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Final Limitation of Financial Cost
The final limitation applied to financial-cost deductions under the statutory position addressed by the note.
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Sections 100–102 of the Revenue Administration Act, 2016 (Act 915) govern statutory practice notes: a practice note binds the Commissioner-General until revoked but does not bind a taxpayer. A later inconsistent enactment or practice note displaces it to the extent of the inconsistency. This record therefore identifies the note’s own authority and date; the current consolidated law must still be checked.
Document class
GRA practice note
Stated authority
Income Tax Act, 2015 (Act 896)
Reader status
Use with current consolidated law
Act 915 route
1.0 TAX LAW+
The Commissioner-General of the Ghana Revenue Authority is empowered under paragraph 2 of the Seventh Schedule of the Income Tax Act, 2015 (Act 896) to issue
Accordingly, this Practice Note is issued in respect of Section 16 of the Act, which provides for the limitation of the deduction of financial cost in calculating the chargeable income of a person.
2.0 INTERPRETATION+
In this Practice Note the word “Act” means the Income Tax Act, 2015 (Act 896). Definitions and expressions used in this Practice Note have the same meaning as they have in the Act.
3.0 PURPOSE OF THIS PRACTICE NOTE+
This Practice Note is issued to provide direction and guidance to officers of the Ghana Revenue Authority, Tax Practitioners, Consultants, Taxpayers and the general public on the acceptable treatment of the limitation on deduction of financial costs in calculating the chargeable income of a person under section 16 of the Act in order to achieve consistency in the administration of the Act.
4.0 APPLICATION OF THE LAW+
The Act provides the following rules in respect of deduction of financial cost: (i) The quantum of financial cost that can be deducted is limited to -
- the sum of financial gain derived in the year of assessment;and
- 50% of the “adjusted chargeable income” from business or investment. ‘Adjusted Chargeable Income’ is the Chargeable Income from the business or investment without including a financial gain derived by the person or deducting a financial cost incurred by the person.
- (ii) Financial cost that has not been allowed as a deduction in a year of assessment as a result of the limitation in (i) above may be carried forward and treated as incurred for any of the next five years of assessment
- (iii) Financial costs that are carried forward shall be applied in the order in which they are incurred;
- (iv) Financial cost in this instance does not include interest;
5.0 FORMAT FOR THE DETERMINATION OF 50% OF ADJUSTED CHARGEABLE INCOME FROM BUSINESS OR INVESTMENT+
| Reference | Computation | GHS | GHS |
|---|---|---|---|
| Net Profit before tax | xxxxx | ||
| Add back: | |||
| Disallowable deductions | xx | ||
| xxxxx | |||
| Less: | |||
| Allowable deductions | xx | ||
| A | Adjusted profit | Xxxx | |
| Less | |||
| Capital allowance | xx | ||
| B | Chargeable Income | xxx | |
| Add financial cost | xx | ||
| zzz | |||
| Less financial gain | yy | ||
| C | Adjusted Chargeable Income (after adjusting for financial gain and financial cost) | zzzz |
6.1 Illustration 1+
Where the financial cost is more than the financial gain plus 50% of the chargeable income GHS
| Description | GHS |
|---|---|
| Profit before tax | 22,000.00 |
| The following were included in arriving at the net profit before tax: | |
| Depreciation | 7,000.00 |
| General bad debt written off | 1,500.00 |
| Unrelieved loss | 2,000.00 |
| Total Financial Gain | 7,000.00 |
| Total Financial Cost | 50,000.00 |
| Capital allowance | 12,000.00 |
Required
Determine the chargeable income after adjusting for financial gain and financial cost. Compute the allowable financial cost. Compute the tax payable.
