Business Income

Defining a business
A business is defined as an organization or economic system where goods and services are
exchanged for one another or for money. A business is in essence a trade.

Defining trade
Because a business is essentially a trade, it is important to understand what the term trade includes
and to understand how you can identify something to be a trade.

Trade means a commercial transition in a sale or purchase of items or services. It is constituted by

certain factors that clearly defines it that are called the badges of trade

Badges of trade
1. subject matter – the nature of goods involved should be determined because an investment
and a trade will differ.

2. length of period - the time taken between purchasing and selling should also be determined

3. Frequency of similar transactions – the frequency of transactions will determine the nature
of business

4. Supplementary work on assets before sale – if the asset is maintained before sale then it
must be considered to be a trade

5. Circumstances of acquisition – it should be determined whether the asset was purchased or

inherited.

6. Motive - the motive should also be determined.eg. If is to make profit, then its trading.

Business income
Business income refers to profits or gains arising from a trade, profession or vocation. This definition
is intended to include all profit or gains arising from the business regardless of their nature. It
includes:

• Trading profits

• Gains on disposal of business assets

• Gains on satisfaction of business debt and

• A payment received as consideration for accepting a restriction on the capacity to carry on a

trade.
Computing business income
As a general rule, the income of the business has to be calculated with the currency for the country
the business is resident in, and the books of accounts kept in that currency. Where the calculation of
chargeable income involves foreign currencies, the conversion should be made at the exchange rate
prevailing on the date of a transaction.

However, some businesses convert at the end of the financial period.in those cases, the
commissioner general allows the average rate to be used if there has not been a substantial change
in the rates.

Allowable and disallowed expenses

The profit before tax calculated in the financial statements of the business is slightly different from
that calculated for tax purposes because there are allowable and disallowable deductions. The
general rule is that the expenditure should have been incurred by the taxpayer during the year of
assessment in the production of taxable income and should be wholly for producing trading
income for it to be allowable.

Allowable deductions

Below are the allowable deductions for business income

 Cost of clothing worn to work except the ones that cannot be worn out of work.
 Revenue expenditure is incurred when maintaining and repairing an asset.
 Depreciation - the is allowed as long as it falls in the schedule described by the act and has
been incurred by the tax payer in generating the business income.
 Amortization – the loss in the value of intangible assets so it is allowed as far as it is incurred
by the taxpayer in the generation of income subject to tax. It is also allowed for expenditures
incurred in starting up a business to produce income subject to tax.
 Compensation – the compensation is the amount that could be given to the important and
high personnel of the organization for loss of employment contracts due to some business
related reasons. The compensation agreement has to be reasonable to qualify for
deductions. Any un reasonable excessive amount is disallowed
 Entertainment – the entertainment amount includes meals and refreshments (as well as
some sports facilities). The entertainment can be provided to employees as a means of
motivation or customers as promotions. The allowed deduction will only be 50% of the total
amount incurred.
 Bad debt- are allowed but provision is disallowed
 Interest – Interest is the cost of using somebody else’s money. The deductibility depends on
how the taxpayer has used the borrowed funds. if the funds are used for personal purpose
there will be no deduction allowed. Adversely, if used for business purpose, the deduction is
allowed. However, rule is that the deduction will be allowed to the extent that the debt to
equity ratio is 3:1 . Anything exceeding that ratio will not be allowed. The intention of the
rule is to restrict the foreign investors from taking advantage of interests rather than
dividends
 Training expenditure- 125% for a citizen of Lesotho is approved by the commissioner
 Repairs and spare parts- allowed
 Mineral extractions – allowed as if incurred for depreciable asset
 Losses carried forward- allowed
  Losses on disposal of business asset – allowed
 Research and development expenditure –(application of scientific methods) the research
and development expenditure referred to in this section are industrial engineering,
mathematical modelling ,computer software developments and other are allowable
deductions. The Research such as market research, sales promotions quality control
modifications management or efficiency surveys do not qualify under this section as
research and development
 Annuities to former employees – the annuity is allowed to an extend that its paid to a
former employee or dependents of former employees whom while working, was working for
a company generating income Lesotho income. The annuity from the manufacturing should
be deducted from manufacturing income

Disallowed expenses

 Expenses that are dual are disallowed.eg taxi fare between home and work
 Fines and penalties – disallowed
 Gifts – given to employees are disallowed unless it forms part of his/her chargeable income
 Insurance premiums – paid to a non-resident insurer are disallowed

Chargeable business income will therefore be incomes from trade less allowable deductions of the
business.

The computation of adjusted trading profits

The profit before tax amount as it may be calculated in the financial statements of a taxpayer is likely
to be different from the profit that is accepted for tax purposes. This is because the profit in the
financial statements is subject to many accounting conventions and principles, some of which may
not be taken into consideration for tax purposes. Therefore, the trading profit as reported in the
financial statements will have to be adjusted to make it acceptable for tax purposes.

Pro-forma for trading profit adjustment is as follows:

Profit before tax as per financial statements X

Add back: disallowable expenditure X

Less: Exempt or excluded business income (X)

Non-trading income (X)

Depreciation allowance (X)

_____

Adjusted (chargeable) profit X

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