May 2015

1a

Tax planning

In the context of tax avoidance schemes, describe how firms might employ the following approaches to avoid tax

(i) Bankruptcy or liquidation of a firm

(ii) Outsourcing services instead of employing permanent staff.

(iii) Purchasing fixed assets instead of leasing the assets.

1b

Limited companies

Fundi Contractors Ltd is a company engaged in real estate development. On 1 January 2012, the company commenced the construction of 20 residential houses for sale and a shopping mall for lease. The construction was on a five acre piece of land, with the residential houses occupying four acres and the shopping mall one acre.
The residential houses and shopping mall were completed on 31 December 2013
Additional information;-

Selling price per house was Sh. 18, 500,000.
Cost of acquisition of land was Sh. 45,000,000 per acre.
Materials used in building one house cost Sh. 3,480,000 inclusive of value added tax (VAT) of 16%.
Drawings for the houses and related architectural design fees were a total of Sh. 450,000 net of VAT.
Fees for quantity surveyors, civil engineers and electrical engineers for the houses amounted to Sh. 1,740,000 inclusive of VAT.
Cost of sewerage and drainage system amounted to Sh. 4, 480,000 for the entire development in the five acre land.
A second-hand bulldozer was purchased for Sh. 800,000 and used in land excavation within the enfire land.
A salon car used by the site manager was valued at Sh. 900,000 as at 31 December 2013. The car had been purchased in year 2012 at Sh. 1,500,000. The car was used in the maintenance of the estate and shopping mall.
The labour wages for the construction workers on the entire site were Sh. 600,000 per month up to 31 December 2013.
The entire project was financed by ACDC Bank with a loan of Sh. 80,000,000 at an interest rate of 10% per annum. The loan was to be repaid in full on the completion and sale of the houses. The loan was however repaid in full on 1 July 2014.
Pavement and roads within the whole estate were built at a cost of Sh. 6,000,0027 A playground was also constructed at a cost of Sh. 840,000 but for use by house owners only.
The shopping mall comprised shops whose construction cost was Sh. 1,200,000, gymnasium Sh. 450,000 and offices Sh. 600,000. The shopping mall was leased on 1 January 2014 at a monthly rent of Sh. 1,400,000. Maintenance expenses per month amounted to Sh. 400,000. The company incurred costs of advertising Sh. 400,000, water metres Sh. 180,000 and electricity deposits of Sh. 360,000 before leasing.
Estate power lines cost Sh. 800,000 and covered the residential estate and shopping mall.
The interest on loan is to be apportioned between the housing units and shopping mall in proportion to acreage.
All the houses were sold during the year ended 31 December 2014.
Assume that deductible costs and allowances were to be carried forward to the year 2014.
Required:
A schedule for the year ended 31 December 2014 showing:
(i) Total taxable profit or loss from sale of houses.

(ii) Total taxable rental income or loss for the shopping mall

2a

Limited companies

Your country has recently introduced capital gains tax. A group of foreign investors, keen to tap in the growing property and investment sector in your country, have approached you for advice on the impact of capital gains tax
Required;-
Advise the investors on the following in the context of capital gains tax

(i) Meaning of the term "property".

(ii) What constitutes "transfer of property".

(iii) Three examples of transaction that are not deemed to be transfers for tax purposes.

2b

Tax investigations

Mr Shama has been trading as a general merchant since I January 2011. The Revenue Authority discovered that Mr Shama had not filed tax returns since commencement of business.
The investigations revealed that Mr Shama had not maintained proper books of account. The following details were obtained for the period from 1 January 2011 to 31 December 2014.

1	Assets and liabilities

Year ended 31 December
	2011 Sh.	2012 Sh.	2013 Sh.	2014 Sh.
Trade receivables	194,000	360,000	320,000	480,000
Trade payables	150,000	180,000	160,000	200,000
Inventories	120,000	196,000	300,000	340,000
Bank overdraft	90,000	48,000	70,000	120,000
Cash in hand	96,000	76,000	84,000	136,000
10% mortgage loan	1,680,000	1,600,000	1,520,000	1,460,000
Motor cars	2,000,000	2,500,000	3,000,000	2,000,000
Buildings	4,000,000	4,000,000	4,000,000	4,000,000
Wife's bank loan	900,000	800,000	700,000	600,000
Private residence	3,400,000	3,400,000	3,400,000	3,400,000