6.1.1 Solution+
a) Determination of adjusted chargeable income and computation of allowable financial cost
| Description | GHS |
|---|---|
| Net Profit before tax | 22,000.00 |
| Add back: | |
| Depreciation | 7,000.00 |
| General bad debt written off | 1,500.00 |
| 30,500.00 | |
| Less: | |
| Unrelieved loss | 2,000.00 |
| A Adjusted profit | 28,500.00 |
| Less Capital allowance | 12,000.00 |
| B Chargeable Income | 16,500.00 |
| Add financial cost | 50,000.00 |
| 66,500.00 Less financial gain | 7,000.00 |
| C Chargeable Income after adjusting for financial gain and financial cost | 59,500.00 |
b) Allowable financial cost:
The amount of GHS36,750.00 represents the allowable Financial cost for the year of assessment. The excess financial cost of 13,250.00 (50,000.00 – 36,750.00) that is not allowed as a deduction may be carried forward for the next 5 years of assessment.
Computation of chargeable income and tax payable by the company
GHS GHS
| Description | GHS | Total GHS |
|---|---|---|
| Net Profit before tax | 22,000.00 | |
| Add back: | ||
| Depreciation | 7,000.00 | |
| General bad debt written off | 1,500.00 | |
| Financial cost | 50,000.00 | |
| 80,500.00 | ||
| Less: | ||
| Unrelieved loss | 2,000.00 | |
| Allowable financial cost | 36,750.00 | 38,750.00 |
| A Adjusted profit | 41,750.00 | |
| Less: | ||
| Capital allowance | 12,000.00 | |
| B Chargeable Income | 29,750.00 | |
| Tax thereon @ 25% | 7,437.50 | |
6.2 Illustration 2+
Where the financial cost is less than the financial gain plus 50% of the adjusted chargeable income.
| Description | GHS |
|---|---|
| Profit before tax | 22,000.00 |
| The following were included in arriving at the net profit before tax: | |
| Depreciation | 7,000.00 |
| General bad debt written off | 1,500.00 |
| Unrelieved loss | 2,000.00 |
| Total Financial Gain | 10,000.00 |
| Total Financial Cost | 5,000.00 |
| Capital allowance | 12,000.00 |
Required
- a) Determine the chargeable income after adjusting for financial gain and financial cost.
- b) Compute the allowable financial cost.
- c) Compute the tax payable.
6.2.1 Solution+
a) Determination of adjusted chargeable income and computation of allowable financial cost
GHS GHS
| Description | GHS | Total GHS |
|---|---|---|
| Net Profit before tax | 22,000.00 | |
| Add back: | ||
| Depreciation | 7,000.00 | |
| General bad debt written off | 1,500.00 | |
| 30,500.00 | ||
| Less: | ||
| Unrelieved loss | 2,000.00 | |
| A | Adjusted profit | 28,500.00 |
| Less Capital allowance | 12,000.00 | |
| B | Chargeable Income | 16,500.00 |
| Add financial cost | 5,000.00 | |
| 21,500.00 Less financial gain | 10,000.00 | |
| C financial gain and financial cost | Chargeable Income after adjusting for | 11,500.00 |
Since the financial cost (GHS5,000.00) is less than the financial gain plus the 50% of the adjusted chargeable income (GHS15,750), the entire financial cost (GHS 5,000.00) is deductible. Henceno adjustment is made to the reported profit in respect of the financial cost.
c) Computation of chargeable income and tax payable by the company
| Description | GHS |
|---|---|
| Net Profit before tax | 22,000.00 |
| Add back: | |
| Depreciation | 7,000.00 |
| General bad debt written off | 1,500.00 |
| 30,500.00 | |
| Less: | |
| Unrelieved loss | 2,000.00 |
| A Adjusted profit | 28,500.00 |
| Less: | |
| Capital allowance | 12,000.00 |
| B Chargeable Income | 16,500.00 |
| Tax thereon @ 25% (16,500.00 x 25%) | 4,125.00 |
6.3 Illustration 3+
Where the company recorded financial cost without financial gain.
| Description | GHS |
|---|---|
| Profit before tax | 22,000.00 |
| The following were included in arriving at the net profit before tax: | |
| Depreciation | 7,000.00 |
| General bad debt written off | 1,500.00 |
| Unrelieved loss | 2,000.00 |
| Total Financial Gain | - |
| Total Financial Cost | 50,000.00 |
| Capital allowance | 12,000.00 |
Required
- a) Determine the chargeable income after adjusting for financial gain and financial cost.
