UNIVERSITY OF THE WESTERN CAPE

ASSIGNMENT
OCTOBER 2020

MODULE NAME : TAXATION 242

MODULE CODE : TAX 242

DURATION : Due 4 November 2020 17:00pm

TOTAL MARKS : 100 MARKS

Examiner: Mr C Basson
Internal Moderator: Mr B Smith

EXAMINER’S INSTRUCTIONS:
1. Answer all the questions.
2. Answer each question in a separate book.
3. Answers must be in blue or black ink.
4. Please refrain from using any Tippex.
5. Your answer can be done written or typed out. If you are using word, just “save as” PDF.
6. Please submit your answer paper in PDF format to tax242test@gmail.com. Clearly indicate your
student number and name and surname in order to make it easy to sort. If you do not have word
or are submitting a written paper, scan in the paper using a scanner or via a similar scanning app
on your smartphone. Turboscan, ScannerApp etc. These apps should be available on android and
apple stores and are usually free.
QUESTION 1 (45 marks; 99 minutes)

Alex McGregor and Candice McGregor are married in community of property. Alex is
57 years of age and Candice 61 years old. Alex belongs to a medical aid where he is
the main member and Candice is the only registered dependant. They are both South
African residents.

Information relating to Candice:

Candice was employed by Nextek (Pty) Ltd until 30 June 2019. She received a monthly
salary of R10 000. On 30 June 2019 Candice received a bonus of R30 000. She
contributed 5% of her salary to a provident fund and R5 000 per month to a retirement
annuity fund during the 2020 year of assessment.

The following amounts also accrued to her during the 2020 year of assessment:

• Rental income of R98 000 (not excluded from the joint estate). Deductible
expenses incurred, related to the rental property for the year of assessment
was R 35 000.
• Interest R52 000 (not excluded from the joint estate – not from a tax-free
investment).

Information relating to Alex:

Alex was employed by Neucon (Pty) Ltd and for the 2020 year of assessment.

1) Alex received a monthly pensionable salary of R 42 300 per month.

2) Alex received a monthly annuity of R 9 200 per month since 31 May 2017.His
deceased aunt bequeathed it to him upon her death. He will receive the annuity
payment for the rest of his life. This annuity was excluded from the joint estate.

3) Alex received a gross foreign dividend of R 18 260 in the year of assessment. The
dividend is not exempt in terms of s 10(B)(2).

4) He earned foreign interest of R 7 400 and local interest (not from a tax-free
investment) of R 21 700 for the current year of assessment.

5) Alex received an entertainment allowance of R10 000 for the 2020 year of
assessment. He was required to entertain clients on a regular basis and incurred
entertainment expenses of R 7 650 (he can produce proof thereof; however, he is
not required to do so by his employer) for the year of assessment.

6) Alex was granted the use of a company-provided Toyota Fortuner as from 1 March
2019. When Neucon (Pty) Ltd purchased the Fortuner they took out a qualifying
maintenance plan as well. In addition, Neucon (Pty) Ltd bears half of the fuel cost
 as well as the full cost of maintaining the vehicle. Alex pays for the other half of the
fuel cost incurred.

The Fortuner, which was purchased by Neucon (Pty) Ltd on 30 June 2018, at a
cost of R 329 900. The cost price included VAT amounting to R9 800 and excluded
finance charges. Alex pays R 3 200 a month to the company for the use of the
vehicle. Alex kept accurate records of total kilometres travelled during the current
year of assessment. He travelled 8 000 of the total 20 000 kilometres during the
year of assessment for private purposes. The fuel expense for the year amounted
to R 29 500. Alex also received a travel allowance for the Fortuner of R 6000 per
month from 30 September 2019.

7) Neucon (Pty) Ltd and Alex both contribute 10% of Alex’s salary on a monthly basis
towards Alex’s pension fund meaning a total contribution of 20%. During the year
Alex made a lumpsum payment of R65 000 into the fund in addition to the monthly
contribution in order to boost his retirement savings. Alex’s remuneration was R
843 998.51 for the year of assessment.

8) After 26 years of service this was the first time Alex received any reward for long
service. A set of Nelson Mandela Kruger Rands was presented to Alex during a
company function held on 15 February 2020.The Kruger Rands were purchased
for Alex, because everyone at work knows how much he loves collecting expensive
coins. The company paid R15 000 for the set of Kruger Rands.

9) Alex took out a loan of R 1 000 000 at HSCB Bank at the rate of prime plus 3
percent in December 2018. The company had an arrangement with BNF Bank
which states that Alex had to pay 4% of the interest on the loan and the rest will be
covered by Neucon (Pty) Ltd.

