TAXATION REVISION (QUESTIONS AND ANSWERS)

QUESTION TWO 

The partners are of the view that due to their very useful community service, they should be exempt              from income tax.  Explain under what conditions this is possible.    (3 marks)   

Charitable Trust are exempted from taxation if:

 

  • One public in character serving a small section or the public in general (not discriminative)
  • for enhancement of education or religion
  • for purpose of eradication of poverty and disease
  • no profit sharing
  • income generated is expended in Kenya for benefit of Kenyan citizens
  • registered as a charitable trust

 

Watu clinic does not qualify as a charitable trust hence not exempted from tax.

 

Compute the adjusted clinic income for the year of income 2005.    (9 marks)

 

 Show allocation of taxable income among the four partners.  Assume income accrued evenly

 throughout the year.  (3 marks)

Explain how the income allocated under part 

Combine Kutibu‟s p/ship income and tax on husband

 above will be taxed.(2 marks)       

QUESTION FOUR:

What are the capital expenditure implications of taxation in relation to capital allowances available  to a hotel owner? Discuss :

  • – The capital expenditure implication for a hotel owner is that he will enjoy all capital allowances as deductible expenses leading to reduction in taxable profits and tax liability.

 

  • The capital allowances include:
  • Investment deduction on hotel building certified as industrial building
  • Industrial building deduction on cost of hotel building net of investment deduction
  • Wear and tear allowance on computers, washing machines, lawn mowers, furniture, beds, carpets etc.

Diminution in value of utensils and other kitchen wares.

QUESTION FIVE:

Required:

  • The VAT payable or refundable for each month, clearly indicating when due. (12 marks)
  • The penalties (where applicable) relating to the above transactions.(4 marks) 
    • The penalties are:

     

                Failure to file VAT return = Sh.10,000

    Failure to pay VAT on due date = 2% p.m compounded interest on unpaid VAT

  •   Recoveries from insurance are treated as taxable supplies hence output tax shall be charged accordingly.
  • State and explain the VAT position on recoveries from insurance. (1 mark)                                                                       
  • State the customs duty position of the above transactions.(3 marks)
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