QUESTION 1 (30 MARKS, 36 MINUTES)

IGNORE VAT

You have recently started working in the tax department of one of the major accounting firms
on a part-time basis. Your senior manager has given you a few queries from clients that have
already been answered by a former tax consultant.

The tax consultant who prepared the responses was recently fired as their tax knowledge
was not sufficient. Therefore you need to critically evaluate the responses before your senior
manager can respond to the clients.

Below are the queries that have been answered. In each case your answer should be
supported by appropriate reference to the Income Tax Act and case law, where necessary.

Query 1 (8 marks)

Query from John M:

I lived in South Africa my whole life and all my family still lives there. I recently moved to
Australia as I was offered a job here. Before leaving for Australia, I had never been out of
South Africa. I left South Africa on 31 March 2014. I love Australia so much that I won’t move
back to South Africa. I bought myself a house and put my children in one of the best schools
over here.

I had to return to South Africa in June 2014 as my mother got very sick. I stayed in South
Africa from 15 June 2014 until 20 October 2014 when I returned to Australia.

I was told that I have to pay normal tax on my worldwide income for the whole year of
assessment as I am still considered a South African resident. Please advise me if this is true.

Tax Consultant Response:

You came back to South Africa for more than 91 days therefore you are a South African
resident and you must pay tax on your worldwide income.

Query 2 (14 marks)

Query from Sam E

I am a South African resident and I have a number of investments. I am 35 years old. For the
year of assessment ended 28 February 2015 I earned the following.

R
Interest from a South African bank 50 000
Interest from a Swiss bank 65 000
Local dividends received as part of an annuity 200 000
Foreign dividends (I hold 15% of the equity shares and voting rights) 150 000
Foreign dividends (I hold 7% of the equity shares and voting rights) 100 000
Rental income for an apartment in the UK 120 000

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In addition to the above I purchased an annuity on 1 June 2013 for R20 000. It pays R500 a
month for 5 years from the day I purchased it. On the 30 September 2014 I commuted the
annuity for a lump sum of R14 000.

I am unsure of how the above investments will affect my taxable income. Please can you
calculate my taxable income from the above investments?

Tax Consultant Response:

R
Gross Income
Interest from a South African Bank 50 000
Interest from a Swiss Bank 65 000
Local dividends received as part of an annuity 200 000
Foreign dividends (15% shares held)- para (k) 150 000
Foreign dividends (7% share held)- para (k) 100 000
Rental income- not from a South African source therefore not included in gross 0
income
Monthly annuity- para (a) 6 000
(500 x 12)
Lump sum- capital in nature therefore not included in gross income 0
Less: Exempt income
Local interest- s(10)(1)(i) (34 500)
Foreign interest- s(10)(1)(h) (65 000)
Local dividends- s(10)(1)(k) (200 000)
Foreign dividends- no exemption because you hold more than 10% of the 0
shares.
Foreign dividends (46 429)
(13/28 x 100 000)
Rental income- no exemption available for rental income 0
S10A purchased annuity exemption for monthly annuity (6 000)
S10A – no exemption for lump sum as not included in gross income 0
Income 219 071

Query 3 (8 Marks)

Query from Gary DV

I was offered a job in the Cayman Islands and I am going to accept the offer. I didn’t want to
move over there with all my belongings so I decided to sell a few of my assets. The assets
that I sold were:

 My car: I drove a Mini Cooper S and I bought it in 2010. I sold it for R180 000 and I
bought it for R300 000.
 My house that I lived in: I bought it in 2005 for R1 500 000 and sold it for R 2 800 000.
 My apartment that I rented out to tenants. I bought it in 2008 for R800 000 and sold it
for R1 600 000.
 My Yacht (15 m in length): I bought it for R770 000 and sold it for R500 000.

None of these assets were ever used for business purposes. Please can you advise me on
the normal tax consequences of the above transactions?

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Tax Consultant Response:

Some of these assets are capital in nature and therefore will not be included in gross income.
They might still be included in taxable income in terms of S26A. The ones that are not capital
will be included in gross income.

Car: Proceeds 180 000

Base cost (300 000)
Capital loss: (120 000)

Capital loss however it is disregarded as it is a personal use asset.

House: Proceeds 2 800 000

Base cost (1 500 000)
Capital gain: 1 300 000

Capital gain however it is disregarded as it is a personal use asset.

Apartment:

You rented it out and therefore when you bought the apartment you entered into a scheme of
profit making so the apartment is revenue in nature therefore it will be included in gross
income.

Yacht: Proceeds 500 000

Base cost (770 000)
Capital loss (270 000)

Total capital gains/capital loss (270 000)

Inclusion rate (x 66.6%) (179 820) to be set off against taxable income

REQUIRED:

QUESTION 1 MARKS
Subtotal Total
With reference to legislation and case law where necessary,
critically evaluate the responses that have been prepared by the
previous tax consultant for the above three queries. 30 30
TOTAL MARKS 30

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QUESTION 2 (30 MARKS, 36 MINUTES)

You are currently employed by Ta-X-perts and your company assists other companies to
complete their tax returns. The company that you are currently assisting is Universal
Sportswear (Pty) Ltd.

