (1.5 marks)
ii) What is the position of the tax law on tax payment made by Company B to the UK? (1.5 marks)
iii) What is the total tax payable by both companies? (8 marks)
iv) What is the total tax expenditure? (1 mark)
(12 marks)

i) The tax implication of a resident entity holding 25% of another resident entity is that,
any dividend declared is exempt from tax. This does not, however, apply if the paying
company is into mining and mineral operations or petroleum operations.

(1.5 marks)

ii) Income accrued and derived by non-resident is payable in Ghana and the global
income of resident person is payable in Ghana. It is therefore wrong for PAYE
payment of Citizens of United Kingdom be payable in United Kingdom. It has to be
paid in Ghana.

(1.5 marks)

iii) Computation of tax payable and Tax Expenditure
Year of assessment 2021
Basis period January 1, 2021 to December 31, 2021

  • 20 Marks

AT – Nov 2021 – L3 – Q4 – Business income – Corporate income tax | Minerals and mining

Compute the chargeable income and tax payable for Akwatia Gold Mines for 2020 and identify tax optimization opportunities.

Akwatia Gold Mines was established ten years ago. For the year ended 31 December 2020, the following income statement was prepared and submitted to the Ghana Revenue Authority as part of its financial statement.

Akwatia Gold Mines
Income Statement for the Year Ended 31/12/2020

1.

2.

3.

4.

5.

6.

7.

The capital allowance agreed for the period was GH¢24,320,500.

Required:
a) Compute the chargeable income of the company and the tax payable. (15 marks)

b) Advise Akwatia Gold Mines on how to identify opportunities within the tax laws to optimise tax payable for the year ended 31 December 2020.  (5 marks)

a) Akwatia Gold Mine Limited
Computation of Chargeable Income for the year of assessment 2020

b) Opportunities within the tax laws to assist Akwatia Gold Mines to optimise tax payable include:

  • Capitalisation of mining rights and exploration costs: Mining companies can capitalize the costs of acquiring mining rights and exploratory expenses. This allows the company to claim capital allowances, thus reducing the tax burden.
  • Retention of foreign exchange: A portion of foreign exchange earnings may be retained for the purchase of spare parts or other inputs, ensuring efficient operations without tax impositions.
  • Exemption from import duties: Akwatia Gold Mines can benefit from exemptions on customs duties for machinery and equipment imported for mining activities. If such equipment is not diverted for other purposes, these exemptions can lead to significant tax savings.
  • Employee tax exemptions: Employees housed at the mine site are exempt from PAYE taxes on housing allowances, which can optimize the company’s employee-related tax liabilities.
  • Carry forward of losses: Akwatia Gold Mines can carry forward losses for up to five years. This would allow them to deduct previous years’ losses from current income, thereby reducing taxable income.
  • Stability agreements: The company could enter into a stability agreement with the government, ensuring that the company is protected from changes in tax laws, exchange controls, and import duties for an agreed period.

 

  • 17 Marks

AT – May 2020 – L3 – Q4a – Business income – Corporate income tax

Compute the chargeable income for Mamavi, a retail business owner, for the year ended 31 December 2018 based on the provided profit and loss account.

Mamavi is a retail business woman with a chain of shops in Ghana. She commenced business on 1 March 2011, with the business name of Unity Enterprise. She sells health foods, fruits, vegetables and juices.

The Enterprise’ profit or loss account for the year ended 31 December 2018 as prepared by the Accountant are reproduced below:

NOTES

A business loan was taken out to finance the cost of improvements to the store, in particular
the juice bars. The interest element included in the loan repayment amounted to GH¢1,750.
A mortgage loan was taken out by Mamavi to buy the family a house in Hlefi, Volta Region.
The interest element in the loan repayment for the mortgage was GH¢2,670.

This court case was as a result of a car hitting Mamavi when she was walking her dog out
at night. The car owner claimed Mamavi stepped out in front of him and therefore it was
her fault. Mamavi’s Lawyer told her to respond to the allegation because she needed five
sessions of physiotherapy to help heal her leg. Mamavi is suing the car owner for her costs.

GH¢700 of the painting cost related to the painting of Mamavi’s private house. The balance
related to painting her shop. GH¢1,200 lease charges relate to the leasing of a car for the
business
Required:
Compute Mamavi’s chargeable income for the year ended 31 December 2018

Mamavi
Computation of chargeable Income for the year assessment 2018
Basis Period 1/3/2018 -31/12/2018

 

  • 20 Marks

AT – MAR 2024 – L3 – Q4 – Business Income – Corporate Income Tax | Capital Allowance

Covers capital allowance computation, tax rules on long-term contracts, and chargeable income calculation.

