Question Tag: Corporate Income

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  • 4 Marks

AT – Nov 2015 – L3 – Q1b – Business income – Corporate income tax

Circumstances under which shares are not considered chargeable assets for capital gains tax purposes.

Shares of a resident company are classified as chargeable assets under capital gains tax. Under what circumstances will shares not be described as chargeable assets under capital gains tax provision?

Shares are classified as chargeable assets under section 97 (1) (a) and (b). However, under the following provisions, shares are not classified as chargeable assets:

i. Securities (shares) of a company listed on the Ghana Stock Exchange during the twenty-five years after the establishment of the Ghana Stock Exchange. It was established in 1990. Section 97 (3) (a) of the Internal Revenue Act, 2000 Act 592.

ii. Also, realization involving the disposal of shares in the course of liquidation (section 96 (2) of the Internal Revenue Act 2000, Act 592, as amended).

  • 10 Marks

AT – May 2017 – L3 – Q4c – Business income – Corporate income tax

Calculate the capital allowance for the year 2016 after the exchange of assets, and discuss the treatment of goodwill.

c) Sakote Ltd, a trading company, has the following extracts from its financial records:

  • It bought a 4 X 4 Vehicle for an amount of GH¢225,000.00 in the year 2015. The cost of the vehicle was limited to an amount of GH¢75,000 for capital allowance purposes in the year 2015.
  • It also put up a building at a cost of GH¢150,000.00 in the same year. The cost of the land was GH¢20,000 and GH¢130,000 was the cost of the building.
  • The Company accordingly informed the Commissioner-General about putting the assets into use and in the generation of its income in 2015 year of assessment.
  • In the year 2016, it exchanged the vehicle for 4 plots of land. The value of the plots of land agreed with the landowners was GH¢220,000. The exchange was deemed satisfactory to both parties, and documentations were carried through.

Required:

i) Calculate the amount of capital allowance claimable for 2016 year of assessment by Sakote Ltd. (7 marks)
ii) Sakote Ltd paid for Goodwill amounting to GH¢10,000 in 2016 and intends to grant capital allowance on the value of the goodwill. Explain whether or not this arrangement is in accordance with the tax laws. (3 marks)
(Total: 10 marks)

i) Calculation of Capital Allowance for 2016 Year of Assessment

Class Class 2 Class 4 Capital Allowance
Rate 30% 10% (SLM)
Cost of Vehicle GH¢75,000
Cost of Building GH¢130,000
Capital Allowance 2015 (GH¢22,500) (GH¢13,000)
WDV c/d 2015 GH¢52,500 GH¢117,000

2016 Capital Allowance Computation:

Class Class 2 Class 4 Capital Allowance
WDV b/d 2016 GH¢52,500 GH¢117,000
Proceeds from Sale of Vehicle (220,000) (GH¢167,500)
WDV after Disposal GH¢0 GH¢117,000
Capital Allowance GH¢0 GH¢13,000 GH¢13,000
WDV c/d GH¢0 GH¢104,000

(7 marks)

Conclusion:

  • The amount of GH¢167,500 constitutes income which should be added to business income, and capital allowance of GH¢13,000 is claimable for 2016 year of assessment.

ii) Goodwill and Capital Allowance:

Goodwill is an asset that qualifies as a capital expenditure for accounting purposes only. Capital allowance is not granted in respect of assets as such, but rather on depreciable assets as defined by tax provisions.

Conclusion:

Goodwill does not qualify for capital allowance as it is not a depreciable asset in accordance with tax law. Therefore, the GH¢10,000 paid by Sakote Ltd for goodwill is not eligible for capital allowance.