No portion of the outstanding capital has ever been repaid. The official rate of
interest was 7% from 1 March 2019 until 31 August 2019, it then moved up to 10%
for the period 1 September 2019 – 29 February 2020.

The following table reflects what the prime rate was for the period:
PERIOD PERCENTAGE %
1 March 2019 – 31 August 2019 6
1 September 2019 – 29 February 2020 9

10) Alex’s total monthly medical aid fund contributions amounted to R5 300 of which
his employer contributed 40% for his benefit to the fund, according to the rules of
the fund. The other 60% was deducted from his monthly salary and paid to the
medical aid fund on his benefit. Neither Alex nor his spouse are disabled persons
as defined. During the year of assessment there was expenditure of R46 700 that
 was not covered by the medical aid. All the expenditure qualifies as “qualifying
medical expenses”. It was all paid by the end of the current year of assessment.

11) Alex owns a cell phone which he purchased through a contract with NTM. He uses
this cell phone every day and it consists of both private and business as per his
employment contract. He provided Neucon with proof of his business calls every
month and claimed the business use expense back from Neucon. Neucon
reimbused Alex a total of R 8 650 for the year of assessment.

12) Alex and Candice live in a 5 roomed Town house provided by Neucon (Pty) Ltd.
Alex’s remuneration proxy for the year of assessment was R 430 000. Alex
received the house fully furnished but he has to pay the water and electricity
himself. Alex’s employer does not own the residence, he rents it at a monthly rental
of R 9 500 per month. Alex pays rental of R 2 000 per month for the use of the
accommodation. Neither Alex nor Candice own shares or are able to control the
Neucon in any way. They had the use of the house for the full year of assessment.

13) Neucon owns a luxurious cottage in Struisbaai just outside Hermanus. Alex and
Candice spent seven days in the cottage during December 2019. Alex did not have
to pay for his stay in the cottage. When the cottage is not being used by employees,
it is rented out at a daily rate of R 1 850 per day to other guests.

14) Alex has the right of use to a company computer with a cost of R 24 000, which he
uses mainly for business purposes. He started using the computer on 1 March
2019, which was 6 months after the computer was acquired by the employer. The
market value of the computer when Alex got the right of use thereto was R 19 000.

15) He made his annual donation of R 99 000 to the SANPARKS at the end of October
2019. SANPARKS is a registered PBO and he received his donation certificate
during December 2019.

16) During September 2018, Alex was sent to Cape Town for business purposes for a
period of five days and four nights. An allowance of R 8450 was paid to him to
cover his costs in respect of accommodation, meals and incidental costs. His costs
amounted to:

DETAILS R’

Accommodation 3 900

Meals 960

Incidental Costs 309

 TOTAL COST 5 169

Alex could present documentary evidence of all his costs and no amount was
refunded to Neucon (Pty) Ltd.

REQUIRED Marks

Show all your calculations and round off to the nearest Rand. You need
NOT provide references to the Income Tax Act. Ignore VAT

1 Calculate the total tax liability of Alex McGregor for the year of ended 44
29 February 2020. Provide reasons if an amount is not taken into
account for purposes of taxable income.
1
Presentation (framework, neat lay-out)

MARKS 45
QUESTION 2 [20 marks; 36 minutes]
Consider the following independent cases where taxpayers have incurred
expenditure:

1) A taxpayer obtains a court interdict, prohibiting a competitor from manufacturing

an item that was invented by the taxpayer. The cost of obtaining this interdict was
R26000. Is this deductible from the taxpayer’s income? (3 marks)

2) A golf-club manufacturer sells all its products subject to a one-year warranty

arrangement, in terms of which it repairs or replaces (free of charge) defective
products. Based upon experience in previous years, the taxpayer expects that
3.5% of the value of goods sold is spent on replacing or repairing defective
products in terms of the warranty arrangement. For accounting purposes, the
taxpayer raises a warranty provision at the end of its financial year, based upon
3.5% of those products sold which are still under the one-year warranty period.
How much of this provision is deductible? (3 marks)

3) A taxpayer company claims a provision for employees’ bonuses as a tax deduction.