Universal Sportswear (Pty) Ltd (Universal) is a company based in South Africa. The company
specialises in the manufacture of sports equipment and sports clothing. It sells locally and it
exports to certain countries when big sporting events are being held. In addition to this, the
company also owns a number of local and foreign investments. The company does not seek
any controlling interests. Therefore the investments never exceed 9% of the companies’
shares.

Universal’s financial director decided to take leave to go and watch the Cricket World Cup in
Australia and was not able to prepare the company’s tax return. Therefore Universal has
asked for your assistance.

To help with the preparation of the tax return, you have been provided with the Statement of
Comprehensive Income for the year ended 28 February 2015. All figures are exclusive of
VAT unless otherwise stated or unless the context dictates that a figure includes VAT.

Universal Sportswear (Pty) Ltd

Statement of Comprehensive Income for the year ended 28 February 2015

NOTES R
Sales 1 26 000 000
Cost of sales 2 (17 333 333)
Gross Profit 8 666 667
Add: Other income
Investment income 3 650 000
Profit on sale of asset (Machine A) 4 7 000

Less: Expenses
Rent expense 5 (30 000)
Salaries and wages 6 (4 567 897)
Bad debts 7 (2 678 965)
Depreciation 4&8 (1 500 000)
Net profit before tax 546 805

NOTES:

1. Sales
Sales include sales of all sports equipment that has been sold locally and overseas during
the year of assessment. Some inventory was sold to an overseas customer FOB
destination point. The inventory is expected to arrive at the customer’s premises on
21 March 2015 and the customer will pay at the time of receiving the goods. The
inventory was sold for R20 000 and is included in the sales figure.

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2. Cost of Sales
The cost of sales is calculated as follows:

R
Balance on 01/03/2014 (note (a) below) 6 450 000
Raw materials purchased and finished goods (note (b) and (c) 14 850 230
below)
Balance on 28/02/2015 (note (d) below) (3 966 897)
17 333 333

(a) The inventory was written down by an amount of R600 000 as it was impaired.
This impairment could not be justified for tax purposes and was disallowed by the
Commissioner.

(b) Raw materials to be used in the production of the sports equipment was
purchased from China on 5 February 2015. The goods were shipped on the
26 February 2015 FOB shipping point and will only arrive in South Africa on
5 March 2015. The goods were purchased for R365 430 and the purchase was
recorded on 26 February 2015. This amount is included in the purchases figure
above.

(c) During the year one of its local suppliers donated material with a market value of
R50 000 to Universal. The bookkeeper was unsure of how to account for this
transaction and thus is has not been included in the purchases figure.

(d) The closing stock was determined based on a stock count of inventory on the
factory floor on 28 February 2015.

3. Investment income
Universal earned the following investment income:
 Dividends from a local company of R200 000.
 Interest from a local bank of R150 000.
 The balance of the investment income consists of dividends from a company
situated in the United Kingdom.

4. Profit on sale of asset

Universal bought a new machine (Machine A) from a non-VAT vendor
on 15 December 2013. The machine was used to manufacture sports equipment since its
acquisition. It was bought for R250 000 and had an open market value of R245 000 at
that time. In April 2014 the machine was moved from one part of the factory to another;
due to the specialized nature of the machine and amount of R35 000 was paid to move it.

The machine was sold on 10 January 2015 for R300 000.

5. Rent expense
Universal started renting a new building from 1 January 2015. To sweeten the lease
agreement, Universal agreed to pay the lessor a year’s rental in advance and duly paid
the lessor an amount of R180 000.

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6. Salaries and wages
R
Salaries and wages (note (a) below) 3 997 897
Employer contributions (note (b) below) 570 000
4 567 897

(a) These are salaries and wages paid to employees for the year.

(b) All employees are required to be part of the company’s pension fund. The company
contributes on a 1:1 basis with employees to the pension fund.

7. Bad debts
The bad debts for the year included an amount that was loaned to an employee during a
prior year. The company wrote off the loan which amounted to R33 000.

The bad debts balance per the Statement of Comprehensive Income includes the
movement in the allowance for doubtful debts.

The balance of trade debtors per the Statement of Financial Position was:
Opening trade debtors R2 044 752
Closing trade debtors R2 674 568

8. Depreciation
Depreciation has been calculated on the following assets:
 An office desk that was purchased to be used in the administration department. It
was bought on 1 January 2015 for an amount of R7 752 (including VAT).

 Universal bought their new factory building from Kimmelon (Pty) Ltd for
R3 500 000. The market value was R3 000 000 on the date of purchase.
Kimmelon previously used the building as an administration block.

