AT – Nov 2020 – L3 – Q4a – Business income, Corporate income tax

Compute the tax payable by Kaka Ltd for the 2019 year of assessment, including capital allowances, fresh graduate incentives, and royalties.

Question

Kaka Ltd is a mining company that has been operating in Ghana for some time now. The following relates to Kaka Ltd’s 2019 year of assessment:

Description	Amount (GH¢)
Revenue	10,200,000
Cost	4,000,000
Profit	6,200,000

The following additional information is relevant and has been adjusted in arriving at the profit stated above:

Depreciation, depletion, and amortization: GH¢2,000,000.
Cost incurred in overburden stripping and shaft sinking during production to improve access amounted to GH¢800,000.
Contribution towards a worthwhile cause is GH¢10,000. This was in support of a hole-in-heart child, duly acknowledged by the Ghana Health Service.
Royalty of GH¢80,000 was paid without recourse to the revenue from production.

Additional information:

An asset (Capital Asset) acquired in 2016 for GH¢1,000,000 was sold for GH¢200,000 in 2019.
Capital allowance (written down value brought forward) on the assets as of 31 December 2018 was GH¢4,000,000.
10 fresh graduates were recruited in the 2019 year of assessment; 4 of them completed universities in the USA, while the others completed the University for Development Studies in Ghana. They were paid GH¢120,000 as salaries. The total workforce for 2019 was 60 employees.

Required: i) Compute the tax payable by Kaka Ltd.
(10 marks)

ii) The mining company indicated that it had an idle cash of GH¢100,000. If it adds it to its working capital, an additional income of GH¢10,000 would accrue but with an option to purchase Treasury Bills, the interest would remain at GH¢10,000.

Required:
Advise Management on the tax implication of the proposed investment.
(2 marks)

Answer

i) Computation of Tax Payable by Kaka Ltd for the 2019 Year of Assessment:
Given that there is no information about the number of times capital allowance has been granted on the written down value, any assumption is correct as capital allowance in mining is granted 5 years straight line methods

ii) Tax Implication of Proposed Investment Decision:

Option 1: Add GH¢100,000 to Working Capital:

The additional income of GH¢10,000 will be classified as business income and will be subject to corporate tax at the mining rate of 35%.
Tax payable on GH¢10,000 business income:

$G H ¢3, 500$

Option 2: Purchase Treasury Bills:

The interest income of GH¢10,000 from Treasury Bills will be classified as investment income, and the tax rate on such income is 25%.
Tax payable on GH¢10,000 interest income:

$G H ¢2, 500$

Conclusion:

Kaka Ltd should invest in Treasury Bills, as the tax payable on interest income (GH¢2,500) is lower than the tax payable on additional business income (GH¢3,500), resulting in higher after-tax income from the Treasury Bills investment.

Tags: Capital Allowance, Corporate Income Tax, Fresh graduate incentive, Mining operations, Royalty
Level: Level 3

Topic: Business income - Corporate income tax
Series: NOV 2020

Uploader: Theophilus