These bonuses are payable to employees, on a pro rata basis according to months
of service of those who are in its employment on 31 October of each year. But
they are paid on only 30 November of each year. If an employee leaves before
the date of payment, he cannot claim any portion of his bonus unless his departure
came about as a result of him reaching pensionable age or ill health. The year of
assessment of the company ends on 31 March, and it is seeking to deduct a
provision for bonuses accrued but not paid, in the calculation of its taxable income.
This provision was R32 000. (3 marks)

4) Two doctors in partnership in a private practice have agreed that the ‘standard’
uniform for all the doctors consulting at the practice will be a white safari suit.
These suits have become synonymous with medical practitioners and others
closely associated with the medical profession. During the current year of
assessment, each doctor had spent R3 000 on safari suits. Is the R3 000
deductible? (3 marks)

5) As part of the transfer to new business premises, a manufacturing company has

incurred removal costs of R150 000 of which R50 000 is for the removal of
manufacturing equipment and R100 000 for the removal of the trading stock. Is
this R150 000 deductible from the manufacturing income? (3 marks)

6) A company purchases a vacant plot of land for R250 000 with the intention of
constructing a manufacturing factory on the land. The company then spends
R 20 000 on demolition and clearing. Municipal rates incurred in respect of the plot
amounted to R 3 000 for the current tax year. The company managed to let a
portion of the plot out as a parking lot, and so earned rental income of R4 000 for
 the current tax year. How much of the specified expenditure items is deductible
under s11(a)? (5 marks)

REQUIRED Marks
1. Discuss, with clear supporting reasons, the extent to which the
expenditure in each of the above cases would be deductible in terms 20
of s11(a) of the Income Tax Act.

MARKS 20
QUESTION 3 [27 MARKS; 49 MINUTES]

Aneesa Bedeker is 45 years of age and received a salary of R 15 200 per month for
the period from 1 March – 30 June 2019. She also received a bonus of R 10 000 during
this period. She contributes 7,5% of her salary to the company pension fund and
10,5% to a retirement annuity fund.

On 1 July 2019 the business was sold to another company and Aneesa was employed
by the new owners at a salary of R 13 000 per month. She also received an
entertainment allowance of R 1 300 per month, but she does not have to account for
this allowance. The new company had no pension fund, so she increased her
retirement annuity contribution to 12.5% of her salary. Both employers agreed to take
the RAF contributions into account for employees’ tax purposes.

REQUIRED Marks

Show all your calculations and round off to the nearest Rand. Ignore VAT
1 Calculate the employees’ tax deductible from Aneesa’s salary:
a) For the period ended 30 June 2019. 10
b) For the period 1 July 2019 to 29 February 2020. 8
2 Calculate Aneesa’s final tax liability for the 2020 year of assessment. 9

MARKS 27

Question 4 [8 MARKS; 14 MINUTES]

The following question relates to capital gains tax. Please indicate whether the
statement is TRUE or FALSE, provide reasons for your answers:

1. The net capital gains of a natural person for the 2020 year of assessment are
included in the calculation of taxable income at the inclusion rate of 40%.
2. Only natural persons and trusts are entitled to an annual exclusion of R 40 000 for
the 2020 year of assessment.
3. The annual exclusion of R 40 000 can reduce a capital gain or reduce a capital
loss.
4. Non-residents are not subject to capital gains tax in South Africa.
Appendix A – Rates for year of assessments ending 29 February 2020

REBATES (section 6)

• Primary rebate: R 14 220

• Secondary rebate: R 7 749
• Tertiary rebate: R 2 601

MEDICAL REBATES (section 6A)

• Benefits to the taxpayer: R310

• Benefits to the taxpayer and one dependant: R620
• Benefits to each additional dependant: R209.

RATES OF NORMAL TAX

Taxable income (R) Rates of tax (R)

0 – 195 850 18% of taxable income
195 851 – 305 850 35 253 + 26% of taxable income above 195 850
305 851 – 423 300 63 853 + 31% of taxable income above 305 850
423 301 – 555 600 100 263 + 36% of taxable income above 423 300
555 601 – 708 310 147 891 + 39% of taxable income above 555 600
708 311 – 1 500 000 207 448 + 41% of taxable income above 708 310
1 500 001 and above 532 041 + 45% of taxable income above 1 500 000

Travel Allowance

Value of the vehicle (R) Fixed cost (R p.a) Fuel cost (c/km) Maintenance cost (c/km)
0 - 85 000 28 352 95.7 34.4
85 001 - 170 000 50 631 106.8 43.1
170 001 - 255 000 72 983 116.0 47.5
255 001 - 340 000 92 683 124.8 51.9
340 001 - 425 000 112 443 133.5 60.9
425 001 - 510 000 133 147 153.2 71.6
510 001 - 595 000 153 850 158.4 88.9
more than 595 000 153 850 158.4 88.9

Alternative fixed rate for certain reimbursive travel allowances: 361 cents per
kilometer