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Taxation Handout

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					Taxation ND III
TAXATION DEFINITION OF TAXATION Tax is a compulsory levy imposed by the government on every qualified tax payer. Taxation means compulsory payment by the individuals, partnership and companies to the government coffer as a percentage of their annual income primarily with the aim of raising revenue and secondly with the aim of directing the factors of production towards the Government objectives for the period. Tax base and tax rate (input terms in taxation is an object upon which the tax is paid. Tax rate is the percentage (%) or promotion to be paid as tax. REASONS WHY THE GOVERNMENT LEVIES TAXES The reasons why the Government levies taxes are: i. To stimulate growth and development in an economy ii. To fight depression, inflation and deflation; iii. To achieve equitable distribution of income and wealth; iv. To allocate resources in a socially desirable manner; v. To discourage consumption of goods that are considered to be socially undesirable such as goods that are inimical to health; vi. To encourage and protect infant industries in the country vii. To ensure that the balance of payments of the country is in a healthy position and viii. To preserve and augment foreign exchange reserves TYPES OF TAX Tax is divided into Direct and Indirect Taxes Direct tax – are imposed by the government on the income and revenue of individuals and companies of which incidence of payment and burden fall directly on the tax. That is the tax that is paid directly by the taxpayers to the purse of government, wherein the taxpayer bears the incidence alone. For example, Personal Income Tax; Company Income Tax; Capital Gain Tax; CTT, Petroleum Profits Tax, Pay-As-YouEarn (PAYE); Ad-Valorem tax (tax paid over goods). Indirect tax – are taxes being imposed by the government on the income and revenue of individuals and companies of which incidence of payment fall on the tax payer but of which real burden is shifted to the final consumer. Examples of indirect taxes are Sales Tax, Custom Duties, Import and Export Duties, Excise Duties, Tariff, Value Added Tax (VAT). Indirect tax can be avoided because it is payable only if one buys the commodities on which the tax is imposed and it involves little administrative cost than direct taxes. Moreover, indirect taxes do not create disincentive to efforts as in the case of direct taxes and do not therefore affect the economic functions of the taxpayer. Indirect taxes are more flexible as people are more sensitive about increase in direct taxes because of he direct effects on their disposable incomes. Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

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For a tax to be qualifies as good, Adams Smith Canons of good tax/principles of a good tax is taken into consideration and they are: i. Ability to pay ii. Certainty iii. Convenience iv. Economy v. Benefit vi. Equality MODEL OF TAX ADMINISTRATION IN NIGERIA There are two models, which are: U.S.A. Model and U.K Model U.S.A. MODEL: This assumes that all he qualified adult tax payer know the tax law in operation in the country and it is their responsibilities to pay tax as at when due to the relevant tax authority under self assessment scheme. U.K. MODEL: This assumes that the taxpayer does not know the tax law and it is the duty of government to access and demand tax from them AGENTS OF TAX ADMINISTRATION IN NIGERIA FEDERAL BOARD OF INLAND REVENUE (FBIR): This is the apex body of tax system in the country. The board is responsible for the administration and management of Company Income Tax Act /79 and it is located in Abuja but has branches all over the federation. Composition: a. The chairman who is also the Chairman of Joint tax Board. He has the responsibility of peciding over meeting of the board either in person or by a duely selected representative of his choice. b. Four (4) deputy chairman whose duty is to assist the chairman c. A representative of the Ministry of Finance not below the rank of a director d. A representative from NNPC not lower in rank than an Executive Director e. A Director from the Custom and Excise Office f. A Director from the National Planning Commission g. A representative from National Revenue Mobilization and Fiscal Commission h. The Registrar of Companies i. A legal adviser to the Board j. A secretary (Ex-Officio) Note that both the legal adviser and the secretary are not members of the FBIR because they have no voting right. FUNCTIONS OF FBIR 1. Administration of tax laws Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

A.

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2. Acting as a medium through which policies, directives from the ministry of finance in tax matters reach other bodies associated with tax matters 3. Advising government on tax matters through the Ministry of Finance 4. The board is responsible for assessment, collection of tax and account the money collected to the state treasury 5. Ensures that all taxes collected are remitted to the Government coffer. 6. Responsible for employing, promoting and discipline of staff of FBIR JOINT BOARD (JTB) This is the board that is responsible for the administration of income tax under the ITMA ‟61 as amended to date. The board has affiliated offices throughout the country. COMPOSITION: i. The chairman of the Federal Inland Revenue who is also the chairman of the Joint Tax Board. ii. A representative member from every state of the Federation Inland Revenue Board i.e. each of the states of the Federation has a representative in JTB iii. A legal adviser of the Federal Board of Inland Revenue acts as legal adviser to the Joint Tax Board iv. A secretary of the Board is appointed by Federal Civil Service Commission and is usually an officer who is knowledgeable in tax matters. His functions are to summoning meetings of the board and minutes and maintaining records of the board‟s proceeding. Note that both the legal adviser and the secretary are not members of the FBIR because they have no voting right. FUNCTIONS OF JTB 1. It promotes uniformity both in the application of tax policies it obtain uniformity in the administration, collection and assessment of tax in the incidence of tax on individuals throughout Nigeria. 2. It advises government on issues regarding double taxation arrangements with other countries. 3. It advises government in respect to any propose amendment to the Income Tax Act. 4. It advises government in respect of any tax rate 5. it settles dispute between two states on internal revenue matters 6. It approves pensions and providence funds C. STATE BOARD OF INTERNAL REVENUE The administration of the income tax in each state of the federation is vested on SBIR. Prior to 1993 YOA, the composition of the board was different from state to state. However, with 1993 amendment of Income tax management Act, the composition is now uniform throughout the country. Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

B.

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COMPOSITION OF SBIR i. The executive head of state service as chairman being person experience in taxation. ii. Three persons nominated by commissioner for finance in the state service base on their personal merits iii. The directors or head of department within the state service iv. A direct from the state ministry of finance v. A legal Adviser vi. A Secretary FUNCTION OF SBIR 1) The board is responsible for the appointment, promotion, dismissing, transferring and imposing discipline of the state service 2) SBIR makes recommendations to the JTB where appropriate on tax legislations/matters 3) Establishment of an effective and efficient framework for optimum collection of taxed and penalties due to government under relevant tax law 4) It controls the management of the states services on matters of the policy 5) It puts in place framework deemed necessary and expedient for collection and assessment TECHNICAL COMMITTEE TO THE STATE INTERNAL REVENUE BOARD In accordance to S.85C (i) of PITD 1993 as amended, there shall be a technical committee of the state board which shall comprise: a. The Chairman of the state boards as chairman b. The Director within the state service c. The legal adviser to the state service d. The Secretary of the state service POWERS AND DUTIES i. Power to co-opt additional staff from within the state service in the discharge of its duties ii. To consider all matters that requires professionals and technical expertise and makes recommendation to the state board iii. Advise the state board in its powers and duties iv. To attend to all such matters as may from time to time be referred to it by the board. LOCAL GOVERNMENT REVENUE COMMITTEE In accordance with S. 85 d (i) PITD 1993 as amended, there shall be established for each local government area of a state, a committee to be known as local government revenue committee. COMPOSITION OF LOCAL GOVERNMENT REVENUE COMMITTEE 1) The supervisor for finance as chairman Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

D.

