CPA › Advanced Taxation › November 2019

CPA Advanced Taxation – November 2019 Past Paper & Answers

Unit: Advanced Taxation

15 Questions

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Questions

Download CPA Advanced Taxation November 2019 past paper with detailed answers and marking scheme. This paper is based on KASNEB examination standards and is ideal for revision and exam preparation.

Access the full paper online, download the PDF, or study offline. Each question includes step-by-step solutions to help you understand key concepts in Advanced Taxation.

Other Advanced Taxation Past Papers

1a
Taxation of cross border activities
​​Examine four reasons for the increased importance of information exchange programmes in relation to taxation among various countries.
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1b
Tax dispute resolution mechanism
​​The following information relates to Majani Ltd: 

1. The company has been operating in your country for over 20 years. 

2. The company's accounts for the year ended 31 December 2018 could not be signed by the directors until 1 August 2019 when the Chief Executive Officer (CEO) returned from a medical trip abroad. 

3. Following the delay in signing the accounts, the revenue authority imposed a late returns penalty of Sh.484,840 on the company. 

Required: 
As a tax consultant, draft a letter of objection to the revenue authority indicating the grounds of appeal in compliance with tax legislation.
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1c
Taxation of business income and specialized business activities
​​Sharon and Primus are partners running a hardware business. They have approached you to assist them prepare the partnership returns for the year ended 31 December 2018. The following information has been presented to you:

1
 The partnership agreement provides that:
  • Profits and losses will be shared in the ratio of 2:1 for Sharon and Primus respectively.
  • Partners will be allowed to withdraw up to Sh.100,000 in cash without being charged interest. Any excess withdrawals will be subject to interest at a rate of 8% per annum.
  • Each partner will be entitled to a monthly salary of Sh.60,000 per month. However, no salary would be paid to any partner in the months of January, May and September due to expected low sales based on analysis of past trends. Partners would be entitled to a commission.
2
The balances in the books of account as at 31 December 2018 and 31 December 2017 included the following:
31 December 2018
Sh.
31 December 2017
Sh.
Accrued commission due to partners
400,000
360,000
Accounts payable (trade)
2,000,000
1,600,000
Accrued advertising expense
610,000
340,000
Prepaid royalty income
160,000
100,000
Accounts receivable (trade)
5,900,000
1,700,000
Accrued salaries and wages (partners excluded)
410,000
130,000
Accumulated depreciation
600,000
340,000
3
Extracts of cash payments during the year were as follows:
Sh.
Commission paid to partners equally
100,000
Purchases (goods for sale)
1,000,000
Advertising expenses
150,000
Salaries and wages (partners excluded)
1,390,000
Motor vehicle expenses
240,000
Electricity expenses
80,000
Office partitions
60,000
Purchase of office equipment
97,000
Meals to employees
200,000
Loan interest
35,000
Cash withdrawn by partners - Sharon
160,000
                                             - Primus
100,000
4
All receipts were channeled through the account and included the following:
Sh.
Sales (all were on credit terms)
1,600,000
Royalty income
240,000
Proceeds from sale of office equipment
45,000
Computer leasing charges
6,000
5
 The partners withdrew hardware goods for personal use as indicated below:
Sh.
Sharon
110,000
Primus
60,000
6
In December 2018, some of the hardware goods which were valued at Sh.60,000 were destroyed by fire... Compensation of Sh.35,000 was received from the insurance company.

Required:
(i)
Taxable profit or loss of the partnership for the year ended 31 December 2018.
(ii)
A schedule showing the partners allocation of taxable income or loss.
 Hint: Ignore opening and closing inventory.
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2a
Public Financial Management Reforms in Kenya
​​A number of countries have external resources departments as part of stimulating economic growth. 

Explain four roles of such departments.
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2b
Public sector procurement
​​Discuss three reasons for the failure of a number of projects under public private partnerships (PPPs).
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2c
Value added tax administration
​​Xyeng China Company (K) Ltd. has been engaged in the building industry for many years. There has been an ongoing dispute with the revenue authority as to the amount of value added tax (VAT) that the company is liable to pay. 

According to the revenue authority's assessment, the company is supposed to pay Sh.5.6 million, whereas the company's assessment of the VAT payable is Sh.3.9 million. 

You have been provided with the following additional details relating to the company's transactions during the assessment period:

Purchases
Delivery date
Invoice date
Invoice amount(Sh.)
Payment date
Drilling machines
5 February 2019
10 March 2019
5,220,000
4 April 2019
Mobile crane
20 February 2019
8 March 2019
3,045,000
10 April 2019
Concrete mixer
18 February 2019
26 February 2019
3,770,000
2 May 2019
Poker vibrator
26 February 2019
12 March 2019
906,250
7 April 2019
Photocopying machine
12 March 2019
4 April 2019
174,000
5 May 2019
2 Forklifts
6 April 2019
20 April 2019
1,584,125
6 May 2019
700 Tonnes of cement
26 March 2019
4 April 2019
28,125,565
12 May 2019
Bottled mineral water
12 March 2019
8 April 2019
137,460
30 April 2019
Executive boardroom table
19 March 2019
4 April 2019
145,000
12 May 2019
Postal rental box
2 February 2019
24 February 2019
13,920
15 March 2019
Paint from ABC Ltd
14 April 2019
20 April 2019
3,117,500
12 May 2019
Petrol for trucks engaged in construction work
12 March 2019
19 March 2019
1,200,960
8 April 2019

Additional information: 
1. The company had negotiated a contract of Sh.84 million exclusive of VAT on 1 February 2019, for which it received a progress payment of Sh.52 million on 27 March 2019. The invoice had been raised earlier on 15 March 2019 based on the Architect's certificate for the value of work certified. 

