INTEGRATION: QUESTION 1 45 marks

Background

Blendit (Pty) Ltd (“Blendit”) is a South African resident company, situated in Johannesburg, which
manufacturers smoothie makers. Blendit sells their different smoothie makers to both local and
foreign customers through their online store and their retail stores situated in Johannesburg, South
Africa. The South African Revenue Service (SARS) accepts Blendit’s operations as a “process of
manufacture”.

Blendit has a 30 June financial year-end and is a registered Category B value-added tax (VAT)
vendor. Blendit makes 97% taxable supplies. Where possible, Blendit will plan their tax matters in
such a manner to legally minimise their tax liability.

Equity shares and voting rights in Blendit are directly held as follows:
Shareholder Shares held Notes
Air Master (Pty) Ltd 550 Air Master (Pty) Ltd is a South African resident
company and registered VAT vendor that makes 100%
taxable supplies.
Ms Maria Strawberry 450 Ms Maria Strawberry is a 45-year-old South African
resident who is an employee of Blendit. She is not a
registered VAT vendor.
Total issued shares 1 000

The shareholding in Blendit did not change at any time during Blendit’s 2024 year of assessment.

All amounts exclude VAT, unless specifically stated otherwise. All relevant and valid documentation
required in terms of the VAT Act, 89 of 1991, as amended has been obtained.

Blendit’s taxable income amounted to R9 100 000 before the following transactional information was
taken into account:

1. Blendit sold 15 smoothie makers of R5 175 (including VAT) each, which was delivered to a
customer on 27 June 2024. The customer paid for the smoothie makers in cash on
2 July 2024. This transaction was not accounted for in the 2024 year of assessment because
payment was only received after year-end. The value of the 15 smoothie makers was not
included in closing stock (see note 2.4 below) as the stock was manufactured during the 2024
year of assessment.

2. Opening stock and closing stock values have not been taken into account in Blendit’s 2024
financial year’s cost of sales amount.

2.1 Blendit had 55 smoothie makers in stock at the end of its 2023 year of assessment that
were manufactured at a cost of R165 000 in total.

2.2 The previous financial manager (Mr Freddy Apple) retired on 31 December 2023. He
received a smoothie maker in recognition for his hard work on 20 December 2023. The

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 cost to manufacture this smoothie maker was R3 000 and the sales price R4 500 on
20 December 2023. Mr Freddy Apple did not pay for the smoothie maker.

2.3 Blendit donated a smoothie maker (that was initially manufactured with the intention to
sell) to the Rainbow Kids Foundation during May 2024. This smoothie maker originally
cost R8 800 to manufacture and had market value of R12 000 on the date of the
dontation. No marketing benefit was obtained from this donation, but Blendit received a
valid tax receipt for this donation.

2.4 After a physical stock count performed on 30 June 2024, Blendit had 60 smoothie makers
in stock. The cost to manufacture the 60 smoothie makers amounted to R186 000. These
smoothie makers had a market value of R216 000 and a net realisable value of
R180 000.

3. During its 2024 year of assessment, Blendit provided the following employment benefits:

3.1 Blendit contributed R460 000 towards the employees’ pension fund.

3.2 Salaries and wages amounting to R3 450 000.

4. Blendit wrote off the capital portion of a loan granted to Air Master (Pty) Ltd during the current
year of assessment. A loan of R180 000 was made to Air Master (Pty) Ltd in order to fund the
purchase of a manufacturing machine that was used by Air Master (Pty) Ltd in their
manufacturing process. The write-off of the loan was a commercial decision by Blendit, and not
a donation. Air Master (Pty) Ltd still owns this manufacturing machine.

5. Accounting depreciation of R1 162 500 was deducted from the taxable income for the 2024 year
of assessment.

The fixed asset register of Blendit on 30 June 2024 indicated the following:
Item Note Acquisition / Useful life Cost Depreciation
Lease date (years)
Leased
manufacturing
premises 6.1 01/03/2021 8 R4 500 000 R562 500
Manufacturing
machine 6.2 28/02/2023 5 R2 400 000 R480 000
R483 000
Delivery vehicle 6.3 01/04/2023 4 (incl. VAT) R120 000
Retail stores 6.4 ? 10 ? R0
R1 162 500

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5.1 On 1 March 2021, when their previous lease agreement ended, Blendit entered into a new lease
agreement with Simply Rent (Pty) Ltd (“Simply Rent”) and moved into a new manufacturing
premises. Simply Rent is a South African incorporated company and is not a connected person
in relation to Blendit. The terms of the lease agreement were as follows:

 Commencement date: 1 March 2021.

