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09
06

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA

CA PROFESSIONAL (STRATEGIC LEVEL I) EXAMINATION

DECEMBER 2013

15304 - ADVANCED TAXATION AND STRATEGIC TAX PLANNING

Instructions to candidates:
(1)

Time allowed:
Reading and planning
Writing

: 15 minutes
: 3 hours

(2)

Marks : 100 marks

(3)

Answer all questions.

(4)

Begin each answer on a separate page. Submit all workings.

(5)

All answers should be in English Language, in the answer booklets provided.

Question No. 01
Express Bank PLC is a company engaged in the business of a commercial bank. You are
provided the following financial details and statement of financial position as at 31 March 2013.

Assets
Cash and short term funds
Balance with Central Bank regulatory deposit
Investment in treasury bills
Loans and advances
Loans and advances- non-performing
Finance leases
Finance leases non-performing
Other receivable
Property and equipment
Intangible assets
Total assets
Liabilities
Deposit from customers
Borrowings
Interest accrued
Staff retirement benefit
Others
Total liabilities
Net assets
Equity
Reserves
Total Equity and reserves

(2)

2013

2012

Rs. 000

Rs. 000

5,800,000
1,650,000
6,470,000
52,600,000
7,250,000
8,750,000
2,750,000
11,442,983
2,349,000
2,000,000
101,061,983

5,120,000
1,550,000
8,250,000
48,260,000
5,150,000
7,250,000
2,450,000
10,450,000
2,323,000
90,803,000

43,000,000
27,500,000
7,550,000
3,100,000
1,360,000
82,510,000
18,551,983
8,100,000
10,451,983
18,551,983

37,950,000
26,750,000
4,750,000
3,260,000
1,260,000
73,970,000
16,833,000
8,000,000
8,833,000
16,833,000

Income Statement
For the year ended 31 March 2013
2013

2012

Interest Income
Interest Expense
Net Interest Income
Other Income
Dividend Income
Fees and Commission Income
Profit/(Losses) from Finance Lease
Profit from Offshore Banking Unit
Total Operating Income

Rs. 000
8,950,000
3,450,000
5,500,000
1,664,000
258,000
437,000
37,500
478,000
8,374,500

Rs. 000
7,560,000
3,150,000
4,410,000
1,528,000
162,000
418,000
2,800
712,000
7,232,800

Less: Operating Expenses

Personnel Cost
Provision for Staff Retirement Benefits
Premises, Equipment and Establishments
Other Overhead Expenses
Operating Profit Before Provisions
Specific Provisions for loan losses
General Provisions for loan losses
Loan Written off
Recovery of loan written-off
Interest Written-off
Recovery of Interest written-off
Operating Profit Before Value Added Tax
Less: Value Added Tax on Financial Services
Operating profit Before Income Tax

3,750,000
186,000
315,000
652,000
3,471,500
423,000
168,000
652,000
(27,000)
146,000
(42,000)
2,151,500
388,500
1,763,000

3,560,000
171,000
298,000
680,000
2,523,800
480,000
57,000
48,000
(12,000)
1,950,800
428,000
1,522,800

The following additional information is also provided.

(i)

The interest income of the bank consists of interest income of Rs. 785 million on loans
granted to companies to invest in full for the operation of re-opened abandoned factories
and Rs.184 million (net of WHT) on account of treasury bills and bonds.

(3)

(ii)

The following expenses have been included in other overhead expenses:

Rs.
14,480,000
7,860,000
80,000,000
74,000,000
14,250,000
34,000,000
17,300,000
300,000,000
500,000
68,350,000

Advertising expenses
Entertainment expenses
Donation
Depreciation
Tax on tax paid
Legal expenses
Impairment losses of investment
Amortization of intangible assets
Stamp duty on the issue of shares
Staff training
(iii)

Profit on disposal of fixed assets amounting to Rs. 2,200,000 has been included in other
income.

(iv)

You are told that personnel cost, premises equipment and establishment costs are fully
allowable for income tax and the profit from finance lease and profit from offshore
banking unit have not included allowable or disallowable expenses for tax purpose other
than depreciation allowance due on the leasing stocks.

(v)

Details of property and equipment, tax written down value (TWDV), book written down
value (BWDV), additions and disposals are as follows:
Rs.
Description
Land as at 1 April 2012
BWDV of Other Assets as at 1 April 2012
Total as at 1 April 2012

1,000,000,000
1,323,000,000
2,323,000,000

Additions (net of depreciation)

Depreciation for the year
Disposal (BWDV)
Book Written Down Value as at 31 March 2013
Tax Written Down Value as at 1 April 2012

130,000,000
74,000,000
30,000,000
2,349,000,000
348,000,000

Details of Tax Written Down Value

Computers
Furniture and Fittings
Motor Vehicles
Computer Software (not developed locally)

(4)

Year of purchase
2009/10
2008/09
2008/09
2009/10

Rs.
125,000,000
47,500,000
26,000,000
149,500,000
348,000,000

(vi)

Additions during the year represent the computers, purchased on 1 April 2012. The
computers have been depreciated at the rate of 20% from the date of purchase.

