- State the tax position of Mrs. Kiogora. ( 2 marks)
- She has the option to file her own self-assessment return with respect to her employment
and business income at arms length.
- Her employment and business income qualify for separate taxation.
- A tax refund is due to her for the year of income.
Comment on any information that you did not use in computation of Mr. Kiogora‟s taxable income. ( 5 marks)
- Kiogora is denied owner occupied interest deduction since it appears he does not live in his house.
- In arriving at taxable rental income cost of building extension and painting extension are capital in nature hence not deductible against gross rent.
- Entertainment and petrol re-imbursements are not taxable employment benefits (they are business expenses).
- Contribution by the employer on behalf of Mr. Kiogora to approved pension scheme is not taxable.
- Interest from Post Office Savings Bank is tax exempt
- Interest from Euro and National Bank are qualifying and W/T @ 15% is final.
With examples distinguish between:
(i) specific customs duty from advalorem import customs duty. ( 4 marks) (i) Specific import customs duty refers to customs duty charge based on units of imported item i.e change per unit e.g on each unit of vehicle. While advalorem import customs duty is duty levy based on value of item imported for example jewellery, medication, liquors, etc.
(ii) discriminatory policy from non-discriminatory policy as used in custom duties. ( 4 marks) Discriminatory policy is an international trade policy where a country charges different duties according to the source (country of origin) of the same kind of commodity. Nondiscriminatory policy refers to the charging of similar rates of customers duty on similar goods from different countries:
Comment on the accuracy of the above entries clearly stating the possible errors made by the accountant. ( 3 marks)
- Sales account entry posted on wrong side (debited) rather than credited 2. VAT received in Bank a/c of Sh.105,000 correctly posted. 3. VAT paid through Bank of Sh.140,000 is not posted to the VAT a/c.
- State the tax position where a taxpayer undertakes transactions aimed at avoiding liability to tax. (3 marks) Tax avoidance is the arrangement of taxpayer’s affairs in such a manner that tax liability is reduced without breaking the law. Tax avoidance is therefore legal method of reducing tax liability. However, where the commissioner is satisfied that the main objective of a given transaction was to avoid tax then he may direct that tax arising thereof be paid. This will also arise in areas of shortfall distributions of dividends by a company Sec.23 and 24 of Income Tax Act.
- Explain the tax treatment of the following:
Income and expenditure after cessation of business. (3 marks)
The income or expenditure received or paid by a person after the cessation of his business is considered taxable income or allowable expenditure of the person for the year of income that the income of expenditure is received or paid, as the case may be. If the payment is not exhaustively set off in the year of income in which it is paid, the difference is deducted from taxable income for the year of income in which the business ceased.
Accounting periods not coinciding with the year of income. (3 marks)
Section 27 deals with accounting periods not coinciding with the year of income. The legal position is as follows: subject to such adjustments as the commissioner may deem necessary, such accounting periods is to be taken as the year of income:
In the case of accompany for all chargeable income
In the case of an individual for all chargeable income except employment income. Where a person makes up the accounts of his business for a period longer or shorter than twelve months, the commissioner may subject to such adjustments as he may consider necessary treat the income of any such accounting period as income of the year of income in which the accounting period ends and tax is charged accordingly.
In the case of a partnership which makes up the accounts of its business to an accounting date other than
31st December in any year, the accounting date of the partners of the partnership in respect of income of the business is considered to be that of the partnership, but the income from employment or services rendered elsewhere will fall within the normal year of income in which it was earned.
Offences by corporate bodies. (3 marks)
Where, under the Act, any offence has been committed by any body corporate, then everyone who, at the time the offence was committed was a director, general manager, secretary or other similar officer, is also guilty of the offence, unless he proves that the offence was committed without his consent or knowledge and that he took reasonable precautions to prevent the commission of the offence, as he should have taken having regard to his company – (S.116)
Service of notices. (2 marks)
The Commissioner is necessarily empowered to determine the form of any notice, return of income, or any other document required for the purposes of the Act shall take and once he has specified the form of any such document, that is the form it must take. Notice given by the commissioner under this Act may be signed by any officer authorized to do so, and any notice purporting to be signed by the commissioner, is assumed, unless proved otherwise, to have been signed by the authorized officer. Any document which has the name, or title of the commissioner, or of the authorized officer who issued it, printed, stamped, or written thereon, is sufficiently authorized.
