TAX2601 ASSIGNMENT 3 (700143)

DUE DATE: 03 APRIL 2023

STUDENT NUMBER :13263447

STUDENT NAME: SIBONGILE MNANA

TASK 1

a)

1. The amount must not be exempt from income tax.

2. The amount must be of a revenue or capital nature.
3. The amount must be received or accrued by/to the taxpayer.
4. The amount must not be of a capital nature, unless it falls within the range of section 24J
of the Income Tax Act.
5. The amount must not be specifically excluded from the gross income definition by any
other provision of the Income Tax Act.

B)

The R20 000 receipt is of a capital nature in the hands of RentaGeny (Pty) Ltd, therefore should
not be included in the company’s gross income.

In case law, there are various cases stating that in determining whether a receipt or accrual is
capital or revenue in nature, one must look at whether the receipt arose from the realisation of a
capital asset or whether it was received in pursuance of a profit making scheme. In definition,
capital receipts arise selling items such as PPE (selling for your best advantage) and revenue
receipts arise when selling items such as trading stock (selling as a profit making scheme).
Therefore, we can say R20 000 receipt from the selling of the generator (PPE) is of a capital
nature.

RentaGeny (Pty) Ltd purchased the generator with the purpose of earning rental income, but
due to slow business decided to sell it. The sale of the generator was not part of the company’s
regular business operations. Therefore, the transaction was of a capital nature. In the absence
of a change of intention, the disposal of capital asset will result in a receipt of a capital nature.
TASK 2
Definition/ Requirement
Carrying on of trade
Expenditure or loss
Actually incurred
During the year of assessment
In the production
Application
Beach Vibes (Pty) Ltd is carrying on a trade
of selling beach umbrellas (an activity
included in the definition of trade). The R30
000 was acquired while carrying on their
trade of selling
umbrellas.
Beach Vibes incurred expenses in the form of
fees paid to a social media advertising
agency
for the purpose of advertising their beach
umbrellas.
Beach Vibes incurred expenses in the form of
fees paid to a social media advertising
agency
for the purpose of advertising their beach
umbrellas.
Even though not exactly mentioned in section
11(a), the expenditure that the taxpayer
seeks to claim as a deduction must be
incurred during the year in which it is claimed.
This expense was incurred during the year of
assessment
ending 31 January 2023, and therefore, we
need to determine whether it meets the
requirements for deduction under section
11(a) and section 23
The key requirement for the expense to
qualify for deduction under section 11(a) is
that it must have been incurred in the
production of income.
 To identify expenditure incurred for the
purpose of producing income, the courts
(notably in Port Elizabeth Electric Tramway
Co Ltd v CIR (1936 CPD), Joffe and Co (Pty)
Ltd v CIR (1946 AD) and COT v Rendle
(1965 (1) SA 59)) have ruled the
following:
 Firstly, the act giving rise to the
expendituremust have been
performed for the purpose of
producing income, and;
 Secondly, the expenditure in question
must be closely linked to the
performance of the act so identified.
In this case, the expense was
incurred for the purpose of promoting
and selling Beach Vibes' beach
umbrellas, which is clearly related to
the production of income.
Furthermore, the fact that the
advertising campaign was run during
the peak summer months further
strengthens the argument that it was
incurred for the purpose of producing
income.
Not of a capital nature The expense is not of a capital nature, as it
was incurred for the purpose of generating
revenue for the business and does not result
in the acquisition of a capital asset.
Additionally, there is no indication that this
expense is prohibited by any specific
provision in the Income Tax Act.
 Conclusion Therefore, based on the above analysis, we
can conclude that the expense of R30,000
paid to the social media advertising agency is
tax deductible for the year of assessment
ending 31 January 2023, as it meets the
requirements of section 11(a) and section 23.

TASK 3

a) Beach Vibes (Pty) Ltd has a gross income of R4, 500, 000, which exceeds the threshold
for a small business corporation. According to the Income Tax Act, a small business
corporation is defined as a company with a gross income less than R20 million per year.
b) J

Sales 4 500 000,00

Bad debts (including employee loan) : R18,750 – 7000 -11 750,00
Design costs: (R85 000 x 10 %) -850,00
Doubtful debt (R50 000 x 25 %) -12 000,00
Insurance (R20, 000 x 7 months + R30, 000 x 5 months): R270, 000
(deductible) -270 000,00
Inventory purchases -180 000,00
Closing stock 240 000,00
salaries (excluding medical aid contributions): R600, 000 600 000,00
(deductible)
Medical aid contribution -250 000,00
Sundry expenses -30 000,00
Donations: R15, 000 (deductible) -15 000,00
Taxable income 4 570 400,00
Tax liability @28% 1 279 712,00

Reasons for non-taxable amounts:

The insurance premiums paid upfront are deductible in the year in which they are incurred.
Thus, the R180,000 paid for the period of 1 February 2022 t0 32 August 2022 is deductible in
the 2022 year of assessment. The R360,000 paid between 1 September 2022 and 31 August
2023 is deductible in the 2023 year of assessment.

TASK 4

a) The first provisional tax payment for the 2023 year of assessment:
Taxable income for the 2022 year of assessment R821 000
Add: Estimated taxable income for the 2023 year of R905 780
assessment
Total taxable income for the 2023 year of assessment R1 726 780

The basic amount for the calculation of provisional tax is 90 % of the total taxable
income for the 2023 year of assessment, which is R1 554 102 (90% x R1 726 780).
The due date for payment of the first provisional tax payment was 31 August 2022.
Since the client has not made any provisional tax payments yet, the payment is now
overdue, and SARS will charge interest on the outstanding amount. In order to have
prevented the payment of interest and penalties, the client should have made the
payment on or before 31 August 2022.

b) The second provisional tax payment:

Taxable income for the 2023 year of assessment R905 780

(estimated)
Less: Taxable income for 2022 year of assessment R821 000
Taxable income to be taxed in 2023 R84 780

The basic amount for the calculation of provisional tax is 90% of the taxable income to be
taxed in the 2023 year of assessment: (90% x R84 780) which is R76 302.
The due date for the payment of the second provisional tax payment is the last day of the
2023 year of assessment, i.e. 24 February 2024.
c) The interest charged by SARS on the outstanding first provisional tax payment will be
deductible for income tax in the 2023 year of assessment, if it is paid before the end of
that year of assessment. This is due to the fact that the interest is incurred in the
production of income and forms part of the expenses incurred in the production of the
company’s taxable income.