Question Tag: Income Tax Act 2015 (Act 896)

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  • 4 Marks

TX – May 2019 – L3 – Q2C – Capital Allowance

Discuss the concepts of domestic and excluded expenditure according to the Income Tax Act 2015 (Act 896) and their implications on tax deductions.

i) What constitutes domestic expenditure? (2 marks)
ii) What constitutes excluded expenditure? (2 marks)

i) Domestic expenditure constitutes the following:
Where an individual incurs expenditure in respect of that individual, the expenditure is domestic expenditure to the extent that it is incurred:

  • In maintaining the individual, including the provision of shelter, meals, refreshment, entertainment, or other leisure activities.
  • By the individual in commuting from home.
  • In acquiring clothing for the individual, other than clothing that is not suitable for wearing outside of work.
  • In educating the individual, other than education that is directly relevant to a business conducted by the individual and that does not lead to a degree or diploma.

Where another person incurs expenditure in making a payment to or providing any other benefit for an individual, the expenditure is domestic expenditure except to the extent that:

  • The payment or benefit is included in the calculation of the income of the individual.
  • The individual provides consideration of an equal market value for the payment or benefit; or
  • The amount of the expenditure is so small as to make it unreasonable or administratively impracticable to account.

The expenditures as stated above include interest incurred on the amount borrowed that is used as described above.

ii) Excluded expenditure constitutes the following:

  • Tax payable under Act 896.
  • Bribes and expenditure incurred in corrupt practices.
  • Interest, penalties, and fines paid or payable to a government or a political subdivision of a government of any country for breach of any legislation.
  • Expenditure to the extent incurred by a person in deriving exempt amounts or final withholding payments.
  • Retirement contributions unless they are included in calculating the income of an employee in line with the Pension Act 2008 Act 766.
    Dividends.
  • Depreciation. Instead, capital allowance is allowed to the person.
  • 7 Marks

TX – May 2019 – L3 – Q3B – Tax planning

Discuss the tax implications of finance lease arrangements, particularly concerning the eligibility for capital allowance under the Income Tax Act 2015 (Act 896).

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)

  • 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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