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Hba2302:Advanced Taxation Question Paper

Hba2302:Advanced Taxation

Course:Bachelor Of Commerce

Institution: Meru University Of Science And Technology question papers

Exam Year:2011

QUESTION ONE (30 MARKS)
Ali bin is a married man and has been in business on his own account as an Interstate Transporters since 1 January 1999. For each tax year, he has accepted estimated assessments made upon him by the Commissioner for Income Tax. In January 1999, Ali had Kshs20,000 stolen from his house and upon reading this in the press, the Commissioner has suggested to him that past assessments appear to have been inadequate and that he ought now to prepare a statement showing his financial position since he commended business. The commissioner has advise Ali to seek professional advice as necessary. Ali has now consulted you having himself produced the following draft financial statement and drawn the conclusions indicated below.
Assessment at 1 January:
1999 2000 2001 2002 2003 2004 2005 Kshs. Kshs. Kshs. Kshs. Kshs. Kshs. Kshs cash hoard 20,000 20,000 20,000 20,000 20,000 20,000 - Cash at bank 100 3,900 7,600 11,300 13,900 19,900 26,100 Stock - 10 10 15 15 20 20 (received from a deceased relative) at original value 6,000 6,000 5,000 3,000 - - - Freehold house at cost -____ -____ -____ -____ 20,000 20,000 20,000 26,100 29,910 32,610 34,315 53,915 59,920 46,120 At previous 1 Jan -___ 26,100 29,910 32,610 34,315 53,915 59,920
Increase (decrease) - 3,800 2,700 1,705 19,600 6,005 (13,800) Expenses (Rent before buying house) 338 338 338 169 - - Mortgage interest - - - 720 1,440 1,440 Housekeeping 1,156 1,156 1,156 1,156 1,156 1,156 Miscellaneous 1,200 2,694 1,200 2,694 1,200 2,694 1,200 3,245 1,200 3,796 1,200 3,796 Total of wealth Increase plus expenses 6,504 5,394 4,399 22,845 9,801 (10,004)
Income: Sale of jewellery - (1,000) (2,000) (3,000) - - Betting winnings (650) (800) (1,000) (1,200) (1,500) (2,000) 5,854 3,994 1,399 18,645 8,301 12,004
Net increase (decrease) Kshs. Total increases 37,793 Total decreases (12,004) 25,789
Average income over the period Kshs 4,298
Required: a) Without redrafting the above statement, state fifteen areas that the CIT. is likely to inquire upon and specify the additional information and evidence he may require. (20 Marks) b) a profit arising from his employment. Indeed, in y judgement, the authorities show that to be a profit arising from employment the payment, must be in referene to the services the employee renders by virtue of his office, and it must be something in the nature of a reward for services past, present or Justice Upjohn in HOCHSTRASSER V. Mayes(1960) 38 TC 673,
Required: In the light of the above judgement and the relevant provisons o Income Tax Act(Cap.470) of the laws of Kenya, explain the tax benefits arising out of the use of the (i) Expense reimbursement. (2 Marks) (ii) Benefits in kind. (2 Marks) (iii) Pension entitlement (2 Marks) (iv) Bonus Schemes (2 Marks) (v) Share Purchase arrangements for employees. (2 Marks)
QUESTION TWO (20 MARKS)
a) The income Tax Act imposes still penalties in order to discourage tax evasion. However, the rate of compliance is still quite low. What alternative measures has the Government taken to improve compliance? (20 Marks)
QUESTION THREE (20 MARKS)
Sometimes critics allege that many accounts prepared in Kenya are open to suspicion of having been based on records, which to a degree are incomplete. You have been approached by the owner of a legal firm to test the re bearing in mind that the accounts can be selected by the Commissioner for in-depth examination. His first year of trading is 2005. The draft accounts are as follows:
Balance sheet at 31 December 2005 Fixed Asset Sh. Sh. - Buildings - Motor Vehicle - Computers - Furniture and fittings 1,000,000 545,312 300,000 225,000 2,070,31
Current Assets Cash at bank Debtors, deposits and prepayments
72,836 798,000 870,000
Current Liabilities Taxation Hire purchase, creditor Trade creditor, sundry creditors and accruals
Net Current liabilities Total Assets
100,000 150,000 1,075,000 1,325,000
(454,164) 1,616,148
Represented by: Sh. Sh. Loan Capital Account
Total Assets
430,500 1,185,648 1,616,148
1,616,148
Capital Account Sh Profit for the year Drawings 365,000 (240,000)

Required:
State ten areas you may require to make further enquiries, indicating the additional information and any evidence you may require from management. What are recommended action in each case to comply with the tax law? (20 Marks)
Capital –Self and wife 1,060,648 1,185,648
Profit and Loss Account Sh. Professional fees
Expenses Salary - self and wife - Others Taxation Motor vehicle running expenses Professional fees-legal Travel and subsistence Insurance for vehicles Subscriptions – Law society Depreciation Bank and hire purchase charges Repair and maintenance Office rent House keeping expenses Telephone
Net profit
4,249,000
500,000 750,000 50,000 725,000 55,000 104,000 170,000 10,000 120,000 128,000 600,000 360,000 175,000 137,000 3,884,000
365,000
QUESTION FOUR (20 MARKS)
Rai, Sai and Tai former school mates who are doing business together. The business is not registered but they regard themselves as equals in it. They keep proper books of account and have been able to provide the following profit and loss account for the year ended 31 December 2005.
Profit and loss Account Sh. Sh. Establishment expenses Rent of business premises owned by all of them jointly Interest expense Stationery and printing Lighting and heating General Farm expenses Repair of premises Depreciation 800,000 180,000 80,000 120,000 40,000 294,000 40,000 300,000 Gross Profit Sundry receipts Interests income Profit on sale of shares Gross income from farming Lottery winnings Dividend(Gross) 1,908,000 80,000 72,000 200,000 340,000 800,000 120,000 Rai Tai Salary to Sai 80,000 120,000 160,000
Commission to partners: Rai Sai Tai Bad debt Gift, present and charity Donation to child welfare Interest on loan taken to pay income tax Legal charges Net profit
96,000 96,000 96,000 240,000 40,000 200,000
20,000 120,000 398,000 3,520,000

________ 3,520,000
Additional information
1. Capital allowances have been agreed as follows: Wear and Tear allowance Sh180,000; Farm works deduction Sh120,000. 2. The partners had borrowed Sh400,000 with a hope of investing it on fixed securities to earn more income. Interest rates nevertheless declined. Interest expense of Sh72,000 relate to this loan. 3. Legal charges include Sh40,000 paid to finish a case in the customs department. 4. In 2005, the partners brought forward losses amounting to Sh.800,000 from this business. Required: a) Compute taxable income derived from the partnership. (12 Marks) b) Show allocation among partners. (8 Marks)
QUESTION FIVE (20 MARKS)
a) Set out the attributes of any Tax planning Scheme. (8 Marks) b) You are Tax Consultant specializing in personal tax. You are approached by the Personnel Manager of one of your client company for advice on the following matters. (i) How to avoid/minimize tax on low interest benefit; ( 6 Marks) (ii) How to overcome the proposal employees provided with car should be assessed on the higher of the prescribed values and 2% of the cost of the motor vehicle. (6 Marks)

Hba2302:Advanced Taxation Question Paper

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