Taxation: Basis Period Of Assessment, Capital Allowance And Loss Relief

The following topics will be discussed in this series, those topics are: -

         a. Basis period of assessment

         b. Capital allowance

         c. Loss relief.

Assessable Profit

The accounting profit arrived at in the trading, profit & loss account is not usually the same as “tax profit”. This is because in ascertaining the accounting profit some expenses which are not allowed for tax purposes may have been reported and some income included in the accounting profit are tax-free.


In simple terms, assessable profit is simply computed as adjusted profit less losses (unrelieved c/f) before taking into consideration capital allowances, balancing allowance and or balancing charge. This is also a profit in which education tax is treated at 2%. It should be noted that treatment of this profit depends on the tax type as companies income tax treatment differs from petroleum profit tax treatment.

Adjusted profit is computed as below:
Net Profit (as per account)                                              ****
Add:   disallowable expenses taxable income (not reported)
Less: allowable expenses (not reported) non-taxable income (reported)

Meaning of Basis Period

Basis period is simply time within which an assessment is raised/computed on a taxpayer for the purpose of establishing the correct amount of tax liability in a particular period. Basis period can also be seen as the basis upon which tax liabilities would be computed. Every business has its accounting year end (accounting period) as it suits the company’s operations except for few industries in Nigeria where the permanent year end is determined by the applicable authority. e.g Banks.

More so a company’s accounting date may not correspond with the government fiscal year; which is 1st January to 31st December. Based on the above, it can be said that for the sake of equity; which is one of the qualities of the Nigerian tax system, the Nigerian government through the TaxAuthorities provides for the basis upon which taxes would be computed on a common ground.

Types of Basis Period
A Careful study of the provisions in the Nigerian tax laws (CITA,PPTA,CGTA,PITA etc.) show that we basically have two (2) types of basis period applicable to every company liable to tax. They are:
• Preceding Year Basis
• Actual Year Basis

Preceding year Basis Period
Section 29 (1) of the Companies Income Tax Act, C21 LFN 2004 (as amended) provides that; ….the profit of any company for each year of assessment from such source of its profits (hereinafter referred to as the “assessable profits”) shall be the profits of the year immediately preceding the year of assessment from each such source.

This simply means that the profit to be subjected to tax in a particular year will not be that earned that same year but the profit of the immediate past year. Assessable Profits are computed on the amount of the profits of the year ended on that day in the year preceding the year of assessment.

Note that for companies, profit is being ascertained on an annual basis. This means that every basis period determined on preceding year basis must be up to 12 months ending on a company’s permanent year end.

Under normal circumstance, the basis period is the same as the accounting period. What differs are the “accounting year” and “tax year”.




Example:
Determine the tax year and basis period for company that has just filed 2013 financial statement, having 30th September as its permanent year end. The company has been in operation for over five years.

Solution:
• Tax Year: 2014
• Basis Period: 1/10/2012 – 30/9/2013

Actual Year Basis Period
This simply means that the months in the basis period of a year of assessment shall be within the same year. However, unlike preceding year basis period, the year of account will coincide with the year of assessment.

Considering the earlier example, the year of assessment will not be 2014 but 2013 and the basis period will be 1/1/2013 – 31/12/2013.

Taxes that are assessed on actual year basis include: Petroleum Income Tax, Capital Gains Tax, Personal Income Tax etc.

Normal Basis Period
A basis period is considered to be normal if the following conditions are fulfilled:

• The number of months in the basis period must be exactly twelve (12) because year of assessment literally means twelve months

• The basis period must have commenced the day after the end of the previous one. There must be continuity

• There must be only one permanent year end.

Example:
Consider a company whose permanent year end is October 30 every year. What will be the basis period for assessable profits for 2012 to 2014 years of assessment?

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

It is worthy of note that it is only a business in continuous operation (say over 3 years) and that has neither changed permanent year end nor cease operations that will have a normal basis period.

