STARRY GOLD ACADEMY

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INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

ADVANCED TAX

ONLINE INTENSIVE REVISION - QUESTION AND ANSWERS

QUESTION 1 Sound Glass Product Limited was granted a pioneer certificate on April 1 2004 for the three years. At the expiration of the pioneer period, the certificate expired and the company continued its business. Accumulated losses at March 31, 2007 N375,000 Capital expenditure incurred during the pioneer period. Industrial buildings 500,000 Non-industrial buildings 650,000 Plant and Machinery 750,000 Motor Vehicles 485,000 Both the losses and the capital expenditure were certified by the Federal Board of Inland Revenue. The company, after the expiration of the pioneer certificate retains December 31 as its year-end. The adjusted profits of the company from its non-pioneer trade are: Period April to December 2007 N990,000 Year ended December 31, 2008 N1,086,000 During the year ended December 31, 2004 and 2005 the company imported identical product for which it was granted pioneer status and profits amounting to N540,000 and N945,000 for nine months to December 31, 2004 and the year ended December 31, 2005 respectively were realized.

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Compute the tax liabilities of the company for the relevant years of assessment. Solution Sound Glass Product Limited (a) Computation of Tax Liabilities for the Relevant Tax Years 2004 Tax Year N N Assessable Profit 540,000 Tax at 35% 189,000 Education Tax (2% x 540,000) 10,800 2005 Tax Year N N Assessable Profit 776,250 Tax at 35% 271,688 Education Tax (2% x 776,250) 15,525 2006 Tax Year N N Assessable Profit 945,000 Tax at 35% 283,500 Education Tax (2% x 945,000) 18,800 2007 Tax Year N N Adjusted Profit 990,000 Less b/f 375,000 Relieved (375,000) (375,000) Loss Lapsed NIL Capital Allowance 979,095 Relieved (615,000) (615,000)

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Capital Allowance b/f 364,095 Taxable Profit NIL Tax as 30% NIL Education Tax (2% x 990,000) 19,800 2008 Tax Year N N Adjusted Profit 1,261,500 Capital Allowance for the year 267,705 Capital Allowance b/f 364,095 631,800 Relieved (631,800) (631,800) Capital Allowance c/f NIL Taxable Profit 629,700 Tax at 30% 188,910 Education Tax (2% x 1,261,500) 25,230 2009 Tax Year N N Adjusted Profit 1,086,000 Capital Allowance for the year 267,705 Relieved 267,705) (267,705) Capital Allowance c/f NIL Taxable Profit 818,295 Education Tax (2% x 1,261,500) 21,720 Working Notes 1. Basis Period for Assessable Profits Tax Year Basis Period Assessable Profit

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2007 1/4/07-31/12/07 990,000 2008 1/4/07-31/3/08 1,261,500 2009 1/1/08-31/12/08 1,086,000 Working: 2008 = 1/4/07-31/12/07 = 990,000 1/1/08-31/03/08 = 3/12x1,086,000 271,500

1,261,500

2. Basis Period for Assessable Profitsfor Non-Pioneer Profit

Tax Year Basis Period Assessable Profit 2004 1/4/04- 31/12/05 540,000 2005 1/4/04-31/03/05 776,250 2006 1/1/05-31/12/05 945,000 Working: 2005 = 1/4/04 - 31/12/04 = 990,000 1/1/05 -31/03/05= 3/12x945,000 236,250 776,250 3. Capital Allowances Plant & Motor Capital Machinery Vehicle Building Allowance IA 50 50 15 A.A 25 25 10 Tax Year 2007 Cost 750,000 485,000 1,159,000 IA (375,000) (242,500) (172,500) 790,000 AA (9Mths) (70,313) (45,469) (73,313) 189,095 2008 TWDV 304,687 197,031 904,187 AA (101,563) (65,677) 100,465) 267,705 2009 TWDV 203,124 131,354 803,722

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AA (101,563) (65,677) 100,465) 267,705 2010 TWDV 58,345 36,450 11,307 Working: (a) 2007 Tax Year (i) Plant and Machinery = (750,000 – 375,000) x 9/12 = 70,313 4 (ii) Motor Vehicle =(485,000 – 242,500) x 9/12 = 45,469 4 (iii) Building =[(500,000 – 650,000)–172,500] x 9/12 = 73,313 10 (b) 2008 Tax Year (i) Plant and Machinery = 304,68 = 101,563 4 - 1 (ii) Motor Vehicle = 197,031 = 65,677 4 - 1 (iii) Building = 904,187 = 100,465 10 - 1