E.

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2) Three local government councilors as members 3) Two other persons experienced in revenue matters to be nominated by the chairman of local government on their personal merit. The revenue committee shall be responsible for the assessment and collection of all taxes fines and rates under its jurisdiction and shall account for all amounts so collected in a manner to be prescribed by the chairman of the local government. TAX MATTERS TAX RETURNS – consist of audited statements, capital allowances computation and tax liability computation together with the completed tax for “IR3C” TYPES, TIME AND TERMS OF PAYMENT OF ASSESSMENT In Nigeria, there are 4 types of assessment namely: a) Provisional tax assessment: This is an assessment of tax based on the amount equal to what was paid in the preceeding year. This is done when the taxpayer fails to provide his present information to the tax authority. This must be paid before the end of March of any given year. It is due from corporate taxpayer (i.e. company alone) within 3 months of each year of assessment. It is payable at once. b) Assessed tax by government: that is the Best of Judgement. This is payable within 2 months from the date of the notice of assessment. This is also paid at once. c) Self-assessment system: that is the assessment of tax liability by the taxpayer. Same with BOJ. The taxpayer here can negotiate with the authority for installmental payment of tax liability. d) Turnover bases of assessment: This is peculiar with taxpayer that under disclose his tax based on the profit earned. PENALTY FOR LATE PAYMENTS OF ASSESSMENT Failure to comply with the payment timetable of any of the assessment will attract a penalty at commercial rate of interest; the penalty is in addition to the tax in default. PRE-OPERATIONAL LEVY Every company which is yet to commence the operation is liable to a preoperational levy of N500 for the first year and N400 for each subsequent year that such company come forward to obtain clearance certificate on the ground that is has not commence the business i.e. it is paid by a registered company that has not commenced operations but has been incorporated. THE BODY OF APPEAL COMMISSIONERS This body is established at the State and Federal levels to hear the appeals filed by the tax payers against decision of the tax authority. Where there is a dispute on assessment between the taxpayer and the tax authority and a notice of refusal with the tax payer has been sent by the internal revenue, the tax payer has within 30 days to appeal to the Appeal Commissioner. Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

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COMPOSITION At the State level, the membership must not exceed six (6) and must not exceed twelve (12) persons as the federal level. Those who are normally appointed as Appeal Commissioner are non-civil servants who have distinguished themselves in various filed such as Accountancy or Taxation, Legal, and Business etc with one being the chairman. The secretary of the commission shall be a public officer usually a staff of Federal Inland Revenue (FIR). The tenure of office is for three (3) years. The appointment, resignation and retirement are published in the Government gazette. The State or Federal Government fixes their remunerations as the case may be and is paid by the Minister of Finance subject to the approval of the relevant appropriate body. The members of Appeal Commissioners must disclose their financial interest or relationship with any persons brought before him. There or more commissioners may hear and determine any appeal provided none of them has any financial interest in the tax payer directly or indirectly. HOW A SEAT OF ANY OF THE APPEAL COMMISSIONERS CAN BE DECLARED VACANT. If any commissioner is absent from the meetings of the body for two consecutive times. If any commissioners is incapacitated by infirmities or old age If any commissioner is adjudged bankrupt or been convicted from an offence of felony or tax matters Where any of the commissioners fails to declare his financial interest in the tax payer before the commencement of the appeal process.

1) 2) 3) 4)

HEARING OF APPEAL BY APPEAL COMMISSIONERS Three (3) or more commissioners may hear and determine an appeal, which may be to confirm, reduce or increase the assessment as deemed fit. On commencement of appeal, the secretary of appeal commissioners to the tax authority and the tax payer gives seven days notice stating date and venue fixed for hearing the appeal. The tax payer may be represented on the hearing of any appeal but the Onus of providing complain of an assessment is vested on the tax payer. A tax payer may be required to deposit on account of the tax charged in the assessment under appeal with the board „an amount equal to the tax charged now plus 10% of the amount of such deposit”. This is possible where the representative of the tax authority can prove to the appeal commissioner that: a. The tax payer has not sent his returns and supporting account to the authority b. That the appeal was to abuse the appeal process At the conclusion of an appeal, the secretary of an appeal commissioner shall supply a certified copy of decision reached to the taxpayer or the board upon request within 3 months such decision. The board upon the taxpayer shall serve the amount of tax chargeable under the assessment as determined by the “AC”. Where the tax payer or the board still find Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

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aggrieved on the decision of the commissioners, either of the parties may then appeal to the court giving notice of objection in writing 30 days to the secretary of the Appeal Commissioners (AC).

TAX ADMINISTRATION AND TAX MATTERS IN NIGERIA a) TAX AVOIDANCE This occurs a tax payer takes a perfectly legal course to keep down the amount he has to pay in taxes. Is a careful tax planning of a tax payer by making use of the loop holes available in tax laws to reduce the payment of tax. An alternative term for tax avoidance is “Tax mitigation”. There is no offence the tax payer committed; therefore he cannot be liable to any fines, penalties nor imprisonment because it is an art of winning games without actually cheating”. For example, PIT entitles to children allowance, unmarried man claiming children‟s allowance. b) TAX EVASION Is a fraudulent dishonesty intentional disclosure of facts and figures by tax payer so as to minimize tax to be paid or not to pay tax at all. This is reduction of tax liability by falsifying documents; perpetrate fraud, concealment of certain essential information or any other illegal means. Since it is a criminal offence, tax evader is liable to fines, penalties, and at times, coupled with imprisonment. REASONS FOR HIGH TAX EVASION IN NIGERIA a. Lack of honest and qualified personnel to administer the tax laws in Nigeria b. Corruption among tax officials c. Lack of a spirit of national consciousness on the part of the taxpayer d. Inconsistency in tax policies as a result of the political instability coupled with epileptic economic conditions e. False declaration of asserts by the taxpayers POSSIBLE SOLUTIONS TO THE TAX EVASION IN NIGERIA a. Recruitment of honest and competent staff b. Activities of tax officials should be closely monitored to minimize the incidence of fraud c. Stiff penalty for contravene any section of the tax law d. Taxpayer should be educated about their civic responsibility e. Consistence in tax policies f. Bureaucratic documentation should be reduced to avoid forgery g. Establishment of State Revenue Court BEST OF JUDGEMENT (BOJ) Section 5A ITMA 61 and S. 46(3) CITA ‟79 as amended to date. This is an assessment raised on tax payer by the tax authority, which has failed to remit his returns within an appropriate time limit or under disclose certain information. Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

