SOLUTION PRINCIPLES & PRACTICE OF TAXATION NOVEMBER 2010 SOLUTION 1 Employment GHS Salary Add: Rent Allowance Transport

Allowance Benefit from purchase of buses Less: 5% Social Security (5% x 9,600) Chargeable employment income Transport Net profit as per a/cs Add: Depreciation Vehicle Income Tax Less: C/Allowance (20,000 x 30% x 9 mths) Assessment Employment Transport Total Assessable Income Less: Marriage Relief Child Allowance Chargeable Income 35 30 18,200 114,380 132,580 65 132,515 600 480 8,000 GHS 9,600 9,080 18,680 480 18,200 117,720 800 360 1,160 118,880 4,500 114,380

SOLUTION 2 Capital Expenditure and revenue Expenditure The following statements will be found helpful in distinguishing between capital expenditure and revenue expenditure:a) b) Capital expenditure is something that is going to be spent once and for all and income expenditure is a thing that is going to recur every year. (Lord Dunedin) The distinction is between expenditure that is to meet a continuous demand and expenditure made once and for all. (Rowlatt J.)

c)

Fixed capital is what the owner turns to profit by keeping it in his own possession, circulating capital is what he makes profit of by parting with it and letting it change masters. (Adams Smith) The cost of additions or improvements to assets acquired for long term use in the trade and not for resale, plus the incidental costs thereof. From the above, it becomes clear that capital expenditure involves, for example, the cost of a vehicle, plant, machinery, equipment, a building constructed or purchased for long time use in the business and not for resale. On the other hand, revenue expenditure involves the cost of raw materials to be converted into finished products for sale or direct purchses of goods for sale. Revenue expenditure also includes such incidental expenses as electricity and water, repairs and maintenance, bank charges, salaries and wages etc. It should also be noted that what may be regarded as a capital expenditure in one business could be a revenue expenditure in another business. This distinction in income taxation is important because in the computation of chargeable income for tax purposes:Revenue expenditure is allowed as deductible in arriving at the adjusted profit for tax purposes, capital expenditure is not deductable but capital allowances are granted. In quite a number of cases, to determine whether a particular expense is capital or revenue is so complex that it is finally settled at the courts. Some decided tax cases are:i. ii. iii. iv. v. Bullcraft Main Collieries Ltd vrs OGrady (Capital Exp) Law Shipping Co. Ltd vrs C. I. R. (Capital Exp) Samuel Jones & Co (Devondale Ltd vrs C. I. R. (Revenue Exp) Odeon Associated Theatres Ltd vrs Jones (Revenue Exp) Green vrs J. Gliksten & Son Ltd (Revenue Exp)

d)

SOLUTION 3 GHS Net profit as per a/cs Add Back: Maintenance Sundry Expenses Salaries & allowances etc (Partners 6 mths) 14,500 3,100 24,725 GHS 32,400

Depreciation Adjusted Profit Less: Capital allowance Cheargeable Income Distribution of Profits Living allowance Transport allowance Interest on Capital Child Education Risk allowance Profits Chargeable Income Add Backs A.I CA C.I 26898 Sharing Rudolf 17,932 14,500 32,432 26,897 59,329 26,897.50 (6 months) Justin 8,966 10,225 19,191 38,275 70,675 53,795

2,200 92,300

38,275 70,675 16,880 53,795 Justin 6,000 1,200 625 1,200 1,200 10,225 5,887 16,112

Rudolf 6,000 1,200 2,500 2,400 2,400 14,500 29,433 43,933

1/11/07 31/10/08 1/11/07 30/4/08

Capital Allowance Computation Pool.2 30% 28,000 24,000 52,000 15,600 36,400 Pool.4 20% 6,400 6,400 1,280 5,120

B/F Adds Dep. Allowance c/f

16,880

DISTRIBUTION JUSTIN1/3 8,966 10,225 19,191 RUDOLF2/3 17,932 14,500 32,432

C.I.

C.A.

Granted

C.I.

59,329

SOLUTION 4 GHS Net profit as per a/cs Less: Dividend Received Rent Income Add: Repairs (Vehicles & Farm Equipment Defalcation Legal & Professional Depreciation Fines and Penalties Genral Provisions (Bad Debts) Donations Adjusted profit 3,600 32,000 16,500 4,700 1,200 108,000 2,800 6,400 2,000 GHS 217,900 35,600 182,300

141,600 323,900

Less: Loss b/f Utilised (Profit) c/f Chargeable Income Capital Allowance: b/f Current c/f Rent Income: Less: 8% Final Tax Capital Allowance Computation Pool.1 40% b/f 2,400 Adds 2,400 ... Allowance 960 c/f 1,440 533.400 323,900 209,500 38,200 C.I. 32,960 C.A. 71,160 32,000 2,560 323,900 209,500 NIL 209,500 71,160 138,340

Pool.2 30% 18,000 9,000 27,000 8,100 18,900

Pool.4 20% 12,000 7,500 19,500 3,900 15,600

Pool.5 10% 120,000 120,000 20,000 100,000

Total

32,960

SOLUTION 5 (a) GHS Consideration Received Less: Cost Base Chargeable Gain Assessable Less: Roll-Over Relief: Cost of Replacement Cost Base Chargeable Gain Less: Exempt Amount Tax at 5% = GHS7,475 Comments Part of the proceeds of sale was used to acquire a similar chargeable asset within a year of realisation hence he qualifies for roll-over relief. (b) The Commissioner may reject an application if: a) b) He is satisfied that the person has no fixed place of abode or business; or He has reasonable grounds to believe that that person:i. ii. iii. will not keep proper accounting records relating to any business activity carried on by him; or will not submit regular and reliable tax return as required by or under the VAT Act; or is not a fit and proper person to be registered. GHS 75,000 46,800 28,200 13,200 15,000 50 14,950

60,000 46,800