 Period of the lease: 8 years.
 Monthly rent: R40 000 payable at the beginning of each month.
 Blendit were obliged to improve the manufacturing premises so it could be used for
its manufacturing operations at a cost of R4 000 000. The improvements commenced
on 1 March 2021 and were completed on 31 August 2021 at a total cost of
R4 500 000. The manufacturing premises were brought into use by Blendit on
30 September 2021.

5.2 A second-hand manufacturing machine was purchased on 28 February 2023 for an amount of
R2 400 000 from a person not registered for VAT. Blendit incurred installation costs of R300 000
on 15 March 2023. The machine was brought into use on 20 March 2023.

5.3 Blendit only have one delivery vehicle that was purchased on 1 April 2023 for an amount of
R483 000 (including VAT) and immediately brought into use. On 31 January 2024 the delivery
vehicle was stolen together with trading stock that was meant to be delivered to clients on the
same date. Blendit received a consideration of R523 250 from the insurance company on 15
February 2024 of which R500 250 relates to the stolen vehicle and the remaining amount to the
trading stock.

Blendit purchased and brought into use a new and unused manufacturing machine with the
proceeds received from the insurance company for R985 000 on 1 April 2024.

In terms of Binding General Ruling: No. 7, delivery vehicles’ proposed write-off period is four
years.

5.4 Blendit owned two retail stores in Johannesburg, South Africa by the end of its 2024 year of
assessment. The information relating to their retail stores are as follows:

Retail store 1 was a second-hand retail store that was leased by Blendit for the period 1 January
2022 to 31 December 2023 at an annual rental amount of R750 000. The lease payments for
the 2024 year of assessment were already correctly deducted from the preliminary taxable
income. When the lease term ended, Blendit acquired this retail store for R800 000. The open
market value (as defined in the VAT Act) of this retail store amounted to R2 700 000 on
31 December 2023.

Retail store 2 was purchased new and unused for R2 415 000 (including VAT) on
1 January 2017 and immediately brought into use. Blendit spent R100 000 to repaint the walls
of this retail store and R29 900 (including VAT) as the total cost for four new cash registers on
1 June 2024. These cash registers were brought into use on the date it was purchased.

In terms of Binding General Ruling: No. 7, cash registers’ proposed write-off period is five years.

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 Retail store 3 was purchased second-hand from a non-connected person for
R2 100 000 on 1 January 2018. Blendit did not qualify for any allowances on this building. This
retail store was situated in Pretoria, South Africa. The purchase price of the retail store remained
outstanding on a loan account on which monthly interest payments at 6% was made. During
2021, at the time when the outstanding capital amount on this retail store was R1 500 000,
Blendit was experiencing severe financial difficulties. For this reason, the seller wrote off the
outstanding capital and interest on 31 December 2021.

Blendit continued to sell smoothie makers through this retail store until
1 October 2023. A large competitor company in the smoothie maker industry offered Blendit a
payment of R550 000 if they would agree not to trade in Pretoria anymore and to continue not
to trade in Pretoria for a period of three years. Blendit agreed because the retail store in Pretoria
was not as successful as the two in Johannesburg. The competitor made the payment to Blendit
on 1 November 2023.

Due to Blendit no longer being able to trade in Pretoria, the retail store was sold for
R2 300 000 to Air Master (Pty) Ltd on 2 February 2024. The market value of the retail store
amounted to R2 500 000 on 2 February 2024. Air Master (Pty) Ltd will use the store in making
taxable supplies.

6. Blendit had an unutilised assessed loss of R2 500 000 (correctly determined and assessed by
SARS) brought forward from its 2023 year of assessment.

Marks
QUESTION 1 - REQUIRED: Sub-
total Total
(a) Give one reason why Blendit will not qualify as a “small business corporation”
as defined for normal tax purposes.
No marks will be awarded for references to legislation. 1 1
(b) Calculate the normal tax payable by Blendit (Pty) Ltd for its 2024 year of
assessment. Start your answer with the preliminary taxable income amount
of R9 100 000.
Clearly show and provide brief reasons for all nil effect items. 44 44
TOTAL MARKS (45)

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