QUESTION 1 (4 Marks; 6 Minutes)

Lessor (Pty) Ltd had a 2 year rental agreement (starting 1 January 2021) with a tenant for
one of its beachfront properties. Lessor (Pty) Ltd’s tenant was abroad on holiday for the first
quarter of the 2022 calendar year. On 28 February 2022 (Lessor (Pty) Ltd’s financial year-
end) both the January 2022 and February 2022 rentals were still outstanding. The property
is let at R9 900 per month. All rentals due up to 31 December 2021 have been received by
Lessor (Pty) Ltd.

REQUIRED:
Determine and discuss the amount of rentals which Lessor (Pty) Ltd will be required to
include in its gross income for the 2022 year of assessment. Make reference to case law to
support your determinations.
QUESTION 2 (12 marks; 22 minutes)

Horison Investment CC (Horison Investment) is a resident Closed Corporation that acquires

buildings to rent out to businesses to earn rental income. Horison Investment’s financial year
end is 30 June.

Horison Investment specialises in the acquisition of buildings that are then adapted by
Horison Investment to the specifications of businesses in the book printing industry. These
specifically furnished buildings are then rented out to printing businesses. Fifteen buildings
were acquired for this purpose more than ten years ago.

A decrease in the demand for printed books, due to the increase in the popularity of e-books,
negatively affected the book printing industry which caused many of Horison Investment’s
tenants to not renew their lease contracts. New tenants in this market could not be found.
Therefore Horison Investment had to sell five of the fifteen buildings over the past two years
to remain financially afloat. The proceeds from the disposal of these buildings were invested
in a fixed deposit at a bank until Horison Investment could find better opportunities.

Eight of the remaining ten buildings were refurbished to comply with the specifications of
other tenants and were re-rented. The two remaining buildings were earmarked for a new
project after the marketing manager became aware of a new development that was planned
in the area were the two buildings are situated and only few people were aware of this fact.
The buildings were adapted at a high cost during the year ended 30 June 2022 to comply
with the specifications of the market in this new development. The marketing manager ran
extensive marketing campaigns to market these two properties for sale as the profit potential
was much higher if the buildings were disposed of instead of also refurbishing it to the
specifications of new tenants in other industries for renting out.

The two buildings were sold at a profit of R3 million on 25 May 2022 at the time of the
announcement of the new development.

REQUIRED Marks
Discuss, with reference to the Income Tax Act 58 of 1962 and applicable case
a) 12
law, whether Horison Investment CC will have to include the proceeds of the sale
of the two buildings on 25 May 2022 in the gross income for the year ended
30 June 2022.
TOTAL MARKS 12
QUESTION 3 (12 marks; 22 minutes)

Mrs Ooh-la-la owns a nail salon. She is famous for her extensive range problem solving nail
treatments. She guarantees her customers that they will not break a nail for at least four
weeks after they had one of her treatments. In the very rare circumstance of a nail breaking
within four weeks, she refunds her customer the full amount of the treatment.

Mr Mechanic visited Mrs Ooh-la-la’s nail salon on 1 February 2022 to get a nail treatment to
the value of R1 000. He paid her an amount of R1 000 in cash for his treatment.

Mrs Beauty visited Mrs Ooh-la-la’s nail salon on 25 February 2022 to get a nail treatment to
the value of R1 500. She couldn’t believe that none of her nails would break for four weeks
and therefore Mrs Ooh-la-la gave her permission to only pay for her treatment after the four
weeks have passed if none of her nails broke in these four weeks.

Mrs Ooh-la-la, while cutting her hair entered into a conversation with her hairdresser, Mrs
Snow. They made a bet that if Mrs Snow gets a nail treatment and none of her nails break
within four weeks she would pay Mrs Ooh-la-la an amount of R2 000. Mrs Snow received the
treatment on 3 February 2022. Mrs Snow did not break a nail by 28 February 2022 (after four
weeks) and paid the betting amount on 25 March 2022.

REQUIRED Marks

a) Discuss, with reference to the Income Tax Act No. 58 of 1962 and applicable 12
case law, whether the amounts received by Mrs Ooh-la-la will be included in her
gross income for the 2022 year of assessment.

TOTAL MARKS 12
QUESTION 4 (20 marks; 36 minutes)

Pukki Outfitters CC (hereafter referred to as Pukki) is a resident CC established by students.

The business supplies personalised outfits to residences at universities. Pukki’s year end is
31 January 2022.

Transaction 1 (5 marks; 9 minutes)

Pukki has entered into a contract with Onthou-My-Altyd ladies residence for the supply of the
2022 first year’s outfits.

In terms of this contract the costs relating to this order amounts to R20 000. An initial
payment of R17 000 is required before 3 January 2022 to activate the order. The outfits have
to be supplied to the residence on 27 January 2022.

The residence has seven days from delivery to test the quality of the outfits. If any defects in
the quality, as stipulated in the contract, were found, Pukki would forfeit the outstanding
payment of
R3 000 from the residence.

Transaction 2 (15 marks; 27 minutes)

Pukki bought a piece of land in the town for R250 000 five years ago. They planned to build
a wooden building on this land from where they were planning to operate the business.
Pukki has not yet made enough money to build the wooden building. Pukki in the meantime
accepted an offer from a developer to purchase the land from them as it was a very
profitable deal for Pukki.

The developer erected ten independent flats on the premises. They offered Pukki one flat
with a value of R750 000 as payment for the piece of land.

REQUIRED Marks
Discuss, with reference to the Income Tax Act 58 of 1962 and case law, if any of
these amounts will be included in the gross income of Pukki Outfitters CC for the
year ended 31 January 2022.
a) Transaction 1 5

b) Transaction 2 15

TOTAL MARKS 20
QUESTION 5 (17 marks, 31 minutes)

Eddie, a South African resident, is a sales representative of Green Ltd, a company that sells
pesticides to farmers. Eddie is very diligent in following the application instructions as
indicated on the labels of products when he makes a recommendation to a client.
All sales representatives of Green Ltd earn commission of 15% on sales. Commission on a
sales transaction is only payable to the sales representatives once the specific outstanding
invoice has been collected by the sales representatives.
Eddie sold 800 litres of Gardomil (a pesticide used on maize) for R56 000 (R70 a litre) on
15 November 2021 to a client, earning him commission of R8 400.
The client sprayed the product on his maize during December 2021 as per Eddie’s
recommendation, but was not happy with the results thereof. Eddie investigated the query
and found that there was an error on the application instruction of the Gardomil label. On 2
January 2022 Eddie then offered to supply the client with the same product at his (Eddie’s)
own cost, which amounted to R45 000 together with a new recommendation as per the
correct application instruction. The client accepted the offer, applied the replacement
product as per the new recommendation and was happy with the results. Eddie paid the
R45 000 on 31 January 2022.
Eddie managed to collect this outstanding invoice by 15 February 2022. His commission
was paid out to him on 31 March 2022.

REQUIRED Marks

a) Discuss, with reference to the Income Tax Act No. 58 of 1962 and applicable 8
case law, if the commission received by Eddie will be included in his gross
income for the 2022 year of assessment. Ignore VAT.

b) Discuss, with reference to the Income Tax Act No. 58 of 1962 and applicable 9
case law, whether Eddie will be entitled to a deduction for the R45 000 product
cost incurred, in determining his taxable income for the 2022 year of
assessment. Ignore VAT.

TOTAL MARKS 17