2	He brought into the business a private pick up owned by his son valued at sh.500,000 in the year 2013
3	He has been repaying, together with his wife, the bank loan acquired by the wife The mortgage loan was in respect to his private residence.
4	His living expenses amounted to Sh. 40,000 in 2011 and have been increasing at a compounded rate of 10% per annum
5	In the year 2013, he paid school fees of Sh. 184,000 out of the business bank account for his children's education.
6	He disposed of a motor car in 2014 for Sh. 800,000. The motor car had cost Sh 1,000,000 when it was purchased on 1 January 2011. Capital deductions were agreed at 2.5% on cost per annum on motor vehicles and none on buildings.
7	He donated Sh. 42,000 to a fund raiser in in and of a local church in year 2013
8	He withdrew Sh. 200,000 from the business bank account in year 2014 to repaint his private residence

Upon completion of the investigation, the Revenue Authority issued an estimated assessment of Sh. 4,000,000 which Mr Shama disputed.

Required.

(i) A capital statement for Mr Shama for the year ended 31 December 2012, 2013 and 2014

(ii) Advise Mr Shama on whether he should appeal against the estimated assessment

3a

Professional practice in taxation

Outline two factors that a tax practitioner should consider in deciding whether to provide oral or written advice to a client.

3b

Limited companies

Deka Ltd has been operating in our country since 1 January 2012 The company is a subsidiary of Mega Ltd which is based in the United Kingdom (UK). The financial statements of Deka Ltd for the year ended 31 December 2014 are presented below

Deka Ltd Statement of income for the year ended 31 December 2014:
	Sh. "000"	Sh. "000"
Sales		97,440
Less:cost of sales		(44,940)
Gross profit		52,500
Less: Expenses
Wages	30,000
Depreciation	7,500
Interest	1,500
General expenses	9,000	(48,000)
		4,500
		(600)
		3,000

Statement of Financial Position as at 31 December 2014
Fixed assets (net)	Sh."000"	Sh."000" 93,000
Current asset
Stock	6,000
Trade debtors	2,250
Bank balance	15,000	23,250
Total assets		116,250
Capital and liabilities
Ordinary share capital		87,000
Debentures		13,500
Retained profits		10,000
Current liabilities
Trade creditors	4,775
Accrued wages	375
Proposed dividend	600	5,750
Total capital and liabilities		116,254

Bank account for the year ended 31 December 2014
	Sh,"000"		Sh,"000"
Balance brought forward	1,500	Wages	30,375
Receipts from customers	98,250	General expenses	90,000
		Payment to suppliers	43,125
		Interest	1,500
		Dividend	750
		Balance carried down	15,000
	99,750		99,750

Additional information;

1	Included in sales was Sh. 2,100,000 representing goods sold to the parent compa All sales to the parent company are made at 10% below normal selling price.
2	General expenses include:

		Sh.
	Floatation cost on issue of debentures	1,400,000
	Stamp duty on issue of debentures	800,000
	Conveyance fees on purchase of land	2,000,000
	Foreign exchange losses relating to the parent company's transactions	560,000

3	The written down values of fixed assets extracted as at 1 January 2014 Were follows

		Sh.
	Industrial Wilding	17,100,000
	Computers	900,000
	Processing machinery (imported from UK)	19,906,250
	Office partition	400,000
	Lorries (each 3 tonnes)	4,500,000
	Delivery vans	3,600,000
	Pick ups	2,500,000
	Furniture and fittings	600,000
	Office equipment	800,000

	The company did not claim investment deduction on industrial building and processing machinery in year 2012 However, the company erroneously claimed industrial building deduction and wear and tear (Class IV) allowances on the industrial building and processing machinery respectively for years 2012 and 2013 Other assets were not included in computing the capital deductions.
4	Included in the cost of processing machinery was import duty Sh. 1,200,000 and freight charges Sh. 400,000.

Required;-
(i) Investment deduction (ID) allowance that was due to Deka Ltd in year 2012

(ii) Total over or under claimed wear and tear allowance in relation to the processing machinery as at 31 December 2013

(iii) Corrected capital deductions that were due to Deka Ltd in years 2012, 2013 and 2014

(iv) Deka Ltd's adjusted taxable profit or loss for the year ended 31 December 2014 reflecting any prior-period adjustments for capital allowances.