- b) Compute the allowable financial cost.
- c) Compute the tax payable.
6.3.1 Solution+
a) Determination of adjusted chargeable income and computation of allowable financial cost
GHS GHS
| Description | GHS | Total GHS |
|---|---|---|
| Net Profit before tax | 22,000.00 | |
| Add back: | ||
| Depreciation | 7,000.00 | |
| General bad debt written off | 1,500.00 | |
| 30,500.00 | ||
| Less: | ||
| Unrelieved loss | 2,000.00 | |
| A Adjusted profit | 28,500.00 | |
| Less Capital allowance | 12,000.00 | |
| B Chargeable Income | 16,500.00 | |
| Add financial cost | 50,000.00 | |
| 66,500.00 Less financial gain | - | |
| C Chargeable Income after adjusting financial gain and financial cost | for | 66,500.00 |
b) Allowable financial cost
Financial gain +50% of chargeable income
Only GHS33,250 representing 50% of the adjusted chargeable income of GHS 66,500 is deductible as financial cost. The remaining amount of GHS16,750.00 of the financial cost that is not allowed as a deduction may be carried forward for the next five years of assessment.
Computation of chargeable income and tax payable by the company
GHS GHS
| Description | GHS | Total GHS |
|---|---|---|
| Net Profit before tax | 22,000.00 | |
| Add back: | ||
| Depreciation | 7,000.00 | |
| General bad debt written off | 1,500.00 | |
| Financial cost | 50,000.00 | |
| 80,500.00 | ||
| Less: | ||
| Unrelieved loss | 2,000.00 | |
| Allowable financial cost | 33,250.00 | 35,250.00 |
| A Adjusted profit | 45,250.00 | |
| Less: | ||
| Capital allowance | 12,000.00 | |
| B Chargeable Income | 33,250.00 | |
| Tax thereon @25% (33,250.00 x 25%) | 8,312.50 | |
6.4 Illustration 4+
Where financial gain is nil and there is no positive chargeable income (excluding financial cost), then there should be no deduction for financial cost.
| Description | GHS |
|---|---|
| Profit before tax | 5,000.00 |
| The following were included in arriving at the net profit before tax: | |
| Depreciation | 7,000.00 |
| General bad debt written off | 1,500.00 |
| Unrelieved loss | 2,000.00 |
| Total Financial Gain | Nil |
| Total Financial Cost | 50,000.00 |
| Capital allowance | 12,000.00 |
Required
- a) Determine the chargeable income after adjusting for financial gain and financial cost.
- b) Compute the allowable financial cost.
- c) Compute the tax payable.
6.4.1 Solution+
a) Determination of adjusted chargeable income and computation of allowable financial cost
GHS GHS
| Description | GHS |
|---|---|
| Net Profit before tax | 5,000.00 |
| Add back: | |
| Depreciation | 7,000.00 |
| General bad debt written off | 1,500.00 |
| 13,500.00 | |
| Less: | |
| Unrelieved loss | 2,000.00 |
| A Adjusted profit | 11,500.00 |
| Less Capital allowance | 12,000.00 |
| B Chargeable Income | (500.00) |
b) Allowable financial cost
From the solution, the financial gain is nil and there is a negative chargeable income of (GHS500). In view of this there would be no deduction for financial cost.
The entire financial cost (GHS50, 000) may be carried forward for the next 5 years of assessment.
Computation of chargeable income and tax payable by the company.
GHS GHS
| Description | GHS |
|---|---|
| Net Profit before tax | 5,000.00 |
| Add back: | |
| Depreciation | 7,000.00 |
| General bad debt written off | 1,500.00 |
| Financial cost | 50,000.00 |
| 63,500.00 | |
| Less: | |
| Unrelieved loss | 2,000.00 |
| A Adjusted profit | 61,500.00 |
| Less: | |
| Capital allowance | 12,000.00 |
| B Chargeable Income | 49,500.00 |
| Tax thereon (49,500.00 x 25%) | 12,375.00 |
Official source
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