BASIS OF ASSESSMENT OF PROFITS OF BUSINESSES (BASIS PERIOD)

1.0 INTRODUCTION

As you are going to see in this unit, the basis period of assessment is very important, as it is a determinant of the assessable income or profits, and hence, the amount of tax payable by any taxpayer. Therefore, this unit shall focus on the rules for determining the assessable profits of businesses that are just commencing, those that changed their accounting dates and also those that have ceased from business operations.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

1.  define assessable profits
2. determine the basis of assessment for a subsisting business, new business and so on 
3. compute the total profits necessary for tax purposes. 

3.0 MAIN CONTENT

3.1 Determination of Basis of Assessment

It is of significance that the tax authority determines the correct basis period for a business that is liable to tax. The reasons are:

1.  tax authority will neither tax a taxpayer twice nor leave a portion of the profit unassessed. 
2. it helps the tax authority to grant capital allowances to tax-payers, as well as, carry forward any excess of such. 
3. it helps in the set off of loss reliefs as well as lapsing of any losses without relief. 

SELF-ASSESSMENT EXERCISE 1

Justify the necessity for determination of basis period by a tax authority. 3.2 Basis of Assessing a Subsisting Business The basic principle underlying the concept of “basis of assessment” is that the assessable profits for a year of assessment shall be the business profits that are adjusted profit for its accounting year, ended in the preceding year of assessment. For instance, the profits that will be assessed to taxation in the year 2009 will be the profits of the year 2008. This is what is popularly referred to as the “Preceding Year Basis” (PYB) of assessment and the applicable rule is known as the “normal rule”.

Illustration 1

Nerat Ltd. is a Company which commenced business on 1st January, 1995. Its profit and loss account for the year ended December 31st 2008 showed a profit of N20million. After applying the rules of allowable expenses and taxable income, the company had an adjusted profit of N30million for the year ended December 31st 2008. The company’s adjusted profits for the two previous years are as follows:
Year ended December 31, 2006 - N15million
Year ended December 31, 2007 - N22million
You are required to determine the basis of assessment and assessable profit for all relevant years of assessment.