4a

Taxation of cross border activities

Citing examples, explain the following terms in the context of the global environment of taxation:

(i) Tax haven

(ii) Transfer pricing

(iii) Most favoured notion status

4b

Limited companies

Samoa Insurance Company Ltd provides two insurance covers to their customers. The following information was obtained from the financial records of the company for the year ended 31 December 2014

	Fire Insurance	Motor Insurance
	Sh.	Sh.
Gross premiums	9,800,000	7,420,000
Commission on re-insurance accepted	400,000	180,000
Claims recovered on re-insurance	360,400	442,600
Bad debts	46,200	36,800
Investment income	240,000	380,000
Purchase of furniture	150,000	120,000
Returned premiums	840,000	560,000
Re-insurance premium paid	460,000	320,000
Rent income on premises	296,500	-
Unrealised foreign exchange losses	37,400	32,600
Management salaries	472,000	260,000
Agency fees	645,600	284,900
Reserves for unexpired risk 1 January 2014	96,000	74,200
Commission on re-insurance ceded	248,600	384,700
Repairs of rental premises	64,900	-
Claims paid	1,640,000	1,200,000
Claims outstanding: 1 January 2014	578,000	384,000
31 December 2014	682,000	470,000
Legal expenses relating to claims	64,000	82,000
Dividends from life assurance fund	167,800	140,800
Purchase of motor cars (Saloon)	2,400,000	2,500,000

Additional information;-

Management salaries include Sh. 172,000 paid to suppliers of laptop computer, to fire insurance business
The agency fees include conveyance fees of Sh. 84,500 paid by motor insurance unit
Investment expenses incurred by both businesses amounted to Sh. 14,000.
Investment income includes gain on sale of office equipment of Sh. 240,000 for fire Insurance and Sh. 300,000 for motor insurance

Required;-

A statement of taxable profit or loss for Samoa Insurance Company Ltd. for the year ended 31 December 2014.

5a

Tax systems and policies

Discuss for limitations of taxation policy in attaining the macro-economic objectives of a country

5b

Taxation of business income and specialized business activities

Kimutai and Wakoli started an accountancy firm on 1 January 2014 under the name Kimutai Wakoli and Associates. They deposited Sh. 3,000,000 and Sh. 2,000,000 as capital respectively and agreed that the profits and losses would be shared equally They also agreed that interest on capital would be paid at the rate of 5% per annum based on the initial capital contributions.
The firm did not maintain the necessary books of account, but provided the following additional information

1	On 5 January 2014, the firm signed a six year lease for an office at an annual lease payment of Sh. 200,000. A deposit equivalent to two years lease was paid on commencement of the lease
2	On 10 January

	Assets	Sh.
	Motor vehicle	2,500,000
	Furniture and fittings	280,000
	Computer and printers	120,000
	Telephone and fax machines	40,000
	Reference books	16,000
	Kitchen utensils (for office tea)	3,000
	Television set	12,000
	Fans (for office ventilation)	6,000
	Carpets	22,000
	Safe (metallic)	25,000

3	Professional fees earned amounted to Sh. 8.200,000. Of this amount Sh. 3,700,000 was received in cash wink the balance was deposited directly by clients to the firm's bank account
4	The following monthly payments were made from the funds received in cash before banking the balance at each month end. Business mileage to partners Sh. Kimutai 30,000 Wakoli 25,000 Mobile phone airtime (Official) Sh. Kimutai 3,000 Wakoli 3,000 Staff 2,000 Office.tea.and.snacks...5,000

5	Analysis of the firm's banks statement for the year showed the following summary of payments.

		Sh.
	Lease payment	400,000
	Purchase of motor vehicle	2,500,000
	Purchase of other assets	524,000
	Office expenses	2,921,000
	Advertisement commission	200,000

6	The office expenses arnount shown in note 5 above was further analysed as follows:

		Sh.
Partner's salaries: Kimutai		600,000
Wakoli		400,000
Staff salaries		436,000
Contribution to retirement benefit plan:
	Partners	180,000
	Staff	120,000
Contribution to a medical scheme:
	Partners	280,000
	Staff	150,000
Premium on partners life assurance policies		210,000
Golf club membership for partners		50,000
Donation	Political party	10,000
	Red Cross Society of Kenya	60,000
Tax consultancy fees		35,000
Subscription to professional institute		40,000
Training fees	Partners' children	140,000
	Staff	80,000
Motor vehicle insurance (firm)		30,000
Other office expenses		1,000,000
		2,921,000

Required:
Taxable profit (or loss) for the partnership for the year ended 31 December 2014

May 2015

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