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Limitation on Deduction of Financial Costs

The limitation on deducting financial costs under the version of Act 896 addressed by the note.

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ReferenceDT/2016/006Issue date6 October 2016Source statusPublished GRA practice noteCurrent-law statusReviewed 14 August 2026

Legal effect and current-law check

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

Sections 100–102 ↗

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 -

a) the sum of financial gain derived in the year of assessment; and

b) 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 forwardand 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

Computation of 50% of Adjusted Chargeable Income (C)=zzzz *50%

=zz

Allowable Financial cost=Financial gain + zz

6.1 Illustration 1+

Where the financial cost is more than the financial gain plus 50% of the 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
Realised 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.

Solution.

Description	GHS
a) Determination of adjusted chargeable income and computation of
allowable financial cost 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:
Realised 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:

=Financial gain +50% of the adjusted chargeable income

=7,000.00 + {(50%*(59,500}

=7,000.00+ 29,750

=36,750.00

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.

Description	GHS	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:
Realised 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+

Description	GHS
Where the financial cost is less than the financial gain plus 50% of the adjusted
chargeable income. 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
Realised 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+

Description	GHS	GHS
a) allowable financial cost	Determination of adjusted chargeable income and computation of
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:
Realised 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

b) Allowable financial cost=Financial gain +50% of Adjusted Chargeable

Income

=10,000.00 + {50 %*11,500}

=10,000.00+ 5,750.00

=15,750.00

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. Hence no adjustment is made to the reported profit in

respect of the financial cost.

Description	GHS
c)	Computation of chargeable income and tax payable by the company.
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:
Realised 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+

Description	GHS
Where the company recorded financial cost without financial gain. 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
Realised 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+

Description	GHS	GHS
a) Determination of adjusted chargeable income and computation of
allowable financial cost 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:
Realised 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

=Nil + {(50%*(66,500)}

=33,250

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.

Description	GHS	GHS
Computation of chargeable income and tax payable by the company 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:
Realised 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
Realised 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

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:
Realised 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.

Description	GHS
Computation of chargeable income and tax payable by the company. 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:
Realised 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

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