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This assessment is often based on the knowledge, which the authority has about the tax payer. BOJ assessment is not a final assessment but rather an assessment to stimulate a tax payer to render his returns. Therefore, a payment made on BOJ assessment does not exonerate the tax payer from paying any additional assessment that may be raised on submission of returns or being credited when the final assessment is made. ARTIFICIAL TRANSACTIONS These are transactions regarded by the tax authority not to have been made at an arms length. That is, any transaction that is not made in line with normal business activity or undertaken is an official business. So, the tax authority has the right to revisit such transaction and treat it as it ought to have been made as if the parties involve were operating in an open market. Examples are transactions between Sister Company i.e. holding and subsidiary companies; husband and wives, and other persons that may have relationship with one another. BACK-DUTY INVESTIGATION This is a process of re-visiting the past records and tax matters of a tax payer by the relevant tax authority (RTA), where they are of opinion that over the years there have been. a. Error or omission in the assessment or collection of taxes due b. False or doubtful claims for allowances or relief c. Failure to disclose in full or partially any income or earning d. Decline in revenue or profit or the growth in business is not in line with the type done by a tax payer. TAX OBJECTION AND TAX APPEAL On receiving the notice of assessment, the tax payer has the right to agree or disagree with the assessment served on him by the relevant tax authority. Where a tax payer disagrees with the assessment rose on it by the Board, such taxpayer has the right of objection. The right of objection can only be exercised by notifying the board in writing to the board and requesting the review and revisit of the assessment within 30days. For a valid objection, the following are important: i. The objection must be in writing and addressed to the board ii. The objection must be made within thirty days from the notice of assessment iii. The reasons for the objection must be stated. SPECIMEN OF NOTICE OBJECTION XYZ Tax Practice No 18, Oba Adebimpe Ibadan. Federal Board of Internal Revenue, Abuja. Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

Taxation ND III
Nigeria. Dear Sir, Re-Objection to the assessment The following assessment was raised on our client on 31st January 2004: File No. 001JB Assessment No. KL4 Year of assessment 2004 Total Profit N1m Tax Liability N300,000 Date of Serving the notice of Assessment 31/01/04

i. ii. iii. iv. v. vi.

Based on the above assessment, we hereby asking you to discharge, and raised a revise assessment based on the returns sent to you properly.

The following are the grounds for objections: a. That the said assessment was based on the past record of our client b. That the total profit under assessment was N450,000 c. That the actual tax liability should have been N135,000 If you have anything to discuss with us, you should feel free to communicate it with us. Thanks. Yours faithfully, AKINWOYE, Gabriel For and behalf of XYZ Practice Date: 31 – 01 – 04 Where the board reviews a valid objection and an attempt is made to settle this issue with the tax payer. But where no agreement is reached, the authority will have so send a Notice of Refusal back to the tax payer to amend the assessment. On receipt of that notice of refusal by the tax payer, the tax payer can appeal within 30 days in writing to the secretary of the Body of Appeal Commissioner (section 52 CITA‟79) A notice of appeal against an assessment shall contain the following a. The name of the Tax Payer b. The assessment number and relevant year of assessment Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

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c. d. e. f. g. The total profit for the period consigned The tax charge The date of service of the Notice of refusal by the board The reason of Appeal against assessment The contact address of the tax payer WHERE AN ASSESSMENT IS TO BE CONSIDERED AS FINAL AND CONCLUSIVE An assessment is paid to be final and conclusive under the following: Where no valid objection was lodged to the appropriate quarters Where an agreement has been reached between the tax payer and the authority subsequent iii. Where no valid appeal has been lodged or where due notice has not been given of any further appeal against the decision of the appeal judge or commissioners. i. ii.

DETERMINATION OF RESIDENCE RELEVANT TAX AUTHORITY The relevant tax authority in relation to a person is the tax authority that could assess tax on the income of the person for a year of assessment. The determination of the relevant tax authority in respect of any taxable person is informed by deemed place of residence. The relevant tax authority for an individuals or body (including a family, any corporation sole and executor of estate of a deceased person falls under the tax jurisdiction of the Board of Internal Revenue of the State in which they reside. A trustee of any trust or settlement may be assessed either by the State Board of Internal Revenue or Federal Board of Inland Revenue. Where all the income of the settlement or trust for a year of assessment arises in one territory, the tax authority of that territory is relevant. But where the income of the settlement or trust for a year of assessment arises in more than one territory or in any other case where the relevant tax authority cannot be determined, the Federal Board of Inland Revenue is relevant. For persons, employed in the Nigerian Army, Nigerian Navy, Nigeria Air Force and Nigerian Police Force; Officer of the Nigerian Foreign Affairs Service; Every resident of the Federal Capital Territory, Abuja and; Persons resident outside Nigeria who derives income or profit from Nigeria; will be assessed by the Federal Board of Inland Revenue and they are deemed to be resident in the Federal Capital Territory. PLACE OF RESIDENCE AND PRINCIPAL PLACE OR RESIDENCE Place of Residence: Under paragraph 1 of the first schedule to the ITMA 1961, this means a place available for an individual‟s domestics use in Nigeria (on a relevant Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

Taxation ND III
day) does not include any hotel, rest-house or other place at which he is temporarily lodging unless no more permanent place for his use on that day. Principal Place of Residence: In relation to an individual with two or more places of residence on a relevant day, not being both within any one-territory means: a. In case of an individual with no source of earned income, other than a pension in Nigeria, that place or those places in which he usually resides; b. In the cased of an individual who has a source of earned income other than a pension in Nigeria, that places of those places which on a relevant day is nearest to his usual place of work. c. In the cased of an individual who has a source of unearned income in Nigeria, that place of those places in which he usually resides. BASIS OF ASSESSMENT These are methods of charging income or profits to tax. These methods depend on the applicable Accounts or Decree. It is a common knowledge that trade or business is assessed to tax on two methods, namely Preceeding Year Basis or Actual Year/Normal basis. 1. Preceeding Year Basis: It means the income or profit earned in a particular year would be subject to tax in the following year. Example of such income or profit and the applicable Actor or Decree are as follows: a. Company‟s profit – CITA 1979 (as amended) b. Unearned Income – ITMA 1961 as replaced by PITB 1993 c. Partnership Income – as above. 2. Actual Year Basis: It means the income or profit is taxable in the year the income is earned. The assessment usually starts from 1st of January to 31st of December of that same year. Examples of income or profits and the applicable acts or decree are as follows: a. Employment Income – ITMA 1961 as replaced by PITB 1993 b. Petroleum Profit – PPTA 1959 as amended c. Capital Gains – CGT 1967 as amended d. Capital Transfer – CTTA 1979 (released) The rule is universal in its application but is not without exception. exception to this rule can be seen in the following cases: The

