Income Tax Implications and Mitigation Measures for Welmount Ghana Ltd

I. Income Tax Implications of the Realization of Assets

From the facts presented, Welmount Ghana Limited realized two assets i.e. the parcel of land located at Achimota and the shares the company held in Barclays Bank of Ghana Limited. The gain if any from the realization of these assets must be determined separately. Candidates are therefore expected to determine the consideration received, the cost and the gain (if any) of the land and the shares.

Consideration Received

Section 37 of the Income Tax Act, 2015 (Act 896) defines consideration received as the amount derived by a person from owing an asset and this includes an amount derived from altering the value of that asset and in the nature of a covenant to repair that asset and an amount derived by that person or an entitlement for that person to derive an amount in the future in respect of realizing that asset. Under section 50(2) where a person realizes more than one asset at the same time by way of transfer or as part of the same arrangement, the amount derived in realizing each asset is apportioned between the assets according to the market value of each of the assets at the time of realization. Since Welmount received GHS500,000 from the realization of land and the shares, the consideration received will be apportioned between the two assets according to their market values and thus the consideration received for the land will be:

400,000500,000×500,000=GHS 400,000\frac{400,000}{500,000} \times 500,000 = \text{GHS } 400,000500,000400,000​×500,000=GHS 400,000

Consideration received for the shares will be:

100,000500,000×500,000=GHS 100,000\frac{100,000}{500,000} \times 500,000 = \text{GHS } 100,000500,000100,000​×500,000=GHS 100,000

Cost

Cost is defined in section 36(1) of Act 896 to encumber the following: i. expenditure incurred in acquiring, construction, manufacturing or production of the asset; ii. expenditure incurred in altering, improving or maintain the asset; and iii. incidental expenditure incurred in acquiring and realizing the asset.

Cost of the land

It was acquired in February 2007 for GHS75,000. An amount of GHS25,000 was spent to construct a fence wall and this also qualifies as cost.

Apportionment of Incidental Cost

The incidental cost in realizing the assets as defined in section 36(4) of Act 896 include the GHS30,000 paid for the valuation of the assets and the GHS35,000 paid to the marketing firm to advertise the sale of the assets. These incidental expenditures would also be apportioned between the two assets according to the market values of these assets. The valuation cost to be allocated to the land will be:

400,000500,000×30,000=GHS 24,000\frac{400,000}{500,000} \times 30,000 = \text{GHS } 24,000500,000400,000​×30,000=GHS 24,000

The marketing cost to be allocated to the land will be:

400,000500,000×35,000=GHS 28,000\frac{400,000}{500,000} \times 35,000 = \text{GHS } 28,000500,000400,000​×35,000=GHS 28,000

Total cost of the land will be $75,000 + 25,000 + 24,000 + 28,000 = \text{GHS } 152,000.

Cost of the shares

It was acquired in March 2008 for GHS20,000.

Apportionment of Incidental Cost

The valuation cost to be allocated to the shares will be:

100,000500,000×30,000=GHS 6,000\frac{100,000}{500,000} \times 30,000 = \text{GHS } 6,000500,000100,000​×30,000=GHS 6,000

The marketing cost to be allocated to the shares will be:

100,000500,000×35,000=GHS 7,000\frac{100,000}{500,000} \times 35,000 = \text{GHS } 7,000500,000100,000​×35,000=GHS 7,000

Total cost of the shares will be $20,000 + 6,000 + 7,000 = \text{GHS } 33,000.

Gain from Realization of Land

Section 35(1)(a) of Act 896 defines a gain from realization as the sum of the consideration received less the cost at the time of realization. Thus, for the land, the gain will be $400,000 – 152,000 = \text{GHS } 248,000.

The gain from the realization of the shares will be $100,000 – 33,000 = \text{GHS } 67,000.

In tabular form, the gain from the realization of the land will be:

In tabular form, the gain from the realization of the shares will be:

Section 46(1) of Act 896 permits a person to replace an asset either six months before realization or within a year of realization. From the facts, the land was replaced within twelve months of realization and thus, the gain made from the realization of land will not be subject to tax since the cost of acquiring the replacement asset (GH₵600,000) exceeds the gain from the realization (GH₵248,000). The gain made from the realization of the shares will be taxable as investment income of Welmount at the rate of 25%.

II. Measures to Mitigate Tax Exposure

The company could have purchased shares either six months prior to the realization or within twelve months of realization to escape the payment of tax on the gain from the realization of the shares. In addition, if the company’s accounting year is the same as the year of assessment (i.e. January to December) the company would be required to pay tax on the gain it made when it realized the parcel of land in June 2017 even though it replaced the asset in February 2018. This is because, the gain was made in the year 2017 and by December 2017, the basis period of the company for 2017 would have ended for which reason it would have been required to pay tax on the gain for 2017. The company can only take the benefit of roll over relief from the purchase of the replacement asset in 2018. Thus, from a tax planning perspective, it is always imperative to realize and replace an asset within the same basis period of the company to ensure maximum tax benefit.