Finstruct Ltd has been awarded an airport terminal project. The project started on 1 January 2022 for a contract sum of GH¢60,000,000. The construction of the airport is to be completed on 31 December 2023.

Finstruct Ltd has a financial year ending on 31 December each year. On 31 December 2022, the accounts appropriate to the airport contract contained the following:

Cost Item GH¢
Cost of construction materials 25,500,000
Direct wages of construction staff 22,100,000
Hire of special equipment 300,000
Cost of soil test 100,000
Purchase of fuel and lubricants 750,000
Consultancy services 135,000

Additional information:
i) Materials costing GH¢340,000 sent to the site were returned to the company’s warehouse.
ii) Materials sent to the site worth GH¢675,000 were still unused at the construction site as of 31 December 2022.
iii) Finstruct Ltd pays some of its workers the first week of the ensuing month after the end of the current month. GH¢57,000 is still owed for wages as of the close of the year 2022, and this was not included in the accounts.
iv) A bill amounting to GH¢45,000 was submitted late by Finstruct Ltd, and as of 31 December 2022, the bill had not yet been paid. This was not included in the accounts.
v) It is estimated that the cost to complete the project as of 31 December 2022 should be GH¢8,265,180.
vi) The following details are available on assets of Finstruct Ltd:

Required:
a) Compute the capital allowance for Finstruct Ltd for the year 2022. (6 marks)
b) Explain the tax rules on long-term contracts and compute the percentage of contract completion of the project. (4 marks)
c) Compute the chargeable income of Finstruct Ltd for the year ended 31 December 2022. (10 marks)

a)

Computation of Capital Allowance

Assumptions:
1. There was no depreciation
2. Pick up was not restricted because of the nature of the sector

b) Explanation of Tax Rules on Long-Term Contracts and Calculation of Percentage Completion
Amounts to be included or deducted in calculating the person’s income related to a long-term contract are considered based on the percentage of the contract completed during each basis period. The percentage of completion is determined by comparing the total expenses allocated to the contract and incurred before the end of a basis period with the estimated total contract expenses as determined at the time of commencement of the contract.

Percentage of Completion =85.84%

(4 marks)

c) Computation of Chargeable Income for Finstruct Ltd for the year ended 31 December 2022

Description GH¢
Materials to site 25,500,000
Less: Materials returned (340,000)
Less: Closing stock (Unused materials) (675,000)
Net Material Cost 24,485,000
Wages Paid 22,100,000
Add: Wages Owed 57,000
Net Wages Cost 22,157,000
Hire of Special Equipment 300,000
Cost of Soil Test 100,000
Fuel and Lubricant 750,000
Consultancy Services 180,000
Capital Allowance 2,146,320
Total Cost to Date 50,118,320
Estimated Cost to Complete 8,265,180
Total Cost of Completion 58,383,500

Stage of Completion = 85.84%
Revenue: 85.84% x GH¢60,000,000 = GH¢51,504,000
Cost of Sale: 85.84% x GH¢58,364,000 = GH¢50,099,658

Chargeable Income: GH¢1,404,342

  • 10 Marks

AT – May 2017 – L3 – Q3b – Business income – Corporate income tax

Compute allowable financial cost on hedged transactions and provide management advice on the tax implications.

b) XYZ Ltd runs a business with a basis period from January to December each year. The following information is relevant to its business operations for 2016 year of assessment:

Item Amount (GH¢)
Chargeable Income from business operations 40,000
Financial cost incurred on hedged transactions 150,000
Financial gain from hedged transactions 60,000

Required:

i) Compute the financial cost to be allowed in 2016 year of assessment. (6 marks)

ii) Advise management on the above results. (4 marks)
(Total: 10 marks)

b) XYZ Ltd

COMPUTATION OF CHARGEABLE INCOME FROM OPERATION
Y/A OF ASSESSMENT: 2016

Item GH¢
Chargeable income (given) 40,000
Add Financial Cost from hedging 150,000
190,000
Less Financial gain from hedging 60,000
Income from operation 130,000

COMPUTATION OF FINANCIAL COST ALLOWABLE
Y/A – 2016

Item GH¢
Financial Gain from hedging 60,000
Add 50% Chargeable Income from operation (50% * 130,000) 65,000
Financial cost allowable ceiling 125,000

ii) ADVISE TO MANAGEMENT

The cost incurred from hedging was GH¢150,000. The allowable ceiling on the cost incurred is GH¢125,000. The excess of GH¢25,000 (GH¢150,000 – GH¢125,000) will be carried over for five years. The financial cost carried forward shall be allowed in five years following. It is granted in the order in which they occur.

Management should in future be mindful of the implication of cost on derivatives as they are not allowed wholesale but are restricted in accordance with section 16 of Act 896 Act 2015 and its amendment.

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