Question 2 Igbayilola Company Limited is a company that deals in properties and other investments. During the year ended 31 December, 2006, the following transaction took place,

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() One owing of a two-wing duplex which was completed in 2002 for N1,860,000 was sold for N6,000,000. An estate valuer has advised that the wing which remained unsold is worth N6,750,000 in the open market. The commission paid o he estate agent was 2.75% of sales while the estate valuer received a fee of 5% of he valuation. Additional cost incurred in improving he wing prior to sale was N254,000. () A giant Generator that was purchased in 2004 for N750,000 was disposed off for N1,230,000 during the year. The cost of advertisement was N22,500. Two months later, a new Generator was purchased for N1,150,000 () The company sold one the buildings for N7,500,000. The original cost of acquiring the assets was N1,500,000 Advertisement cost was N19,500 while the estate agent received2.5% of a sales. Payment is to be effected by four equal bi-annual installments commencing 1st March, 2007. You are to: i) Compare the capital gains tax payable for each of the transaction ii) List five exemption from Capital Gains Tax (5 marks)

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Solution Igbayilola Company Limited () Computation of Capital Gains Tax Payable for 200 Year of Assessment () Partial Disposal N N

Sales Proceeds 6,000,000 Less: Estate agent commission 1,000

Estate Valuer’s fee 337,00 (502,00) Net Sales Proceed 5,497,00 Deduct: Cost of acquisition

6,000,000 x 1,860,000 (875,294) 6,000,000 + 6,750,000 Capital Gains 4,622,206

() Roll Over Relief N N Capital Gains 457,500 Deduct the lower of i) Amount Reinversed 1,150,000 ii) Sales Proceeds 1,230,000

Less: Cost of acquisition (750,000) Amount Roll over (400,000) Net Capital Gains 57,500 Capital Gains Tax at 10 5,750

Notes: Capital Gains Tax if there were no replacement of asset N Sales Proceeds 1,230,000 Less: Cost of advertisement (22,00) Net Sales Proceeds 1,207,00 Deduct: Cost of acquisition (70,000) Capital Gains 47,000

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Capital Gains 4,70 Observe that only N5,750 is required to be aid immediately while N40,000 is rolled over. (a) Payment of Capital Gains Tax by Installment Instal Capital lment Date Tax Year Workings Gains C.G.T 1. 1/3/07 2007 187x ,793/700 1,448,20 144,825 2. 1/9/07 2007 187x ,793/700 1,448,20 144,825 3. 1/3/08 2008 187x ,793/700 1,448,20 144,825 4. 1/9/08 2008 187x ,793/700 1,448,20 144,825 Notes: the Capital Gains is obtained as follows: N N

Sales Proceeds 7,500,000 Less: Estate agent’s fee 187,500 Advertisement cost 19,500 (207,000)

Net Sales Proceeds 7,293,000 Deduct: Cost of acquisition (1,500,000) Capital Gains 5,793,000

b) Exemptions from Capital Gains Tax (a) Capital gains on the disposal of government security (b) Capital gains on the disposal of investment under

a super annuation fund scheme (c) Capital gains on the disposal of investment by a local government authority (d) Capital gains on the disposal of a landed property through forced acquisition by the government

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(e) Capital gains on the disposal of any medal won for honor and gallantry (f) Capital gains on the disposal of a mechanical propelled vehicle for the carriage of goods and passengers (g) Capital gains arising from the disposal of any asset by an ecclesiastical, charitable or educational institution of a public character (h) Capital gains arising from the disposal of an asset by any statutory or registered friendly society (i) Capital gains arising from the disposal of an asset by any cooperative society registered under the Cooperative Society law of any state (j) Capital gains arising from the disposal of an asset by any trade union registered under the Trade Union Act, provided the asset was not acquired in connection with any trade or business carried out.