(3 marks)

  • 10 Marks

AT – Nov 2016 – L3 – Q4b – Business income – Corporate income tax

Calculate the tax payable by Bambara Ltd and comment on the treatment of specific income and expenses

b) Bambara Ltd has the following summarized income statement relating to the 2015 year of assessment:

GH¢
Revenue 100,000
Cost of Sales 65,000
Gross Profit 35,000
Operating expenses 20,000
Net profit 15,000

Upon a closer scrutiny, the following came up:

i) Dividend net of withholding tax received from A Ltd was GH¢10,000. The amount received was added to revenue above. Bambara Ltd has 10% equity interest in A Ltd.
ii) Bad debts of GH¢1,000 were recovered. This was adjusted to the Income Surplus Account.
iii) A penalty of GH¢2,000 was paid and has been added to operating costs to determine the net profit as disclosed.
iv) Capital allowance agreed with Ghana Revenue Authority was GH¢1,000, and depreciation of GH¢1,300 was added to operating costs.
v) Taxes paid in previous quarters amounting to GH¢1,200 were added to operating costs to determine the net profit.
vi) It came to light that an amount of GH¢11,400 net of 5% withholding tax relating to the supply of goods was not brought into the accounts at all on account of omission. The withholding tax was certified correct.

Required:
Determine the tax payable by Bambara Ltd and comment on any four reasons for the inclusion and/or non-inclusion of the transactions in the determination of income. (10 marks)

Bambara Ltd – Computation of Tax Payable for Y/A 2015

  1. Net Profit as Disclosed:

    Net Profit=15,000 GH¢\text{Net Profit} = 15,000 \text{ GH¢}

  2. Adjustments:
    • Deduct Dividend: Dividend received is subject to final withholding tax and should not be included in taxable income.

      Adjusted Net Profit=15,000−10,000=5,000 GH¢\text{Adjusted Net Profit} = 15,000 – 10,000 = 5,000 \text{ GH¢}

    • Add Back Non-Allowable Expenses:
      • Bad Debts Recovered: This should be added to taxable income, not adjusted to the income surplus account.
      • Penalty: Penalties are non-deductible expenses and should be added back.
      • Depreciation: Depreciation is not allowable for tax purposes; instead, capital allowance is claimed.
      • Taxes Paid: Taxes are non-deductible and should be added back.
      • Revenue Omitted: Revenue omitted due to an omission should be included in the taxable income.

      Adjusted Net Profit=5,000+1,000+2,000+1,300+1,200+12,000=22,500 GH¢\text{Adjusted Net Profit} = 5,000 + 1,000 + 2,000 + 1,300 + 1,200 + 12,000 = 22,500 \text{ GH¢}

  3. Less Capital Allowance:

    Chargeable Income=22,500−1,000=21,500 GH¢\text{Chargeable Income} = 22,500 – 1,000 = 21,500 \text{ GH¢}

  4. Tax Computation:

    \text{Tax Payable at 25%} = 21,500 \times 25\% = 5,375 \text{ GH¢}

  5. Withholding Tax Adjustment:
    • The GH¢11,400 omitted was net of 5% withholding tax, so add back the gross amount and deduct the withholding tax.

    Withholding Tax on Omitted Revenue=(12,000 – 11,400)+1,200=1,800 GH¢\text{Withholding Tax on Omitted Revenue} = \text{(12,000 – 11,400)} + 1,200 = 1,800 \text{ GH¢} Net Tax Payable=5,375−1,800=3,575 GH¢\text{Net Tax Payable} = 5,375 – 1,800 = 3,575 \text{ GH¢}

Comments on Inclusions and Non-Inclusions:

  1. Dividend Income: Dividend is subject to a final withholding tax at 8%, and since Bambara Ltd holds only 10% equity, it should not be added to taxable income.
  2. Bad Debts Recovered: Recovered bad debts should be added to income as they are considered income when recovered.
  3. Penalty: Penalties paid are not allowable deductions for tax purposes, hence should be added back to income.
  4. Depreciation vs. Capital Allowance: Depreciation is not allowable for tax purposes; instead, the capital allowance granted by the GRA should be used.
  5. Omitted Revenue: Revenue omitted due to an error should be included in the taxable income, and the corresponding withholding tax should be credited.

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