Long term contracts span over a long period of time and have tax implications.
Required:
i) What is long term contract as defined in the Income Tax Act, 2015 (Act 896)? (1 mark)
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long-term contract means a contract:
- for manufacture, installation or construction or, in relation to each, the performance of related services; and
- which is not completed within 12 months of the date on which work under the contract commences.
ii) What are the tax rules on long-term contracts? (2 marks)
View Solution
- Amounts to be included or deducted in calculating the person’s income that relate to a long-term contract are taken into account on the basis of the percentage of the contract completed during each basis period.
- The percentage of completion is determined by comparing the total expenses allocated to the contract and incurred before the end of a basis period with the estimated total contract expenses as determined at the time of commencement of the contract.
- The Commissioner-General may allow any unrelieved loss to be carried back and treated as an unrelieved loss of an earlier basis period. The amount carried back is limited to the profit (if any) from the contract for the basis period to which the loss is carried back.
- The above rule applies where a long-term contract is completed and the person has an unrelieved loss attributable to that contract for the basis period in which the contract ended or any earlier basis period.
- An unrelieved loss of a business for a basis period is attributable to a long-term contract to the extent that there is a loss from the contract for the period.
- A profit or a loss from a long-term contract for a basis period is determined by comparing amounts included in income under the contract with deductions under the contract for that period. ( Any 4 points)