Module Name: Taxation 3

Module Code: Tax3226N_3247N

Application-based Assignment for the October 2024 Examination

Cycle

Examination Date:
Examiner: FJ de Hart Moderator: Mpofu

Marks: 100 NQF Level: 7

INSTRUCTIONS
1. Follow all the instructions and complete all tasks.
2. Students may not work in groups or consult other students. The final product must be your own work.
3. Copying directly from text or other student’s work will result in being awarded a 0% and the possibility of
disciplinary action.
4. Should the College suspect that an individual other than the registered student has completed the
examination on the student’s behalf, the student will be disqualified, and/or awarded 0%.
5. The College reserves the right to request a student to complete an oral examination should cheating or
plagiarism be suspected.
6. Please sign the declaration section found in the answer book on page 2 to verify that you are the student.
7. This examination must be submitted within the specified time frame. Late submissions will not be
accepted and therefore, marked.
8. Once you have typed/handwritten your answers, save your document in PDF format, and then upload to
myClass. Your uploaded document must be in PDF format.
9. Number all pages of your answer book.
10. Put your name and or student number at the top of each page.
11. Use the allocation of marks for each task as a guideline on how to structure your answer.
12. Do not change the numbering of the questions per task.
13. Do not use WhatsApp language when answering questions. Such answers will not be marked.
14. Keep enough power or electricity backups as the College will not be responsible for any power failures
during online assessments. Candidates are encouraged to make alternative arrangements such as using a
power bank etc.
15. Keep a copy of your assessment answer book.
QUESTION 1 (15 marks)

The following information regarding D-Analytics (Pty) Ltd has been provided to you:

• The company analyses consumer spending habits, to facilitate the development of

household consumer-friendly applications (apps) based on market trends.
• It is registered in South Africa and its year of assessment ends on 28 February.
• It is a registered VAT vendor making only taxable supplies.

For the past few years they have been working on a new idea to improve online advertising
associated with commonly used household applications (apps). Their key analyst, Mr Hehure,
who worked on the project from the start, resigned on 1 November 2021.

Due to Mr Hehure’s knowledge of the project and the exposure he has had to the sensitive
information of the intended project, D-Analytics paid a restraint of trade payment of R1 400 000
to him on 30 November 2021. Mr Hehure is restrained from competing with the company or to
work for any competitors for two years from the date of payment.

REQUIRED MARKS

Discuss whether or not the restraint of trade payment of R1 400 000 paid by D-
Analytics (Pty) Ltd will qualify as a deduction in terms of the general deduction
formula (section 11(a) read with section 23 of the Income Tax Act) for the year of
assessment ending on 28 February 2022. In addition, consider any other section/s
of the Income Tax Act, in which the restraint of trade payment might be deductible.
15

List all the requirements and discuss each requirement in relation to the information
provided. Include any calculations where necessary.

Ignore case law.

QUESTION 2 (30 marks)

PART A
Buffalo (Pty) Ltd manufactures a variety of African beers. The company has provided you with
the following background in respect of the enterprise:
• Its manufacturing activities have been approved by SARS as a qualifying process of
manufacture.
• The company is not a small business corporation as defined in the Income Tax Act, 1962
(Act 58 of 1962), as amended.
• Its financial year ends on the last day of February.
• Buffalo is a registered VAT vendor making only taxable supplies. Where needed, Buffalo
obtained valid tax invoices and the required documentation for all its transactions.
• All amounts exclude VAT where applicable, unless specifically stated otherwise.

The company’s gross profit and other income, before other expenses is presented as follows:

Extract of statement of profit or loss and other comprehensive income for the year ended
28 February 2022:

Notes R
Sales 1 9 750 000
Cost of sales 2 (4 029 570)
Gross profit 5 720 430
Other income 50 000
Interest received 3 50 000
Total income 5 777 430

Notes:
1. 5% of the sales amount reflected above, were returned. The adjustment for these returns
has been made to the cost of sales account only, in the statement presented above.
2. Cost of sales, all at cost price, was determined as follows:
R
Opening stock 1 719 280
Add: Purchases 5 626 000
Less: Closing stock (3 315 710)
4 029 570

The market value for the opening stock was R1 650 000 on 1 March 2021 and the market
value for the closing stock was R3 400 000 on 28 February 2022.

3. Interest was received from a fixed deposit with Afreak Bank (a local South African Bank).
 REQUIRED – PART A MARKS
Make the appropriate adjustments to each the amounts provided in the extracted
statement (and notes hereto) above to determine the amount ultimately to be
6
included in taxable income. Also indicate, where no adjustments are required, or
amounts are exempt.

