Question

Principles of Caribbean Tax and Tax Management:

Brick & Stone
Income Statement for the year ended 31 December 2010
	Notes	$	$
Sales			2,500,000
Cost of Sales	1		1,100,000
Gross Profit			1,400,000
Expenses
Salaries & Wages	2	760,000
Employer Social Security Contribution		2,400
Rent and Rates	3	240,000
Insurance		50,000
Maintenance		120,000
Depreciation	4	55,000
Los on Disposal of Vehicle	5	10,000
Telephone	6	35,000
Electricity	7	54,000
Utilities		70,000
Entertainment	8	100,000
Donations	9	85,000
Provision for Bad Debts	10	80,000
Fines and Penalties	11	15,000
Drawings		105,000	1,781,400
Net Profit/ (Loss)			(381,400)

Brick & Stone

Notes on the Income Statement

1. The cost of sales includes goods valuing $250,000 that were purchased for Mr. Stone’s personal use

2. Salaries & Wages include $25,000 per month, and $20,000 per month, paid to Mr. Stone and Mr. Brick respectively.

3. $65,000 of the rent relates to the private dwelling of Mr. Brick’s wife

4. The rates of depreciation n the fixed assets of the business are below those given in the Wear and Tear schedule of the Income Tax Act. The Wear and Tear allowance total 35% of qualifying assets valuing $300,000

5.The partners agreed to dispose of an old pick up truck with a net book value of $35,000 for $25,000. The pick up had a tax written down value of $30,000

6. The telephone expense includes 20% for private calls made from Mr. Stone’s cellular phone.

7. The electricity relates to the private dwelling of Mr. Brick

8. Entertainment expenses relate solely for the promotion of the business to new and prospective customers

9. Donations of $60,000 were made to a local political party to fund its campaign. The remainder was donated to an approved local children’s home.

10. The partners could not determine if all of the customers would be able to settle their bills on time so a general provision of $80,000 was made to cushion the effect of any debt going bad.

11. Fines and penalties include traffic offences of $5,000 and penalties $10,000 for non filing of VAT returns for the period January to march 2010

Note that the business was owned solely by Mr Brick and registered in Trinidad and Tobago as a Sole Trading business in 2009. However, through continuous growth, Mr. Brick decided to enter into a partnership agreement with Mr. Stone, thus the status of the business was changed in 2009. The partnership agreement stated that the partners are to share profit and loss in the ration 45:55.

Additional Information:

- Mr. Stone is a director for a local company and received gross emoluments of $250,000 per annum; payroll taxes amounted to $15,000 and are deemed to be correct

- Personal allowance if $60,000

- Income tax rate is 25%

- Mr. Brick rents his private dwelling for $15,000 per month for 8 months with effect from May 1, 2011

- The partners each paid estimated obligations f $10,000 per quarter on March 31, June 30, September 30, and December 31.

Tip: The income tax rate is 25% and the income tax threshold is $1,500,000.

REQUIRED:

b. Given the information provided, compute the tax liability of Mr. Brick and Mr. Stone.

c. Brick met in a motor vehicle accident and died January 1, 2017. Stone asked for your professional consultation on the business as a going concern. What would your consultation to Mr. Stone be?      

Answer 1

Part a) Calculation of Tax Liability of Both Partners

Working Note:- Income Statement for year ended 2016

Sales 2500000

COGS 1100000

Less:- Personal use for Stone 250000 850000

Gross Profit 1650000

Expenses

Salaries 760000

Less: Stone 300000

Brick 240000 220000

Employer NIS Contribution 2400

Rent 240000

Less:-Brick Personal 65000 175000

Insurance 50000

Maintenance 120000

Depreciation 105000

Loss on Disposal of asset 5000

Telephone 28000

Utility 70000

Entertainment 100000

Donation to Local Party 60000

Provision for Bad Debts 80000

Penalty 10000

Drawings 105000

Book Profits 519600

Total Tax by Partnership Firm @ 25%= 129900

Brick's Tax @ 45%= 58455

Stone's Tax@ 55%=71445

Calculation of Total Income of Brick

Salary drawn 20000*12 240000

Tax @ 25% 60000

Calculation of Total Income of Stone

Salary drawn 300000

Emoluments as Director 250000

Personal Allowance 60000

Less: Payroll Taxes 15000

Total Income 595000

Taxes @ 25% 148750

Part a) Tax Liability for Brick

Tax on Salary 60000

Tax in Partneship Firm 58455

Total Tax Liability 118455

Tax Liability for Stone

Tax on Salary 148750

Tax in Partneship Firm 71445

Total Tax Liability 220195

Part b) When Partner dies, Partnership Firm can be converted into Sole Proprietorship . Firstly Partnership firm is dissolved, partners need to surrender GST registration and subsequently obtain fresh registration in the name of Proprietorship Firm, PAN is also surrendered.