Principles of Taxation

TAX2601
2023 Semester 2

ASSESSMENT 3 - SOLUTION
 TAX2601/2023/Semester 2/Solution to assessment 3
____________________________________________________________________________

QUESTION 1 (28 marks)

PART A (22 marks)

Normal tax liability of Health Harmony (Pty) Ltd for the 2023 year of
assessment (31 March 2023) R
Calculated taxable income - given 6 785 000
Add / (deduct):
Dividend received from OJuicy 50 000 (1)
Less: Exempt income (50 000) (1)
Rental income received (R15 000 x 9 months) (gross income) 135 000 (1)
Leasehold improvements effected by the lessee:
- Specific inclusion in gross income ito par (h)
- But, inclusion limited to the amount stipulated in the agreement 100 000 (1)
Inventory:
Purchases of trading stock (s11(a)) (1 789 000) (1)
Add: Closing stock at lower of cost or market value 300 670 (1)
Deduct: Opening stock at lower of cost or market value (665 430) (1)
Expired supplements sold to family members:
Recoupment at market value (R26 000 R12 800) (s22(8)) 13 200 (2)
Marketing expense:
- Portion relating to the current yoa - 1 Mar to 31 Mar 2023 (s11(a))
(R90 000/10months x 1month (Mar 2023)) (9 000) (1)
- Portion relating to the following yoa 1 Apr 31 Dec 2023 is the
prepaid portion (s23H) (R90 000/10 x 9months) = R81 000
Prepaid portion relates to a period that is greater than 6 months, but is less
than R100 000, therefore deductible in the current yoa (s23H proviso (bb)) (81 000) (2)
Expenditure relating to patents: (s11(gB))
Term extension deduct in full (35 000) (1)
Knowledge in connection with a patent - R60 000 x 5% (3 000) (1)
Bad debts written off: (s11(i))
Bad debts relating to product sales (58 000) (1)
Bad debt relating to employee:
- Loan made to employee (amount not previously included in income) Nil (1)
- Interest accrued on the loan (previously included in income) (1 000) (1)
Restraint of trade:
Lesser amount of: R1 000 000/1year or R1 000 000/3years = R333 333 (333 333) (2)
Taxable Income 4 359 107 (1)

Normal tax liability @ 27% 1 176 959 (2)

Marks [22]

2
 TAX2601/2023/Semester 2/Solution to assessment 3
____________________________________________________________________________

PART B (6 marks)
First provisional tax payment R
Basic amount to be determined:
- 2023, not yet assessed (1)
- 2022, assessed 20 August 2023 issued more than 14 days before new
provisional payment is due, therefore may be used. (1)
- No adjustment of 8% required as not more than 18 months have passed
before provisional tax is due. (1)
Basic amount used 1 966 500 (1)
R1 966 500 X 27% 530 955 (1)
R530 955 X 50% 265 478 (1)
The due date is 30 September 2023 (1)
Marks [7]
Max [6]

QUESTION 2 (12 marks)

Definition Application
Carrying on of a trade The expense is incurred for trade - operating as a franchise (2)
restaurant.
Expenditure or loss In this case there is an amount to be paid, i.e. R80 000, if turnover (2)
exceeds R4 million
Actually incurred The R80 000 is dependent on a condition - whether the turnover (5)
will exceed R4 million at the end of 28 Feb 2023.
There is no definite and absolute liability to pay this amount
before or even at year end (28 Feb 2023), there is no way of
knowing whether the annual turnover will exceed R4 million.
Also, the fact that the amount was actually paid does not make it
actually incurred (except if for some reason it was not refundable).
However, in this instance the amount would have become
refundable to Bella Italia if a turnover of R4 million was not
reached.
The expenditure has therefore not been actually incurred.
Case law: Edgars Stores
During the year of The R80 000 relates to the 28 Feb 2023 year of assessment. (1)
assessment

In the production of In this case the expense relates closely to the business of (2)
income operating a restaurant (close concomitant) and therefore, is
incurred in the production of income
Not of a capital nature Not required
Sec 23 prohibition Not applicable
Overall conclusion The expense of R80 000 does not meet all the requirements of
the general deduction formula and will not be deducted for (1)
income tax purposes.
Total marks [13]
Max [12]
© Unisa