SU 7 CLASS QUESTION 1 (Test 2020 adjusted) (45 marks, 81 minutes)

Primehyper (Pty) Ltd (hereafter referred to as “Primehyper”) is a resident company that specialises
in the wholesale retail of groceries directly to the public. Primehyper is not currently involved with
any process of manufacture. The company has a 31 December year-end.
The following information from Primehyper’s accounting records in respect of the year of
assessment that ended on 31 December 2023 is presented to you (the tax practitioner) by the
accountant:

SCHEDULE OF ITEMS FOR THE TAXATION CALCULATION

Description Note R
INCOME AND RECEIPTS
Sales of groceries 1 29 999 999
Sale of gift vouchers 2 115 000

EXPENDITURE
Trading stock 3 14 555 000
Staff costs 4 9 000 000
Learnership allowances paid 5 160 000
Rent paid 6 2 800 000
Depreciation 7 1 084 700
Other expenses 8 3 000 000
Billboard expenses 9 50 000
Dividends paid 10 20 000

Notes:

1. Included in the sales amount is pre-payments of R120 000 received from customers who
ordered groceries online on 30 December 2023. The groceries were delivered on 2 January
2024.

2. Primehyper sell gift vouchers in the form of a plastic card that the holder of the voucher can
use to pay for groceries at a future date. Primehyper fully complies with the requirements of
Consumer Protection Act, No 68 of 2009 (CPA) which obliges the issuer of the gift voucher to
honour the gift voucher for at least three years after issue. Primehyper’s accountant therefore
raised a liability in the accounting records which will remain until the gift vouchers are used or
expire.
3. Primehyper’s accountant does not know how to deal with trading stock for taxation purposes
and hence only noted the purchases of trading stock of R14 555 000 during the year. The
accountant did however fill in a questionnaire regarding trading stock, which provided the
following information:

3.1 Opening stock that agrees to the closing stock value on 31 December 2022 amounted to
R8 000 000 on 1 January 2023. During August 2023 Primehyper received trading stock
with a market value of R170 000 from a supplier free of charge as an incentive for
Primehyper to keep the business relationship going. The cost price of these items for the
supplier originally amounted to R125 000.

3.2 Per the physical stock count on 31 December 2023 closing stock amounted to R10 000
000. All the stock can be sold for more than cost price. Trading stock that was being
transported to the warehouse on 31 December 2023 but that arrived too late to be
counted and was also not yet sold (cost price of R67 000, market value of R88 000) is not
included in the closing stock.

3.3 Primehyper made use of a supplier of trading stock’s offer and was awarded R228 000
early settlement discount on 15 November 2023. The settlement discount relates to
purchases made during the current year of assessment that is included in R14 555 000
above. The trading stock to which the settlement discount relates was still on hand on
31 December 2023 (refer note 3.2 above).

3.4 Since Primehyper sells groceries, management sometimes uses trading stock for
purposes other than to make sales. A summary of such trading stock items that was
utilised for different purposes during the year is as follows:

Date used Description Cost Price Market value

January to Trading stock in the form R46 000 R55 000

December 2023 of cleaning materials was
used throughout
Primehyper’s operations.

12 May 2023 Trading stock donated to R13 000 R17 700

a registered PBO and with
the required certificate
received.

22 December 2023 Trading stock given to R275 000 R302 000

employees as Christmas
gifts.

4. Staff costs consists of salaries of R8 000 000 which is the cost to company amount for the
current year of assessment as well as a provision for bonuses amounting to R1 000 000 which
will be paid in January 2024. The amount for bonuses will be finalised after the financial
statements that will show the final profit made during 2023 is audited.
5. Primehyper has learnership agreements with two potential future employees Mr Ismael and Ms
Napo. Primehyper voluntarily paid the allowances of R160 000 (correctly calculated) to Mr
Ismael and Ms Napo for them to cover their living expenses.

