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Advanced Taxation Question Paper

Advanced Taxation

Course:Bachelor Of Commerce

Institution: Kca University question papers

Exam Year:2010

UNIVERSITY EXAMINATIONS: 2010/2011
THIRD YEAR EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
CFM 300-A: ADVANCED TAXATION
DATE: DECEMBER 2010 TIME: 2 HOURS
INSTRUCTIONS: Answer ALL questions
Instructions: Answer ALL questions. Show all workings and state all assumptions used to support your answers.
RATES OF TAX (Including wife’s employment, self employment and professional income rates of tax).
Year of income 2009.
Monthly taxable pay Annual taxable pay Rates of tax
(Shillings) (Shillings) % in each shilling
1 - 10164 1 -121968 10%
10165 - 19740 121969 - 236880 15%
19741 - 29316 236881 - 351792 20%
29317 - 38892 351793 - 466704 25%
Excess over 38892 Excess/over- 466704 30%
Personal relief Ksh.1.162 per month (Ksh.13,944 per annum)
Prescribed benefit rates of motor vehicles provided by employer
Monthly Annual Rates
rates
(Ksh) (Ksh)
Capital allowances:
Wear and tear allowances:
Class I 37.5%
Class II 30% (i) Saloons, Hatch Backs
Class III 25% and Estates
Class IV 12.5%
Industrial building allowances: Up to 1200 cc 3,600 43,200
Industrial buildings 2.5% 1201- 1500 cc 4,200 50,400
Hotels 10 % 1501- 1750 cc 5,800 69,600
Farm work allowances 50 % 1751- 2000 cc 7,200 86,400
Investment deduction allowances: 2001- 3000 cc 8,600 103,200
2003 - 70% Over 3000 cc 14,400 172,800
2004 - 100%
2005 - 100% (ii) Pick-ups, Panel Vans (Unconverted)
Shipping investment deduction 40%
2
Mining allowance: Up to 1750 cc 3,600 43,200
Year 1 - 40% Over 1750 cc 4,200 50,400
Year 2-7 - 10% (iii) Land Rovers/ Cruisers 7,200 86,400
OR 2% of the initial capital cost of the vehicle for each month.
Commissioner’s prescribed benefit rates
Monthly rates Annual rates
Services Ksh. Ksh.
(i) Electricity (common or from generator) 1,500 18,000
(ii) Water (Communal or from a borehole) 500 6,000
(iii) Provision of furniture (1% of cost to employer)
If hired, the cost of hire should be brought to charge
(iv) Telephone (Landline and mobile phones) 30% of bills
Agriculture employees: reduced rates of benefits
(i) Water 200 2,400
(ii) Electricity 900 10,800
QUESTION ONE
Mr. Thomas Mate has been in a manufacturing business in Kisumu industrial area since 2005. He
prepares his account to 31 August every year. The following transactions took place for year ended 31
August 2008 and 2009.
1 /9/2008. Bought one Nissan Sunny vehicle for use in business for Kshs. 2, 500,000. He used the
car 1/5th of the time or private purposes
1/12/2008 Bought a loader for Kshs. 7,500,000. On the same date in the afternoon he bought a
hatchback vehicle for Kshs. 6,000,000.
1/2/2009 Bought a trademark Kshs. 660,000
1/8/2009 Bought land for Kshs. 8,000,000 and put up additional factory building on the land at
cost of Kshs. 6,000,000.
1/7/2009 Bought a second hand processing machine for Kshs. 500,000.
1/8/2009 Installed second hand machinery worth Kshs. 12,000.000 and new worth Kshs.
20,000,000 and brought the building and machinery into use with effect from the same
date.
10/8/2009 Bough a photocopier on hire purchase for Kshs. 480,000 with a loan borrowed from BBK
Bank at interest rate of 20%.The interest rate was repayable in four semi annual
instalments with the principal repayment per instalment of Kshs. 80,000
20/8/2009 Sold an old trailer for Kshs. 1,720,000. The original cost of the trailer was Kshs.
3,000,000.
27/8/2009. Sold and old machine for Kshs. 980,000. The original cost of this machine was Kshs.
1,520,000
28/8/2009 Replaced one of the cars by paying Kshs. 640,000 after obtaining a trade –in allowance
of Kshs. 210,000
3
30/8/2009 Sold an old plant which originally cost Kshs. 700,000 for Kshs. 900,000
31/8/2009 Bought a new computer for Kshs. 200,000 and sold an old computer at Kshs. 100,000
The written down values for the assets as at 31 August 2008 were as follows:
Kshs.
Patents and copyrights
Trailers and tractors
Motor car
Processor
Photocopiers
Computers
Industrial building (bought and first used in 1.9.2003)
1000,000
5,700,000
1,400,000
190,000
1,300,000
1,600,000
5,600,000
Required:
a) Compute the capital deductions as per Second Schedule. (12 marks)
b) Specify the information you have not used in (a) above and state why you have not used such
information? (4 marks)
c) Explain how donated assets which are purchased in a lump sum are allocated as qualifying cost
