Explain the tax treatment for the following transactions under article (9) of the income tax law :( 7.5 marks) a. Tax payer has personal asset valued at SAR 100,000 a cost base of

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Q1. Explain the tax treatment for the following transactions under article (9) of

the income tax law 🙁 7.5 marks)

a. Taxpayer has personal asset valued at SAR 100,000 a cost base of SAR

80,000. Earning gains of SAR 20,000. What is the gain or loss on the

disposed asset?

Answer:

As per article 9: the gain and loss of an asset is the difference between the

compensation receive and its cost base, meaning in this case 100,000 –

80,000 = 20,000 SAR of gain.

Article 9 – section A.

b. Taxpayer has an asset of two components and he disposed one

component for SAR 50,000 Cash. The taxpayer purchased that asset for

SAR 100,000 Cash 5 years ago. The expert valued that assets at the time

of purchase for SAR 200,000 out of which SAR 70,000 was belong to the

disposed component. What is the gain or loss on the disposed asset?

Answer:

As per article 9, section E: in case of a disposal of a part of an asset, the

cost base is apportioned تقسمbetween the part retained the part disposed of

in accordance with their market value at the time of the purchase.

In this case, the portion of the asset at the time of purchase is 70,000 SAR

and it was sold at 50,000.

50,000 – 70,000 = (20,000)

Meaning there is a 20,000 SAR loss in value.

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c. Taxpayer possess land with book value of SAR 100,000 and he paid SAR

20,000 Cash to improve the land. Are expenses deductible?

Answer:

As per article 9, section F: the expenses incurred to alter or improve a

non-depreciable asset, a land in this case, are ADDED to the value of the

cost base of the asset.

Thus, the cost base of the this will be 120,000 SAR.

The improvement costs are NOT deductible as they add to the value of

the asset.

d. Tax payer disposed an asset encumbered by debt amounted to SAR

120,000 but Its market value is SAR 100,000 with cost base of SAR

80,000 .What is the gain or loss on the disposed asset?

Answer:

As per article 9, section I, the disposal of an asset encumbered by debt

EXCEEDING its MARKET value, the taxpayer disposal of the asset is

treated as RECEIVING a compensation equal to the value of the debt.

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In this case, the taxpayer is considered having received a compensation of

120,000 SAR, where the market value is 100,000 SAR.

Thus, the taxpayer GAINED 20,000 SAR on the disposal of this asset.

e. Taxpayer converted an asset used in the activity to his personal use with a

cost base of SAR 50,000 and market value of SAR 40,000. What is the

gain or loss on the disposed asset and whether gains or losses taken into

consideration when determining tax base?

Answer:

As per article 9, section L, when an asset is converted to personal use, as

is the case here, the taxpayer is deemed to have disposed of the asset at

MARKET VALUE. The recognition to be made on Gains, but not losses.

In this case, the disposal value would be 40,000 SAR while its cost base

is 50,000.

40,000 – 50,000 = (10,000) Loss and thus not recognized.

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Q2. Taxpayer incurred expenses of SAR 10,000 to alter and improve

equipment with a cost base of SAR 100,000. Are these expenses

deductible under article 18 of the law? (2.5 marks)

Answer:

As per article 18, section A, repaired and improvement of depreciable

assets in each group MAY BE deductible.

Section B, for each year, the amount deducted MAY NOT exceed 4% of

the balance value of the group.

Section C, the amount exceeding the limit will be added to the balance of

the value of the group.

In our example, the cost base of this asset (it can also be a group of assets

of the same kind) is 100,000. 4% of this would be 4,000 SAR.

The 4,000 SAR is deductible, the remaining 6,000 will be added to the

cost base of the asset, making its cost base now 106,000 SAR.

Q3. Tax payer recorded the following journal entry (2.5 marks)

a.

D r. Bad debt expense 10,000

Cr. Provision for doubtful receivable 10,000

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Required: Is that provision deductible under article (14) of the law?

Answer:

As per article 14, section A, a deduction for bad debts is possible from the

sale of goods that have been declared as taxable income of the taxpayer.

Section B adds, once there is evidence proving the impossibility of

collection.

From this journal entry, we assume that the provision for doubtful

receivables come from accounts receivables after failure of collection.

Thus, satisfying the first condition, with evidence as per section 2, YES,

the bad debt is deductible.

b. 1n 2020

D r. Accounts receivable (Ibrahim) 100,000

Cr. Sales 100,000

In 2021

D r. Bad debt expense 20,000

Cr. Accounts receivable Ibrahim)

Required: Is that bad debt expense deductible under article (14) of the

law?

Answer:

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Similar to the previous part, this satisfied the section A in article 14

(recognized as taxable income), with evidence proving the impossibility

of collection, yes the bad debt can be deductible.

Q4. In financial accounting tax payers can choose any depreciation rates

for depreciable assets ,but when tax payers prepare their tax base , they

must apply depreciation rates according to article (17 ) of the income tax

law, So, explain depreciation rates according to article (17) (2.5 marks)

Answer:

The depreciation rates as per the guide as follows:

Buildings its 5%, which is 20 years.

Movable industrial or agricultural facilities is 10%, which is 10 years.

Machinery, factories and equipment (including computer programs and

means of transport) is 25%, which is 4 years.

Costs of geological studies, exploring and drilling expenses and costs of

preparatory operations for development and exploitation of natural

resources is 20%, which is 5 years.

All other fixed assets, whether tangible or intangible, not covered above

(including ships, aircrafts, trains, furniture, etc) is 10% which is 10 years.

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