THE BASIS PERIOD The Basis Period is the accounting period of a business or the number of months, which is being subjected to tax. Businesses are being subjected to tax on preceeding year. The following are the feature of a Normal Basis period: i. The accounting period must not be more than or less than 12 month duration ii. The accounting period must end on the preceding year iii. The accounting period must commence a day following the end of a previous one. In the following circumstances there are special provisions in CITA, ITMA as replaced by PITD on how to assess such business to tax. 1. COMMENCEMENT OF BUSINESS Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

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The provision of the acts or decree or principle shall be applicable when a business has just started the operation. The date of incorporation or registration is irrelevant for this purpose. The provision of the Acts or Decree is found in the following areas: a. CITA 1979 (as amended) S.25(3) b. ITMA 1961 (as amended) S.23(3) c. PITD 1993 S.24 In cases the business is a new venture, the first three (3) years of assessment shall be determined as follows: Tax Year Basis of Assessment st Year 1 It is on actual. The assessment will start from the date of commencement to 31st December of the year. nd Year 2 It is for 12 starting from the date of commencement rd Year 3 It is on preceding year. Recognizing when the business is making up its accounts. However, where 12 months basis period on preceding year cannot be obtained reflect the basis period for the 2nd year of assessment. ILLUSTRATION 1 Mr. Olu Ajayi commenced business on 1st June, 1992making up his accounts annually to 31st December. The adjusted profits submitted to the revenue are as follows: N Period to 31/12/92 220,000 Year to 31/12/93 460,000 Year to 31/12/94 480,000 Compute the assessable profit for the 1st 3 years of the business. SOLUTION OLU AJAYI Computation of Assessable Profit for the 1st Years of Assessment Tax Year Basis Period Assessable Profit N 1992 1/6/92 – 31/12/92 220,000 1993 1/6/92 – 31/0593 (w1) 411,667 1994 1/1/93 – 31/1293 460,000 Workings: 1993 Tax Year (1/6/92 – 31/5/93) Initial 1/6/92 – 31/12/92 5 months 1/1/93 – 31/5/93 (5/12  460,000)

220,000 191,667 411,667

ILLUSTRATION 2: Stop Gold Nigeria Limited commenced business on 1/12/98 and decided to make up its Annual Account to 30th June. The following figures adjusted for tax purpose were extracted from the books of the company Period 01/12/98 – 30.06/99 8,400 Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

Taxation ND III
Year to 30/06/2000 9,600 Year to 30/06/2001 20,000 Year to 30/06/2002 40,000 You are required to compute tax payable for all years of assessment involved. RIGHT OF ELECTION This is also known as Actual Assessment or Revised Assessment. On commencement of a new business, a taxpayer has the right to elect in the 2 nd and 3rd year of assessment. The assessment is on actual, starting from 1st of January to 31st of December of that year. This is exercised within 2 years after the end of the second year of assessment and can be revoked within one year after end of the third year of assessment. It is advisable for a taxpayer to elect for the lower of the assessable profit for the second and third year of assessment based on normal assessment or actual assessment. ILLUSTRATION 2 Mr. Johnson commenced business on 1st July 1993 making up his account annually 31st December. The adjusted profits submitted to the revenue are as follows: N Period to 31/12/93 180,000 Period to 31/12/94 280,000 Year to 31/12/95 320,000 Required: Determine the assessable profit for the first 3 years of the business considering any available option for the taxpayer.

CESSATION OF BUSINESS This will arise when a business is permanently winded up. This is different from temporary cessation. The provision of the Act on cessation of business is applicable only on a permanent cessation of a business. The following years are important when a business ceased. 1) Penultimate Year – this is the year preceeding the final year of a business 2) Ultimate Year – this is the final year of a business The provision of the Act or Decree on cessation of business is found in the following sections a. CITA 1979 as amended S.25(4) b. ITMA 1961 as amended S.23(4) c. PITD 1993 S.25 The provision of the Act or Decree can be summarised as follows: Tax Year Basis of Assessment 1. Penultimate The assessable profit is the higher of i. Preceding Year Basis (PYB) ii. Actual Year Basis (AYB) 2. Ultimate Year The assessable profit will commence from 1st of January to the date of cessation Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

2.

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ILLUSTRATION DOLAPO decided to cease trading permanently on 31st May 1996 due to declining profit. The adjusted profits submitted to the Revenue are as follows: N Year ended 31/12/94 420,000 Year ended 31/12/95 360,000 Year to 31/5/96 140,000 Required: Compute the assessable profit for the relevant year of assessment ILLUSTRATION 2 Mr. Ogboru commenced business on 1st April 1992, making up his accounts annually to 30th September. Due to shortage of raw materials the business ceased permanently on 31st of March 1996 with the adjusted profit for the periods amounting to N120,000. The other adjusted profits submitted to the Revenue are as follows: N Period to 30/9/92 170,000 Year of 30/9/93 320,000 Year to 30/9/94 280,000 Year to 30/9/95 220,000 Required: Compute the assessable profit for all the relevant years of assessment considering any available option. CHANGE OF ACOUNTING DATE This is occurring when a business fails to make up its account to its usual accounting year-end. The change must be permanent before the rule can be applied. The following are some of the reasons why a business may decide to change its accounting period. a) To suit the nature of his business b) To conform with the government fiscal year c) To meet the requirement of its new owner. The relevant provision of the Act or decree on change of accounting date is found in the following section: S.23 and S.25 (2) CITA 1979 as amended. The revenue is empowered to apply any method suitable to enhance the revenue accruable to the government. The following procedures are usually adopted by the revenue whenever there is a change of accounting date. i. Identity the year at which the business first fails to make up it account to its usual accounting year-end ii. Identity the two subsequent year after (i) above iii. Compute the assessable profit for the 3 years based on the old accounting yearend iv. Compute the assessable profit for the 3 years based on the new accounting year-end v. Sum up the assessable profit in (iii) and (iv) above separately vi. Select the higher of the two Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

