- 30 Marks
Question
As a result of the developing nature of Nigeria’s economy, there are some industries and products that are not well developed on a scale that can adequately cater for the needs of the populace. One of the investment incentives available to industries and products in this category, is contained in the Industrial Development (Income Tax Relief) Act 1971. Application has to be made to the Federal Government in order to enjoy any of these numerous investment incentives.
Owoeye Machine Tools Nigeria Limited was incorporated on January 20, 2016, and was initially granted a pioneer certificate on April 1, 2016. At the end of the pioneer period, the company, as a result of negligence, failed to follow due process in applying for extension of the pioneer certificate. The company, however, retained March 31 as its financial year end.
The following records and information were obtained from the company:
(i) Qualifying capital expenditure on property, plant and equipment (certified by the Federal Inland Revenue Service) incurred during the pioneer period:
N’000 Industrial building 23,800
Building (non-industrial) 11,600 Motor vehicles 6,200 Plant 10,400 Furniture and fittings 5,800
(ii) Statement of adjusted profits/(losses) during the pioneer period:
Period under review Total profits/(losses)
N’000 Year ended March 31, 2017 (44,450) Year ended March 31, 2018 (23,140) Year ended March 31, 2019, 8,700
(iii) Both the qualifying capital expenditure on property, plant and equipment and adjusted profits/(losses) were certified by the Federal Inland Revenue Service.
(iv) The company made a gross turnover of N312,450,000 and adjusted profit of
N52,250,000 during the year ended March 31, 2020.
(v) Extract from the statement of profit or loss for the year ended March 31, 2021, revealed the following:
N’000 Gross turnover
320,220 Less: Cost of sales
(176,550) Gross profit
143,670 Less: Expenses:
Salaries and wages 48,430
Transport and traveling 2,360
Motor running expenses 1,580
Postage and telephone 1,150
Bank charges 870
Repairs and maintenance 3,660
Auditors‟ remuneration 1,500
Legal and professional fees (see note i) 2,000
Depreciation 15,770
Donations 1,600
Allowance for doubtful debts (see note ii) 7,000
Administrative expenses (note iii) 10,070 95,990 Net profit
47,680
Notes:
Legal and professional fees included N1,400,000 paid to the company’s lawyer in respect of acquisition of land for the purposes of the business.
Allowance for doubtful debts comprised: N1,350,000 for specific provision; N4,150,000 for general provision; and N1,500,000 for bad debts written off.
Administrative expenses included N850,000 paid to a financial consultant who helped in preparing feasibility study on viability of a proposed product line.
The schedule of qualifying capital expenditure on property, plant and equipment purchased during the year ended March 31, 2021, is as follows:
Type Date of acquisition Amount
N’000 Motor vehicles (2) April 15, 2020, 3,200 Plant (1) July 1, 2020, 5,000 Furniture and fittings (4) February 13, 2021, 1,200
Required:
As the company’s Tax Manager, you are to prepare a report for the attention of the Managing Director showing the companies:
a. Adjusted profit for the year ended March 31, 2021, b. Tax liabilities for 2021 and 2022 assessment years
Answer
Owoeye Machine Tools Nigeria Limited
Address …………….
INTERNAL MEMO
Date: …………….… From: Tax Manager
To:
Managing Director
RE: ADJUSTED PROFIT AND TAX LIABILITIES PAYABLE
I refer to your request on computations of adjusted profit for the year ended March 31, 2021 and tax liabilities for 2021 and 2022 assessment years. I hereby present the report for your perusal.
(a) Determination of adjusted profit for the year ended March 31, 2021
The adjusted profit of the company for the year ended March 31, 2021 (the first year after the pioneer period), as shown in appendix 1 was N69,850,000. As a result of aggregate losses of N58,890,000 made during the pioneer period, which the adjusted profit of 2021 was used to relieve, the total profit produced a nil figure. No companies income tax is payable. Since 2021 assessment year is the first year of its new business and in line with the provisions of CITA 2004 (as amended), the company is exempted from paying minimum tax. Tertiary education tax of N1,045,000 only will be paid by the company.
As for the 2022 assessment year, the company generated total profit of
N29,097,000 (after utilization of capital allowances). The company, therefore
would pay companies income tax of N8,729,100 and tertiary education tax of
N1,746,250. This gives total tax liabilities of N10,475,350.