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Question 3 The records of the two trustees of Ogbodu children settlement create in favour of the three children Alade, Idowu and Bola show the following as at December 31, 2007 N

Rental Income (gross) 90,000 Trading Income 100,000 Dividends (gross) 68,000 Interest 43,000 Sundry Income 42,000

The following additional information is available: (a) The interest received is from the Citizens International Bank Limited. (b) Interest on debt repayment by the settlement of is N20,000 (c) Each beneficiary is entitled to ¼ share of the net distributable income. (d) Fixed annuity to a beneficiary is N41,000 (gross) (e) Trustees remuneration per Trust Deed: Fixed N10,000 each 2% of total computed income (f) Administrative and other expenses N68,000 (g) Under the terms of the Trust Deed, the Trustees made discretionary

payments to Alade N15,000 Idowu N12,000 Bola N10,000 (h) Capital allowance: N43,500 (i) The children have no other income You are required to compute: (i) Income tax payable by the trustees on the trust income (ii) The amount due to each beneficiary.

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Solution 3 THE TRUSTEES OF OGBODU CHILDREN a) Computation of Income Tax payable by the Trustees for 2008 Tax Year TOTAL ALADE IDOWU BOLA INCOME Rental Income 90,000 Trading income 100,000 Dividends 68,000 Interest 43,000 Sundry Income 42,000 TOTAL INCOME 343,000 Less: EXPESES Trustees’ remuneration

- Fixed 20,000 - Variable 3,804

Interest on debt repayment 20,000 Fixed Annuity 41,000 Administrative expenses68,000 (152,804) COMPUTED ICOME 190,196 Capital Allowance 43,500 Relieved (43,500) (43,500) 146,696 Less: Discretionary Payments (37,000) 15,000 12,0010,000 Remainder of Computed Income 109,696 Less: Distribution (82,272) 27,424 27,424 27,424 Trustee’s Income 27,424 b) Due to Beneficiaries 42,424 39,424 37,424 Tax payable by Trustees First N27, 424 at 2% = N1,371

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NOTE Variable Trustees’ Remuneration N N Total Income 343,000 Less: Fixed Remuneration 20,000 Interest 20,000 Fixed annuity 41,000 Administrative expenses 68,000 (149,000) 102% of Chargeable Income 194,000 = 194,000 x 2 2% of Income 102 = N3,804 QUESTION 4 (a) What are the conditions for granting of capital allowances when a

building is purchased by a company for the purpose of its business?

(b)A company permanently ceased trading in 2003 year of assessment. In revising

the income tax and capital allowances computation for the year of cessation you

found out that the company has unabsorbed capital allowance of N 300,000 out of

which N 200,000 is represented by unabsorbed balancing allowances.

What option is available to enable your client to recoup the unabsorbed balancing

allowances of N200,000

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SOLUTION (a) Conditions for granting capital allowance on a

building

The conditions for granting capital allowance on a building

are as follows

(i) The building must be owned at the end of the basis period by the person claiming the allowance

(ii) The building must be in use at the end of the basis period for the purpose of the trade or business where however, the building bought has been used by a previous owner, there are transactions on the account that can be claimed by way of capital allowances (a) Initial allowance is not given on the second –

hand purchaser because this is deemed to have been granted to the previous owner

(b) Annual allowance is computed on the lower of the price to the second-hand building is acquired without being used by a previous owner, the new purchaser will be entitled to claim both initial and annual allowance but on the original cost of construction which shall be deemed to be the purchases price.

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(b) Carry-back of capital allowances on cessation of

trade. On cessation of trade, or business, capital

allowances arising in the assessment year in which trade

permanently ceases may be carried back for relief against

remainder of profits of the five years of assessment

preceding the final year of trading.

The relief should first be claimed against the profits of

the penultimate and there after the pre-penultimate year

and so on for the remaining years.

Accordingly, the option available to recoup the

balancing allowance of N200,000 is to carry it back against

the remainder of profits for 2003 – 2007 assessment years

starting from 2003 assessment years and working

backward in that order.

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QUESTION 5

Regional Commercial Bank Limited, fully owned by Nigerians, has been in

banking business for the past 8 years

You are provided with the following information extracted from the

Books of the Bank:Regional Commercial Bank Limited

N

Adjusted profit for year ended 31 December 2010 5,500,000

Capital allowances for the year 1,500,000

Issued Share Capital 11,200,000

StatutoryReserves 1,800,000

General Reserves 1,600,000

Long-term Loan 1,900,000

You are also informed that the following relate to the accounts for year

ended 31 December 2010:

N

The turnover 250,000,000

The gross profit 25,000,000

The Net Assets 16,500,000

Unutilised Capital allowances brought Forward

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from 2010 assessment year 3,725,000

Required:

(a)Computethe Bank’s Tax liabilities for 2011 year of assessment.

