Example: The permanent year end of Elephant Nigeria Ltd is October 30 every year. Calculate its basis period for assessment years 2012 to 2014.
Suggested solution:
Tax Year Basis Period
2012 1/11/2010 – 30/10/2011
2013 1/11/2011 – 30/10/2012
2014 1/11/2012 – 30/10/2013
Basis period and permanent change in accounting date
Basis periods play a significant role where there is a permanent change in accounting date of a business.
Every taxpayer is free to change his/its accounting date as and when it pleases and the Revenue is not empowered to reject a permanent change. However, a Relevant Tax Authority should be notified of the change where it is going to be permanent.
If the change is temporary; and the taxpayer intends to revert to the old date for the following accounting period, the assessable income/profits for all years of assessment concerned should continue to be based on the result of periods of 12 months ended on the old accounting date within the relevant preceding year. A business can revert to the old accounting date where the scheme does not pay off.
Where there is a permanent change in accounting date, the year of assessment in which the change occurs and the two years of assessment following are used to determine the basis period. The Tax Authority has the power to compute the assessable profits on the basis of the old and the new accounting dates for the three relevant years and will decide on the alternative that produces a higher assessable profit.
The three years of assessment beginning from the year of change are the Revenue’s discretionary years i.e. the years the Revenue chooses as the most favourable to it in terms of tax to be collectible. The reason for the discretion is to ensure that government obtains the best terms possible from the change and to also ensure that none of the affected assessment is based on the profits of more than 12 months. Therefore the three basis periods should be re-worked from commencement along the line of the new date.
A change in accounting date will have one of the following two effects:
· if the new date is later in the income tax year than the old one, there will be a gap in basis period and a tendency to omit the profit of the period of gap from assessment.
· if the new date is earlier in the income tax year than the old one, there will be an overlapping basis period; the profits of some period will be taxed twice.
Cessation
As for cessation of a trade, the last two assessment years are used in the computation. Section 29 (4) CITA.
Basis period and capital allowances
Capital allowances are calculated by reference to the basis period of the year of assessment. In other words, the basis period is the year of expenditure which is normally the preceding year.
In the case of a trade or business:
•where two basis periods overlap, the period common to both is deemed to fall in the earlier basis period;
•where two periods coincide, they shall be treated as overlapping, and the basis period for the earlier year of assessment shall be treated as ending before the end of the basis period for the later year of assessment;
•where there is an interval between the end of the basis period for one year of assessment and the basis period for the next year of assessment then, unless the second mentioned year of assessment is the year in which such individual permanently ceases to carry on the trade or business, the interval shall be allowed to be part of the second basis period; and
• where there is an interval between the end of the basis period for the year of assessment preceding that in which the trade or business permanently ceases to be carried on by such individual and the basis period for the year in which it so ceases, the interval shall be deemed to form part of the first basis period.
Basis period and balancing allowance
There is a close relationship between balancing allowance, balancing charge and the basis period. A balancing allowance is the allowance given to any company, which disposed of any of its assets, and where the residual value of the asset is less than its disposal value.
The circumstances in which balancing allowances or balancing charges can be made are stated in Paragraphs 10 and 11 Fifth Schedule of Personal Income Tax Act, Paragraphs 9 and10 of the Second Schedule of CITA and Paragraph 8 of the PPTA
Paragraph 9 of the Second Schedule of CITA provides that ‘‘where in its basis period for a year of assessment a company owning an asset, which has incurred in respect thereof qualifying expenditure wholly, exclusively, necessarily and reasonably for the purposes of a trade or business carried on by it, disposes of that asset, an allowance (hereinafter called ‘‘a balancing allowance’’) shall be made on that company for that year of the excess of the residue of that expenditure, at the date such asset is disposed of, over the value of that asset at that date.’’ Provided that a balancing allowance shall only be made in respect of such asset if immediately prior to its disposal it was in use by such owner in the trade or business for the purpose of which such qualifying expenditure was incurred.
Basis period and balancing charge
A charge made when the value from an asset disposed of exceeds the residual value of the asset. In a case where the proceeds of an asset at disposal is greater than the amount for which it was acquired then the balancing charge will be restricted to the amount that has been granted as allowance on the asset.
Paragraph 10 of the Second Schedule of CITA provides that ‘‘where in its basis period for a year of assessment a company owning an asset, which has incurred in respect thereof qualifying expenditure wholly, exclusively, necessarily and reasonably for the purposes of a trade or business carried on by it, disposes of that asset, a charge (hereinafter called ‘‘a balancing charge’’) shall be made on that company for that year of the excess of the value of that asset, at the date of its disposal, over the residue of that expenditure at that date.’’ Paragraph 9 of the PPTA and the Fifth Schedule of PITA have similar provisions.
The current system of assessing profits on preceding year basis has been criticised and suggestions have been made to replace it with the adoption of a current year estimated tax similar to the taxation of employment income or the petroleum profits because the system amounts to the taxation of ‘‘paper profits’’ rather than ‘‘real income’’.
If the suggestion is embraced, it may improve voluntary compliance.
Teju Somorin
