- 20 Marks
Question
Kanawu Mine Resources Limited was incorporated on 1 January 2017 to mine gold and diamonds at Prestea in the Western region of Ghana. Various reconnaissance and prospecting activities took place from 2017 to 2019. Actual production started on 1 January 2020.
The following were the cost and revenue relative to reconnaissance and prospecting activities and costs from 2017 to 2019:
| Activities | 2017 (GH¢) | 2018 (GH¢) | 2019 (GH¢) |
|---|---|---|---|
| Analyzing historical exploration data | 250,000 | – | – |
| Purchase of motor vehicles | 1,000,000 | – | – |
| Exploratory drilling and sampling | – | 2,500,000 | – |
| Purchase of surveying infrastructure | 500,000 | – | – |
| Construction of office building | – | 3,700,000 | – |
| Conducting market and finance studies | – | – | 300,000 |
| Renting of office space | 400,000 | – | – |
| Sinking shafts and underground drifts | – | – | 5,400,000 |
| Purchase of land | – | 460,000 | – |
| Permanent excavations | – | 400,000 | 3,000,000 |
| Constructing roads and tunnels | – | 2,200,000 | 1,100,000 |
| Purchase of drilling machines | – | 700,000 | 900,000 |
| Purchase of office equipment | 50,000 | 550,000 | 120,000 |
| Legal fees for acquisition of lease | – | 130,000 | – |
| Purchase of software | – | 230,000 | – |
| Removal of overburden and waste rock | – | – | 470,000 |
| Acquisition of rights to explore | 300,000 | – | – |
| Protocols to chiefs of Prestea | 10,000 | 5,000 | 23,000 |
| Topographical and geophysical studies | 25,000 | 56,000 | – |
| Geological and geochemical studies | 35,000 | 300,000 | – |
| Sale of surveying software | – | – | (130,000) |
| Trenching and sampling expenses | – | 400,000 | 100,000 |
| Sale of drilling equipment | – | – | (50,000) |
| Revenue from pre-production gold | – | – | (500,000) |
The following transactions took place from 1 January 2020 to 31 December 2020:
- The company received compensation of GH¢3,500,000 from their insurers for destruction of some gold mined.
- Mining and processing cost, including wages and salaries incurred during the year, was GH¢120,345,000.
- Sales of gold and diamonds: GH¢378,532,900.
- Ground rent paid to the Administrator of Stool Lands: GH¢321,500.
- Further research and development studies at the cost of GH¢374,300.
- Royalties paid to the government: GH¢11,355,987.
- Acquisition of a new mineral right: GH¢5,000,000.
- Bonus payment for the new mineral right: GH¢300,000.
- Legal and other professional fees for the acquisition of the new mineral right: GH¢121,800.
- Stope preparation and development cost: GH¢1,021,700.
- Business operating permits: GH¢5,563,200 (includes GH¢400,000 provision for 2021).
- General and administrative expenses: GH¢190,467,100 (includes GH¢421,600 for a new iron gate).
- Selling and distribution costs: GH¢172,554,700.
- Finance charge, including interest on loans and bank charges: GH¢211,500,000.
Required:
a) Compute the capital allowance claimable in 2020.
b) Compute the chargeable income and tax payable for the 2020 year of assessment.
c) Comment on the tax treatment of royalty payments and the acquisition of new mineral rights.
Answer
a) Capital Allowance Computation:
Reconnaissance and Prospecting Expenditure as at 1 January 2020: GH¢24,906,000
Additional capital expenditure in 2020:
- Iron Gate: GH¢421,600
Total capital expenditure: GH¢25,327,600
Capital Allowance (20% of GH¢25,327,600) = GH¢5,065,520
b) Chargeable Income and Tax Payable for 2020:
| Description | Amount (GH¢) | Total (GH¢) |
|---|---|---|
| Sales of gold and diamonds | 378,532,900 | |
| Compensation received | 3,500,000 | |
| Total Revenue | 382,032,900 | |
| Less: Allowable Expenses | ||
| Mining and processing cost | (120,345,000) | |
| Ground rent | (321,500) | |
| Royalties | (11,355,987) | |
| Stope preparation and development | (1,021,700) | |
| Business operating permits (excluding 2021) | (5,163,200) | |
| General and administrative expenses (excl. gate) | (190,045,500) | |
| Selling and distribution costs | (172,554,700) | |
| Finance costs | (211,500,000) | |
| Capital allowance | (5,065,520) | |
| Total Allowable Expenses | (717,373,107) | |
| Loss Carried Forward | (335,340,207) | |
| Tax Payable: No tax payable due to the loss carried forward. |
c) Tax Treatment of Royalty Payments and New Mineral Rights:
- Royalty Payments:
Royalties are levied on production and are an allowable deduction for tax purposes. In this case, the royalty of GH¢11,355,987 paid by Kanawu Mine Resources Ltd is deductible when calculating the company’s chargeable income. - New Mineral Rights Acquisition:
The acquisition of a new mineral right is considered a capital asset and should be capitalized. Capital allowances will be granted on this asset. Since the acquisition is related to a new mining operation, it will be treated as a separate mineral operation.
- Tags: Capital Allowance, chargeable income, Corporate Tax, Mining operations
- Level: Level 3
- Topic: Minerals and mining
- Series: MAY 2021
- Uploader: Kwame Aikins