Question Tag: Rental Income

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  • 10 Marks

PT – May 2021 – L2 – Q5a – Withholding Tax Administration

Explain the withholding tax rates and treatment for rental income for residential and non-residential premises.

A resident person who makes a payment to another resident person in respect of the rental of residential or non-residential premises is required to withhold tax in accordance with the Income Tax Act, 2015 (Act 896) as amended.

Required:
i) State the taxation principle applicable to rental income and the relevant rates. (5 marks)
ii) Given i) above, how will you treat this transaction, where a resident person makes a payment to another resident person conducting a business of sale or renting of residential or non-residential premises?

i) Taxation Principle for Rental Income and Relevant Rates

  • Rental income received by a resident person from another resident person is subject to withholding tax.
  • The applicable withholding tax rate for residential premises is 8%, while for non-residential (commercial) premises, the rate is 15%.
  • This withholding tax on rental income is treated as a final tax for the recipient, meaning no further tax is charged on the rental income received.
    (5 marks)

ii) Treatment of the Transaction for a Business of Sale or Renting of Premises

  • When a resident person conducts a business involving the sale or renting of residential or non-residential premises, the payment is treated as a supply of services rather than an investment return.
  • In this case, the withholding tax rate is 7.5% on the payment made to the business, and this withholding tax is not final.
  • The withheld tax serves as an advance tax, and the recipient (the business) will still be required to account for corporate tax based on their total income.
  • 8 Marks

PT – May 2021 – L2 – Q4b – Corporate Tax Liabilities

Compute the tax payable by Fridays Ltd and explain the treatment of rental income and dividends.

Fridays Ltd is a resident company. It provides cleaning services across the country. The following is available from its tax returns for the 2020 year of assessment.

Other relevant information:

  • The dividend was received from Z Ltd, a resident company where Fridays Ltd has 27% shares.

Required:
i) Compute the tax payable assuming its tax rate is 25%. (6 marks)
ii) Explain the treatment of the following:

  • Rental income (1 mark)
  • Dividend (1 mark)

i) Computation of Tax Payable for Fridays Ltd
BASIS PERIOD JANUARY 1-DECEMBER 31, 2020

ii) Treatment of Rental Income
Rental income is taxed as investment income, and withholding tax applies. For residential premises, the rate is 8%, and for commercial premises, the rate is 15%. This withholding tax is treated as final.
(1 mark)

Treatment of Dividend
Dividends paid by a resident entity to another resident entity are exempt from tax if the recipient holds at least 25% voting rights in the paying entity. In this case, since Fridays Ltd holds 27% of Z Ltd’s shares, the dividend is exempt from tax.
(1 mark)

  • 6 Marks

AT – April 2022 – L3 – Q2c – Tax planning | Business income – Corporate income tax

Explain tax incentives for farming, agro-processing, and rental income from cocoa farming activities.

Tax incentives have traditionally been used by governments as tools to promote a particular economic goal. They are preferential tax treatments offered to a selected group of taxpayers and may take the form of tax exemptions, tax holidays, preferential tax rates, and others.

Required:
Explain the tax implications of the following:
i) A person engaged in Farming activity
ii) A person engaged in Agro-Processing activity
iii) The rental income of a person engaged in Cocoa Farming activity

i) A person engaged in Farming activity:

  • Farming activities such as tree crops, cattle ranching, and livestock farming are eligible for tax holidays.
  • For tree crops and cattle farming, there is a 10-year tax holiday, while for other farming activities, there is a 5-year tax holiday.
  • During these periods, the taxpayer pays a concessional rate of 1%.

ii) A person engaged in Agro-Processing activity:

  • Agro-processing businesses enjoy a 5-year tax holiday. After this period, they are taxed at a concessional rate of 1%.
  • Additional locational tax incentives are available based on the region of operation. For example, companies operating in Accra and Tema are taxed at 20%, whereas those in regional capitals are taxed at 15%.

iii) Rental income of a person engaged in Cocoa Farming activity:

  • Rental income from residential properties is taxed at 8%, while rental income from commercial properties is taxed at 15%.
  • For individuals or companies engaged in cocoa farming, rental income earned from leasing residential properties will be taxed at the standard rate, while commercial rental income is subject to the corporate tax rate of 25%.
  • 8 Marks

AT – Nov 2020 – L3 – Q3b – International taxation

Tax computation for Andrew Soweah as an individual, granting relief under the Ghana/UK Double Taxation Agreement using the credit method.

Andrew Soweah recently relocated to Ghana to commence his business after retirement from TaskForce (UK) Ltd, a security company he served for over 20 years. The nature of the business was to provide private security to diplomats and the very affluent.

Before coming to Ghana, he rented out his apartment in the UK for a yearly rent of £18,000. He also maintained a healthy balance in his account with Diamond Bank in London.

His income for 2019 year of assessment is summarized as follows:

  • Business Income (net of all taxes): GH¢126,000.
  • Dividend received from Faithful Ltd, a resident company at gross amount was GH¢18,000.
  • Rent of £16,200 was paid into his account with Diamond Bank. Withholding tax amounting to £1,800 had been deducted.
  • Diamond Bank credited his account with net of £8,100 bank interest. UK tax rate on interest is 10%.

Additional Information:

  • Exchange rate is GH¢7.5 for £1.
  • Andrew Soweah does not contribute to social security in Ghana.

Required: Compute his tax liability as an individual for the relevant year of assessment while granting him relief for double taxation under the Ghana/UK Double Taxation Agreement using the credit method.


  • 20 Marks

FA – July 2023 – L1 – Q2 – Preparation of Partnership accounts

Prepare a ledger account for rental income and a partnership's profit and loss appropriation account with related partners' current accounts.

a) A company owns a number of properties which are rented to tenants. The following information is available for the year ended 30 June 2021:

Date Rent in advance (GHȼ) Rent in arrears (GHȼ)
30 June 2020 140,500 5,200
30 June 2021 148,200 9,200

Cash received from tenants for the year ended 30 June 2021 was GHȼ820,400. All rent in arrears was subsequently received.

Required:

Prepare the ledger account for rental income showing the transfer to the Statement of Profit and Loss, for the year ended 30 June 2021. (5 marks)

b) Awuni, Adjetey, and Kwame are in partnership, running an evening school, and sharing residual profits and losses in the ratio 4:3:3 respectively. At 1 October 2021 their capital and current account balances were:

By formal agreement, the partners are entitled to receive interest at 5% on capital. In addition, Adjetey is paid an annual salary of GHȼ5,455 for his part in running the business.

On 1 April 2022, by mutual agreement, Kwame increased his capital by paying a further GHȼ4,000 into the partnership bank account. Awuni reduced his capital by GHȼ5,000, but kept this in the partnership as a loan bearing interest at 10% per annum. Interest on the loans, by agreement, is credited to Awuni’s current account.

The partners are allowed to take out drawings at any time during the year, but they have agreed to charge interest on such drawings. The date of taking out the drawings, the amount drawn out by each partner, and the interest payable, were as follows during the year to 30 September 2022:

Required:

i) Prepare the profit and loss appropriation account for the year ended 30 September 2022. (8 marks)
ii) Prepare the partners’ current accounts for the year ended 30 September 2022. (7 marks)

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