- 30 Marks
Question
Mr. Ola Alao works as the manager of XYZ Limited which has its office located at Ikeja, Lagos. He lived with his family in Ibafo, Ogun State, and he provided the following information in respect of his 2021 assessment year: (i) He was paid a gross monthly income of N 204,000; (ii) In addition to his salary, he was paid the following bonuses;
| Date of payment | Date of Entitlement | Amount N |
|---|---|---|
| May 29, 2021 | April 4, 2021 | 92,000 |
| September 24, 2021 | August 7, 2021 | 162,000 |
| May 7, 2022 | May 19, 2021 | 58,000 |
(iii) He attended a workshop outside his station for a period of ten days and was paid a daily allowance of N45,000, to cover hotel expenses, transportation and other incidental expenses;
(iv) As a senior sales staff of the establishment, he was given non – assignable luncheon vouchers to the tune of N120,000 in year 2021;
(v) He was assigned an official vehicle for his exclusive use which was purchased at the cost of N8,000,000 by the company;
(vi) He enjoyed the services of a night guard and a domestic staff fully paid for by the company. Domestic servant (staff of the company) was paid N360,000 per annum and the night guard received N480,000 per annum but was hired from a company offering security services;
(vii) He was transferred to the Port-Harcourt office on November 1, 2021 and was paid the sum of N2,000,000 for the purpose of relocating to his new station;
(viii) He lived in a rented apartment fully paid for by company for N600,000 per annum;
(ix) He contributes to an approved pension scheme at the rate of 8% of his salary and has a life insurance policy with a capital sum assured of N5,000,000, paying a premium of N20,000 per month;
(x) He subscribed to National health insurance and National housing fund schemes making contributions of N35,000 and N40,000, respectively on a monthly basis.
Required:
a. For the relevant assessment year,
i. Identify the relevant tax authority of Mr. Ola Alao (2 Marks)
ii. Compute the chargeable income of Mr. Alao
(19 Marks)
iii. Compute income tax payable by Mr. Alao
(5 Marks)
b. Differentiate between a contract of employment and contract for employment.
(4 Marks)
Answer
a. (i) The relevant tax authority of Mr. Ola Alao is Ogun State Internal Revenue
Service.
(ii) MR. OLA ALAO INCOME TAX COMPUTATION FOR ASSESSMENT YEAR 2021
| N | N | |
|---|---|---|
| Gross salary | 2,448,000 | |
| Bonuses – May 29, 2021 | 92,000 | |
| – September 24, 2021 | 162,000 | 254,000 |
| Add benefits in kind: | ||
| Cost of using car (N8,000,000 x 5%) | 400,000 | |
| Night guard | 480,000 | |
| Rent paid for Alao | 600,000 | 1,480,000 |
| Total earned income | 4,182,000 | |
| Tax exempt items: | ||
| Pension contribution (N8% of 2,448,000) | 195,840 | |
| Life assurance premium | 240,000 | |
| National insurance health contribution | 420,000 | |
| National housing fund contribution | 480,000 | (1,335,840) |
| Gross income | 2,846,160 | |
| Consolidated relief allowance (N200,000 + 20% of N2,846,160) | (769,232) | |
| Chargeable income | 2,076,928 |
(iii) Tax payable
| N : K | |
|---|---|
| First N300,000 at 7% | 21,000.00 |
| Next N300,000 at 11% | 33,000.00 |
| Next N500,000 at 15% | 75,000.00 |
| Next N500,000 at 19% | 95,000.00 |
| Next N476,928 at 21% | 100,154.88 |
| 2,076,928 | |
| Tax payable | 324,154.88 |
b.
A contract of employment (also known as a contract of service) is an agreement between an employer and an employee, establishing a master-servant relationship. The employee works under the direct control and supervision of the employer, typically for a fixed salary paid at regular intervals. The employer provides tools, dictates work hours and methods, and is responsible for deducting and remitting taxes under the Pay As You Earn (PAYE) system as per the Personal Income Tax Act (PITA). The employee is entitled to benefits like pension contributions but cannot claim business expenses or delegate duties.
In contrast, a contract for employment (also known as a contract for service) is an agreement between a client and an independent contractor, where the contractor provides specific services for a fee, often upon project completion. The contractor operates autonomously, provides their own tools, has flexibility in work methods and hours, and may serve multiple clients. Taxation involves the client deducting Withholding Tax (WHT) on payments, while the contractor files self-assessed personal income tax returns annually, claiming deductible expenses, capital allowances, and loss relief. No employer-employee benefits like mandatory pension apply, though voluntary contributions are possible.
Key distinguishing factors include the degree of control, payment structure, provision of tools, ability to delegate work, and tax responsibilities. Misclassification can lead to tax liabilities and penalties for the engaging party.
- Topic: Personal Income Tax
- Series: MAY 2024
- Uploader: Samuel Duah