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CTA2022 - Suggested Solution

Examples and exercises in the slides
Taxation Marks

Example 1(a) - Kevin Gouws

Kevin ceased to be an ordinary resident of the Republic on 18 May 2021 because he relocated to Singapore on 1
that date with the intention not to come back. He does not consider South Africa his principal home and real home 1
because he does not intend to return. Therefore, Kevin ceased to be a resident with effect from 18 May 2021. 1

Note The physical precence test should not be applied in the year during the 2022 year of assessment because 1
it is the year Kevin ceased to be ordinary resident. In any case, Kevin does not meet the physical prencence
test as he did not spent at least 91 days in the Republic in the current year of assessment ending 28 February 1
2022. Kevin spent only 79 days in the Republic in the current year of assessment. 1

Kevin is deemed to have disposed of all his capital assets (except those assets that remain within the capital 1
gains tax net) at their market value on 17 May 2021 (s9H(2)(a)(i)), the day before he ceased to be a resident. 1
His year of assessment as a resident, then ends on 17 May 2021 (s9H(2)(a)(ii)). Kevin's year of assessment as 1
a non-resident commences on 18 May 2021 (s9H(2)(a)(iii)). 1

Kevin will thus have to submit two tax returns during the 2022 year of assessment: 1
1 Kevin's taxable income as a resident for the period ended 17 May 2021 1
2 Kevin's taxable income as a non-resident (18 May 2021 to 28 February 2022) 1

Possible 13
Maximum 13

Example 1(b) - Kevin Gouws

Kevin is deemed to have disposed of the shares on 17/05/2021 when he ceased to be a resident. The proceeds on disposal 1
of the shares of R935 000 should not be included in gross income because it is a proceeds of a capital nature. This is as a 1
result of the shares being held with the intention as a capital asset rather than for speculative purposes. In any case, the 1
shares were held for 7 years (being more than 3 years) and would thus be qualifying shares in terms of section 9C, thus 1
the proceeds is capital in nature.

The capital gain shall be calculated as follows:

Proceeds, deemed to be market value 935 000 1
Base cost, is the sum of 15 550
(A) Original cost (par 20) 15 000 1
(B) Paragraph 20(1)(g) (1/3 x R15 000 x 1.1 x 10%) 550 1
(adding one third of the interest on money borrowed to fund 1
the acquisition cost of the shares (par 20(1)(g)).
Capital gain 919 450

This capital gain shall be aggregated with other capital gains, reduced with capital losses and annual exclusion of R40 000 1
and reduced with assessed capital loss and included in taxable income as a resident at the inclusion rate of 40%. 1

The dividend should be included in taxable income of Kevin as a non-resident because it is from a South African Source. 1
Dividend income
*Gross income inclusion - South African source (s9(2)(a)) (R24 000/80%) 30 000 1
*Section 10(1)(k)(i)) local dividends exemption (30 000) 1

Possible 13
Maximum 13

Example 1(c) - Kevin Gouws

Kevin has disposed of his house on 1 May 2021 through the transfer of ownership rights as 1
ruled by the court (par 11 of the 8th Schedule). Capital gains tax is triggered and calculated as
follows: Proceeds 1 620 000 1
Base cost (265 000 + 675 000)/2 470 000 1
Capital gain 1 150 000

Kevin would not be able to disregard the entire capital gain arising from a disposal of his interest B 1
in a primary residence for proceeds of less than R2 million as provided by par 45(1)(b)) B 1
because he was not ordinarily resident in that house throughout the period which he 1
held the interest in the in that house (par 45(4)(a)).

