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. However, the Finance Act (2019) has changed the tax narrative. New companies, with effect from 13 January 2020, can now file their corporate tax returns on a preceding year basis. At this point, you must have learned;

Let’s now insert 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 profit 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 13 January 2020, the Finance Act 2019 has deleted the commencement rule. In essence, the illustration above does not apply to a company that starts operations after January 2020. New companies are therefore required to file returns on a preceding year basis.

 
 

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: 3 March 2020

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