Attached herewith are appendices 1, 2, 3, 4 and 5, which contained all the
computations in respect of adjusted profit and tax liabilities for the period
under review.
Thank you.
Segge Danny
Appendix 1: Computation of adjusted profit
For the year ended March 31, 2021
N’000 Net profit as per accounts
47,680 Add back: Disallowable expenses:
Legal and professional fees 1,400
Depreciation 15,770
Allowance for doubtful debts 4,150
Administrative expenses 850 22,170 Adjusted profit
69,850
(b)
Appendix 2: Computation of tax liabilities
For 2021 and 2022 assessment years
N’000 2021 assessment year
Basis period: 1/4/19 – 31/3/20
Adjusted profit (given)
52,250 Less: Loss b/f from pioneer period 58,890
Relieved (52,250) (52,250) Unrelieved loss c/f 6,640
Capital allowance for the year 22,054
Utilized Nil
Unutilized capital allowance c/f 22,054
Total profit
NIL
Companies’ income tax (minimum tax (appendix 5) (Exempted)
NIL Tertiary education tax @ 2% of N52,250
1,045 Total tax liability payable
1,045
2022 assessment year
Basis period: 1/4/20 – 31/3/21
Adjusted profit (appendix 1)
69,850 Less: Unrelieved loss b/f 6,640
Relieved (6,640) (6,640) Unrelieved loss c/f NIL
63,210 Unutilized capital allowance b/f 22,054
Capital allowance for the year 12,059
Capital allowance available for utilization 34,113
Utilized (34,113) (34,113) Unutilized capital allowance c/f NIL
Total profit
29,097
Companies’ income tax @ 30%
8,729.1 Tertiary education tax @ 2½% of N69,850
1,746.25 Total tax liability payable
10,475.35
Appendix 3: Capital allowances
Industrial Building
Non- industrial building
Motor vehicle
Plant Furniture and fittings
Capital allowance Initial allowance 15% Annual allowance 10%
15% 10%
50% 25%
50% 25%
25% 20%
N’000 2021 A/Y
Cost 23,800 11,600 6,200 10,400 5,800
IA (3,570) (1,740) (3,100) (5,200) (1,450) 15,060 AA (2,023) w1 (986) w2 (775) w3 (1,300) w4 (870) w5 5,954 Inv. allow
(1,040)
1,040
22,054 2022 A/Y
TWDV b/f 18,207 8,874 2,325 3,900 3,480
Additions
3,200 5,000 1,200
IA
(1,600) (2,500) (300) 4,400 AA (2,023) (986) (1,175) w6 (1,925) w7 (1,050) w8 7,159
Inv. allow
(500)
500
12,059 TWDV c/f 16,184 7,888 2,750 4,475 3,330
Workings (1) Industrial building 2021 annual allowance
= N23,800,000 – N3,570,000
N2,023,000
10
(2) Non-industrial building 2021 annual allowance
= N11,600,000 – N1,740,000
N986,000
10
(3) Motor vehicle 2021 annual allowance
= N6,200,000 – N3,100,000
N775,000
4
(4) Plant 2021 annual allowance
= N10,400,000 – N5,200,000
N1,300,000
4
(5) Furniture and fittings 2021 annual allowance
= N5,800,000 – N1,450,000
N870,000
5
(6) Motor vehicle 2022 annual allowance
Old: N2,325,000
N775,000
4-1
New: N3,200,000 – N1,600,000
400,000
4 – 1
1,175,000
(7) Plant 2022 annual allowance
Old: N3900,000
N1,300,000
4-1
New: N5,000,000 – N2,500,000
625,000
4-1
1,925,000
(8) Furniture and fittings
Old: N3,480,000
N870,000
5-1
New: N1,200,000 – N300,000
180,000
5
1,050,000
Appendix 4: Statement of total profit or loss from pioneer business (Section 14 deductions)
Accounting year Total profit/
(loss)
N’000 1/4/16 – 31/3/17 (44,450) 1/4/17 – 31/3/18 (23,140) 1/4/18 – 31/3/19 8,700 Total (58,890)
Appendix 5: Minimum tax computation for 2021 assessment year
N‟000 Gross turnover 312,450 Less: Franked investment income Nil 312,450
Minimum tax @ 0.25% 781.125
However, the company (having just commenced business operations) is exempted from paying minimum tax for the first 48 calendar months (2021, 2022, 2023 and 2024).
- Uploader: Salamat Hamid