Question Tag: Tax Deductibles

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  • 10 Marks

PT – Nov 2023 – L2 – Q4a – Income Tax Liabilities

Explanation of tax treatment of research and development expenses, contributions to worthwhile causes, and financial costs from derivatives.

Your company has recruited five new employees, and the Director of Training has instructed you to explain certain provisions in the Income Tax Act, 2015 (Act 896) to them:

i) Research and development expenditure (3 marks)
ii) Contribution and donations to worthwhile causes (3 marks)
iii) Financial cost from derivatives (4 marks)

i) Research and development expenditure:
Research and development expenses that meet the criteria of being wholly, exclusively, and necessarily incurred during the year in the production of income from business or investment are tax-deductible, irrespective of whether they are capital in nature. These expenses are related to the development of a business or improving business products and processes. However, expenses included in the cost of an asset used for research and development are excluded from this deduction.
(3 marks)

ii) Contribution and donations to worthwhile causes:
Contributions and donations made during the year to worthwhile causes approved by the government are tax-deductible. Worthwhile causes may include:

1. Charitable organizations.
2. Scholarships or educational schemes.
3. Rural or urban development projects.
4. Sports development or promotion.
5. Any other cause approved by the Commissioner-General of the Ghana Revenue Authority.
(3 marks)
iii) Financial cost from derivatives:
Financial costs, such as interest or losses related to a financial instrument, are tax-deductible under the Income Tax Act. Financial instruments include 1. debt claims,
2. derivative instruments
3. foreign currency instruments
4. Any other instrument prescribed by regulations or, in the absence of regulations, treated as a financial instrument by generally accepted accounting principles. The deductible amount of financial cost cannot exceed the sum of:
a. Financial gains derived by the person from the business or investment for the year.
b. Fifty percent of the person’s chargeable income from the business or investment for the year, excluding financial gains or financial costs.
Any denied deduction of financial costs due to these limitations can be carried forward for up to five years.
(4 marks)

  • 20 Marks

PT – March 2023 – L2 – Q4 – Income Tax Liabilities

Compute the chargeable income and capital allowance for Adwoa Mansa based on her accounts.

Adwoa Mansa is self-employed and has not filed her tax returns to the Ghana Revenue Authority. She applied for a tax clearance certificate in February 2023, and the head of her Tax Office insisted that she submit her accounts for the 2022 year of assessment. Below are the details from her auditors for the year ended 31 December 2022.

Details Amount (GH¢)
Gross Profit 5,200,000
Expenses:
Utilities 70,000
Travelling expenses 43,000
Depreciation 30,500
Rent 21,200
Maintenance 25,260
Donations 60,250
Bad debts 52,000
Sanitation 20,000
Business promotion 25,620
Salaries 86,000
Net profit 4,766,170

Additional Information from Adwoa Mansa in response to queries raised by the tax official:

  1. Utilities and Rent:
    Adwoa Mansa and her husband occupy the apartment next to the shop. 25% of the expenditure on utilities and rent relates to her home.
  2. Travelling Expenses:
    28% of the travelling expenses were for private journeys.
  3. Maintenance:
    The maintenance figure includes GH¢11,500 for furniture and fittings bought for the shop and GH¢10,000 for painting her apartment.
  4. Donations:
    • Donation to Covid-19 fund: GH¢32,250
    • Donation to Mallam Atta Women’s Association: GH¢19,500
    • Donation to Farmers Day celebration: GH¢8,500
  5. Bad Debts:
    • General provision: GH¢26,000
    • Specific provision: GH¢10,000
    • Loan to husband written off: GH¢16,000
  6. Sanitation:
    GH¢1,000 was spent on acquiring equipment for cleaning the office premises.
  7. Business Promotion:
    • Permanent billboard: GH¢8,000
    • Television advertisement: GH¢6,620
    • Entertainment of customers: GH¢11,000
  8. Dividend and Interest:
    Adwoa Mansa received a dividend of GH¢18,800 (net) from her investment with Tarzan Ltd and interest of GH¢15,600 from Government Treasury bills. These amounts were included in her gross profit.
  9. Assets Purchased in 2022:
    • Computers: GH¢300,000
    • Warehouse: GH¢330,000
    • Air conditioners: GH¢100,700
      All assets are depreciable for capital allowance purposes.

Required:

a) State the circumstances under which bad debt will be allowable.
(4 marks)

b) Calculate the chargeable income of Adwoa Mansa for the 2022 year of assessment.
(16 marks)

a) Circumstances under which bad debt will be allowable:

  1. The bad debt must be specific, not general.
  2. The bad debt must have arisen in the ordinary course of business.
  3. The amount of the bad debt should have been included in income for previous years.
  4. Necessary steps should have been taken to recover the debt before it is classified as bad.

(4 marks)

b) Computation of Chargeable Income for Adwoa Mansa for the 2022 Assessment Year

Details GH¢ Explanation
Net Profit per accounts 4,766,170
Less:
Dividend (Tarzan Ltd) (18,800) Non-taxable
Interest (Government Treasury bills) (15,600) Non-taxable
Adjusted Net Profit 4,731,770
Addbacks:
Utilities (25% personal use) 17,500 25% relates to personal use
Depreciation 30,500 Non-deductible
Travelling expenses (28% personal use) 12,040 28% relates to personal use
Rent (25% personal use) 5,300 25% relates to personal use
Maintenance: Furniture & fittings (capital) 11,500 Capital expenditure
Maintenance: Painting (personal use) 10,000 Relates to personal use
Donations: Mallam Atta Women’s Association 19,500 Non-allowable donation
Bad debts: General provision 26,000 Non-allowable
Bad debts: Loan to husband 16,000 Non-allowable
Sanitation (equipment) 1,000 Non-allowable (capital expenditure)
Business Promotion: Permanent billboard 8,000 Non-allowable (capital expenditure)
Business Promotion: Entertainment of customers 11,000 Non-allowable
Total Addbacks 168,340
Adjusted Net Profit 4,900,110
Less: Capital Allowance (176,440) See working below
Chargeable Income 4,723,670

Capital Allowance Calculation:

Class Cost (GH¢) Capital Allowance Rate Allowance (GH¢)
Class 1 300,000 40% 120,000
Class 3 113,200 20% 22,640
Class 4 338,000 10% 33,800
Total 176,440

Total Capital Allowance: GH¢176,440

(16 marks)

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