PART B
Further to the above, you were furnished with the following in respect of additional expenses
incurred by Buffalo during the year ended 28 February 2022. Expenses have been listed in
alphabetical order.

1. Annuity – R16 000

Buffalo paid an annuity to Lebogang, the widow of a deceased employee of Buffalo.

2. Depreciation – R94 625

a. Equipment purchased for an amount of R1 293 750 (including VAT) at the start
of January 2022 was brought into use on the same day. The equipment was not
used as part of the process of manufacture.
b. A delivery van was purchased for R168 000 on the same day as the equipment
referred to in 2(a) above, for making deliveries to clients. It was however, only
brought into use on 1 February 2022; and
c. A yeast extraction machine, a machine used directly in the manufacturing
process, was purchased secondhand for an amount of R190 000 on
1 March 2020. Transport and installation costs amounted to R9 790 and R3 960
respectively. The machine was first brought into use on 1 May 2020.

3. Donation – R450 000

The donation was paid to a local Old Age Home. A valid section 18A receipt was
received. No marketing benefit will be obtained from the donation.

4. Lease premium and lease expenses – R170 000

Buffalo commenced leasing a commercial building for selling directly to the public. The
details of the lease agreement are:
• Commencement date on 1 April 2021
• 5-year period, with an optional extension period of another two years.
• Lease premium, for right of use of property for R84 000, paid on 1 May 2021.
• Buffalo agreed to improvements on the premises to the value of R222 000
and paid a monthly rental amounting to R12 500, starting 1 May 2021.
• The building improvements commenced on 1 May 2021 and were completed
and brought into use on 1 January 2022.
• The total cost of the improvements was R205 000.
 The amount of the lease improvement constitutes income in the hands of the lessor.

5. Penalties – R12 105

Buffalo paid penalties for the late submission of tax returns to SARS.

6. Restraint of trade payment agreement – R1 000 000

A former director of the company resigned 31 December 2021 and was paid a restraint
of trade amount. The director contractually agreed not to associate with any competitor
for a five-year period from 31 December 2021.

7. Salaries and bonusses – R850 000

Salaries included a performance bonus payment to production staff for exceeding the
sales and production targets and was paid on 28 February 2022.

Additional information:

Binding General Ruling: No. 7 lists the following write-off periods:

o Non-manufacturing equipment: 5 years

o Delivery vehicles: 4 years

REQUIRED – PART B MARKS

Calculate the income tax liability of Buffalo (Pty) Ltd for its 2022 year of
assessment. Provide brief reasons for each of the amounts excluded from your 24
calculation. Ignore any Capital Gains Tax (CGT) effects.
QUESTION 3 (15 marks)

The following relates to a manufacturing company that operates in the Western Cape.
- It is a registered vendor for Value-Added Tax (VAT) purposes
- It imports specialised raw materials from Austria on a regular basis to be used in the
manufacturing process.
- It also sources various raw materials locally.
- SARS has approved an apportionment ratio of 90% for input tax where input tax relates to
both taxable and exempt supplies.

The following financial information relates to the one-month tax period ending 31 October 2021.
All amounts exclude VAT unless specifically stated otherwise.

1. Sales (total tax invoices) – R9 150 500

- The total tax invoices issued for October 2021 amounted to R9 150 500. Only
R6 215 600 of this amount was received in October 2021.
- A tax credit note for an amount of R27 600 (including VAT) was issued on
23 October 2021 to a client who returned damaged products sold to the client on
11 October 2021.

2. Fees received from in-house day care facility operated by the company for the
benefit of the employees – R187 500
- Employees are charged a small fee for their children to attend the in-house day care
facility (nursery school).

3. Raw materials imported from Austria – R?

The customs duty value of the raw materials was R2 375 400 and the import surcharges
were R74 900.

4. Raw materials sourced locally – R4 500 720

All raw materials (purchased locally and internationally) are used solely for the making
of taxable supplies.

5. Insurance paid – R8 299

- For day care facility (nursery school).

6. Purchase of second-hand industrial production equipment – R400 200

- Purchased from a local non-vendor on 22 October 2021 for a total amount of
R750 000.
- An amount of R400 200 was paid on 31 October 2021 and the remaining balance
on 25 November 2021.

7. Bank Charges – R12 500

These only relate to the manufacturing operations of the enterprise.