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Note: The assessment for the new and old accounting period must be on preceding year basis (PYB). ILLUSTRATION AFOLABI Ltd has been trading for many years making up its accounts annually to 30th June. As a result of the advice from the external auditor, the accounting period was changed to 31st December of every year. The adjusted profit submitted to the revenue office is as follows: Year ended 30/6/91 420,000 Year ended 30/6/92 460,000 Period to 31/12/92 290,000 Year ended 31/12/93 560,000 Year ended 31/12/94 620,000 Required: Compute the assessable profits for the relevant years of assessment DEDUCTION FROM R & D S. 22 of CITA 1993 allows that reserves made for R & D by a company in its accounts any year of assessment shall be an allowable deduction provided that the amount deductible does not exceed 10% of the total profit before deduction of: a) Allowable donation b) Reserve for R & D PERSONAL INCOME TAX IPMAN 61 governs the PIT as amended to date. This Act governs the assessment of individual, Partnership, Settlement and Trust Estate etc. It should be noted (AYB) i.e. the income that accrues to an individual from January to December of a particular year is assessed to tax in that same year of assessment. The Joint Tax Board (JTB) is a custodian of Income Tax and Management Act of 1961 that now govern the PIT. The following categories of persons are liable to the tax under ITMA 61. a. Individual tax payer b. Partnership business (it should be noted that only the partners the constitute partnership are taxable only on the income generated from he partnership business). c. The family set-up (the general income of a particular family is liable to tax. d. The community or village set-up. This implies as stated that the income attributable or accrued to a particular community or village is liable to tax under ITMA 61. e. Trustee and settlement income. The income form a trust estate after the deduction of all relevant expenses is liable to tax under ITMA 61. INCOME EXEMPTED FROM TAX The incomes of the following people are exempted from tax: i. The official emoluments of the President, Vice President of the Federation ands of the States‟ Governors and their respective Deputies. ii. Any consular fees received on behalf of a foreign state or by a consular officer or employee Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

Taxation ND III
iii. iv. v. vi. vii. Income accrued to a Local Government or Government Institution Income accruing to a registered cooperative society under the Co-operative Society Decree 1993. Income accruing to a religious organizations e.g. NASFAT Income accruing to a social club/organization e.g. LIONS CLUB Income accruing to an ecclestical, charitable organization or educational institution of a public character as long as such income is not derived from a trade or business carried on by such institution The income of any trade union registered under he Trade Union Acts, as long as such income is not derived from trade or business carried on by such trade union. Gratuities payable by the Federal or State Government to a public officer and the amount that can be exempted is subject to a certain limitations Income that had suffered withholding tax at source (FRANKED) Investment Income) e.g. Rental Income, Dividend Income, Interest Income from Royalty etc. with effect from 1996 YOA Interest on deposit operates as domiciliary account. Refund or removal, subsistence, Income or Unearned Income.

viii.

ix. x.

xi. xii.

INCOME This is any sum of money accruing derived brought into, or received from, any channel by individual tax payer within a particular YOA. It may be Earned Income or Unearned Income. EARNED INCOME This is the income accruing to a particular tax payer from the personal effort or sweating. It is termed as income that is really worked for. It includes Employment Income like salary, allowances, benefit-in-kind (BIK), pension, gravity; Business Income, that is, income derivable from business activities after the deduction of allowable expenses; Professional/Vocational Income like Income from part-time business or income derivable from one‟s innovation and invention or work of part. A. EMPLOYMENT INCOME: 1. Salary: Salary received by an individual tax payer from his place of work within a particular YOA is taxable in the hands of the tax payer i.e. salary is exposed to tax on Actual Year Basis (AYB). 2. Allowances: for the purpose of tax , allowances given to tax payer can be categorized into two(2) i.e. transport and housing/ rent allowances. Transport allowance given to a taxpayer will not be taxable. If it meets the following conditions: a) Up to 1987 YOA N600 p.a. b) Between 1988 – 1991 YOA N1,740 p.a. c) With effect from 1992 YOA N2,436 p.a. Hosing allowance given to a tax payer shall not be taxable of it meets the following conditions: Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

Taxation ND III
a) Up to 1987 N720 p.a. b) Between 1988 – 1991 YOA 20% of Actual Basic salary but the maximum of N5064 p.a. c) WEF 1992 YOA, it was review as 28% of Actual Basic Salary subject to the maximum of the following: i. Lagos and Abuja N10,000 ii. State Capital N6,000 iii. Other Areas N4,000 d) WEF 1994 to date 28% of ABS subject to the following: i. Lagos and Abuja N20,000 ii. State Capital N12,000 iii. Other Areas N8,000 iii. Benefit-in-kind (BIK): These are the allowances or benefits accrued to a taxpayer from his place of work, which cannot be quantified in monetary terms but are taxable in the hands of the taxpayer. BIK according to ITMA 61 as amended to date is covered by section 4(a) and Section 4(b) of ITMA. BIKs enjoys by a tax payer from his employer are taxable on actual year basis as follows:

Section 4(b) of ITMA ‘61 Benefits in kind of Accommodation: This section states that if employer provides for the use of employee an accommodation that is owned by the business not withstanding an employee payment of rent or not, an employee is deemed to have enjoyed or derived a BIK that is equal to the Annual Rateable Value (AVR) of such accommodation as determined by the state or local land authority of the area. Where the ARV is not given, the BIK shall be 10% of the cost of such accommodation. Note that any BIK depends on the period at which the employer enjoys it and the degree of enjoyment i.e. it is PROFITABLE. iv. Pension: Pension payable to a tax payer is taxabe on actual year basis (AYB). It is regarded as part of employment income. However, pension fund contribution in it‟s entirely is taxable unless the employee has served the employer for at least 5 years for it to be non-taxable. If less, the amounts of pension fund contribution to be exempted shall be N300 for each completed year. Gratuity: For the purpose of tax, an employees is categorised as to public sector and private sector employee: a) In the case of public sector employee, any gratuity paid to an employee up to 1985 YOA was not taxable, unless the employee had not served the employer up to 5 years. Where the employee had not served for up to 5 years, the amount of gratuity exempted from tax was N1,000 for each completed years. With effect from 1986 YOA, gratuity payable to a public sector employee became exempted from tax without any restriction. b) In the case of private sector employee: up to 1985 YOA, any amount of gratuity paid to a private sector employee was taxable irrespective of the length of Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

v.