when such assets are used for business purposes? (4 marks)
(Total: 20 marks)
QUESTION TWO
(a) Describe five measures that the revenue authority in your country may take to widen the tax base
and thus improve on revenue collection (5 marks)
(b) Rules of origin provisions under the East African Community treaty. (3 marks)
(c) Charitable trusts are non-profit-making organisations are formed with the objective of promoting
the social well being of the general public. With reference to Sections 25 and 26 of the Income Tax
Act (Cap.470), explain the tax treatment of charitable trusts. (4 marks)
(d) The Income Tax Act (Cap. 470) grants the Commissioner General the power to effect the recovery
of unpaid taxes. Outline three ways through in which the Commissioner General may exercise this
power. (3 marks)
(Total: 15 marks)
QUESTION THREE
(a) The term “permanent home” has no defined or technical meaning for tax purposes. In previous
cases on tax, the courts of law considered several factors that may point to the existence of a
“permanent home” for tax purposes.
List six such factors (6marks)
(b) Maua Growers Ltd was incorporated in year 2007 but commenced business on 1 January 2009. The
income statement of the company for the year ended 312 December 2009 was as follows:
Kshs.
“000”
Kshs.
“000”
Administration expenses 1,570.15 Sales 28,950.5
General insurance 270.81 Dividends income 270
4
Additional information:
1. The company’s main activity is the growing of flowers for export.
2. The company has leased the land on which it grows flowers from Sian roses ltd one of its
shareholders Sian Roses ltd. Owns 25% of the ordinary share capital in Maua growers ltd.
3. Donation were made to the Kenya flowers council to support activities
4. The loss on sale of investment relates to sale of shares that Maua growers ltd held in a quoted
company
5. Included in medical expenses is Kshs. 24,000 relating to one of the company’s non-executive
directors.
6. Bad debts comprised of:
7. The farmhouse is occupied by the farm manager
8. The surplus from the pension scheme arose after an actuarial valuation was carried out by a firm
of actuaries
9. Divided income was received from a quoted company
10. Legal and professional fees comprised.
Clearing land and planting
roses
18,940 Interest income (net) 164
Rent and rates 265 Gain on sale of tractor 360
Lease charges 650 Surplus from pension
scheme
420
Bad debts 460
Donations 42
Repairs and renewals expenses 252
Loss on sale of investment 96
Medical expenses
320
Legal and professional fees 339.75
Depreciation 840
Interest on overdraft 280.5
Stationery and postage 140
Bank charges 94.2
Irrigation systems 827
Farmhouse 640.4
Pension scheme contributions 350
Compensation to staff for work
related injuries
420.6
Motor vehicle expenses 186
Transportation costs 296
Net profit 2,884.09
30,164.5 30,164.5
Kshs.
General provision 220,000
Specific provision 320,000
Bad debt recoveries (80,000)
460,000
5
11. Repairs and renewals expenses were analyzed as follows:
12. Capital deductions have agreed with the revenue authority at Kshs. 630,000 for the year ended
31 December 2009.
Required:
i) Adjusted taxable profit of Maua Growers Ltd. Fort the year ended 31 December 2009 (10marks)
ii) Tax liability due on the profit computed in (b) (i) above (2marks)
iii) Show how the tax liability determined in (b)(ii) above would be paid (2 marks)
(Total: 20 marks)
QUESTION FOUR
(a) The following information was extracted from the books of Faida Ltd. for the year ended 31
December 2006:
- Profit before tax Kshs. 400,000
- Import duty refunded by tax authority Kshs. 400,000
- Dividend distributed by Faida Ltd. Kshs 8,800,000
- Dividend received by Faida Ltd. Kshs. 3,000,000.
The rate of corporation tax is 30%
Required
Compensating tax payable by Faida Ltd. for the year ended 31 December 2006. (4 marks)
(b) Discuss the Provision of the Income Tax Act (Cap. 470) relating to shortfall tax on non-distribution
of dividend. (3 marks)
(c) Explain the main tax incentive provided to newly listed companies in your country. (4 marks)
(d) Under what circumstances are imported goods considered to have been dumped in you country?
(4 marks)
(Total: 15 Marks)
Kshs.
Audit fees 120,000
Feasibility study on new flower varieties 97,750
Legal fees for recovery of bad debts 74,000
Legal fees for preparing a 5-year farm
lease
48,000
339,750
Kshs.
Repair of motor vehicle 97,200
Repair of greenhouse 34,800
Office partitions 120,000
252,000

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