It must be noted that the first few months when the land was vacant because the property was still built will be an
exception provided by par 48 and not excluded from primary residence exclusion because the residence was erected 1
on a land acquired with the intention of being a primary residence. 1
He would have to use the primary residence exclusion to the extent of the capital gain that is
attributable to the period during which he was ordinarily resident in the house (par 47): 1
*Subject to primary residence exclusion (4.5/6 years) 862 500 1
*Not subject to primary residence exclusion (1.5/6 years) 287 500 1
Kevin will be entitled to use half of the primary residence exclusion (R1 million) because he 1
held the interest jointly with Karen (par 45(2)). The entire R862 500 will be disregarded. 1
The remaining R287 500 capital gain shall be aggregated with other capital gains 1

Possible 14
Maximum 14

Example 2 - John Chung

First property
Proceeds of R150 000 do not exceed costs of R275 000 (R250 000 + 25 000) and costs of R275 000 exceeds both the market 1
value of R200 000 and proceeds of R150 000. Hence paragraph 27 will apply and the valuation date value is the higher of: 1
1) Market value on 1 October 2001 of R200 000; and 1
2) Proceeds less post valuation date costs = R150 000 - R25 000 = R125 000 1
Therefore, valuation date value = R200 000 1

Proceeds 150 000 1

Base cost (R200 000 + R25 000) 225 000 1
Capital loss (75 000)

Second property
Proceeds of R160 000 exceeds the costs of R115 000 (R100 000 + R15 000). Therefore, paragraph 26 will apply and the 2
valuation date value is the higher of: 1) Market value on 1 October 2001 of R205 000 1
2) 20% of (proceeds less post valuation date costs) = 20% x (R160 000 less 1
R15 000) = R29 000
3) TABC of R125 000 1
Valuation date value = R205 000 1

The market value of R205 000 is the chosen valuation date value but it does not exceed the proceeds of R160 000, therefore, 1
the valuation date value will be limited to the proceeds less the post valuation date costs = R160 000 - 15 000 = R145 000 1

Proceeds 160 000 1

Base cost (R145 000 + R15 000) 160 000 1
Capital gain/loss -

Possible 17
Maximum 17

Example 3 and 4: to be discussed in classed

Example 5 - John Soap

Soap Family Trust

Amount donated (R150 000 / 2) 75 000 1
General exemption - section 56(2)(b) (75 000) 1
-

Chan-re Soap
Amount donated 20 000 1
Section 56(1)(b) exemption (20 000) 1
-

Jelly Soap
Amount donated 30 000 1
Bona fide maintenance exemption - section 56(2)(c) (30 000) 1
-
Soya Soap
Amount donated 30 000 1
General exemption - section 56(2)(b) (25 000) 1
5 000
Donations tax rate - section 64 20% 1
Donations tax payable 1 000

DANC Political Party

Amount donated 5 000 1
Section 56(1)(h) exemption (5 000) 1
-

Aunt Butter
Amount donated (R50 000 /2) 25 000 1
Section 56(1)(e) exemption (25 000) 1
-

Possible 13
Maximum 13

Example 6(a) - Isaac Maps

Usufruct
Value of donation based on shorter life expectancy of donor or donee
(The shorter life expectancy is that of donor - age next birthday) 2 784 642 1
Exempt donation because it is a voluntary award the value of which is required to be included in the gross
income of the recipient or donee in terms of paragraph (c), (d) or (i) of the gross income definition in s 1 (2 784 642) 1
Taxable value of donation -

Bare domium
Value of property 3 500 000 1
Value of usufruct based on usufructuary's life expectancy (domestic helper's age next birthday) (3 105 425) 1
Value of bare dominium 394 575

Donations tax calculation

Value of bare dominium 394 575
General exemption - section 56(2) (100 000) 1
294 575
Donations tax rate - section 64 20% 1
Donations tax payable 58 915

Possible 6
Maximum 6
Example 6(b) - Isaac Maps

Family home
*Proceeds, deemed disposal at market value 3 500 000 1
*Base cost (845 449)
Original cost 800 000 1
Donations tax (R58 915*(R3 500 000 - R800 000)/R3 500 000) 45 449 1
*Capital gain 2 654 551
*Primary residence exclusion (paragraph 45) (2 000 000) 1
*Capital gain 654 551

