Return of personal income .. and confirmed by the Overseas Service Act, ; (Inserted by (y) the income of any individual or person in relation whom the. The Personal Income Tax (Amendment) Act was officially gazetted on Tuesday 31 January with an effective date of 14 June Many employers. AMENDMENTS TO THE PERSONAL INCOME TAX ACT. February Introduction. The President of the Federal Republic of Nigeria recently signed into law.
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Appeal provisions of Companies Income Tax Act to apply with certain . way of personal emoluments) that income shall be liable to tax under this Act or under. This Act may be cited as the Income Tax Act, , and shall come into either individual will act in accordance with the intentions of the other;. (b) that of. All references in the Income Tax Act to the Hotel Development Act, (formerly Ch. ) have .. “earned income” means any income of an individual arising in.
Opportunities for tax planning under the Income Tax Act have already been highlighted above. Several cases followed since Ramsay and after Furniss to either limit or extend the ruling in Ramsay. To a large extent, occasional returns seems to have been replaced by the concept of best judgment rule where the Commissioner is granted with wide discretion in terms of making adjusted assessments for dubious tax returns. Second, while the Income Tax Act defines literally every gain, monetary and non-monetary, to be income for the purpose of income taxation and therefore making it difficult for a taxpayer to devise means to mitigate his tax liability, the Income Tax Act is not necessarily a tight-proof legislation in terms of sealing off possible avenues of avoiding tax. S 1, 5, , 18, , 23, 28, , 42, , , Sch 6. Third, is that the Commissioner of Income Tax TRA has sweeping powers under section 35 of the Income Tax Act in terms of declaring dubious tax mitigation schemes as taxable transactions. S 1, , 8, , 15, , 24, 27, 36, 49, 64, Sch ,
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S 1, , , , 28, 36, 42, 57, 68, 74, Sch , 4. S 1, 5, , 20, 22, 36, 38, 49, 56, 66, 70, 83, 89, Sch 2, 4. S 1, 6, , 36, , Sch , 4. S 1, , , 19, , 49, 66, 70, , 93, , Sch 4, long title. The government of Tanzania has strived to bring income tax relief through the Finance Act , Act No. This failure is due to the inconsequential nature of the tax rate cut. This article examines tax planning scheme in respect of personal income tax payable by employed.
The article excludes tax planning on corporate income tax since this is a more flexible tax planning source and thence less controversial.
This however is not to say that tax planning for corporate taxation is not paramount, because tax savings from corporate taxation can be used to scale up employees salaries.
The attempt to the extent possible is to review a whether there are possible avenues for personal-income tax- planning, b how much tax savings is likely to be realized under the personal-income tax-planning 6 Taxation of Retirement contributions referred to in section 7 2 d of the Act. The ongoing Constitutional Reform Process in Tanzania that started five years ago has by way of example, not draw attention to tax agenda despite the public outcry with regard to rampant fiscal abuses and biting tax burden in the country.
Gloppen S. At practice level, this disconnection between the public and tax themes affects willingness of members of the Public to question taxing powers, legislation engendered thereto and tax assessment made thereunder. The result is little public awareness on taxing matters. The answer to this last query should help draw a line between acceptable and unacceptable tax planning. These avenues can be pursued in some of the following ways.
First, exploitation of employment income sources excluded from monthly taxable income under section 7 2 of the Income Tax Act The deductible allowances means that tax is imposed on the net instead of gross income which reduces taxable amount.
Besides these limited avenues for tax planning, the restrictive nature of the Income Tax Act makes it extremely difficult to mitigate tax liability in respect of employment income.
This is contrary to the common notion that tax planning is a seemingly simple and innocent task. This notion is largely a result of the hangover of the Income Tax Act of which had a narrow definition of income and which provided generous exclusions; a loose drafting that simplified tax planning. Conversely, the Income Tax Act has sealed the fate of tax planners through the widening of the statutory definition of income and limiting the scope of exclusions, rendering it practically impossible to realize a tax free payment.
The notion about the simplicity of employment-income tax-planning also stems from the wide range of recently introduced exempted employment sources under the income tax amendments of ; amending or rather adding section 7 3 k. These new amendments exclude housing, transport allowances and other several other allowances from income taxation9, that is, from PAYE While these exemptions undoubtedly bring a great deal of tax relief, they are confined to employees in the public sector.
They do not extend to the private sector employees for whom employment-income tax remain a challenge. This point stresses that tax planning is not a copy-cat scheme and generalizations must be avoided of tax planning experiences from one institution to another, as the case of exemptions availability between public and private institutions just demonstrated.
The type and size of organization, nature of activities and even financing options are some of the factors determining the feasibility of a tax planning scheme for one organization from another. This description should also enlighten a reader on the scope of inputs and processes involved in tax planning.
In place of annual or twice yearly collections, tax was deducted by employers from wages on a weekly or monthly basis. Taxable employees were given code number. In today use, PAYE has become synonymous with personal income tax; essentially, a short form for personal income tax. This may be partial or complete exemption, and in the case of the latter exemption provides absolute tax free payments.
Deductible allowances however are only available to income earned by means of doing business: Part-time workers would therefore preferably label them as consultant or offer such services through a company so that their services are considered that of an independent contractor and not an employee. This is termed the re- characterization of income sources and may or not work depending on the totality of the circumstances.
Second, while the Income Tax Act defines literally every gain, monetary and non-monetary, to be income for the purpose of income taxation and therefore making it difficult for a taxpayer to devise means to mitigate his tax liability, the Income Tax Act is not necessarily a tight-proof legislation in terms of sealing off possible avenues of avoiding tax. Given the complexity of tax legislation design, as a matter of principle every tax legislation has a loophole that allows a taxpayer to arrange his transactions favourably or arrange them in such a way that they fall outside the statutory definition of income or attracts less taxation.
