ascertainment of taxable income statutory …...rent income of rs. 230,000 and net dividend income...
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Ascertainment of Taxable Income
Statutory allowance and qualifying payments
Statutory allowance
The statutory allowance for any individual would be Rs. 500,000. This is a tax free allowance given to all
the citizens of Sri Lanka whether resident or not. Therefore in order to charge income tax an individual
should have an income in excess of Rs. 500,000.
Allowance for qualifying payments
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As per the schedule 10 above and the Section 33 and 34 of the Inland Revenue act no 10 of 2006 and the
amended acts, we can identify 16 categories of qualifying payments.
A. Donations to the government
Under this, donations to following organizations of persons are considered as qualifying
payments.
i. The government of Sri Lanka
ii. A local authority
iii. Any higher educational institute established or deemed to be established under the
Universities Act, No. 16 of 1978
iv. The Buddhist and Pali University or any higher educational institute established by or
under the Buddhist and Pali University Act. No 74 of 1981
v. A fund established by the government of Sri Lanka.
vi. A fund established by a local authority and approved by the Minister.
vii. A fund established by a Provincial council and approved by the Minister.
viii. The Sevana fund created and administered by the National Housing Development
Authority established by the National Housing Development Authority Act, No 17 of
1979.
ix. The Api Wenuwen Api fund established by Api Wenuwen Api Fund Act, No 6 of 2008
Here you are allowed to claim any amount of donation paid to the above persons in a financial
year as a qualifying payment, as well as carry forward any claimed donations to be set off
against future assessable profits.
B. Premium paid for Special Health Insurance
Any accrued premium paid been due for special health insurance policy to cover any incurable
decease is deemed to be a qualifying payment. There is no limit for this claim.
C. Expenditure on government development plan
Any expenditure or investment made on a project included in the development plan of the
government is considered a qualifying payment, subject to
- Prior written approval from the minister
- In accordance with such terms and conditions as specified by the minister having regard to
the development priorities of the government.
Here the maximum deduction from the assessable income would be Rs.25,000 in a year of
assessment. Any unclaimed balances can be carried forward to be set off in the next year and so
on.
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D. Donations to approved charities.
Any donation to an approved charity (approved by the minister and published in the gazette)
which is established to provide institutionalized care for sick and needy is deductible as a
qualifying payment.
E. Premium paid on Life and Medical insurance
- Life insurance policies not being pure endowment policy, with premium payable annually
over a period of not less than 3 years.
- Medical insurance other than (B) above.
Payment should be with in Sri Lanka.
Maximum deductible in a year of assessment for D & E
- Rs. 75,000 or
- 1/3 rd of assessable income, whichever is lower
No carry forward of unclaimed donations or premiums
F. Expenditure on Film production
Any expenditure incurred on films produced after 01.04.2007 Rs. 25,000,000 or on films
produced after 01.04.2008 Rs. 35,000,000 can be claimed as qualifying payments. Any
unclaimed amounts can be carried forward into the future.
G. 50% of the Investments in venture capital companies which enjoy a tax holiday.
1/3 rd of the investment or assessable income, whichever is lower.
H. Investment s in BOI approved companies under section 31 (2), prior to 01.04.2000 – unclaimed
balances. 1/3rd of assessable income
I. Expenditure on construction of cinema and equipping a cinema.
Up to a maximum of Rs. 25 million, unclaimed amounts can be carried forward.
J. Up grading and refurbishing of a cinema.
Up to a maximum of Rs. 10 million can be claimed, unclaimed balances can be carried forward.
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K. Investment made in any undertaking for the construction and sale of houses for the lower
income families.
- Should be approved by the Urban Development Authority or National Housing Authority.
- Floor area of each house should not exceed 500sqft.
No limit to the claim and the unclaimed balances can be carried forward to be set off in the next
year and so on.
L. Expenditure on house constructed or purchased before 01.04.2011.
- The unclaimed brought forward balance can be set off subject to a limit of
01. Rs. 100,000 or
02. 1/3 of assessable income whichever is lower.
M. Expenditure on community development project in an economically marginalized village as
identified and published in the gazette by the commissioner general.
Subject to maximum of Rs. 1 million – no carry forward
N. Investment not less than Rs. 50,000,000 in fixed assets in the expansion of certain undertakings.
Subject to a limit of 25% of the payment, Excess can be carried forward.
O. Investment in manufacturing business made after 01.04.2012
25% of the total payments, excess can be carried forward
P. Allowance on employment income, other the payments under section 4(1)(d).
Rs. 100,000 or excess employment income over Rs. 500,000 – whichever is lower
Order of priority
First claim the statutory allowance.