Abnormal Basis Period
Any basis period that does not fulfill the conditions stated under the normal basis period is said to be abnormal. An abnormal basis period can be obtained under the following circumstances:
• Commencement of a new business
• Change in the accounting date
• Cessation of a business

The above requires special treatments as adequately provided for in the relevant tax laws

Commencement of a New Business
Section 29 (3)(a-e) provides that;

The assessable profits of any company from any trade or business for the year of assessment in which it commenced to carry on trade or business (or in the case of a company other than a Nigerian Company, for the year of assessment in which it commenced to carry on the trade or business in Nigeria) and for two following years of assessment (which years are in this subsection respectively referred to as “the first year” “the second year” and “the third year” shall be ascertained in accordance with the following provisions: 

(a) First Year: the assessable profits shall be the profits of that year(i.e. from date of commencement up to the end of the same year)

(b) Second Year: the amounts of the profits of one year (i.e. 12 months) from the date of commencement of the business.

(c) Third Year: Shall be computed in accordance with Section 29 (1) as earlier highlighted. This means the basis period will be on a preceding year basis except otherwise provided.

(d) For the third year, it may not be possible to obtain a realistic basis period as the period might begin in a month earlier than the month of commencement. This arises where the month of commencement is after the month chosen as the permanent year end. In such situation, the repetitive rule will be applied.

Example:
OWOGOKE Limited commenced business on 1st October, 2002 and makes up its account annually to 31st May. Its assessable profits were as follows:
                                                                               N
Period ended 31st May, 2003                          240,000
Year ended 31st May, 2004                              516,000

Solution
OWOGOKE Ltd – Computation of Assess. Profits
YOA           Basis Period                          Assess Profit (N)
2002           1/10/02 – 31/12/02                 (3/8 * 240,000)       =         90,000
2003           1/10/02 – 30/9/03               (240,000 + 4/12*516,000)    =    412,000
2004           1/6/2002-31/12/3                (240,000 + 4/12*516,000)    =    412,000

Noticeably, the basis period for 2004 YOA begins in a month earlier than the date of commencement. The general practice is to repeat the basis period for the second year.

According to the aforementioned section, a new business is entitled, on giving notice in writing within two years after the end of the second year to the Board to require that the assessable profits both for the second year and third year (but not for one or other only of those years) shall be the actual profits of the respective years of assessment (i.e. profits of 1st January to 31st December of the second and third years of assessment). This is same as actual year basis discussed earlier.

In other words, the taxpayer reserves the right to be assessed to tax in the second and third year on actual year basis instead of the rule highlighted under the commencement of business.

Naturally, the taxpayer will exercise this right only where it may result in a lower tax liability.




De-rock Ventures commenced business on November 1, 1999 and decided to prepare its accounts to April 30 annually. Its adjusted profits were as follows:
Period ended 30th April, 2000                        420,000
Year ended 30th April, 2001                           480,000
Year ended 30th April, 2002                           600,000

Compute the assessable profits for the first 3 years of assessments and decide whether or not De-rock should exercise its right of election.

Solution
De-rock Limited
Computation of Assessable Profits
a. Original Assessment (without Election)
YOA           Basis Period                         Assess Profit (N)
1999          1/11/99 – 31/12/99                 (2/6 * 420,000)      =   140,000
2000          1/11/99 – 30/10/00                  (420,000 + 6/12*480,000)    =  660,000
2001          1/11/99 – 30/10/00                   (Repeated)    660,000
Addition of the assessable profits of the second and third years of assessment is 1,320,000

1. Revised Assessment (on election)

NOTE: Only the assessable profits of the second and third year will change if the right of election is exercised.
YOA             Basis Period                               Assessable profit (N) 
2000              1/1/00 – 31/12/00             (4/6 *420,000 + 8/12*480,000)   =   600,000
2001     1/11/99 – 30/10/00                 (4/12 *480,000 + 8/12 * 600,000)  = 560,000
Addition of the assessable profits of the second and third years of assessment is 1,160,000

Decision
It is to the advantage of De-rock Ventures to exercise its right of election to be assessed on the profits of 2000 and 2001 years of assessment since this result in tax savings of N160,000 (1,320,000 – 1,160,000)

Note: Based on the requirement of the law, the right of election must be exercised on or before 31st December, 2002 (i.e. within two years after the end of the second year – 2000)

31st December, 2002 is 26 months from the date of commencement. Can we now infer, as against the requirement of the law,that the first set of returns can hold till 31st December, 2002?