(vii)

Assets which were given on lease (finance lease) are during the year as follows:
Type of the asset
Motor cars
Equipment

Cost (Rs.)
30,000,000
40,000,000

(viii) During the year disposals/discards of computers, motor vehicles (vans) and furniture and
fittings are as follows:
Type of asset

Book written down value

Selling price
Tax written down value at 1/4/2012

Furniture and
fittings
(Rs.)
5,000,000
2,800,000

Computers
(Rs.)
15,000,000
6,000,000
5,000,000

Motor
vehicles
(Rs.)
10,000,000
8,000,000
2,000,000

(ix)

The bank has paid income tax payable on the employment income of the senior
management without deducting PAYE tax. Tax on tax has been paid.

(x)

You are provided the details of the tax losses and provision for loan losses brought
forward to Y/A 2012/13:
Rs.
Losses from the foreign currency banking - off shore
Losses from the business of leasing brought forward from 2010/11
Losses from the business of leasing brought forward from 2011/12
Last year excess provision of loan losses over 1% of the loans and advances

155,000,000
27,000,000
42,000,000
30,000,000

(xi)

Donations during the year represents cash donation of Rs. 70 million paid to various
approved charitable institutions providing institutionalized care for sick and needy
people.

(xii)

The Bank has declared Rs. 358 million being dividend for the year 2012/13. This total
dividend consists of scrip dividend worth Rs.100 million and dividend declared out of
dividend received from resident companies in Sri Lanka.

(xiii) Legal fees has been paid for recovery of loans.

(xiv)

The bank has paid Rs. 250 million being income tax under self assessment basis for the
Y/A 2012/13.

(5)

You are required to :

(a)

(i) Compute Statutory Income, Assessable Income, Taxable Income, Net Income Tax
Liability for the Y/A 2012/13.
(ii) Compute the minimum dividend to be distributed by Express Bank PLC before 30
September 2013 in order to avoid the deemed dividend tax for the Y/A 2013/14.
(25 marks)

(b)

Describe how the value addition with regard to the business of supplying financial
services is computed.
(5 marks)
(Total 30 marks)
Question No. 02
(a)

Mr. Silva is a lawyer by profession and practices as a partner of ABC Associates. You are
provided the following information.
(i)

Extract of the financial information of the ABC Associates for the Y/A 2012/13 is
as follows:
Rs.
Fees received
78,000,000
Profit after depreciation and partners salary
22,000,000
Partners salary - Silva
4,000,000
Partners salary - other partners
8,000,000
Depreciation
1,600,000
Tax paid by the partnership
1,584,000
Mr. Silva is entitled to 40% share of profit.

(ii)

During the year following dividends have been received.

(iii)

Dividend of USD 1000 equivalent to Rs. 132,000 has been received

through a bank in Sri Lanka on account of dividend from a company
outside Sri Lanka.
Cash dividend from ABC PLC declared out of profits and income liable to
income tax amounts to Rs. 90,000.
Cash dividend from PQR PLC declared out of exempt profits and income
amounts to Rs. 180,000. You are told that the shareholder receiving the
exempt dividend is also entitle to claim the exemption.
Dividend in the form of debentures in XYZ PLC amounts to Rs. 200,000.

Mr. Silva has obtained a housing loan to construct a house in the Y/A 2009/10.
During the year Rs. 130,000 has been paid being capital repayment of the housing
loan and Rs. 247,000 being interest. This house has been rented for Rs. 90,000
per month. Rates paid for the Y/A 2012/13 amounts to Rs. 21,000. The floor area
of the house is 2100 sqft.
(6)

(iv)

Mr. Silva has been paid directors fee for serving as a board member of the
following companies.

ABC Company (Pvt) Ltd Rs. 28,000 (net of tax) per month

PQR (Pvt) Ltd Rs. 9,000 (net of tax) per month

You are told that Mr. Silva has received the above directors fees after deducting
income tax.
(v)

Mr. Silva has paid Rs. 80,000 being medical insurance and Rs. 142,000 on
account of a special health insurance policy for incurable disease.

(vi)

Mr. Silva has received Rs.92,000 being interest during the year after deducting
8% WHT on such interest.