Next the qualifying payments not eligible for carry forward
Finally qualifying payments which are eligible to be carried forward
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Ascertainment of Assessable income
Deductible losses on trade, business, profession or Vocation and Interest,
Annuities, Royalties and Ground rent paid
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1. Deductible losses on trade, business, profession or vocation (Schedule 8)
Losses on trade, business, profession or vocation can be deducted on the following basis.
Rs.
- Total losses incurred during the year XXX
- Unclaimed losses brought forward from prior years (if any) XXX
A. Total Losses XXX
B. 35% of statutory income XXX
- Deductible loss lower of A and B XXX
Balance losses not deducted can be carried forward.
Other condition is, Profits of such trade should be taxable under the act.
However no losses can be claimed from employment income.
Ex.
Mr. Perera had an employment income of Rs. 550,000(PAYE Rs. 2500 deducted by the employer)
rent income of Rs. 230,000 and net dividend income of Rs. 90,000 for the financial year 2013/14.
In addition he was a partner at a private Montessori school , which had tax adjusted trading
profit of Rs. 2,000,0000 of which he is entitle to a 50% share. The partnership has paid tax at the
rate of 8%.
Mr. Perera also had brought forward trading losses from previous years amounting to Rs.
1,256,500.00
He has paid Rs. 84,000 as Life insurance premiums and donated Rs. 50,000 to an approved
charity during the year.
Calculate the income tax payable by Mr. Perera
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Annuities
In order to be deducted from statutory income, an annuity payment should have the following
characteristics.
i. It must be made with reference to the year though it may be paid in periodic
installments.
ii. Not be a receipt or accrual of a capital nature to the payee.
iii. Be made under a legal obligation.
iv. Be either recurrent or capable of recurrence.
v. Be pure income or profit of the payee.
Ex. J.M. Rajaratnam V CIR
CIT v Cowasjee Nilgiriya
CIR v D.B.J. De Silva
Ground Rent
These payments are created when free hold piece of land or a building is sold on a long lease.
Royalties
A royalty is a usage based payments made by one party (the licensee) to another (the licensor) for the
right to ongoing use of an asset, including an intellectual property. Royalties are generally agreed as a
percentage of gross or net revenues derived from the use of an asset or fixed price per unit sold of an
item.
Interest
Following conditions should be satisfied in order to claim Interest as a deduction from statutory income.
i. Loan proceed should have been utilized for the construction of any building or for the purchase
of any site for the construction of any building.
ii. The above condition in (i) should for the purpose of trade, business, profession or vocation.
iii. Paid to a bank licensed under the Banking Act or approved finance company or any other person
recognized by the commissioner general.
Recipient of such interest should declare such interest as income.
*** Any excess annuity, royalty, ground rent or interest paid over the statutory income for a year of
assessment shall be treated as a trading loss which can be claimed in the succeeding years of
assessment.
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Ex.
Dr. Ben had employment income of Rs. 640,000( PAYE Rs. 2,000 deducted) and rent income of Rs.
1,200,000 for the financial year 201314. In addition he had profit from distribution business of Rs.
600,0000, net dividend received from ABC Ltd, Rs. 180,000 and professional income from private
medical practice of Rs. 480,000 for the same year.
He had carry forward unclaimed losses from the distribution business of Rs. 1,300,000
During year he has made the following payments.
- Donation to Api Wenuwen Api fund Rs. 50,000
- Donation to an approved charity Rs. 50,000
- Premium on special insurance policy to cover incurable deceases Rs. 100,000
- General life and medical insurance premium of Rs. 60,000
- Rs. 5,000 per month paid to his spouse under a duly executed deed of separation.
Calculate Mr. Ben’s gross tax and the final tax payable.
Ascertainment of Statutory Income
As per the main income tax computation we have identified the following sources of income, in order to
calculate the statutory income.
i. Income from employment
ii. Income from trade, business, profession or vocation
iii. Net annual value and rent income
iv. Dividends
v. Interest
vi. Annuities, Royalties etc
vii. Income from any other source
Income from any other source
This is effectively “catching all close”. That is income which do not fall into any other category will be
charged under this. However profits of a casual and non recurring nature should not be included.
Cases
Wickramasingha v CIT
CIR v C.S.A. Namasivayam Chettiar
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Annuities, Royalties etc
Annuities
In order to be added to the statutory income, an annuity payment should have the following
characteristics.
i. It must be made with reference to the year though it may be paid in periodic
installments.
ii. Not be a receipt or accrual of a capital nature to the payee.
iii. Be made under a legal obligation.
iv. Be either recurrent or capable of recurrence.
v. Be pure income or profit of the payee.
