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How to calculate basis period and assessable profit of a new company

New companies in Nigeria are expected to file their first set of tax returns in line with the commencement rule. At this point, you must have learned;

Let’s now plug in figures to calculate the basis period and assessable profit of a new company or business.

Illustration


Company ABC commenced business in Nigeria on 1 September 2015 and has an accounting year end of 31 December. Its accounting profits (in Naira) were as follows:

Four months ended   31/12/15                      100,000

Year ended                  31/12/16                    450,000

Year ended                 31/12/17                    1,200,000

 

Additional information

Fines and penalty – 2016 (NGN 40,000), 2017 (NGN55,000)

General provision for bad debts – 2016 (NGN 50,000), 2017 (NGN65,000)

No depreciation

Compute the assessable profits for all relevant years of assessment.

 

Solution

The accounting profit would be adjusted for tax purposes as follows

 

2015 – NGN100,000 + 0 + 0 = NGN100,000

2016 – NGN 450,000 + 40,000 + 50,000 = NGN540,000

2017 – NGN 1,200,000 + 55,000 + 65,000 = NGN1,320,000

Since no depreciation or capital allowance or loss for the period, the assessable profit is;

2015 –  NGN  100,000

2016 –  NGN540,000

2017 – NGN1,320,000

Step 2: Determine the basis period - Preceding year basis

Under the preceding year basis, the basis period will be

 

2015: First year of assessment – 1 September 2015 to 31 December 2015

2016: Second year of assessment – 1 September 2015 to 31 August 2016. The company does not have a separate account from 2015 to August 2016. Hence, the profits for 2016 is pro-rated to 8 months. That is, September to December 2015 (4 months) and January to August 2016 (8 months).

2017: Third year of assessment – 1 January 2016 to 31 December 2016

Step 3: Calculate the assessable profit - Preceding year basis

Using the basis period in step 2, the assessable profit is

 

2015: NGN100,000

2016: NGN(100,000 + (8/12 * 540,000 = 360,000)) = NGN 460,000

2017: NGN540,000

Total profits in the first three years = NGN (100,000 + 460,000 + 540,000) = NGN1,100,000

Step 4: Determine the basis period and assessable profit - Actual year basis

Under the actual year basis (AYB), the basis period and assessable profit of a new company will be

 

2015: First year of assessment – 1 September 2015 to 31 December 2015 – NGN100,000

2016: Second year of assessment – 1 January 2016 to 31 December 2016 – NGN540,000

2017: Third year of assessment – 1 January 2017 to 31 December 2017 – NGN1,320,000

Total profits on AYB = NGN (100,000 + 540,000 + 1,320,000) = NGN1,960,000

Comments

Company ABC is a rational taxpayer that wants to minimize its tax liability. The Company will choose to be assessed to taxes under the preceding year basis since it shows a lower assessable profit of NGN1,100,000. Effective 1 February 2020, commencement rule has been abolished. In essence, the illustration above does not apply to basis period of a company that is after January 2020.

 

We hope this tutorial helped you learn how to calculate the basis period and assessable profit of a new business. If you have questions, feel free to contact us.

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Updated: 1 February 2020

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