Taxation 2AB

DEDUCTIONS CALCULATIONS
Pretty Candle (Pty) Ltd (“Pretty Candle”) is a resident company that manufactures and retails candles
locally. Pretty Candle has a year of assessment ending on the last day of March. Pretty Candle is a
category A Value Added Tax (“VAT”) vendor.
On 31 December 2022, Pretty Candle’s financial manager resigned. Management has requested you
to assist with the taxable income calculation for the year of assessment ended 31 March 2023, and
supplied you with the following information:
Items from the trial balance (all amounts excluding VAT, unless otherwise stated):
1. Sales of R8 200 000 to local clients.

2. Sales of R700 000 exported to Namibia.

3. Purchases of raw material for R400 000 and packing material of R5 750. Pretty candles did
not have any opening or closing stock.

4. Accounting depreciation of R35 000.

5. Salaries of R2 200 000 paid to employees. A provision for leave pay of R440 000 was created.

6. A speeding fine of R1 200 was paid. This speeding fine related to 12 February 2023, when the
driver of the delivery vehicle exceeded the speed limit on the highway.

7. The following transactions were summarised per the trial balance:

Description Period Amount

Fire safety consultant, for 8 1 March 2023 – 31 October R120 000
months’ service 2023
Membership fees as Forum 1 January 2023 – 31 R24 000
for Alternative Energy December 2023
(“FAE”). By law, Pretty
Candle has to be a member
of this forum
Rental contract for copier 1 August 2022 – 30 July R48 000
machine 2023
Total R192 000

8. On 25 March 2023 dividends of R85 000 was declared and payment made to the shareholders
of Pretty Candle.

Notes of items from invoices and contracts not yet included in the trial balance (all amounts
include VAT where applicable)

A. Insurance premiums of R80 000 was paid to insure the production buildings.

B. Pretty Candles erected a cement billboard construction next to the highway for R230 000.
Every month Pretty Candle replaces the vinyl with a season appropriate advertisement. The
cost of the vinyl advertisements for the 2023 year of assessment amounted to R68 000.

REQUIRED:
Calculate with reasons the taxable income of Pretty Candle (Pty) Ltd for the year of assessment ended
31 March 2023. Supply reasons where amounts have no effect on the calculation.
DEDUCTIONS CASE LAW
Background
You have taken a job as an assistant at a tax advisory company, WE-DO-TAX (Pty) Ltd, during your
June holidays to gain some experience and determine whether tax is something you may want to
pursue as a career after your studies. A manager at the tax firm has approached you for assistance
with a few issues, as he is aware of your choice of studies and thinks that you will have firm knowledge
of some principles that he may have forgotten.
Issue 1 (6 Marks)
Gym Junkies (Pty) Ltd is a company that sells gym clothes, healthy snacks, shakes and gym
equipment for recreational use to the public. They sell to customers through sales agents who sign a
contract with Gym Junkies (Pty) Ltd to sell their products and receive a commission on each product
sold. The contract states that if the sales agents sell more than R100 000 a year worth of products,
for three consecutive years, they receive a bonus of R50 000 at the end of the 3rd year of employment
as a sales agent. Gym Junkies (Pty) employs 60 sales agents and all of them are on track to qualify
for this bonus.
The Accountant of Gym Junkies (Pty) Ltd would like to deduct the R50 000 bonus per employee in
the current year of assessment and has asked WE-DO-TAX (Pty) Ltd for assistance on whether or
not this is possible. Advise the manager of WE-DO-TAX (Pty) Ltd, whether these payments will qualify
as deductions, taking into consideration the relevant case law.
Issue 2 (4 Marks)
Major Miners Ltd is a mining company that mines precious metals. They are currently involved in a
lawsuit where they are being sued for damaging nearby land during their operations. The waste
products are damaging the land and the wildlife that inhabits the area nearby. Major Miner Ltd’s legal
team is of the opinion that they will be found guilty and will have to pay an amount estimated at
R3 500 000 to rehabilitate the land being damaged from their operations. Major Miners Ltd has raised
a provision for this in their accounting records at year end. The matter was not yet finalised by the
courts at year end.
They have enquired form WE-DO-TAX (Pty) Ltd whether or not they are able to deduct the amount
for the purposes of calculating their taxable income as they have already deducted it for accounting
purposes. Explain, using the relevant case law, to the manager of WE-DO-TAX (Pty) Ltd, whether it
can be deducted for tax purposes?
Issue 3 (5 Marks)
Meds-R-Us is a company that is involved in the production of medication. The company has numerous
health and safety requirements that must be adhered to. The company has experienced a high
demand for its products. This has resulted in the health and safety practices not being emphasised,
enforced and monitored effectively. Meds-R-Us also stopped implementing the new health and safety
requirements that have come about in recent years. An employee came into contact with a chemical
that is dangerous in its undiluted form and incurred serious injuries. The company paid all the medical
expenditure of the employee.
Meds-R-Us has requested advice from WE-DO-TAX (Pty) Ltd on whether or not the medical
expenditure is deductible. You are required to respond to Meds-R-Us on the matter and provide case
law to support your answers.
Issue 4
Part A (5 Marks)
Computer Solutions (Pty) Ltd is a company that specialises in solving hardware and software issues
of customers. They decided to upgrade the computers that are used by their employees and
purchased new computers to be used by staff in the running of their operations.
Computer Solutions (Pty) Ltd would like to deduct the expenditure incurred in purchasing their
computers. They have asked WE-DO-TAX (Pty) Ltd to confirm whether these expenditure items will
qualify as deductions. You are required to respond to Computer Solutions (Pty) Ltd by referring to
applicable case law.