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Are you paying more income tax than you are required to?

Paying income tax in accordance with the law is a civic duty which we must fulfill as law-abiding citizens. Paying income tax when we are not required to do so is a different matter. 

Income tax, as the name suggests, is a tax on income. Income subject to tax includes the earnings of an employee and profits arising from a trade, business or profession. Persons residing in Jamaica are required to pay income tax in relation to their worldwide income from whatever source. Notwithstanding, the obligation to pay income tax is subject to factors including double taxation treaties, whether a person’s annual income meets the threshold to be taxed, and any exemptions and/or deductions that may be applicable.

Income exempt from income tax includes that:

  • of a charitable organization registered in accordance with the Charities Act;
  • of an approved venture capital company certified in accordance with the Income Tax Act;
  • arising from a scholarship, bursary or any other similar educational endowment held by a person receiving full-time instruction at a university, college, school or other educational establishment;
  • derived as interest of money from investments or deposits in a building society; and
  • arising from transactions carried out on the Jamaica Stock Exchange in shares, stock or securities and, subject to conditions, accruing to an individual who does not hold himself out as a dealer.

As a tax on income, income tax is not applicable where an amount received by a taxpayer is in the nature of capital rather than income. By way of example, a gain realized from a sale of land is not subject to income tax if the vender is not in the business of selling land. 

Where a person is operating a business, that person is allowed to deduct from its revenue, expenses and disbursements wholly and exclusively incurred by such person in acquiring income. Such expenses may, subject to conditions, include:

  • the cost of goods and services;
  • rent;
  • the cost of repairing machinery;
  • taxes (other than income tax) paid on real estate;
  • premiums paid on any insurance policy on property used in accruing the income upon which tax is payable;
  • bad debts or amounts owed but are deemed no longer recoverable;
  • an amount donated to a registered charitable organization;
  • the amount of any loss sustained in the trade, profession or business; and
  • a reasonable amount for exhaustion, wear and tear of any building or structure (depreciation) used for the purpose of acquiring income.

The Income Tax Act also makes provision for certain capital expenses that may be deducted from the amount of income subject to income tax. For example, where an owner incurs capital expenditure on the construction, alteration, renovation, or purchase for renovation, of a building which is to be an industrial building used for the purpose of a trade carried on by that owner, the owner may benefit from allowances including an initial allowance of 20 percent of that capital expenditure. The provisions on allowances extend to capital expenditure incurred:

  • in relation to plant and machinery used in manufacturing goods in Jamaica;
  • in connection with the working of a mine, oil well or other source of mineral deposits of a wasting nature; and
  • on the acquisition or development of intellectual property rights if income receivable in respect of such rights would be liable to income tax.

These allowances are subject to specific conditions that must be satisfied for the taxpayer to benefit from the reduction in the amount of income that will be taxed in a particular year of assessment.

Where capital expenditure has been incurred in respect of a building or structure which is subsequently sold, a balancing allowance or balancing charge will be made in respect of the taxpayer in the year of assessment.

A taxpayer is entitled to take advantage of the exemptions and allowances available. However, care should be taken to ensure that allowances are correctly applied as the penalties for under payment of income tax are severe. In case of doubt, a taxpayer should seek appropriate professional advice. 

Kimberley Brown is an attorney at Myers, Fletcher & Gordon and a member of the firm’s Commercial Department. She may be contacted at kimberley.brown@mfg.com.jm or through the firm’s website www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.

This article is for general information purposes only and does not constitute legal advice.

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