What is a registered pension scheme and what are its implications?
Registered Pension Scheme is a retirement benefit scheme registered under rule 4 of the Income Tax Act and the following are the main rules relating to a registered Pension Scheme – Sec.22:
- Deduction in respect of contributions of an employee in a year shall be limited to the lesser of:
The sum of the contributions made by the employee to registered funds in the year or,
Thirty percent of the employee‟s pensionable income in the year, or
Two hundred and ten thousand per year or seventeen thousand five hundred shillings per month of the funds.
- The deduction in respect of the contributions made by an employer in a year under defined contribution provisions of registered funds shall be limited to the sum of the deductible contributions of the employer in the year under defined contribution provisions of registered funds on behalf of the funds.
- The deduction in respect of the contributions made by an employer in a year under defined benefit provisions of registered funds shall be limited to the amount by which the lesser of –
The sum of the contributions made by the employer and by the employee in the year to registered funds in respect of members of the defined benefit registered funds of the employer, or
Thirty per cent of the sum of the pensionable incomes from the employer in the year of members of defined benefit registered funds of the employer; or
Two hundred and ten thousand shillings per annum times the number of full-year members of defined benefit registered funds of the employer, exceeds the sum of –
The deductible contributions made in the year to the registered funds of the employer by the members of registered funds of the employer, and
The amounts deducted by the employer for the year for contributions made under defined contribution provisions of registered funds under subsection (2) in respect of the members of the defined benefit registered funds.
- Pension funds in respect of an employee may be transferred to another registered fund or registered individual retirement fund and not be treated as a withdrawal under Sec.3 (2)(c)
- Where registered fund is wound up, any surplus funds therein shall be deemed to be the funds of the employer and shall be immediately withdrawn by the employer unless the trust deed in respect of such registered fund specifies the contrary.
Other rules: – Funds must be registered
– Contribution cannot be withdrawn before 5 years have expired neither can contributions be used as security.
- Explain any FOUR effects of Value Added Tax on business. ( 8 marks)
- VAT increases prices of goods or services hence may reduce sales and profitability
- VAT calls upon a registered person (trader) to maintain expensive elaborate records in addition to penalties, where VAT is not paid on time or a return has not been submitted, etc.
- In the case of credit sales the trader will be required to finance VAT whether customers have paid or not and in the case of capital assets input tax is not recoverable but is capitalized.
- VAT may create market imperfections because not all traders dealing in same supplies are required to charge VAT.
- Specify the rules relating to appeal against the Commissioner‟s decision under the
Value Added Tax Act. ( 4 marks)
- If the Commissioner of VAT makes a decision which still leaves the trader aggrieved, such a trader can appeal to the VAT appeals Tribunal within thirty days for an independent decision. However, such a person must pay to the commissioner the assessed tax not in dispute or such part thereof as the commissioner may require before the appeal is registered. It further aggrieved by the rulings of the tribunal he can seek redress from the High Court on payment of full amount of the tax disputed.
With reference to Pay As You Earn (PAYE) system:
Write explanatory notes on the following:
- Taxation of pension income for a retired employee; ( 4 marks)
- Pension payment to retired employee may be a one-time lump sum regular payments for a specified period of a combination of the above.
- Allowable deductions for contributions to a registered pension scheme; ( 2 marks)
- An employee can claim relief in respect of his annual contribution to a registered retirement benefit scheme, limited to the lesser of:
- Procedure for the end of year Return; ( 6 marks)
- Dates of commencement and leaving employment
- Names and address of old and/or new employerDetails of benefits provided, if any, at the back of the tax deduction cardsThe amounts and details of any pay from which tax was deducted which relates to an earlier period of e.g. gratuities, bonuses, compensation for loss of office, etc. Details of rent paid by employee towards housing.
Employees should also give details of normal monthly PAYE remittances, separately from other payments made at the Pay-Master General relating to tax on lump sum payments, audit tax, interest and penalty. Dates on which the relevant payments were made to the bank must also be shown. In addition employers are required to show total tax paid in respect of: tax on lump sum payments, tax determined through PAYE Audit, Interest and penalty. Details of fringe benefits and tax paid thereon should not be reflected on the employee‟s tax deduction card. Employers should submit form P10B showing names of employees involved, loan amounts, rate of interest charged by employer, taxable fringe benefit values and amount of tax paid.
Give a list of statutory deductions. ( 4 marks)
National Social Security Fund (NSSF)
National Hospital Insurance Fund (NHIF)
- Give a list of three omissions which amount to failure to comply with PAYE regulations and indicate the penalty there on. ( 4 marks)
- Failure to deduct tax
- Failure to remit PAYE deducted
- Failure to remit PAYE deducted by due date
- Failure to submit end year PAYE returns to the commissioner The general penalty for not observing PAYE rules is a fine not exceeding ten thousand shillings and/or imprisonment of up to six months. Where the employer fails to deduct tax from employees
pay he will be liable to pay the outstanding tax as though it were due from him. Late payment of tax generally attracts a penalty of 20% plus interest at 2% per month simple interest
(Total: 20 marks)
- QUESTION FOUR
- a) Comment on reasons why a tax payer may appeal to the Local Committee. ( 4 marks)
- A taxpayer may appeal to Local Committee for the following reasons:
- The Commissioner of Income Tax has confirmed an assessment following an objection to it by the taxpayer.
- The Commissioner has rejected a late objection.
- The Commissioner has amended the assessment to the best of his knowledge not acceptable by the taxpayer (non-agreed assessment).
- How does each of the five issues above affect the tax position of Wendani Limited? (10 marks)
- Profit realized on sale of investment which had cost Sh.40,000 amounting to Sh.12,500 is a capital gain. The law relating to capital gains is currently suspended hence the gain is not taxable and since included in profits, it must be deducted before tax.
- The disputed income tax for year ended 30 April 2005 is per revised assessment by the CIT. Wendani Ltd if aggrieved by the CIT decision/assessment have a right to lodge an objection
with the commissioner in writing within 30 days from date of service of the revised assessment
stating clearly the grounds to the objection. Wendani has further right to Local
Committee if the commissioner‟s response to the objection is not satisfactory.
- Preference shares redemption at premium of 20% is non-taxable capital gain and since it was not reflected in the books as income no adjustment is required.
- Payment of wages before commencement now being amortised over 5 years is allowable deduction since it is an expense which would ordinarily be allowable upon commencement as revenue in nature.
- Writing down of stocks to cater for future price decline is not allowable and since already deducted, the amount of Ksh.10,000 must be added to net profit for the tax purposes. Is it prudent to raise an objection on revised assessment? ( 3 marks)
- A taxpayer must carry out cost/benefit analysis before raising objection against revised assessment. In addition he must be able to furnish evidence to provide that he has been unduly over assessed. It would be wise for the taxpayer to enlist services of a qualified accountant or agent for this purpose.
- a) Comment on reasons why a tax payer may appeal to the Local Committee. ( 4 marks)
Define the term capital allowances. ( 4 marks)
- Capital allowances is a term that may be defined as tax relief in respect of certain types of capital expenditure by granting specific deductions in respect thereof as per section 15(2) such as deductions in respect to capital expenditure on industrial buildings; capital expenditure of machinery; mining operations; capital expenditure on agricultural land; investment deductions, etc.