8. Electricity – R140 070

The electricity paid was for both the day care facility and the manufacturing plant and
includes VAT.
REQUIRED: MARKS

Calculate the VAT payable by/refundable to company that should be declared

15
on the VAT201 return for the one-month tax period ending on 31 October 2021.
Clearly show Output and Input VAT.

Should no VAT be applicable, provide a reason.

QUESTION 4 (12 marks)
You obtained the following information in respect of Gorilla (Pty) Limited:

• The company manufactures safety devices for vehicles and is not a small business
corporation as defined in the Income tax Act
• The company has a February year end
The following financial information for tax purposes has also been received:

Assessed Tax Calculated Taxable Income

Date
Year assessment Date
was issued calculated
2022 R3 885 000 30 April 2022
2021 R2 850 000 25 August 2021
2020 R2 640 000 25 August 2020
2019 R2 250 000Note 1 25 April 2019

Note 1: The 2019 year of assessment has not been assessed yet, but the taxable income was
calculated on 25 April 2019.

REQUIRED MARKS
Calculate the following in respect of the 2022 year of assessment:

a) First provisional tax payment; and 5.5

Provide a brief reason for determining the basic amount

b) Second provisional tax payment 2.5

c) Third provisional tax payment; and

4
Clearly state by which date the payment must be made to SARS
QUESTION 5 (15 marks)

Jeffrey (59 years old), a successful businessman, disposed of his assets during the 2022 tax year,
when he decided to retire to the tranquillity of Bredasdorp.
Below follows a list of the proceeds and associated costs incurred by Jeffrey, with corresponding
dates.

Costs Date Total Date

incurred incurred Proceeds sold
House in Pretoria
- Purchase price / sale of house R3 million 1/10/2000 R7.5 million 30/9/2021
- Additional acquisition costs on purchase
of house R130 000 1/10/2000
- Sales commission paid on sale of house R300 000 30/9/2021
- Swimming pool R200 000 30/6/2006
Cost to close-up pool R80 000 1/11/2018
Business R4 million 15/6/2006 R8 million 31/1/2022
Boat (15 metres)
- Purchase cost & proceeds on sale of boat R350 000 15/11/2001 R850 000 15/10/2021
- Transporting the boat to the buyer R50 000 14/10/2021

Additional information:

House in Pretoria – primary residence

- Jeffrey has always made use of a home office to work from for business purposes. His home
office comprised 10% of the total floor space of the house.
- The pool was built for his children, but when they had all moved out of home, he decided to
have the swimming pool filled with soil and covered it with grass.
- On 1 October 2001, the house’s market value was R3 900 000 and the time-apportionment
base cost, correctly calculated, was R4 100 000.

Business:

- Jeffrey purchased the franchise and was actively involved in the operations of the franchise.
- The franchise is a ‘small business’ as defined.

Boat:

- The boat was used for private purposes only.

- As the buyer was based in Durban Jeffrey agreed to transport the boat to Durban at his own
cost on sale of the boat.

REQUIRED: MARKS

Calculate Jeffrey’s taxable capital gain/(capital loss) for the 2022 year of 15
assessment.
QUESTION 6 (13 marks)

Carlos is 30 years old and married (out of community of property). The couple has a four-year-
old child. Carlos acquired the assistance of an unqualified accountant to calculate his net normal
tax for the year ended 28 February 2022. The accountant determined Carlos’s taxable income as
R813 915

You ascertained that the accountant’s calculation of R813 915 did not take any of the information
contained in the following 3 items (and the impact thereof) into account:

1. Provident fund and retirement annuity fund contributions

Carlos made contributions, amounting to R40 000, to a provident fund during the 2022 year
of assessment. In addition, his employer also made additional contributions, amounting to
R20 000, to the provident fund, on his behalf.

Carlos also made contributions, amounting to R190 000, to a retirement annuity fund.

2. Medical scheme fee contributions and expenses

The medical scheme fee contributions and expenses are made up as follows:
R
Carlos’s own contributions paid to the medical scheme for the year 32 000
Qualifying medical expenses not paid by or recoverable from the medical scheme 25 000

Carlos’s employer also contributed an amount of R12 000, in addition, to the medical
scheme, on his behalf. Carlos and his family are all members of the medical scheme. No
member of the family has a disability as defined.

3. Gross foreign dividends (from a unit trust) amounting to R4 000. No foreign tax was withheld
from the foreign dividends.

REQUIRED: MARKS

Calculate Carlos’s net normal tax for the year of assessment ended
28 February 2022. You may assume that Carlos’s remuneration amounted to 13
R785 900 (correctly calculated) for the 2022 year of assessment.