SCHOOL OF BUSINESS AND PUBLIC MANAGEMENT BACHELOR OF COMMERCE

CFM 300ADVANCED TAXATION (DISTANCE LEARNING MODULE)

CAT EXAM SEMESTER 2, 2015 (DUE ONE WEEK FROM DATE OF UPLOADING)

Instructions: Answer BOTH Questions. Show all workings and state all assumptions used to support your answers.

RATES OF TAX (Including wife’s employment, self employment and professional income rates of tax). Year of income 2014.

Capital allowances: Prescribed benefit rates of motor vehicles provided by employer(i) Wear and tear allowances:

Class I 37.5% Monthly rates

Annual RatesClass I 30%

Class I 25% Kshs. Kshs.Class I 12.5% (i) Saloons, Hatch Backs & Estates

Up to 1200 cc 3600 43200

(ii) Industrial building allowances: 1201- 1500 cc 4200 50400Industrial buildings 10% 1501- 1750 cc 5800 69600Hotels 10% 1751- 2000 cc 7200 86400

2001- 3000 cc 8600 103200(iii) Farm work allowances 100 % Over 3000 cc 14400 172800(iv) Shipping investment deduction 40% (iv)Pick-ups, Panel Vans (Unconverted)

(v) Mining allowance: Up to 1750 cc 3,600 43,200

Year 1 - 40% Over 1750 cc 4,200 50,400Year 2-7 - 10% (vi) Land Rovers/ Cruisers 7200 86400

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Monthly taxable pay Annual taxable pay Rates of tax (Shillings) (Shillings) % in each shilling1 - 10164 1 - 121968 10%10165 - 19740 121969 - 236880 15%19741 - 29316 236881 - 351792 20%29317 - 38892 351793 - 466704 25%Excess over 38892 Excess over - 466704 30%

Personal relief Kshs. 1162 per month (Kshs.13,944 per annum)

OR 2% of the initial capital cost of the vehicle for each month.

Commissioner’s prescribed benefit rates Monthly rates Annual ratesKshs. Kshs.

Services 1500 18000(i) Electricity (common or from generator) 500 6000

(ii) Water (Communal or from a borehole)

(iii) Provision of furniture (1% of cost to employer) If hired, the cost of hire should be brought to charge

(iv) Telephone (Landline and mobile phones) 30% of bills

Agricultural employees(i) Water 200 2,400

(ii) Electricity 900 10800

QUESTION ONE

Serena Campo Ltd. has been in the manufacturing business since 2009. The following summary relates to the company’s assets as at 31 December 2012.

Asset Cost Kshs. Year of First UsePlant building 10,200,000 5 January 2009Boilers and processors 6,800,00 12 August 2009Other machinery (auxiliary) 3,200,000 1 July 2010Graders and Tractors 3,000,000 1 February 2010Computers 600,000 25May 2010Prado for manager 3,800,000 6 July 2011Plant building extension 2,400,000 1 September 2011Nissan sunny 900,000 24 October, 2011Furniture and fixtures 800,000 17 November 2011Scanners and printers 500,000 2 December 2011Sports Hall 2,400,000 1 July 2012Staff Dispensary 1,600,000 3 October 2012

Additional Information1. On 1 January 2013, a sewerage system was constructed at a cost of Kshs. 1,420,000. A generator was

also purchased on the same date for Kshs. 900, 000.

2. The following additions assets were purchased or disposed of in the year 2013.

Date Asset Purchased Cost (Kshs.)1 March 2013 Computers 500,0004 May 2013 2 Saloon cars 2,500,000 (each)24 July 2013 Trailer 2,200,00010 September 2013 Lorry (7 tonnes) 5,200,000

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15 October 2013 Curtains 50,000

Date Asset Disposed off

Original Cost (Kshs.)

Sales Proceeds (Kshs.)

Net book value (Kshs.)

2 July 2013 Boilers 2,700,000 1,600,000 800,00030 September 2013 Prado 3,800,000 1,800,000 2,200,00030 November 2013 Tractor 2,200,000 1,500,000 1,300,000

3. On 1 January 2014, the company imported the following machines:

Kshs.Processing machinery 5,500,000Weighing machines 940,000Water pump 875,000

The cost of the imported processing machinery includes an import duty waiver of Kshs. 500,000 granted by the tax authorities.

Required:Compute the capital allowances due to the company for the two years ended 31 December 2013 and 2014. (20 marks)

QUESTION TWO

(a) Briefly explain one similarity and two differences between the taxation of companies and that of co-operative societies in your country. (6 marks)

(b) Sabina Farm Ltd. grows flowers for sale in both domestic and international markets.The following income statement was prepared by the company for the year ended 31 December 2013:

Income Kshs. Kshs.Sales 57,600,000Cost of sales (24,300,000)Gross profit 33,300,000

Expenditure:Salaries and wages 4,600,000Establishment costs 800,000Staff training costs 600,000Telephone and postage 400,000Printing and stationery 200,000Professional fees 380,000Advertising and promotions 120,000Entertainment 30,000Fines and penalties 35,000Finance costs 450,000

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Bank charges 15,000 7,630,000Net profit 25,670,000

Additional information:1. Cost of sales includes Kshs. 1,400,000 represents the value of flowers destroyed in a

hailstorm. An insurance compensation of Kshs. 900,000 is due on the loss but has not been included in the above income statement. Also included in the cost of sales is Kshs. 2,000,000 incurred on the construction of a water reservoir within the farm.

2. Establishment costs represents the amortization of the company’s formation costs.3. Salaries and wages include Kshs. 160,000 paid to workers hired on a temporary basis

during a period of strike by regular workers.4. Staff training costs include:

Kshs.Fire emergency training 50,000Leadership and team-building course 200,000Training of local farmers on water management 60,000

5. Profession fees relate to: Kshs.

External audit 180,000Internal audit 60,000Defense of company’s title to land 80,000Tax planning consultancy 60,000

380,0006. Finance costs comprise:

Kshs.Interest on loans 220,000Foreign exchange losses: Realized 150,000 Unrealized 80,000

450,000

7. Analysis of the fixed assets register revealed the following details as at 1 January 2013

Net book value (NBV) Kshs. “000”

Tax written down value (WDV) Kshs. “000”

Class I 500 380Class II 380 220Class III 2,200 1,900Class IV 1,800 2,100

Industrial buildings:

Year of acquisition/ construction

Net book value (NBV) Kshs. “000”

Tax residual value Kshs. “000”

1 January 2010 1,250,000 84,0001 July 2010 960,000 133,000

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1 January 2011 380,000 88,000

Farm works:

Year of construction Net book value (NBV) Kshs. “000”

Tax residual value Kshs.

1 August 2012 6,000 Nil

Required:(i) Taxable profit of Sabina Farm Ltd. for the year ended 31 December 2013. (12 marks)(ii) Tax payable (if any) by the company for the year. (2 marks)

(Total: 20 marks)

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