Revocation of the Notice of Election
The law equally gives a taxpayer the opportunity to revoke his earlier request for an election by giving notice in writing to the FIRS within twelve months after the end of the third year of assessment.

Example
A&B Limited commenced business on 1st March 2001. it makes up accounts annually to 31st August and its profits as agreed for tax purposes, were:
Period ended 31st August, 2001     300,000
Year ended 31st August, 2002         720,000
Year ended 31st August, 2003         900,000

Solution
A&B Limited
Computation of Assessable Profits
Original Assessment (without Election)
YOA           Basis Period                       Assess Profit (N)
2001             1/3/01 – 31/12/01            (300,000 + 4/12 * 720,000)    =     540,000
2002             1/3/01 – 28/2/02              (300,000 + 6/12*720,000)      =     660,000
2003             1/9/01 – 31/8/02               720,000
Addition of the assessable profits of the second and third years of assessment is 1,380,000

Revised Assessment (on election)
YOA              Basis Period                 Assessable Profit (N)
2002             1/1/02 – 31/12/02         (8/12 *720,000 + 4/12*900,000)   = 780,000
2003             1/1/03 – 31/12/03         (8/12 *900,000 + 4/12 * 960,000)  =  920,000
Addition of the assessable profits of the second and third years of assessment is 1,700,000

Decision
The total assessable profits for the second and third YOA under commencement rule is N1,380,00 which is lower than N1,700,000 under election. Therefore, it is in the interest of A&B Ltd not to exercise its right to avoid payment of higher tax.

However, if an application for election had already been made, the company should renounce it in writing before the expiration of 12 months from the end of the third year of assessment (i.e. on or before 31st December, 2004).

Summary of Assessable Profits
YOA                    Assessable Profits (N)
2001                     540,000
2002                     660,000
2003                     720,000

Basis Period When There is a Change of Accounting Date

For an old established business, the basis of assessment of profit is preceeding year basis. However, the proceeding year basis of assessment cannot be rigidly applied whenever there is a change of accounting date. A normal accounting period may not have ended in the proceeding year because whenever there is a change of accounting date, it is earlier that account are prepared for a period of more than twelve(12) month to the new accounting date or alternatively, two sets of account are prepared to end in the same tax year. One for twelve month to the old accounting year end, the other for less than twelve months to the new accounting year end, and in either situation, special rules apply in determining the basis period for the relevant years of assessment.

Rule on a Change of Accounting Date 

Whenever a company fails to make up its accounts to its normal year-end, for the year of assessment in which that failure occurs as well as the following two years, the assessable profit of the company are computed on such basis as the board in its discretion may decide.

The manner in which the board exercises its discretion in practice is as follows: -

a.       Determine the year of assessment in which the company first failed to make up it accounts to its normal year end.

b.      Identify the two (2) years of assessment next following (a) above.

c.       Compute assessable profits for the three (3) years of assessment in (a) and (b) above on the old accounting date.

d.      Compute assessable profits for the three (3) years of assessment in (a) and (b) above on the new accounting date.

e.       Obtain the sum of the assessable profits for the three (3) years for each of the computation in (c) and (d) above.

f.       The practice of the revenue is to choose the higher of the assessable profits for the 3 years in (e) above.

Basis Period When There is a Ceassation of a Business

On cessation of trade or business by a company, the basis of assessment of profits for the year of cessation (ultimate year) and the immediately proceeding year of assessment (penultimate year) is as follows:

YEAR OF ASSESSMENT                          BASIS OF ASSESSMENT

Ultimate year (year of cessation) : - Actual profits for the year of cessation, 1 January – date                                                            of cessation   

Penultimate year (immediate year before cessation):- Higher of the assessable profits based on:

     a. Actual year basis and

     b. Proceeding year basis

Practice Question on Cessation of a business

QUESTION 1

Femi limited ceased business on 31st October 1994, its adjusted profits/ (loss) for tax purposes were as follows:

Year ended 30/9/91                                                      6,000

Year ended 30/9/92                                                      9,000

Year ended 30/9/93                                                    24,000

Period 1/10/93 to 31/10/94                                         19,500

    Compute the assessable profits for the year of cessation as well as the penultimate year.

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