3. Learning Outcomes:
After completing this topic, you will be able to:
• define liable Business income
• define trade and business under taxation.
• describe allowed income, allowed expenses,
disallowed income, and disallowed expenses
under taxable business income calculation.
• calculate capital allowances on non-current
assets according to Inland Revenue Act.
4. Assessable income from business
• Income from a business for a year of
assessment is the gains and profit from
conducting the business for the year,
• it is liable to income tax.
6. Income from Trade, Business,
Profession, and Vocation
• It is one of the major sources of income
under an individual, partnership, and
company income tax calculation.
• Department of Inland Revenue provides
guidance, on how to compute assessable
income from trade, business and profession.
7. Trade
• A person has purchased some commercial
quantities of items which are more than
enough for him,
• if such articles are held for a short period,
• transactions are repetitive
• anything has been done to have a saleable
item,
• any such motivation to make profits,
8. Calculation of Gains and Profits
from Business
• In order to arrive at the assessable income
from the business, all expenses incurred in the
production of income are allowed as
deductions,
9. Profession
• Any person engaged in professional activity
with his special skills and knowledge.
• A Chartered Accountant engaged in
accounting practice.
• Professional income is subject to withholding
tax at the rate of 5%.
• It is a tax credit.
10. Example
• Mr. Mano is a Chartered Engineer working since
2015 for a construction company in Sri Lanka.
• He provides engineering consultancy services to few
other companies in Sri Lanka as an independent
professional, and received consultancy fee. The
amount received in cash after deducting
withholding tax at 5% is Rs.475, 000. He has
deducted expenditure for tax purpose amounting to
Rs.123,000.
• He also provided consultancy service to a hotel in
India being in Sri Lanka, an the net amount received
in foreign currency is 1460. 1 US$ equals to Rs.170
as at the end of the year of assessment.
11. Vocation
• Vocation is an occupation.
• she or he is suited, trained or qualified.
• Born skills. singer, actor
12. Assessable income from business
Particulars _ +
Net profit before tax XXXX
Disallowed income (Example: exempt income/ final
withholding payments, other amounts that are included in
the employment or investment)
XX
Allowed income (Example: Assessable Charge on disposal of
non-current assets)
XX
Disallowed expenses (Example: depreciation) XX
Allowed expenses/ deductions (Example: Capital allowance) XX
Allowed income (if already included in net profit
calculation)
- -
Allowed expenses/ deductions (if already deducted in net
profit calculation)
Assessable income from business XXXX
13. Allowed expenses
• Some expenses can be allowed to deduct from
business income in accordance with Inland Revenue
Act.
• Such expenses should be related to the production of
income or business.
Examples:
• Salaries to staff
• Advertisement cost
• Electricity charges
• Telephone charges
14. Allowed income
• Some income can be allowed to add to
business income in accordance with Inland
Revenue Act.
• Such income should be related to the
production of income or business.
Example:
• Old bottle sales for soda Distribution Company
15. Disallowed expenses
• Some expenses cannot be allowed to deduct
from business income in accordance with
Inland Revenue Act.
• Such expenses are not related to the
production of income so cannot be deducted
such expenses from business income.
17. Disallowed expenses - Taxes
Examples:
• Income tax payable under the Inland Revenue
Act
• Supper gain tax, Bars and Taverns Levy, Casino
Industry Levy, Mobile Telephone Operator
Levy, Satellite Location Levy, Dedicated Sports
Channel Levy, and Mansion Tax.
• VAT on Financial Services
• Crop Insurance Levy
19. Entitlement to claim
Asset should be acquired,
constructed or assemble and
used in a trade, business,
profession or vocation
If acquired by purchase Claim on cost of purchase
If acquired other than by
purchase
Claim on market value
Year of acquisition Claim for the full year
Year of Disposal Do not claim
Rates of depreciation
The rates of depreciation
depend on the date of
acquisition which continues
until claiming of the full
cost or disposal of the asset.
20.
21. Class Depreciable Assets – WEF YA 2018/19 Number
of Years
1 Computers and data handling equipment 5
2 Buses and mini buses, goods vehicles, trucks,
trailers and trailer- mounted containers.
Plant and machinery used in manufacturing
5
3 Equipment and machinery, office furniture, fixtures 5
4 Buildings, Structures and similar works of a
permanent nature
20
5 Intangible assets other than Goodwill 20
23. Assessable Charge or Balancing Allowance (Disposable Profit or
loss) on disposal of non-current assets
• If any accounting profit in the profit or loss
account from disposal of non-current assets, it
should be deducted from the net profit as per
account vice versa if be any losses of disposal
non-current assets should be added with the
net profit.
• If the total cost has been allowed as an
allowance the entire sale proceeds are treated
as taxable profit.
24. • If the entire cost has not been allowed that
means, sold before the full cost has been claimed
in this case the taxable profit or loss will be
calculated as follows.
Cost of Assets = *****
(-) Capital allowance claimed = (***)
Tax Written Down Value = **
Sales Price = ****
(-) Tax Written Down Value = (**)
Taxable Profit or Loss = ***
Assessable Charge or Balancing Allowance
25. Replacement
• One asset can be replaced with another asset
• Replacement should fulfill the three criteria to
consider as replacement for the tax.
• If full fill above three criteria, the disposal
asset’s any taxable profit can be set off against
purchase new assets and capital allowance
will be allowed for the purchase assets after
deducting amount.
26. • But any loss occurs by disposal any assets if
that time held any replacement, the disposal
assets’ loss cannot be deducted or added with
purchase value of the new assets. The loss
amount will be considered as allowed
expenses.
27. • A lorry purchased in year of assessment 2018/2019 for LKR
1,500,000 was sold in the year of assessment 2022/23for
LKR 675,000.
• You are required to compute Assessable Charge or
Balancing Allowance on lorry disposal.
• A delivery van purchased in the year of assessment
2018/2019 for LKR 1,400,000 was sold on 14th, June, 2022
for LKR 1,100,000. The same type of a new delivery van was
purchased on 31st, July, 2022 for LKR 1,800,000.
• You are required to compute Assessable Charge or
Balancing Allowance on disposal and capital allowance.
• A lorry purchased in year of assessment 2017/2018 for LKR
600,000 was sold in year of assessment 2022/2023 for LKR
400,000.
• You are required to compute the Assessable Charge or
Balancing Allowance on disposal
28. Property, plant and equipment
• Costs of additions during Y/A 2022/23
Rs
“000”
Laboratory equipment 1,400
New generator 5,400
Minibus to transport employees 6,340
Car for the use of the managing director 4,200
29. • In May 2022, a generator was sold for Rs.
1,500,000. It was purchased in Y/A 2020/21
for Rs. 4,800,000. In July 2022, a new
generator was purchased at a cost of Rs.
5,400,000 to replace the old one.
• You are required to compute Assessable
Charge or Balancing Allowance on disposal
and capital allowance for the Y/A 2022/23.