Interest on under estimated tax. (2 marks)
If a person files a provisional return/instalment return of income and later when he files selfassessment return, the tax assessed on the self assessment/final return turns out to be greater than instalment assessment by more than 10%, he will be liable for an interest at the rate of 2% per month on the difference i.e. 2% p.m. (understated tax + 20% penalty). (Total: 17 marks)
- QUESTION ONE
- Explain the tax position of the income of a deceased person. ( 2 marks) Income accrued to or received prior to date of death of a deceased person which would have been assessed on him for a year of income shall be assessed and tax charged on his executors or administrators for that year of income.Income received by executors or administrators which would have been taxable on the deceased person is assessable and charged on them.
Where income relating to the deceased is distributed by executors and administrators before a change in tax rate, they shall not be liable to any increase in tax resulting from the change in tax rate.
- What is „set-off‟ tax? ( 2 marks) Tax already paid by way of PAYE instalment tax systems, withholding tax (if not final tax), refunds claimable from tax authorities, shall be deducted from tax charged on the tax payer for the year of income in respect of which it was deducted.QUESTION TWO:
- Explain the tax treatment of a farmhouse for purposes of capital deductions. ( 2 marks)
- A farmhouse qualifies for a capital deduction called farm works deduction (FWD) at 33⅓ % of cost on straight line basis.
- If the farm house is occupied by the owner of the farm then only ⅓ of the cost will qualify for FWD. Therefore, FWD will be ⅓ of ⅓ of the qualifying cost.
If the farm house is occupied by a director of the farm or other employees, then the total cost qualifies for FWD i.e FWD = ⅓ or 33⅓ % of cost.
- Explain the VAT position on imported goods and warehoused goods. ( 4 marks)
- VAT position on imported goods and warehouse goods: Imported
Goods – VAT value is the value for goods plus the duty.
Warehoused goods = VAT value is the cost plus the duty at the time of release from the warehouse
- Briefly explain the position regarding hotel accommodation tax? (4 marks)Tax charged in accordance with provisions of Hotel Accommodation Tax ActGuest of hotels and clubs charged accommodation tax of 12.5% (full board or 17.5% (bed and breakfast) plus hotel training levy of 2% based on the hotel or club charges.
- Type of tax – direct tax cannot be shifted but indirect tax can.
- Objects of a tax – e.g. income tax can not be shifted.
- Price elasticity of supply and demand
- Availability of substitutes – goods without substitutes means consumer bear the tax
- Geographical coverage of the tax – can consumers move to other areas to avoid tax.
- rate of tax – higher tax rates means people try to shift tax.
- tate and briefly explain the factors that influence tax shifting. (6 marks)
- Profitability of business – If businesses are making losses there is the likelihood of shifting the whole tax to consumers
- Government fiscal policy – price control means no tax shifting.
- Explain the tax position on “recovery of tax from persons intending to leave Kenya or who have left
Kenya” ( 3 marks)
Recovery of tax from persons intending to leave on having left Kenya.
– Commissioner is required to issue estimated assessment as quickly as possible and according to the best of his judgement, to persons who are about to leave Kenya.
- The taxpayer has failed to file tax returns
- The CIT believes that the taxpayer was under assessed hence issue additional assessment.
- Where the CIT discovers a fraud in tax returns filed by the taxpayer in earlier years.
- The CIT can issue an assessment when:
In case of discovery of fraud the CIT can issue an assessment regardless of how many years
- For any other type of assessment, the CIT can issue it before the lapse of 7 years from the year of income to which the assessment relates.
(Total: 20 marks)
- Explain the VAT position on imported goods and warehoused goods. ( 4 marks)