Ex. J.M. Rajaratnam V CIR
CIT v Cowasjee Nilgiriya
CIR v D.B.J. De Silva
- Person paying such annuity shall deduct 10% from the annuity paid if the payment is in
excess of Rs. 50,000 per month or Rs. 500,000 per year. (other than for annuities paid to a
person aged 60 year or over)
- If the annuity is paid to a non resident person 20% withholding tax, shall be deducted.
- Withholding certificate shall be issued to the recipient and he can claim the tax deducted as
a tax credit.
Royalties
A royalty is a usage based payments made by one party (the licensee) to another (the licensor) for the
right to ongoing use of an asset, including an intellectual property. Royalties are generally agreed as a
percentage of gross or net revenues derived from the use of an asset or fixed price per unit sold of an
item.
- Person paying such Royalty shall deduct 10% from the Royalty paid if the payment is in
excess of Rs. 50,000 per month or Rs. 500,000 per year. (other than for exempt royalties)
- If the royalty is paid to a person outside Sri Lanka person 20% withholding tax, shall be
deducted.
- Withholding certificate shall be issued to the recipient and he can claim the tax deducted as
a tax credit.
Exempt royalties
1) Royalty received in foreign currency from outside Sri Lanka.
2) Receipt of royalty by a non resident person from BOI company where the agreement was
entered before 01.04.2004
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****Other sources of income such as discounts or premiums will also be taxable as separate sources
of income.
Interest income
Interest income could arise for the investments including the following
01. Deposits with banks or financial institutions
02. Debt securities
03. Loans
Computation of interest income should be on
01. Accruals basis.
02. Receipt basis if there is a condition to say that no interest will be payable before the maturity.
03. Irrecoverable interest should be excluded.
Banks and financial institutions will deduct withholding tax at the rate of 10%, 2.5% or 0% depending on
the disclosed income of the recipient of interest.
Interest income which was subjected to WHT will not of the assessable income in the hands of the
recipient if the recipient is an individual.
The person who deducts the withholding tax should issue a certificate of tax deduction, where the
recipient can claim tax credit.
Exempt Interest
a) Interest on special account, with the approval of Central Bank opened with funds obtained by
exchange of foreign currency held outside Sri Lanka.
b) Interest on FCBU accounts
c) Interest on foreign currency account
d) Interest to senior citizens over the age of 60 years up to Rs. 500,000 is exempt from tax, if those
deposits are held in the state banks.
e) Interest from Reconstruction Bond.
f) Interest from Sri Lanka nation building bond.
g) Interest from Motherland developments bonds.
h) Interest from Investment made outside Sri Lanka.
i) Interest to person outside Sri Lanka from loan granted to a person in Sri Lanka.
j) Interest on Treasury bond investment External Rupee account.
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Ex.
Mr. Shantha’s income and expenses for the year of assessment 2013/14 are as follows he is 61 years of
age.
- Taxable employment income Rs. 720,000 ( PAYE Rs. 5,000 deducted by employer)
- Gratuity and retirement benefits received, at retirement Rs. 2,500,000( Retired after 18
years of service at ABC Bank Plc)
- Trading profit adjusted for tax from tea estate in Bandarawela, Rs. 860,000
- Rent income Rs. 680,000
- Loss from the tourist guest house in Kandy Rs. 852,000
- Dividend received Rs. 360,000 from PQ Plc (Net)
- Interest paid to Lanka Development Bank for loan obtained to construct the tourist
guesthouse in Kandy Rs. 248,350.00
- Medical and life insurance premiums paid Rs. 90,000
- Annuity received for the sales of partnership share in a consultancy firm which Mr. Shatha
was partner 5 year ago. This was a legally binding contract for repayment of partnership
share on an annual basis of Rs. 100,000 per annum.
- Mr. Shantha’s tax Liability for 2012/13 was Rs. 200,000. Income installments paid for the tax
year 2013/14 was as follows. First installment on the due date, 2nd installment 40 days
before the due date, 3rd installment 10 days before the due date, 4th installment 35 day
before the due date. You may assume that Mr. Shantha has claimed the early payment
discount where ever possible.
Calculate Mr. Shantha’s Gross income tax and the final tax payable/refund claimed.
Dividend Income
Dividends may be paid in the following forms
Money or an order to pay money
Shares in any other company
Debentures in that company or any other company
Script dividend
Dividends are subjected to 10% WHT unless the dividend is paid out of dividends received form another
company.
Dividends paid to certain identified shareholders will be tax free.
- Dividends of certain BOI company which enjoy tax holidays may also be exempt from tax.
- Dividends from unit trusts or mutual funds are also exempt.
- Foreign dividends received will also be exempt.
Certain dividends are taxable at reduced rates.