Direct Tax
What this domain tests
Direct Tax examines whether you can move from a charging provision to a defensible computation. The exam tests characterisation of income, residence and source, allowable deductions, timing, losses, withholding, and treaty relief. You must show the adjustment trail, not just a final figure.
Core rules and concepts
- Charging head and character. Every receipt must fall within a charging head. Employment, business, property, and capital gains are treated differently for rates, deductions, and timing.
- Residence and source. Residence is usually decided by physical-presence days, domicile, place of incorporation, or central management and control. Source is usually where the activity, asset, or payer is located. Cross-border income can be taxed twice, so treaty relief allocates taxing rights.
- Deductions. An expense must be incurred in producing taxable income, be revenue rather than capital, and not be private or specifically disallowed. Statutory limits often apply.
- Capital allowances. Tax depreciation replaces accounting depreciation. Add back book depreciation and deduct the permitted capital allowance.
- Losses and administration. Loss carry-forward may be restricted by continuity-of-ownership or business tests. Withholding, instalments, returns, and penalties are examinable.
Worked example
A company reports accounting profit of 500,000. It has a non-deductible fine of 10,000, accounting depreciation of 40,000, and tax depreciation of 55,000. Start with 500,000; add back the fine 10,000; add back book depreciation 40,000; deduct tax depreciation 55,000. Taxable income is 525,000. At a 25% rate, tax is 131,250 before credits. The reasoning is that the fine is disallowed, and the depreciation adjustment prevents a double deduction while granting the tax allowance.
Traps that cost marks
Treating capital legal or acquisition costs as revenue deductions; deducting private or entertaining expenses; forgetting the depreciation adjustment; starting from accounting profit without explaining adjustments; applying a treaty without checking beneficial ownership; and ignoring loss-continuity rules.