(b)The International Financial Reporting Standards (IFRS) contains

some provisions that have Income Tax implications. State

THREE issues in IFRS that have some Tax implications?

(c)Capital expenditures qualify for grant of Capital Allowances based on

certain criteria.

(d) List FOUR categories of Capital expenditure that qualify for grant of

Capital

Allowances under the Companies Income Tax Act CAP C21 LFN 2004.

(ii) List the conditions for granting Capital Allowances

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SOLUTION

REGIONAL COMMERCIAL BANK LIMITED

INCOME TAX COMPUTATION

FOR 2011 ASSESSMENT YEAR

NN

Adjusted profit for year ended 31 October 20105,500,000

Deduct: Capital allowancesUnutilizedb/f from 20103,725,000

For the year1,500,0005,225,000

Maximum claimable is662/3% of Assessable Profit

i.e. 662/3% of N5,500,000(3,666,667)(3,666,667)

Unutilised Capital Allowance c/f1,558,333

Chargeable profits1,833,333

Income tax at 30% of N1,833,333550,000

Education tax @2% of Assessable profits110,000.00

MINIMUM TAX PAYABLE

N

(a)0.5% of N25,000,000 (Gross Profit)125,000

(b)0.5% of N16,500,000 (Net Assets)82,500

(c)0.25% of N11,200,000 (issued Capital)28,000

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(d)

0.25% of N500,000 (Turnover)

1,25%Highest (a) to (d)125,000

NTurnover250,000,000Less500,000249,500,000-

0.125% of N249,500,000 (Excess Turnover)311,875

Add Highest (a) to (d)125,000

Minimum Tax436,875

Since the Minimum tax is lower than the computed tax of N550,000,the tax

payable is N550,000.

(b)Three issues in International Financial Reporting Standards (IFRS) that

have tax implications -

(i)Employees’ benefits in all forms are to be recognized as part of staff cost

ii)Provision for impairment on property, plant and equipment.

(iii)Goodwill that should be recognized on business combination and

takeover, will have Capital Gains Tax impact.

(iv)Fair value gains and losses on Investment Properties and Financial

Instruments.

(v)IFRS transition adjustments.

(c)(i)Five categories of Capital Expenditure that qualify for the grant of

Capital Allowances are as follows:-Qualifying Building Expenditure

-

Qualifying Industrial Building Expenditure

-

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Qualifying Mining Expenditure

-

Qualifying Plant Expenditure

-

Qualifying Furniture and Fittings expenditure

-

QualifyingMotor Vehicles

-

QualifyingPlantation Equipment

-

QualifyingHousing Estate

-

Qualifying Ranching and Plantation

-

QualifyingResearch & Development

(ii)Conditions for granting Capital Allowances

-The Company claiming the allowance must be the owner of the assets at

the end of its basis period for a year of assessment.

-The assets must be used for the purpose of a trade or business of the

Company.

-The grant is for a year of assessment and is usually against the

AssessableProfits of the basis period for that year of assessment.

-

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A claim should be made by the Company before any Capital Allowance

can be granted.

Where the basis period for any year of assessment is less than one year,

when commencement provisions are being applied, the annual

allowance for that year of assessment shall be proportionately reduced.

-

The relief is granted by deduction from the remainder of Assessable

Profits in the computation of the Company’s Total Prof

its. The remainder of the Assessable Profit is the Assessable Profits plus any

balancing charge and any Loss Relief due, that is, Capital Allowance relief is

granted after giving effect to Loss Relief.

-

Unutilised allowances in the year of permanent cessation of a trade or

business carried on by a Company shall be available for relief against the

remainder of its Assessable Profits for the preceding years of assessment

up to the fifth year-before the year of permanent cessation.

-Where a relief is to be granted to a Company after the assessment has

become final and conclusive in respect of any assessment year, the

Revenue Service may make such repayment or set-off of the tax in lieu of

making the deduction for the amount of the relief.

-The amount of Capita

l Allowances calculated is generally restricted to a

percentage (at present 66 2/3%) of the Assessable Profit. For any company

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in the Agro Allied Industry or that which is engaged in the trade or

business of manufacturing is not affected by the restriction.

-The residue of expenditure is the total qualifying expenditure incurred

less the total of any initial and annual allowances granted to date.

Investment Allowance should not be deducted from qualifying

expenditure to arrive at the residue.

