- 16 Marks
Question
Solomon, Musa, and Chinnedu were classmates in their secondary school days. They are friends with a passion for running a joint business because of their trust in one another. They formed a partnership some years later, providing specialized agricultural engineering services to the agricultural sector. Accounts are made up to December 31 each year. The following are the adjusted profits for tax purposes:
| Year Ended | Adjusted Profits (N) |
|---|---|
| December 31, 2014 | 3,240,000 |
| December 31, 2015 | 3,712,500 |
| December 31, 2016 | 5,400,000 |
| December 31, 2017 | 4,950,000 |
Additional information:
(i) Solomon, Musa, and Chinnedu are to share profits in the ratio of 3:6:3, respectively.
(ii) Salaries drawn:
- Solomon: N810,000
- Musa: N540,000
- Chinnedu: N405,000
(iii) Interest on capital is 7½%.
(iv) Capital account of each partner:
- Solomon: N337,500
- Musa: N675,000
- Chinnedu: N473,500
(v) On May 31, 2016, Solomon retired, and Bakare, another old school mate, was admitted on June 1, 2016, on an annual salary of N405,000. He introduced a capital of N472,500 and was to have the same profit-sharing ratio as Solomon.
Required:
Calculate each partner’s income from the partnership business for the 2016 year of assessment and indicate the basis for which each partner will be assessed to tax.
Answer
Computation of Partner’s Income for 2016 Assessment Year
| Particulars | Solomon (N) | Musa (N) | Chinnedu (N) | Bakare (N) |
|---|---|---|---|---|
| Salary (5 months for Solomon, 7 months for Bakare) | 337,500 | N/A | N/A | 236,250 |
| Salary (12 months for Musa, Chinnedu) | N/A | 540,000 | 405,000 | N/A |
| Interest on Capital | 10,547 | 50,625 | 35,513 | 20,672 |
| Share of Profit | 562,500 | 1,856,250 | 928,125 | 787,500 |
| Total Income | 910,547 | 2,446,875 | 1,368,638 | 1,044,422 |
Basis Period for Each Partner:
- Solomon: Solomon is deemed to have ceased business on May 31, 2016, having retired on that date. The cessation provision applies, and he will be assessed for the 2016 tax year on his income from January 1, 2016, to May 31, 2016. His basis period is actual.
- Bakare: Bakare commenced business on June 1, 2016. For 2016, he is assessed on an actual basis for his income from June 1, 2016, to December 31, 2016.
- Musa and Chinnedu: Both Musa and Chinnedu, the continuing partners, will be assessed on the preceding year basis for 2016, based on the profit for the year ended December 31, 2015.
- Tags: Basis Period, Partners' Income, Partnership, Partnership Taxation Rules, Taxation
- Level: Level 2
- Topic: Taxation of Partnerships and Sole Proprietorships
- Series: NOV 2018
- Uploader: Kwame Aikins