This requires an in-depth interpretation of the provisions of the Act. Third, in case of a doubtful tax-mitigation scheme whose implication is not clear, the scheme can be confirmed through the mechanism of private ruling under section of the Income Tax Act.
Tax planning attempts are confronted by a number of towering hurdles. First, tax planning is not an exact science.
It is based on the best interpretation of the fiscal laws and a calculated prediction of the judgment of the tax authorities.
Third, is that the Commissioner of Income Tax TRA has sweeping powers under section 35 of the Income Tax Act in terms of declaring dubious tax mitigation schemes as taxable transactions. As part of the sweeping powers, the Commissioner of Income Tax has the power to make adjusted assessment under section 96 of the Act.
Under this section, the Commissioner may adjust an assessment within three years of making an initial assessment. This essentially means that a tax mitigation scheme that has generated tax savings only becomes safe after the lapse of three years.
Four, certified public accountants and registered tax consultants occasionally express fear of possible suspension or penalization from the professional bodies such as the NBAA [National Board of Accountants] as a consequence of advising or assisting in implementing dishonest tax saving schemes in the form of unacceptable tax planning.
All these considerations need to be consciously borne in mind when implementing a tax scheme including an employment income tax scheme. Opportunities for tax planning under the Income Tax Act have already been highlighted above.
This is the main framework for tax planning in respect of income tax under the Act. The exclusions allow room for an employer to emphasize on making payments that are tax free; b but tax planning can also utilize the characterization of employment income as business income to reduce the taxable amount, as already explained in the introduction.
All these are discussed sequentially below. Since out-of-station payments are not taxable, this avenue provides an open room for arranging payments in the form of per diem and travelling allowances.
As well and in relation to part-time lecturers in Universities, per diem and travelling allowances may be structured to minimize tax liability. Since travelling allowances and accommodation allowances for from out-of-station part-time lecturers are not taxable, but teaching allowances are; one may consider raising the travelling and accommodation allowances while lowering the per teaching allowance rates.
Besides, the tax authorities may deny the per diem and teaching allowance rates based on the countrywide experience or official per diem policy of that particular university when it comes to its full time lecturers. Second, focus is on advance salary in section 27 1 c of the Act.
Advance salary payments are tax free considerations given that such loans, so issued over a period of 12 months, do not exceed three months basic salary of the borrower. Employees can well receive payments under the label of advance salary to qualify for exemption from tax.
The set back, however is that this option may stress the accounting departments since it hikes the amount of paperwork and records involved in managing the loan transactions: It may be advisable to increase these forms of allowances or hike the amount payable under these allowances, as part of remuneration incentives to employees. One challenge is that the scope of payments that fall under this category in work places may be limited, thereby restricting the tax savings realized under this tax planning option.
This option, however, is feasible so long as it involves a small number of employees and so long as it is used sporadically to avoid raising suspicion on the tax savings motives of the arrangement by the tax authorities.
Fifth, assigning some activities to some employees in the capacity as consultants, so as to convert employment income to business income which is another seeming avenue for tax planning. This is possible for a limited number of transactions, such as cases where a staff member of an Institution is appointed to a special duty as a legal officer for the Institution.
This choice of planning is not without its hazards. First, characterization may place a burden on the payee to register a business entity, a process that may introduce its own costs and bureaucracies.
Second, the TRA is empowered to conduct occasional returns12 to match financial records of the taxpayers and his payors to satisfy itself as to the correctness of the financial statements. This may therefore counter the effect of the tax planning. Effort is made in this Part to sum them up in a more chronological order.
Second, the unavailability of deductible allowances under section 11 to 19 of the Act limits chances of tax planning. These are deductible costs applied in the course of deriving income and are available to business and investment income. The tax philosophy does not seem to recognize the exorbitant cost of living incurred by employees such as housing, transport, child education etc. The denial of the deductibility of the living costs in taxing employment income severely undermines the maneuverability of tax planning.
Third, exempted amounts listed under the second schedule of the Income Tax Act do not give any obvious or meaningful tax relief to employment income receivable by employees.
As already seen, the only exemption on employment allowances under section 7 3 k [introduced by the Finance Act ] cover public sector employees alone.
If these exemptions were extended to the private sector, it could save employers up to half of the PAYE liability and allow regular salary increments to motivate the lowly 12 This was the position under the old law, the Income Tax Act which in order to provide the tax authorities with information to enable them to trace potential taxpayers and prevent evasion of tax, empowered the Commissioner for Tax to require any person to furnish returns containing details of payments made to other persons.
The aspect of occasional returns however does not seem to have been carried over to the new Income Tax Act To a large extent, occasional returns seems to have been replaced by the concept of best judgment rule where the Commissioner is granted with wide discretion in terms of making adjusted assessments for dubious tax returns.
The exempted income sources under the Finance Act include: But the nature of these exclusions makes them of little or no use for tax planning. For instance, very few mid-senior employees tend to benefit from the personal use of office car; and the provision of cafeteria services are offered by a very limited number of employers. First, is in relation to research supervision allowance for private university lecturers. This article failed to confirm the common impression that supervision allowances, except for public university lecturers,13 are tax free payments.
This is based on the following construction of the Income Tax Act Second, inconclusive findings are also traced to one tax planning method, notably cash payments. This is one of the contentious areas where employees consistently argue that offering cash payments through the cashier engenders tax free payments.
This is a false premise ab initio. Accounting methods are founded on the basis of debit and credit entries which eventually culminate into financial statements. These entries show what has been earned, what has been expended and what has been paid. These entries are the records that tax authorities review and audit in determining the taxable income.