RHODES UNIVERSITY

DEPARTMENT OF ACCOUNTING

TAXATION 3

EXAMINATION: JUNE 2019

MARKS: 100 WRITING TIME: 180 minutes

EXAMINERS: INTERNAL MODERATORS:

Mr EB Horn Mr HN Harnett
Mr R Poole

_________________________________________________________________________
GENERAL INSTRUCTIONS TO CANDIDATES
1. There are 3 questions on 6 pages in this paper. Addenda will be supplied separately.
2. Questions must be answered in blue or black ink. No erasable pens, pencils or
correction fluid/tape may be used.
3. EACH QUESTION MUST BE ANSWERED IN A SEPARATE ANSWER BOOK.
4. It is in the candidate’s interest to write legibly.
5. Candidates may make use of the Oxford Concise English Dictionary.
6. Permitted text: The Consolidated Income Tax Act 2018/2019.
7. Under no circumstances may questions relating to this paper be raised after the initial
reading time. Thereafter, candidates must use their initiative to deal with any perceived
errors or ambiguities in the paper. Any assumptions made by the candidate should be
clearly stated.

QUESTION MARKS TIME (in minutes)

1 10 18
2 25 45
3 65 117
TOTAL 100 180

Tax 3 Examination – June 2019 Page 1 of 6

QUESTION 1 10 MARKS; 18 MINUTES

African Arts Trading (Pty) Ltd (AAT) is a South-African resident company with a year of
assessment, which ends on 31 December. AAT’s shareholders are also its directors. AAT
operates in the South African art trading market, and until 2015 performed very well. However,
in 2015 AAT’s profitability started to decrease due to the entrance of larger companies to the
industry.

AAT recorded assessed losses in the 2016 and 2017 years of assessment amounting to
R150 million in total. In June 2018, AAT ceased trading. The company has not traded since.

In January 2019, five energetic, enthusiastic and young Rhodes University graduates, who
believe they have the collective ability to turn the company around, bought out AAT’s existing
shareholders. The new shareholders are also AAT’s new directors. The graduates’ plan is that
AAT should start trading again on 1 July 2019. Based on their budget and market research,
the graduates estimate that AAT will realise a small profit for tax purposes in the 2019 year of
assessment. However, they do not anticipate having to pay any income tax for the next two
years due to the R150 million assessed loss carried forward at the end of the 2017 year of
assessment. Consequently, they are of the opinion that AAT does not need to pay any income
tax as required by the Income Tax Act.

REQUIRED

Marks
Sub-
total Total
a) Advise AAT’s directors of whether Africa Arts Trading (Pty) Ltd will be
able to offset the assessed loss brought forward from the 2017 year
of assessment against income in the 2019 year of assessment. 5 5
b) Discuss the tax administration consequences should the
Commissioner for SARS disallow the assessed loss in the 2019 year
of assessment. Do not refer to sections 80A-L or section 103 in your
answer. Your advice should refer to relevant legislation and case law. 4 4
Communication skills – logical argument 1 1
TOTAL 10

Tax 3 Examination – June 2019 Page 2 of 6

QUESTION 2 25 MARKS; 45 MINUTES

Fans of Joza City (Pty) Ltd (a football club in Makhanda) attended a match in Port Alfred on
16 January 2018. After a surprize loss of 5 – 0 to Ndlambe Warriors (Pty) Ltd, the fans went
out of control and caused severe damage to Ndlambe’s Warriors’ property.

Ndlambe Warriors instituted legal action against Joza City for the damage caused by Joza
City’s fans. Judgment was handed down in favour of Ndlambe Warriors in November 2018,
awarding them R1.5 million, broken down as follows:
 R500 000 for loss of income (while the property was being repaired); and
 R1 million for medical expenses in respect of injured spectators.

Following the judgment handed down by the Court in November 2018, the full amount of
R1.5 million was settled on 1 December 2018. Joza City incurred legal fees of R50 000
defending the action. Ndlambe Warriors incurred R800 000 repairing their stadium.

Both Joza City and Ndlambe Warriors have years of assessment, which end on the last day
of February, and the Commissioner for SARS regards Joza City and Ndlambe Warriors to be
trading.

REQUIRED

Marks
In all cases, make appropriate reference to legislation and case Sub-
law in support of your arguments. total Total
a) Draft a memorandum to the Board of Directors of Joza City advising
them of the tax deductibility of the following amounts incurred for the
year of assessment ending 28 February 2019: 14
a) R1.5 million in damages; and 6
b) R50 000 in legal fees.

Communication skills – presentation and logical argument 2 22

b) Advise Ndlambe Warriors (Pty) Ltd as to the tax deductibility of the
R800 000 spent on repairs to their stadium for the year of assessment
ending 28 February 2019 3 3
TOTAL 25

Tax 3 Examination – June 2019 Page 3 of 6

QUESTION 3 65 MARKS; 117 MINUTES

Africa Building Contractors (ABC) (Pty) Ltd is a South-African resident company with a year
of assessment, which ends on 31 December. ABC’s shareholders are also its directors. In
terms of Practice Note 42, the Commissioner for SARS regards the construction of buildings,
including plumbing and sewerage as a process similar to a process of manufacture. ABC is
not a small business corporation in terms of s12E(4) of the Income Tax Act.

