Jomo Kenyatta University of Agriculture and Technology

End of Semester University Examinations

Examinations for the Post Graduate Diploma in Tax Administration

BRT 3105: Income Tax Practice

Date: April 2018 Time: 3 Hours

Instructions

1. This paper contains five questions.

2. Answer questions one and any other two questions.
3. All answers should be written on the official answer sheets provided.
4. Each question should be answered on a fresh page of the answer sheet.
5. Write your admission number on each answer sheet.
6. Mobile phones, laptops and similar electronic gadgets are strictly prohibited
in the examination room.
7. Detection of cheating shall lead to immediate disqualification.
8. Candidates should remain seated in the examination room throughout the
examination period.
9. Candidates are expected to show clearly their workings and assumptions
made

Question One
 a) Define the following terms as used in the Income Tax Act;

i. Fringe benefit
(2 marks)
ii. Fringe benefit tax
(2 marks)
iii. Market rate of interest
(2 marks)
b) In respect of employment income, state any three items that are:

i. Gains or profits from employment (3 marks)

ii. Exempt from tax (3 marks)
c) Carefit Bank offered loans to her employees on 1 st January 2014 in the sum of
Ksh 180 million charging interest at 8% per annum. The last quarter treasury
bill rate was 12% p.a.
Required
Calculate the fringe benefit tax for the 1 st quarter of 2014, if any, payable by
the company assuming employees made a monthly repayment of Ksh 18
million per month in form of principal loan.
(8 marks)
d) State any two case laws in relation to employment income
(4 marks)
e) Explain any three why the Government of Kenya levies taxes
(6 marks)

Question Two
a) Define the term ‘employee’
(2 marks)

b) Mr Macron, is a director with had the following gains and benefits for the year
2016:-

- Basic salary kshs. 300,000 per month

- Leave pay of kshs. 100,000 in the month of May 2017
- Staff meals attributable to her kshs. 50,000 per annum
- Pension contributions deducted from her Salary per month 10% of her basic
pay
- She enjoys the company medical cover with Sanlam insurance and in the year
2015, he had a total of kshs. 150,000 medical expenses that was catered for.
- She is provided with a Toyota Harrier of 3500cc whose initial cost was Kshs.
3,500,000
- The company pays Kshs. 10,000 every month towards her life assurance with
CIC Kenya as part of the company’s life group cover.
 - The company pays ksh. 1,200,000 every year towards her daughters’ school
fees to Gems Cambridge. The Company allows this as its expense.
- She is housed at Nyali and the employer pays Kshs. 200,000 house rent,
5,000 water, 5,000 electricity and Kshs. 12,000 to the night guard every
month.
- Her profit from farming for the year was Kshs. 960,000.

Required:

i. Determine the tax due and payable by Mr Macron for the year 2017.
(13 marks)

Question Three

a) The following information relates to the accounts filed by Garden Space, a

taxpayer in respect of rental income received for the year ended 31 st December
2014. The taxpayer is involved in both commercial and residential properties.
Garden Space Limited
Profit and Loss Account
For the year ended 31st Dec 2017
Kshs Kshs
Rental Income received 16,000,000
Less Expenses:
Land rates and rent 1,200,000
Salaries and wages 2,000,000
Motor vehicle running expenses 1,400,000
Agency fees 1,000,000
Repairs and maintenance 2,500,000
Bad debts 250,000
Audit and Accountancy 300,000
Water 400,000
Electricity 500,000
Cleaning 600,000
Security 426,000
Miscellaneous 2,200,000 9,876,000
Net profit per Accounts 124,000
 Notes to the accounts;

1. Salaries and wages include amounts paid to the directors as bonuses

amounting to Kshs 1,500,000.
2. Agency fees is agreed at 10% of the rent income received.
3. The taxpayer received goodwill amounting to Kshs 14,000,000 during the
year. This has not been brought to tax claiming that it is a capital item.
4. Repairs and maintenance include furniture bought for a furnished unit costing
Kshs 1,500,000 and additional extension which was done at a cost of Kshs
1,000,000 for purposes of generator installation. The extension was approved
by the Ministry after the taxpayer had satisfied all the requirements by law.
5. Security include an alarm system installed at a cost of Kshs 400,000.
6. Miscellaneous include the cost of a generator installed at the extension at a
cost of Kshs 1,000,000 and its installation of Kshs 400,000 by Power Techs
Ltd. In the amount is also Kshs 500,000 paid as facilitation to County
inspectors informally to give an inspection certificate and letter of occupation.
No law requires such a payment.
Required:

Calculate the taxable rental income and indicate legal backing or case law discussion
where any item has been adjusted for in the tax computations.

(15 marks)

Question Four

As per the Income Tax Act Cap 470, explain any five features of each of the
following:
a) Business Income (7 marks)

b) Allowability of expenses (8 marks)

Question Five

(a) Home Appliances Suppliers Ltd submitted the following Profit and Loss
Account for the year ended 31st December, 2016.

Revenue: KSH
Total Sales 65,000,000

Opening Stock 15,000,000

Purchases 45,000,000

60,000,000

Less: Closing Stock 12,000,000 48,000,000

Gross Profit 17,000,000

Insurance compensation for loss of stock 310,000

Bad and doubtful debts recovered 1,560,000

Gain from sale of shares 500,000

Interest from Post office savings bank 600,000

Gain from sale of motor vehicle 120,000

Proceeds from sale of land 2,500,000

Fixed Deposit Interest 250,000

Total Revenue
22,840,000

Expenditure:

Salaries and wages 3,500,000

Bonus to staff 1,500,000

Legal and Accountancy fees 3,500,000

Interest on loan 450,000

Donations to Kenya Red Cross 50,000

Repairs and Renewals 1,350,000

Loss on sale of furniture 35,000

Entrance to trade exhibition 15,000

Depreciation 350,200

Instalment tax 100,000

Directors Fees 2,500,000

Sales Commissions 100,000

Annual Club Subscriptions for employees 20,000

Purchase of furniture 320,500

General bad debts written off 224,500

Advertising 1,250,000

Water and Electricity 395,000

Annual Subscription and entrance fee to ASK show 20,000

Advance tax 45,000

Contribution to staff registered Pension Scheme 250,000

NSSF and NHIF payment for employees 100,000

Stamp duty- sale of land 125,400 16,200,600

Net Profit 6,639,400

Additional Information:

1. Legal and Accountancy include:

Suppliers contracts 30,000

Employment contracts for staff 450,000

Defense of a company driver on traffic offence 25,000

Accountancy and audit fees 75,000

Income Tax Appeal 15,000

Commission- land transfer 60,200

Lease renewal Agreement (50 years) 40,500

2. Repairs and Renewals include:

Replacement of car engine 84,500

Painting of a new office extension 20,000

Repairs and painting of existing premises 35,000

Carpeting of managers offices 48,500

Conversion of a garage into an office 87,500

3. Advertising include ksh 105,000 spent on acquisition of a billboard.

4. Water and Electricity include ksh 65,000 in additional deposits as demanded by
the power company.
5. Bad debts recovered include ksh 420,500 relating to bad debts which were not
previously allowed as an expense.
6. Capital Deductions Allowances and Diminution in value of implements were
agreed with Kenya Revenue Authority at ksh 950,000 and Ksh120,000
respectively.
Required:

Compute chargeable business income for Home Appliances Suppliers Ltd for the
2016 year of income.

(15 marks)