Possible 4
Maximum 4

Example 7 - Jabu Gumbi

Jabu will be liable for donations tax for not charging a market-related interest on the loan to the trust (section 7C). 1
The donations tax will be levied in terms of s 54 and calculated using the difference between the official rate of interest 1
(the repo rate plus 100 basis points) and the actual interest charged of Rnil as follows: 1
Interest from 1 March 2020 to 31 July 2020 (R3.8 million x 7.75% x 153/365) 123 448 1
Interest from 1 August 2020 to 29 Feb 2021 (R3.8 million x 7.50% x 213/365) 166 315 1
289 763
Less general donation exemption (if not used) (100 000) 1
189 763
Donations tax at 20% (section 64(1)(a)(i)) 37 953 1

The donation is deemed to be made by Jabu on 29 February 2021 (last day of the end of the year of assessment) 1
and the donations tax is payable on 31 March 2021 (the end of the month following the month of the donation). 1

Possible 9
Maximum 9

Example 8 - Advance Ltd

Seller
It will be tax efficient (cash flow and administrative wise) for the sale of the building to be arranged and treated as a sale 1
of a going concern because all of the criteria necessary for such a sale can be met: 1
1) Both Advance Ltd and the seller are VAT vendors 1
2) They can agree in writing that the building is disposed of as a going concern 1
3) That the building will be an income-earning activity on the date of transfer with all leases continuing as such 1
4) The building necessary for carrying on such enterprise is part of the disposal 1
5) Agree that the consideration for that supply is inclusive of VAT at the rate of zero percent. 1
The seller purchased the building with the intention of making more than 50% taxable supplies. The supplies were made 1
as follows: 1) Shops and offices are commercial accommodation that are taxable supplies at the standard rate of 15%. 1
2) Residential units are exempt supplies. 1
The business is that making 90% taxable supplies 1

The sale of the building will therefore be treated as a going concern in full and subject to 0% VAT (zero-rated sale). 1
The output VAT will amount to Rnil (R2 850 000*0%). As the entire sale of a building is a taxable supply, input VAT 1
should be claimed in full. Only 90% of the input VAT was claimed on purchase; hence an additional 1
section 16(3)(h ) input VAT can be claimed on the remaining 10%. The additional input VAT is calculated as follows: 1
A x B x C, where A - is the tax fraction of 15/115 1
B - is the lesser of
1) the adjusted cost of R1 150 000 (R1 000 000*115/100); 1
2) the market value (B in the formula) during a change of use - not applicable; and
3) the open market value on sale of R2 850 000 (R2 850 000*100/100) (NB: VAT = 0%) 1
- the lesser is R1 150 000 1
C - 10% 1
Therefore, the section 16(3)(h ) adjustment amounts to R15 000 (15/115*R1 150 000*10%). 1

Advance Ltd
Advance Ltd paid Rnil amount in respect of the going concern sale and will thus claim Rnil input VAT. However, since 1
Advance is only going to use 70% of the building to make taxable supplies, there must be a s18A output VAT adjustment 1
that is calculated as follows: Consideration 2 850 000 1
Less value of assets that will be used 100% in making taxable supplies -
Less value of assets for which input VAT is denied -
2 850 000
Multiplied by non-taxable use of 30% 855 000 1
Multiplied by 15% 128 250 1
In both cases the timing of the supply is the earlier of the invoice or payment of the consideration. 1
Possible 27
Maximum 25
Example 9 - Employee

Output tax on deemed supply in respect of right of use granted to employee:

Step 1 R160 000 (determined value already excludes VAT)
Step 2 R160 000 x 0.3% = R480
Step 3 R480 - R150 (insurance) - R70 (maintenance) = R260
The fule is zero-rated, interest is exempt and fixed costs have a denied input VAT and thus not deductible
The R150 and R70 constitute a separate supply on which output tax is levied (see below)
Step 4 R260 x 15/115 = R33.91
Step 5 R33.91 x 100% x 2 = R67.82 output tax for the two months payable by the employer on the fringe benefit

Output tax on supply at value in respect of consideration received:

The employer must account for output tax on the consideration paid by the employee to the employer in respect of the
insurance and maintenance (the employer probably claimed the VAT on these expenses paid by him.)
R150 + R70 = R220 x 15/115 x 2 = R57.39

Total output tax = (R67.82 x 80%) + R57.39 = R111.65