(vii)

Mr. Silva has paid Rs. 68,000 being quarterly tax for the Y/A 2012/13

Compute the net income tax payable for the Y/A 2012/13.
(15 marks)
(b)

Discuss the income tax liability of dividend received from a company outside Sri Lanka.
(5 marks)
(Total 20 marks)

Question No. 03
Dasa Industries engaged in the manufacture of welding plants is a partnership business between
Munidasa and Gunadasa. Gunadasa is the owner of the patent in respect of the welding plants
manufactured by the partnership. The accounts of the business for year ended 31 March 2013
disclosed a net profit of Rs. 4,600,000 after crediting a gross rent of Rs. 600,000 from letting part
of the business premises and Rs. 200,000 realised from the sale of a lathe machine which was
purchased in the year 2000 and after debiting the following sums.
Rs.
1.
Salary paid to Munidasa
1,200,000
2.
Interest paid on capital
(a) Munidasa
Rs. 200,000
(b) Gunadasa
Rs. 300,000
500,000
3.
Royalty paid to Gunadasa for the use of his patent
600,000
4.
Rates including Rs. 10,000 applicable to the premises let
40,000
(Profits and losses are shared equally)
Compute income tax payable by the partnership and partner Munidasa for the year of assessment
2012/13.
(Total 10 marks)

(7)

Question No. 04
(a)

McNiven Shipping Company (Pvt) Ltd is a company resident in Sri Lanka. During the
month of March 2013 it received the following amounts of money from the supplies
made.
Rs.
1. From international transportation of goods and passengers
68,000,000
2. From transportation of goods and passengers between ports
in Sri Lanka (coastal shipping)
12,000,000
3. The rental received from a shipping company in China for
the use in international waters of a ship owned by the
company (the ship is used by the Chinese company in terms
of a charter hire agreement entered into in China between
the two companies)
12,000,000
VAT paid by the company by way of input taxes are as follows.
1.
2.

VAT paid on a repair to the ship let under the charter hire
agreement
VAT paid in relation to the other ships used by the company

Rs.
2,500,000
8,680,000

Compute VAT payable by the company for the month of March 2013.
(b)

(10 marks)

Describe international transportation for the purpose of Value Added Tax.

(3 marks)
(Total 13 marks)

Question No. 05
(a)

In the year 2000 Mr. Wanigasuriya inherited two acres of marshy land from his late
father. Few years later he reclaimed the land at a cost of Rs. 3,000,000. Immediately
after the land was reclaimed he got an offer of Rs. 6,000,000 for the land which he
rejected. His intention was to realize the maximum possible amount from the sale of the
land. During the year ended 31 March 2013 he divided the land into thirty blocks and
realised a sum of Rs. 40,000,000 from the sale of all the blocks. He spent Rs. 200,000 on
advertising which was the only expenditure incurred in relation to the sale. The assessor
intends assessing the profit arising to Mr. Wanigasuriya as profit from an adventure.
Comment on the assessors intention.
(5 marks)

(b)

A company resident in the United Kingdom owns a web site which is used by business
entities to advertise their goods and services. During the year of assessment 2012/2013
the company received from Sri Lankan customers, who advertised their goods and
services through the web site, a sum of Rs. 24,000,000. To use the web site Sri Lankan
customers placed orders with the company in UK which were accepted in the UK by the
company. After acceptance the Sri Lankan customers remitted the relevant charges to the
company in UK.
State whether the UK company is liable to pay any tax in Sri Lanka on the profits it made
from the amounts received from Sri Lankan customers. Explain by reference to the
statutory provisions and decided cases.
(5 marks)
(8)

(c)

A partner of a firm of chartered accountants emigrated to Australia after transferring his

interest in the firm to the other partner who continues to carry on the professional
business as a proprietorship. The interest so transferred was valued at Rs. 10,000,000.
No cash was paid for the transfer of the interest but in terms of an agreement between the
two partners which was notarialy executed the partner who continues in the business
agreed to pay to the other fourty annuities of Rs. 300,000 each over a period of six years.
In terms of this agreement the partner paid a sum of Rs. 2,100,000 during year ended 31
March 2012 and claimed a deduction in respect of the same in the computation of his
assessable income on the basis that the payment is an annuity.
Explain whether you can consider the above payment as an annuity.
(5 marks)
(Total 15 marks)

Question No. 06
(a)

The assessor has received information that a foreigner whose tax amounting to
Rs. 8,000,000 is in default is about to leave the island for good without paying the tax and
he has Rs. 12,000,000 in a special deposit with Bank of Island-Metropolitan branch.
Explain the action that the assessor should take in the circumstances assuming that the
information is reliable.
(6 marks)

(b)

Explain the statutory rules in the Inland Revenue Act applicable to the recovery of tax
from the assets of a partnership in circumstances in which the tax payable by a partner is
in default.
(6 marks)
(Total 12 marks)

(9)