2. The company had also on 18 February 2019 secured a tile fixing contract of Sh.18 million exclusive of VAT for which an installment payment of Sh.7.2 million was received on 12 March 2019 ahead of the completion date on 24 May 2019. The invoice was raised for full payment on completion. By the end of May 2019, the balance of the payment had not been received from the client. 

The above transactions are inclusive of VAT where applicable unless otherwise stated. 

Required: 
Advise Xyeng China Construction Company (K) Ltd. on: 

(i) The correct VAT position for the company for the period between February 2019 and May 2019. 

(ii) What action to take based on your analysis in (c) (i) above.
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3a
Limited companies
​​Country X has recently proposed to change the regulations on taxation of Savings and Credit Co-operation Societies (Saccos). This change will entail taxing most of the income and exempting only the interest earned from members. The proposed changes will also double the withholding tax rate on dividends paid by Saccos. 

Required: 
With reference to the above scenario, explain four effects of the proposed legislative changes on Saccos.
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3b
Tax planning
​​Discuss three incentives provided by your country to spur the growth of the housing and construction sector.
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3c
Limited companies
​​Maisha Mema Insurance Company Limited provided the following information for the year ended 31 December 2018:

Sh."000"
Gross premiums received
30,000
Claims paid
4,000
Commission ceded
800
Commission accepted
20
Claims recovered on reinsurance
3,000
Foreign exchange gains realised
3,500
Dividends from life assurance fund
2,000
Rental income (commercial building)
1,600
Bad debts provision
500
Investment income
1,200
Reserve for unexpired risks (1 January 2018)
1,000
Legal expenses related to claims
400
Agency fees
400
Management fees
120
Repairs on rental properties
200
Entertainment expenses
400
Purchase of furnitur
600
Purchase of computer
300
Reinsurance premiums paid
4,000
Returned premiums
5,000

Additional information:
1
Reserves for unexpired risks on 31 December 2018 were Sh.200,000.
2
Claims outstanding on 1 January 2018 and 31 December 2018 were Sh.600,000 and Sh.900,000 respectively.
3
Premiums outstanding on 1 January 2018 and 31 December 2018 were Sh.6,000,000 and Sh.12,000,000 respectively.
4
Agency fees included Sh.200,000 relating to the life assurance business.
5
Legal fees included Sh.100,000 relating to settlement of a tax dispute.
6
Investment income comprised:
Sh.
Interest from bank
850,000(net)
Interest from treasury bonds
350,000 (gross)

Required: 
(i) Taxable profit or loss of Maisha Mema Insurance Company Limited for the year ended 31 December 2018. 

(ii) Tax payable (if any) from your computations in (c) (i) above.

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4a
Taxation of cross border activities
​​One-stop border posts (OSBPs) are a fairly recent cross-border trade initiative which have significantly changed the way neighbouring countries conduct business with each other. 

Required: 
(i) Explain the meaning of OSBPs. 

(ii) Summarise four benefits of OSBPs.
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4b
Professional practice in taxation
​​Describe four functions of tax agents.
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4c
Limited companies
​​Benita Contractors Ltd. operates in the construction industry. On 1 November 2016, the company won a tender for the construction of two projects, a hospital and an office complex. Construction of the projects commenced on 1 January 2017. The following details relate to the two projects for the year ended 31 December 2018:

Balance as at 1 January 2018:
Hospital project
Sh."000"
Office complex
Sh."000"
Materials
6,000
4,000
Accrued salaries and wages
1,500
1,200
Plant (written down value)
190,000
150,000
Cost of work done
200,000
200,000
Value of works certified to date
200,000
160,000
Transactions undertaken during the year:
Material delivered to site
From store
10,000
14,000
From supplier
100,000
128,000
Plant purchased at cost
-
120,000
Sub contractors fee
-
18,000
Consultancy fees
30,000
29,000
Inspection fee
10,000
5,000
Salaries and wages
120,000
180,000
Head office expenses
-
2,000
Material transferred out
10,000
17,000
Material sales
-
22,000
Plant lease charges
400
200
Direct expenses
3,000
2,000
Cash received from sub contractor
300,000
600,000
Cumulative value of work certified as at 31 December 2018
700,000
860,000
Value of work uncertified in the year
30,000
42,000
Balance carried forward:
Material on site
40,000
50,000
Material on site
1,000
2,000

Additional information: 
1
Consultancy fees for the hospital project include Sh.40,000 prepaid for the year 2019.
2
Wear and tear allowance on plant was provided at the rate of 12.5% per annum.
3
Direct expenses accrued and not reflected above were as follows:
Hospital
Sh."000"
Office
Sh."000"
As at I January 2018
200
-
As at 31 December 2018
1,000
400

Required:
A schedule showing the taxable profit and tax payable (if any) by Benita Contractors Ltd. as at 31 December 2018.
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5a
Public Sector Investment and enterprise management
​​The Cabinet Secretary responsible for matters relating to public investments should prepare and submit a consolidated report to the National Assembly at the end of each financial year. 

Evaluate the significance of any four information contained in the consolidated report.
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5b
Management of Public Debts in both National and County Governments’
​​Explain four ways through which the Public Debt Management office may enhance the functions of the commission on revenue allocation in your country.
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5c
Introduction to Public Financial Management
​​Discuss four fiscal responsibility principles that the National Treasury and Planning must enforce when managing the national government public finance in your country.
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