Neither Mr Ismael nor Ms Napo is disabled as defined in section 6B(1) of the Income Tax Act
No. 58 of 1962. Their learnership agreements have been registered with the relevant SETA
and titles and codes have been allocated by the Director-General: Department of Labour.
Further details are as follows:
 Mr Ismael who holds an NQF 6 qualification entered into a 24 month learnership
agreement with Primehyper on 1 January 2022. Mr Ismael successfully completed his
learnership agreement on 31 December 2023.
 Ms Napo who holds an NQF 8 qualification entered into a 12-month learnership
agreement with Primehyper on 1 September 2023.

6. Primehyper has a combination of leased and owned assets (also see note 7 below). Rent
relating to Primehyper’s leased vehicles and buildings currently amounts to R200 000 per
month and was paid in advance up to February 2024. The amount of R2 800 000 above is
correctly calculated.

7. Deprecation for the year relates to the following assets:

7.1 Primehyper owns a commercial building that was bought second hand for R50 000 000
(and brought into use) on 1 July 2017.

7.2 The current shop fittings were all installed and brought into use on 1 January 2023. The
cost price and market value was R800 000.

7.3 Electronic office equipment that was bought and brought into use on 1 May 2023 for
R47 000. Primehyper donated the equipment to a registered PBO on 31 December 2023
since management decided to rather lease office equipment from 1 January 2024.
Primehyper unfortunately did not obtain all the required documentation regarding the
donation. The market value of the equipment was R40 000 on the date of the donation.

SARS allows a write-off period in terms of Binding General Ruling No7 for:
o Shop fittings – 6 years
o Electronic office equipment – 3 years

8. These expenses were audited and are all tax deductible.

9. Primehyper’s management realised that they needed to step up marketing in order to maintain
sales volumes during the current tough economic conditions. Primehyper therefore paid R50
000 to Moruleng Mall’s management on 1 July 2023 in order to have the right to erect a large
billboard that will display Primehyper’s logo. The billboard has not been erected by 31
December 2023.

In addition to the billboard, Primehyper’s management is considering giving away free samples
of certain grocery items in order to introduce potential customers to the quality of Primehyper’s
trading stock. Primehyper’s management has, however, at 31 December 2023 not started the
handing out of the free samples since they are concerned about the deductibility of the items
for income tax purposes. Management always considers any potential income tax effects as
part of their operational planning for the business.
10. The dividend was declared to shareholders registered on 16 December 2023 and paid a week
later. All shareholders have submitted the required declarations and written undertakings in
time.

Shareholder analysis:
Shareholder Number of shares Percentage of shares
Atlantis Limited (SA resident company) 400 20%
Jamaica SpA (Italian resident company) 200 10%
Mr J Bhokang (SA resident) 1 200 60%
Mr K la Grange (resident of Australia) 200 10%

Total 2 000 100%

Take note:

South Africa entered into double taxation agreements with Italy and Australia in terms of which
dividends paid to those two countries’ residents are taxed according to the tax treaty at a rate
of 5% where a shareholder holds at least 10% of the shareholding. The shareholders that are
not resident in South Africa do not have a permanent establishment in South Africa.

REQUIRED Marks

(a) Calculate the taxable income (or assessed loss) of Primehyper (Pty) Ltd for the 25
year of assessment that ended on 31 December 2023, in terms of the Income
Tax Act No. 58 of 1962.
The applicable section number of the Income Tax Act No. 58 of 1962 should be
supplied for each item in your answer. Further reasons are not required.
You may ignore any value-added tax (VAT) as well as capital gains tax (CGT)
implications

(b) Assume that Primehyper’s management started to hand out free samples of
trading stock on 1 April 2024 (refer to note 9 above).
Discuss, supported with references to case law, the deductibility of the cost 10
price of the free samples for Primehyper (Pty) Ltd in terms of the Income Tax
Act No. 58 of 1962, during the year of assessment ending on 31 December
2024. You do not need to refer to s22 of the Income Tax Act. SU 3 work

(c) Calculate the dividends tax applicable to each of the respective 10

shareholders. Motivate your answer.
Indicate who is responsible to pay the dividends tax to SARS and at what date
it is payable. SU 9 work

TOTAL MARKS 45