AC10179 Papua New Guinea Taxation

Session 2, 2022

Case Study - Example

This assessment requires you to calculate the tax payable for a company as well as prepare a short advice letter addressing some questions from the client. The assessment is designed to represent a real life practical client engagement and will require come calculations as well as tax research.

The following Case Information relates to a typical client that an accountant may be asked to provide various taxation services to in any tax year. Assume that you are the accountant presented with this information and it is your job to provide advice and annual compliance services to the client for the year ended 31st December 2021.

Marks will be allocated not only for the technical accuracy of your answers but also for your research skills demonstrated and the presentation/communication skills shown in your letters of advice.

CASE INFORMATION

Silvery Ltd (Silvery) is a PNG incorporated company involved in mining in PNG. It is a 96% subsidiary of Silvery (Aust) Ltd (Aust) which is an Australian based holding company which provides all the funding and management support for the operations. David, a local PNG resident, is a director of Silvery Ltd and owns the other 4% of the company. He asked you to provide some taxation advice in relation to the PNG operations for Silvery Ltd for the year ended 31st December 2021. To assist you, he has provided you with the following financial information.

The 2021 financial statements show a profit before tax and dividends of K6,223,000. The following items are included in the calculation of the profit.

1) This profit includes income and direct costs from three different projects in different locations and in different stages of production around PNG. Their details are

Project	sales	Cost of Production	Direct Salaries	Current ROI
Project A	K42,500,000	K25,000,000	K2,000,000	29%
Project B	K11,000,000	K10,400,000	K500,000	2%
Project C	K2,100,000	K6,000,000	K600,000	(6%)

Assume all projects are subject to Accumulation X calculations.

2) There is K1,930,000 of administration wages paid. This includes wages paid to Davids nephew of K255,000. The market value salary for the role that his nephew has would be K56,000.

3) Silvery sold some vacant land for K34,450,000 on 3 March 2021. The land was originally acquired in 2019 for K31,000,000 and was to be used to build some storage buildings. However, the land was later deemed to be unsuitable for this purpose and therefore sold during this year

4) David has negotiated a higher rate of superannuation of 30% for himself on his salary of K105,000. Assume that his salary is considered to be at a market level.

5) Silvery has been provided with a loan from Aust to help fund its operations of $A55,000,000. No interest is charged on this loan and there have been no repayments on this loan. The loan is revalued to Kina every year with any movement included in the profit and loss. As at 31st December 2020, the loan was K80,335,123 and it was K84,493,932 on 31st December 2021.

6) During the year, Silvery paid fines of K10,000 for breach of PNG environmental laws.

7) Management fees of K870,000 have been paid which includes management fees paid to Davids wife of K75,000.

8) Silvery acquired a motor vehicle for one of its staff on the 31st of March 2021 at a cost of K75,000. The vehicle was used 100% for business purposes and was expensed in the profit and loss.

9) A dividend of K1,250,000 was paid during the year in accordance with the shareholding

10) Silvery has paid K1,293,000 in provisional tax for the year.

11) Silvery has a prior year revenue loss from the 2017 year of K2,650,000. K450,000 of this was a foreign loss. Assume that there has not been any change of shareholding since then.

Assume that all amounts are GST exclusive unless otherwise stated and ignore any transfer pricing implications.

PART B) Prepare a letter of advice to David explaining :

Impressed with your work in calculating the taxable income of Silvery, David has asked for a meeting to discuss the following

a) What are the tax implications for both the company and the shareholders in paying the dividend of K1,250,000?

b) David has heard that there may be changes coming to how sale of land will be treated for PNG tax. Silvery is considering selling some other land at a profit which was acquired with a view to make a profit on resale and would like to know what the potential tax implication and tax issues of this will be in the future?

PART B: PREPARE A LETTER AND RESPOND TO Davids questions. This needs to be professional in its approach.