Key:
 EUR = Euro
 NGN = Nigerian Naira
 HKD = Hong Kong Dollar

Transactions

1. ABC constructed a house at a cost of R750 000 during the 2018 year of assessment. ABC
donated the house to a children’s home on 17 November 2018, at which date the market
value amounted to R800 000. The children’s home is a registered Public Benefit
Organisation as contemplated in section 30 of the Income Tax Act and ABC has obtained
the relevant section 18A certificate. (5 marks)

2. ABC employed seven interns who commenced a 12-month learnership agreement on

1 July 2017. All seven interns have an NQF level 5 qualification. The learnership
agreements were registered with the Construction Education and Training Authority SETA
(CETA) on 1 July 2017. Two interns left ABC’s employ on 31 December 2017 and did not
complete the learnership. ABC has complied with all the administrative requirements in
terms of the Income Tax Act. (7 marks)

3. On 3 February 2018 ABC disposed of a cement mixer which was used in the building
process for R90 000 to an unrelated party. ABC purchased the cement mixer new on
30 December 2015 for R75 000 (market value R80 000) and brought it into use on
7 January 2016 in the building process. In order to replace the cement mixer, ABC used
all the proceeds on disposal and purchased a second hand mixer at a cost of R160 000
on 27 February 2018 and brought the cement mixer into use on 1 March 2018 in trade.
(12 marks)

Tax 3 Examination – June 2019 Page 4 of 6

4. ABC purchased three floors directly from a developer in an administrative block consisting
of 15 floors; the three floors will house ABC’s finance and administrative division. ABC
purchased the three floors at a cost of R1 250 000 (market value R1 200 000) on
30 June 2018 and brought it into use on 3 July 2018. (4 marks)

5. ABC imported trading stock from Italy at a cost of EUR10 000. The trading stock was
shipped Free On Board on 1 November 2018 and the accounts payable was settled on
31 January 2019. The trading stock will be used in the construction of the houses.
ABC paid customs duty of R10 700 on importation. (5 marks)

6. ABC sold a manufacturing machine for NGN20 000 000 to an unrelated party on
30 November 2018. This manufacturing machine was purchased new for HKD7 500 000
on 1 March 2014 and brought into use on 3 April 2014 in the construction business.
(4 marks)

The relevant exchange rates for notes 5 and 6 are:

Spot rate Average rate
1 March 2014 HKD1 = R1.67
3 April 2014 HKD1 = R1.79
Average exchange rate: HKD1 = R1.72
2014 year of assessment
1 November 2018 EUR1 = R14.25
30 November 2018 HKD1 = R1.85
NGN1 = R0.040
Average exchange rate: HKD1 = R1.79
2018 year of assessment NGN1 = R0.036
31 December 2018 EUR1 = R13.28

7. ABC entered into a contract on 1 December 2018 to supply and install built in cupboards
for an all-inclusive contract price of R750 000. ABC estimates that it will incur
tax-deductible costs totalling R325 000 during the 2018 year of assessment in carrying out
its obligations in terms of the contract. This cost relates to the purchase of materials for
the cupboards, which does not form part of ABC’s normal trading stock, the production
cost and the cost of installation. ABC received a deposit of R375 000 (as part consideration
for the contract amount) on 3 December 2018. ABC commenced work on the contract on
5 December 2018. ABC incurred expenditure amounting to R250 000 in relation to this
contract during December 2018. (8 marks)

Tax 3 Examination – June 2019 Page 5 of 6

8. On 17 October 2018, ABC received a foreign dividend of R125 000 after deducting
7.5% Nigerian foreign withholding tax (with a Rand equivalent of R10 135). ABC holds 6%
of the equity shares and voting rights in the Nigerian incorporated company.
Persons that are not connected to ABC and companies that do not form part of the same
group of companies hold the remaining 94% shareholding. (6 marks)

9. On 1 June 2018 Group 9 (Pty) Ltd (a 70% shareholder of ABC) borrowed R1 250 000 at
8% per annum from a local bank and on the same date lent the full amount to ABC at
10% per annum to finance the purchase of the administrative floors (refer to note 4). The
capital amount of the loan will be repaid in 2020. Group 9 has a year of assessment that
ends on 31 December (Acknowledgement: SAICA ITC – January 2018 (adapted)).

ABC uses all available elections to minimise their income tax liability.

REQUIRED

IGNORE VALUE-ADDED TAX (VAT) Marks

Sub-
total Total
a) Discuss the income tax consequences of transactions 1 to 8 for
Africa Building Contractors (Pty) Ltd, for the year of assessment
ended 31 December 2018. Your discussion should include 51
calculations, references to relevant legislation and case law.

Communication skills – logical argument and appropriate style 1 52

b) In respect of transaction 9, discuss the income tax consequences
for Group 9 (Pty) Ltd for the year of assessment ended
31 December 2018 relating to the loan advanced by Group 9
(Pty) Ltd. Your discussion should include references to relevant 12
legislation and case law.

Communication skills – logical argument and appropriate style 1 13

TOTAL 65

END OF THE EXAMINATION

Tax 3 Examination – June 2019 Page 6 of 6