Ask a tax student to explain income splitting and you will usually hear one sentence. Examiners want four marks’ worth. Section 32 of the Income Tax Act, 2015 (Act 896) lets the Commissioner-General undo arrangements that shift income to associates while the original earner keeps the benefit. In this article you will learn the three-limb test, who counts as an associate, what ICAG has actually asked, and a four-line format for the exam hall.
What Section 32 says
Subsection (1): “Where a person attempts to split income with another person, the Commissioner-General may, by notice in writing to that person, prevent a reduction in tax payable.”
Subsection (2) lets the Commissioner-General, in the notice, (a) adjust the amount to be included in or deducted from income for the purpose of calculating the income of each person, or (b) re-characterise the source and type of any income, loss, amount or payment.
Subsection (3) says a person attempting to split income includes an arrangement between associated persons (a) for the transfer of an asset, directly or indirectly, including the transfer of an amount derived; (b) where the transferor retains legal or implicit right to benefit from the asset currently or in the future; and (c) where one of the reasons for the transfer is to lower the tax payable by an associated person.
The three limbs, in plain English
Limb (a): a transfer. An asset, or an amount derived from it, moves between associated persons. “Directly or indirectly” means routing it through a third party does not escape.
Limb (b): retained benefit. The person who transfers keeps a legal or implicit right to benefit, now or in future. Genuinely giving the asset away, with no strings, does not meet this limb.
Limb (c): a tax-lowering reason. Tax saving must be one of the reasons. It does not need to be the only reason or the main reason. (The general anti-avoidance rule in section 34 is the section that talks about a tax avoidance scheme and its main purpose. Do not mix the two.)
The limbs are joined by “and”. All three must be present for the deeming rule in 32(3) to apply.
Who is an “associate”? Go to section 128
Section 128 treats two persons as being in a controlled relationship where they are an individual and a relative, partners in the same partnership, an entity and a person who controls it or may benefit from fifty percent or more of its voting power or rights to income or capital, a settlor, trustee and beneficiary, or a person who, not being an employee, acts on another’s directions, requests, suggestions or wishes. “Relative” includes the individual’s child, spouse, parent, grandparent, grandchild, sibling, aunt, uncle, nephew, niece or first cousin, including by marriage or adoption. Under section 128(3) the Commissioner-General may accept that two persons are not associated if it is not reasonable to expect either to act on the other’s intentions.
A teaching illustration (invented; rates illustrative only)
Maame Esi Boateng, a sole proprietor, has GH¢150,000 of consulting fees coming. She invoices through her brother Yaw’s dormant enterprise and keeps the bank mandate. At illustrative marginal rates of 30% for Esi and 10% for Yaw’s enterprise, the tax avoided is GH¢150,000 × 20% = GH¢30,000. All three limbs are present: siblings are associates (limb a), Esi controls the money (limb b), and the only reason for the route is the rate gap (limb c). Under section 32(2), the Commissioner-General can put the GH¢150,000 back into Esi’s income.
If Esi instead handed over the contract, equipment and client relationship outright, with no retained benefit, limb (b) fails and section 32(3) is not met.
What ICAG has actually asked
May 2021, Advanced Taxation, Q2(c), 4 marks: “Evaluate the impact of income splitting as an anti-tax avoidance measure.” The marking scheme: under section 32, the Commissioner-General may, in writing, prevent a reduction in tax payable and adjust arrangements of an income-splitting nature to protect revenue; it is very impactful if the Commissioner-General gets wind of the arrangement and re-characterises the income. Examiner’s Comment: good performance by most; some candidates “defined income splitting but could not link it to the requirement of the question”.
July 2024, Advanced Taxation, Q2(b), 5 marks of 20 (Edem Enterprise): profit before tax GH¢200,000,000, with salaries to the MD, his wife (who does not work there) and his son (in Junior High School), the MD’s social security and depreciation. The marking scheme adds back GH¢1,780,000 in total, giving adjusted profit of GH¢201,780,000; less capital allowance of GH¢300,000, taxable income is GH¢201,480,000. The examiner described the part as determining chargeable income “from records of income splitting arrangement” and called performance “very encouraging”.
March 2024, Advanced Taxation, Q3(c)(iv), 2 marks: the scheme lists three legislative restrictions in the Income Tax Act: income splitting, transfer pricing and thin capitalisation, plus the assignment of income doctrine.
Profs answer bank, CITG Strategic Tax Planning, February 2020, Q5 (15 marks): identify any three anti-avoidance provisions in Act 896. Income splitting is among the provisions the solution offers. (This is from the Profs answer bank, not an official CITG marking scheme.)
EXAM TIP: In an “evaluate” question, do not stop at the definition. The May 2021 examiner said candidates who did exactly that could not link the answer to the requirement. Name the section, apply the limbs, state the Commissioner-General’s power, then evaluate the impact.
Five mistakes that cost marks
1. Defining without evaluating.
2. Writing “profit splitting” instead of the Act’s term, income splitting.
3. Giving only limb (a) and forgetting that retained benefit and the tax-lowering reason are also required.
4. Leaving a non-working wife’s or a schoolboy son’s salary in the expenses (section 9(1) requires an expense to be wholly, exclusively and necessarily incurred in producing the income).
5. Blurring sections 31, 32, 33 and 34.
The answer format
Line one: section and trigger. Line two: the three limbs and the section 128 associate link. Line three: the Commissioner-General’s power under 32(2), by written notice. Line four: the evaluation, which is that it protects revenue by stopping income being shifted to lower-bracket relatives, and its impact depends on detection.
Conclusion
Section 32 is short, and examiners reward those who apply it rather than recite it. Learn the three limbs, remember the associate list in section 128, and always finish with an evaluation.
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