Taxation ND III
service. WEF 1986 YOA, gratuity paid to a private sector employee became from tax if:  He had served for at least a minimum number of 10 u\years and that the amount of gratuity was not more than N50,000  The amount was reviewed upward to N100,00 WEF 1988 YOA  WEF 1990 to date, gratuity payable to a private sector employee became exempted to tax without any condition. B. BUSINESS INCOME Business income is exposed to tax on PYB. The income that is taxable is income after the deduction of all relevant and allowable expenses. C. PROFESSIONAL/VOCATIONAL INCOME This is also exposed to tax on PYB UNEARNED INCOME All unearned income like Rent, Interest, Dividend, and Royalty are exposed to tax on PYB. Unearned income is defined as those incomes approved or derived by tax payer from his previous or past investment. Treatment of rent paid in Advance Where rent is receivable or paid in advance for more than a period of 5 years, such should be treated to have being paid for maximum period of 5 years. RELIEF’S AND ALLOWANCE 1. PERSONAL ALLOWANCE: This is an allowance granted to a tax payer who derived income from Nigeria, and also has at least a source of earned income. Note: women are not entitled to Personal Allowance unless it can be claimed that she is the breadwinner of the family. Personal Allowance Rate over the years is as follows: Between 1990 – 1991 N2,000 plus 15% of earned income WEF 1907 – 1998 N3,000 plus 15% of earned income 1998 to date N5,000 plus 20% of earned income 2. WIFE ALLOWANCE: This is an allowance given to a tax payer who maintains a wife at least a year before the YOA. This allowance was abolished as from 1992 YOA. 3. CHILDREN ALLOWANCE: This is also an allowance granted to a tax payer who has been maintaining a child or children at least a year before the YOA. The child or those children need to be his biological children. Conditions necessary for the granting of Children Allowance a) The child or must be maintained by the tax payer at lest a year before the YOA. b) The child or children should not be more than 16years of age except they are undergoing tillage or educational training c) The child or children should not have been deriving income Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

Taxation ND III
d) The child or children should be in any of the educational institutions or under apprenticeship e) The child or children need to be biological children of the tax payer The rates of Children Allowance over the year are: Between 1981 – 1991 N400 subject to 4 children Between 1992 – 1994 N500 subject to 4 children For 1995 only N1,000 subject to 4 children WEF 1996 – 1997 N1,500 subject to 4 children 1998 to date N2,500 subject to 4 children 4. DEPARTMENT RELATIVE ALLOWANCE: This is an allowance granted to a tax payer who has maintained a dependant or at most two dependant relatives at least a year before the YOA. For this allowance to be enjoyed, the dependant relative must not have income in excess of N600 p.a up till 1997 YOA. The rates are as follows: Between 1987 – 1994 N600 subject to 1 dependant Between 1995 – 1997 N1,500 p.a. subject to 1 dependant WEF 1998 to date N2,000 p.a. subject to at most 2 dependants 5. LIFE POLICY ALLOWANCE: This is an allowance granted to a tax payer who has a life policy on himself and hat of his wife or spouse at least a year before the YOA. Over the years, the following are the rate of Life policy allowance. Between 1995 – 1996 N5,000 subject to the lower of the following i. Actual premium paid ii. 20% of earned income iii. 15% of sum assured iv. N2,000 up to 1991 YOA and N5,000 WEF 1993 – 1995 YOA WEF 1996 to date, it became Actual Premium paid without any restriction 6. COST OF EQUITY (COE): This is an allowance granted to a tax payer who has shares in company floated for research and development purposes. The maximum for research and development purpose shall not exceed 25% of the amount of interest. You can only claim 25% of T.I or the actual investment paid. 7. MORTGAGED INTEREST: This is the interest payable on the fund borrowed to finance or develop a tax payers; personal dwelling house he is living. It is an allowance under statutory deductions to be enjoyed by the tax payer.

DONATION: In PIT, the maximum amount the tax payer can enjoy shall not exceed 19% of the Income after donation. In practice, it is 10/110 FORMATION FOR THE COMPUTATION OF PERSONAL INCOME TAX Earned Income: N N Salary xx Allowance xx Pension & Fund contributions xx Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

Taxation ND III
B.I.K. Business Profit Professional/Vocational Profit xx xx xx Xx xx xx xx xx

T.E.I

Unearned Income: Rent Dividend Interest Royalty Statutory Deduction Mortgage Interest Alimony

xx xx

T.U.E.I S.T.I

xx xx

xx Xx

N.S.T.I

Relieves & Allowances Personal Allowances Children Allowances Dependent Relative Allowance Life Policy Cost of Equity Donation TOTAL INCOME TAXABLE INCOME Taxable Income subject to Tax Profit 1st N20,000 15% Next N20,000 10% Next N40,000 15% Next N40,000 20% Above N120,000 25%

xx xx xx xx xx xx

xx XX

ILLUSTRATION Ojurongbe Junior, a bachelor, secured a top-job with Plastic Bank Ltd. As an Assistant Manager on 29 December 1998. he got married to his finance on the 31 st of January 1999. the couple was blessed with a baby on 13th December 1999. the following information relates to Ojurongbe Junior for the year ended 31 st December 1999. N 85,000 2,000 300 5,000 2,000

Salary B.I.K. (all assessable) Dividend Received (gross) Interest paid on loan for development Football pool prize Lecturer:

Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

Taxation ND III
Ojurongbe maintains his aged parents and his elder sister who are incapacitated. On 3rd March 1998, he was allotted 2,000 ordinary shares at N120 per share in New Invention Limited, a research and development company newly incorporated in Nigeria. He owes a Life Assurance policy on his Life on a capital sum of N40,000 and paid a premium of N3,000 p.a. contribution to an approved pension scheme paid during the year amounted to N380. You are required to compute the amount of income tax payable by Ojurongbe Junior for 1999 YOA (Assume PIT rate to be 30%) ILLUSTRATION 2 The following information relates to Mr. Abdul, a married man. You are required to compute the amount of income tax payable for 2000 and state the due date of payment Items year ended 31/12/99 year ended 31/12/00 Salary 180,000 185,000 B.I.K. 6,000 7,000 Bonus 30,000 35,000 Rent Received (Net) 5,600 8,400 Dividend received (gross) 2,100 4,200 Football winning 7,000 8,000 Mortgage interest paid 36,000 45,000 M. Abdul‟s son who was born on 5/1/89 and was still in full-time education at a higher school received income from a Trust Fund set up by his father 6,000 4,000 ILLUSTRATION 3 Mr. Popoola retired from the Federal Ministry of Finance as a director of taxes with effect of 3rd May 1998 with the following detail of salary: Basic Salary N90,000 p.a. Other Allowance N24,000 p.a. For transport, an official vehicle was provided. The market value of the vehicle is N500,000 at the date of purchase. N1,2000 is deducted from his salary monthly for the use of the car. Housing: An official accommodation is provided in one of the Federal; Government Building. The Rateable value has been agreed at N30,000. The sum of N360 is deducted monthly for the use of the house. He was paid a pension fund contribution of N58,900 while he is to return on a pension of N75,000 p.a. A gratuity of N159,000 was paid to him for being in service for about 18 years. He joined the firm of Enny & Willy, Chartered Accountant on 1st June 1998 as the tax payer. Sharing P & L in the ratio 2:2:1 as between Enny, Willy and Popoola in the firm Enny, Willy and Popoola. The adjusted profit before appropriation for the period ended 31/12/98 is N430,125. salary of N60,000 p.a. is payable to each partner and interest on capital is at 15% p.a. Leave of passage payable in September every year is N15,000. His capital contribution was the total gratuity paid to him by the Federal Government of Nigeria. The capital contribution of the either 2 partners is reflected in the ratio at which profit Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