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QUESTION 6

Abilewa Nigeria Limited is a Pharmaceutical Company

involved in the

production and distribution of drugs. In an effort to have a

fair share of the market, the Company has lately been

involved in the research of a new drug to be used in the

treatment of pancreas called Haemoxylin. To date, so

much money has been committed to the project.

It has just been revealed that a competitor is developing

an identical product that will threaten its anticipated

market dominance. The Research and Development

Director is worried by this development and is requesting,

amongst other things, the release of the sum of eight

million naira (N8,000,000) to champion the cause of

stopping the product from entering the market. In

realisation of this, he has paid so much to an employee of

the other Company to provide information on the drug. It

was revealed that the sum of four million naira

(N4,000,000) was expended in the purchase of equipment

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for the research. Meanwhile, the food and drugs unit in

the Federal Ministry of Health has been invited on the mix

of the drug and has considered the need for the Company

to stop further research until they are cleared.The

Managing Director, while appreciating this cheering news,

unilaterally approved an additional three million naira

(N3,000,000) which was not included in the total amount

for Research and Development initially approved by the

Board in the Budget of the current year. He opined that

the money was genuinely spent. These commitments have

been reflected in the Profit and Loss account with a total

profit of N32,000,000 (thirty-two million naira). While this

was unfolding, the Board of the Company relieved the

Managing Director of his appointment. His compensation

of N10,500,000 was paid from the Research and

Development Budget.

Required:

As the Tax Consultant to the Company, you have been

invited to examine the Books of Abilewa Nigeria Limited

and write your report on:

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(a)The determination of non-allowable Research and

Development cost and the treatment of each of the

amounts spent.

(b)Ethical considerations arising from the case

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SOLUTION

The Board of Directors

Abilewa Nigeria Limited

Pharmacy Road

Abah

Dear Sir,

RE: EXPENDITURE ON RESEARCH AND

DEVELOPMENT

We refer to your instruction on the above subject

matter and are pleased to present hereunder our

report.Research and Development Expenditure

(R&D)Qualifying R & D expenditure include those

incurred on equipment and facilities, patents,

licences, secret formulae or process or for

information, concerning industrial, commercial or

scientific processes, technical feasibility of products

or processes and

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purchases, searching for and discovering and testing

products or processes for future market use, and

such similar costs which have not brought into

existence, any assets.

The amount deductible from profit in respect of

provision for R &D is restricted to 10% of Total Profits

before deduction of donation and before deduction of

the R&D expenditure provision.

(a)Tax Implication of the R&D Costs.

(i)The release of N8,000,000 is inclusive of

N4,000,000 expended on purchaseof equipment for

the research on HaemoxylinTheN4,000,000 used to

purchase equipment for research would be

capitalized

and 20% of the amount will be allowed as Investment

Tax Credit on Qualifying expenditure

(ii) The additional N3, 000,000 approved by the

Managing Director is also

Disallowedfor tax purpose.

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(iii) The compensation of N10,500,000 paid to the

Managing Director for loss ofOfficealso does not

qualify as R & D expenditure.

(iv) From the foregoing, the total amount released

was N21,500,000

(wk.1)out of which N17, 500,000 is disallowed. (wk.2)

(v) From the balance of N4, 000,000, only N3,

200,000 actually qualifies as R& Dexpenditure. (wk3)

(vi)The balance of N800, 000 is also disallowed.

The above submission explains the final position on

the determination of non

-

allowable Research and Development cost of Abilewa

Nigeria Limited.

(b)Ethical Issues(i)The Managing Director did not

seek the approval of the Board before committing the

additional N3,000,000, though the commitment

passes the test of the amount being wholly,

exclusively, necessarily and reasonably spent, there

ought to be authorization. It is also disallowed.

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(ii)It is unethical to involve a paid staff of the other

Company to obtain information of their business

secrets.

(iii)The Competitor and Abilewa Nigeria Limited did

not seek necessary approval from the relevant

regulatory bodies

Yours faithfully,

XYZ Consultants

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APPENDIX

Workings

Calculation of composition of Total Research and Development Costs.

N

Initial Release 8,000,000

Additional Release 3,000,000

Compensation to MD 10,500,000

N

21,500,000(wk 1)

Less: Non Allowable Costs

Purchase of equipment 4,000,000

Compensation to MD 10,500,000

Additional Release 3,000,000

(17,500,000) (wk 2)

4,000,000

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