Taxation ND III
and losses are shared. He is married with children, all of school going age. Have both parents to take care of. Investment Income is N60,000 p.a. on rent. You are required to compute the tax liability for the relevant tax year. ADJUSTMENT OF PROFIT Every company in Nigeria is expected to file a return to the relevant tax authority or the Board of Inland Revenue for further assessment, containing its Annual Audited Financial Statement, Capital Allowance Computation. The selfreturns include computation of tax payer tax liability for the relevant years of assessment (YOA). The afore-said tax liability is calculated on taxable income and not on the accounting income. therefore, taxable profit is referred to as the accounting profits as suit tax purpose is known as ADJUSTMENT OF ACCOUNTING PROFIT. The accounting profits needs to be adjusted because of different treatment of expenses. In taxation, some expenses are allowable for tax purpose where some are disallowable to tax purpose. An allowance expenses is an expenses that are allowed to be deducted from the profit while a dis-allowed expenses is that on that is not allowed to be removed from profit. In addition, an expense would be allowed as a deduction from profit if it were WREN. i. WHOLLY: an expense is said to be wholly incurred if it is totally incurred for the sake of the business. ii. EXCLUSIVELY: an expense that is incurred for the sake of business is paid to be exclusively incurred if the business alone enjoys the benefit of such expenses. iii. REASONABLE: an expense that is wholly, necessarily and exclusively incurred may not be reasonable if it is not prudent. iv. NECESSARILY: for an expenses to be necessarily incurred, it should be such that, if it is not incurred the business will not attain or derive the profit. FORMAT N Net profit as per account Add: Disallowed Expenses Taxable income omitted Less: Allowable expenses omitted Non taxable income already included ADJUSTED PROFIT xx xx (x) (x) N xxx xxx xxx (xx)

Adjusted Profit xx Less Relief (x) Assessable profit xx Capital Allowance (x) Taxable Profit xx Taxable Profit x Tax rate = Tax Liability Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

Taxation ND III
ALLOWABLE EXPENSES FOR TAXATION PURPOSE These are expenses that are expected to be removed from profit. They are as follows: 1) Interest on money borrowed as capital employed 2) Rent of any period on business premises 3) Rent of accommodation for business workers, subject to the following restrictions: Up to 1993 YOA Building Flat Lagos 28,000 p.a. 10,000 p.a. Other areas 14,000 p.a. 5,000 p.a. With Effect from 1994 Lagos & Abuja 56,000 20,000 Other areas 28,000 10,000 Fro, 1994 to date Lagos 56,000 20,000 Other areas 28,000 10,000 4) Repairs and Maintenance of business assets. This should be distinguished from repairs and maintenance meant to increase the file span or working efficiently of business assists. 5) Bad debt written off in the course of business activities 6) Specific bad debt and doubtful debt provision 7) Contribution to approved pension, providence or retirement benefit scheme 8) Subscription to recognised trade association 9) Legal expenses on i. Renewal of short-term lease ii. Collection of debt iii. Protection of business assets 10) Retainership fee 11) Reasonable removal expenses 12) Donation to any recognised bodies as contained in schedule 5 part 3 section 24 of CITA „99 13) Auditing and Accountancy fees 14) Expenses incurred in Nigeria or outside Nigeria for the purpose of any management fees having obtained the approval of finance minister. 15) Expenses of any description outside with the approval of FIRS 16) Welfare expenditure of employees without any biasment 17) Entertainment and gifts to customers. Note: Entertainment of foreign customers is allowed while that of home customers is not allowed. Gifts to a customer are that which contains advertisement inscriptions but does not include food, drinks and cigarette. DISALLOWABLE EXPENSES 1) Appropriation of profit (be it partnership/company including salary to the owner of the business Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

Taxation ND III
2) Expenses of capital in nature e.g. purchase of an asset, expense of issue of shares, decoration of new building, construction of iron gate. 3) General bad and doubtful debt provision 4) Loss on sale of assets 5) Any sum recoverable under an insurance policy or indemnity contract 6) Staff loan written off 7) Assets depreciation 8) Legal expenses on i. Acquisition of new lease (be it short or long) ii. Renewal of long term lease iii. Tax appeal 9) Capital repaid or withdrawn 10) Fines and penalties 11) Prior year adjustment 12) Donations to unapproved bodies 13) Subscription to unapproved organizations or non trade association 14) Taxes on income levied in Nigeria 15) Domestic and private expenses 16) Non trade debt written off 17) Contribution to unapproved pension, providence and retirement benefit scheme 18) Unrealized exchange losses on acquisition of assets NON-TAXABLE INCOME a) Profit on disposal of asset b) Franked Investment Income c) Dividend received in form of bonus issued d) Dividend received from a pioneer company during pioneer period e) Dividend received from Agro-Allied Company i.e. Agric Business, Petrolchemical and Liquified Natural Gas (LNG) f) Profit of any company meant for sporting activities g) Income of any cooperative society registered under the cooperative law of the state h) Income derived by a company established for economic development by government i) Profit of any statutory registered friendly club e.g. Rotary Club of Nigeria ILLUSTRATION QUESTIONS: 1. The profit and loss account of Mr. Adeogun Olodumare for the year ended 31st December 1997 shows the following: N N Staff Wages 2,416 Gross profit trading A/c 10,326 Wives Wages 624 Profit on sale of profit 240 Rent 630 Profit on sale of investment 1,032 Light and heats 171 Bank interest received 54 Motorcar expenses 336 Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

Taxation ND III
Telephone Repairs & Renewal Bad debt w/o Miscellaneous Expenses Advertising Loan Interest Depreciation Plant Motorcar Net profit 80 476 100 346 24 130 480 120 5,640 11,652

11,652

Note: a) The authority has agreed that 1/3 of expenditure on light and heat relate to living accommodation at the business premises. b) 1/7 of motor expenses relate to private motoring c) Repairs and Renewal comprise the following: i. Painting shop internally N155 ii. Plant Repairs N220 iii. Building extent to stock room N101 N476 d) Bad debt Account

1997 31/12/97 Bad debt w/o Bal c/d General Specific

N 102 400 398 900 01/01/97 31/12/97

1997 Bal b/f General Specific Bad debt recovered P & L Account 200 360 240 100 900

i. ii. iii. iv. v. vi. vii. f)

g)

e) Miscellaneous expenses comprises the following: Donation to the Civil Liberty N10 Subscription of Chamber of Commerce N8 Entertaining customer N90 Christmas gift to customer-Bottle of gin costing N8.75 @ one per customer With (Mr. Pelumi) labels N70 Payment to employee in lieu of notice N50 Legal expenses on re-debt collection N15 Sundry expenses (all allowable) N103 N346 The profit on the sale of investment relates to the sale of a holding of an ordinary share in a company located on the stock exchange. This shares was purchased by Adeogun Olodumare on 1st January 1997 for N8,460 and sold on 30th June 1997 for 9,492 Mrs. Adeogun assist full time the business Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

Taxation ND III
h) Gross profit is 15% of selling price and Adeogun estimates that he has withdraw goods costing n340 for his own use. i) The staff wages includes N260 paid to Adeogun You are required to compute the Adeogun Olodumare tax adjusted profit before tax allowance for the relevant year of assessment. 2. Dongoyaro Enterprises, a business owned and manages by Alhaji Gambari, a General Merchant, makes his account to 30 September each year. The following is a summary of his profit & loss account for the year ended 30 September 2000. N N Gross profit 98,578 Rent received (gross) 3,500 Dividend received (net) 3,600 Interest on fixed deposit 4,800 Interest received on staff loan 655 Profit on sale of motorcar 8,900 120,033 Less: Rent and rates 33,493 Insurance 4,620 Electricity 1,311 Salaries & wages 33,420 Repairs 1,179 Running expenses 4,986 Mortgage interest 1,980 Depreciation 5,763 Legal expenses 500 Bank charges 391 Loss on sale of furniture 141 Audit & Accountancy 2,130 Donation & Subscription 3,920 Fine for late filing of tax returns 750 Bad & Doubtful debts 2,100 93,084 NET PROFIT 26,949 Additional Information a. Salaries & wages includes management salary of N4,800 paid to Alhaji Gambari b. Donation and subscription comprises i. Donation to Motherless babies Home N900 ii. Donation to Polo Club, Kaduna N1,000 iii. Donation to PDP Political Party N300 iv. Subscription N250 v. Staff tea & coffee N70 vi. Gifts to customers including (N200 drink) N500 c. Bad & Doubtful Debt Account Trade debt 1,245 Balance b/d Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

Taxation ND III
Loan to formal employees 1% of other debt Balance c/d specific debt 1,050 3,300 1,860 7,455 Specific debt 1% on other debtors Recovery debt P & L A/c 1,752 2,903 700 2,100 7,455

d) Legal expenses includes: Retainership fee N60, Debt collection fee N120; New Lease Agreement: N120, Renewal of old but short lease N100, Defense of Business over property N100 = N500 e) Rent paid includes N12,000 for the flat accommodation of the General Manager at Eruwa. You are required to compute adjusted profit of the business. LOSS RELIEF There is difference between loss an Accountant and loss to tax man. The loss to accountant simply connotes excess of expenses over income or revenue. But adjustment to financial information, as some expenses, which are not allowed as deduction might have been considered, so also some income that are not taxable might have been regarded as normal income e.g. profit on sale of fixed assets. The loss we are considering here under loss relief is that of taxation loss. In the existing Nigeria Tax Law, every taxpayer is entitled to claim for loss relief in any year that is incurred or at future time period. TYPES OF LOSS RELIEF a. Current Year Loss Relief: This is referred to as the loss incurred in any particular year of assessment to be relieved against the profit made from other sources in that particular year if assessment. This type of loss relief is applicable to individual tax payer, it is relieved on actual year bases. It can be carried forward incase it has balance left in any year of assessment (and that becomes CFLR) and lastly, the tax payer should notify the tax authority. b. Carried Forward Loss Relief: This is a type of loss that makes it possible for any loss sustained in any YOA to be carried forward to subsequent YOAs. It also has limitations. This type of relief is applicable to individual and company. It is relieved on PYB basis, there is no need to inform the tax authority. CONDITIONS FOR GRANTING RELIEFS i. The total amount of loss that can be relieved should not be more than the actual loss sustained ii. Losses are relieved on FIFO basis (SAS4). iii. If any part of loss is relieved against part of profit, that part of loss being relieved is deemed to have been relieved effectively. iv. Loss can only be relieved against profit v. Any loss sustained in any year of assessment can only be carried forward for maximum number of four (4) years. EXCEPTIONS FROM LIMITATION OF LOSS PROFIT Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

Taxation ND III
a) Any agricultural company or business. Such company can carry it forward indefinitely as long as the loss can be relief b) Companies operate in export processing zone e.g. IITA rice production. ILLUSTRATIONS Oluwa-lo-gbon is a business tycoon and consultant who engage in various types of business. Recent result adjusted for tax purpose is as follows: Financial Services General Trading Block Business Year ended 31/8/94 (140,200) (240,000) 380,000 Year ended 31/8/95 24,000 120,000 (130,000) Year ended 31/8/96 (74,000) 90,000 270,000 Dividend and rents were received net of withholding tax. Compute taxable income for 1995 – 1997 tax years, assuming all relieves are claimable as soon as possible. Mr. Oluwa-lo-gbon is married with 4 children, all in secondary schools. He maintains dependent relatives. ILLUSTRATION II Alhaji Didiwanko commenced business as Cocoa Processing Company on 1st July 1998. The adjusted profit of the company is stated below: N Period to 30/9/93 (600,000) Year ended 30/9/00 1,500,000 Year ended 30/9/01 2,750,000 Capital allowances are as follows: 1998 YOA 750,000 1999 YOA 600,000 2000 YOA 550,000 2002 YOA 480,000 determine the tax liability for relevant YOA. ASSIGNMENT QUESTION 1. Define the term place of residence. How is a place of residence determined in relation of Resident individuals and non resident individuals? (5 MARKS) 2. Adventure Nigeria Limited has been in trading business, importing finished produce since 1st of April 1989, making up account to 31st October of every year, until 1992 when it decided to change its accounting date to end on 31st December. In 1993, there was a marked change in the fiscal policy of the Federal Government which discouraged import substantially. Adventure Nigeria Limited could not continue in the business as it was affected adversely, and had to seize business on 30th June 1997. its trading results for the periods of business are as follows: Period to 31st October 1989 90,000 Year of 31st October 1990 150,000 Year to 31st October 1991 180,000 st October 1992 Year to 31 200,000 Lecturer:
Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA

Taxation ND III
Period to 31st December 1992 Year to 31st December 1993 Year to 31st December 1994 Year to 31st December 1995 Period to 30th June 1997 80,000 300,000 250,000 150,000 30,000

Required: Compute the assessable profit for all relevant years of assessment. You are also to advise both the taxpayer and the revenue authority as to what options to take in all cases available to them. (10 MARKS)

Lecturer:

Akinwoye, Gabriel, NCE, HND, B. Sc., MBA, MTM, ACMA


				
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