 Other machines that are used in the manufacturing process were all bought on
12 January 2012 new and had a cost of R1 200 000 while the market value was
R1 500 000.

 A computer that was used in the administration office. It was bought on

31 October 2014 for R5 000.

Additional information:
a. SARS permits a deduction of 25% of the list of doubtful debts for purposes of the
s11 (j) allowance. The company’s policy is to raise an allowance for doubtful debts
equal to 30% of trade debtors.
b. The write off period for all assets qualifying for s11 (e) is:
 Machines - 5 years
 Office Desks - 4 years
 Computers - 3 years
c. The Commissioner of SARS considers the manufacture of the sports equipment and
sports clothing to be a process of manufacture.

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REQUIRED:

QUESTION 2 MARKS
Subtotal Total
Calculate, providing reasons to support whether the amounts are
taxable or not, the Taxable Income of Universal (Pty) Ltd for the
year of assessment ending 28 February 2015.

Start with net profit before tax of R546 805 and make the
necessary adjustments to determine Taxable Income. Where no
adjustment is necessary this should be stated and a reason
provided. 30 30
TOTAL MARKS 30

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QUESTION 3 (40 MARKS, 48 MINUTES)

Kim Possible (Pty) Ltd (Kim Possible) is a South African company and a registered Category
C VAT vendor. Their financial year-end is the 28 February 2015. The company is a bakery
that supplies various smaller bakeries. Kim Possible is a 90% held subsidiary of G-rant Ltd
which is not a VAT Vendor.

A few years ago, the company purchased the building that it now operates from, however it
only needed two floors and therefore decided to convert the top three floors into 12
apartments, which it rents out to students.

You are assisting the company in preparing its VAT return for the month ended
28 February 2015. The following transactions, which are all VAT inclusive, where relevant,
were entered into during February 2015.

Detail of transactions Notes R

Revenue 1 592 450
Purchases (all from VAT vendors) 2 (142 830)
Insurance proceeds 3 10 000
Purchase of snackwich maker 4 (500)
Purchase of car for prize 5 (100 000)
Telephone costs 6 (700)
Purchase of fixed property 7 (125 000)
Sale of oven 8 78 000
Inventory given to staff 9 (500)

NOTES:
1. Revenue includes the following :
 Sale of brown bread R165 000
 Sale of white bread R213 000
 Sale of cakes R 65 000
 Sale of rolls R 53 234
 Sale of croissants, muffins, doughnuts and scones R 72 216
 Rental income R 24 000

2. Purchases includes the following to make the bakery goods:

 Eggs R23 450
 Milk R24 546
 Flour R22 504
 Salt R19 088
 Yeast R20 450
 Oil R18 125
 Maize meal R14 667

3. One of the double cab light delivery vehicles was involved in an accident. The
insurance company paid out an amount of R10 000 to repair the vehicle.

4. The company purchased a Russell Hobbs snackwich maker for the employees to use
during their lunch break.

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 5. As part of an advertising campaign, the company had a competition and awarded the
winner a car as a prize. The car was purchased 2nd hand from a VAT vendor.

6. The telephone bill for the month was R700.

7. Kim Possible decided to purchase a new building on 30 November 2014 to open

another bakery. The whole building is going to be used as a bakery. The building was
purchased from Mac Kay (not a VAT vendor) who used the building as a warehouse.
The market value on the date of purchase was R1 200 000. Payment takes place
monthly for a year starting on the 1 January 2015. Registration in the Deeds Office is
going to take place on the 1 April 2015.

8. Kim Possible sold an old oven to G-rant Ltd on 1 February 2015. The open market
value on the date of sale was R55 000.

9. Kim Possible decided to give some cakes to all their staff as a thank you for working
so hard. The open market value of the cakes was R600 on the date it was given to the
employees.

QUESTION 3 MARKS
Subtotal Total
3.1 Discuss, with reference to legislation where necessary what
the VAT consequences would be for Kim Possible during
the VAT period under review of the transactions detailed in
Note 1 (Revenue). 12

Efficient and effective communication. 1 13

3.2 Determine, with reasons, the VAT consequences for Kim
Possible for the 1-month VAT period ended
28 February 2015 in respect of Notes 2 to 8.

Show all workings clearly and round all numbers to the

nearest Rand where relevant. 13 13
3.3 Discuss the VAT and normal tax consequences, if any, for
Kim Possible on the cakes which it provided to its
employees in Note 9. 10

Efficient and effective communication. 1 11

3.4 Assuming Kim Possible had a number of branches all over
South Africa.

What requirements would need to be satisfied for the

branches to be able to register as separate VAT vendors? 3 3
TOTAL MARKS 40

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 MONETARY CHANGES – ITC 2015

Applicable in respect of years of assessment commencing on or after 1 March 2014

(i.e. 2015 year of assessment) – unless specifically stated otherwise

REBATES (section 6)
Primary rebate increases from R12 080 to R12 726;
Secondary rebate (65 years of age or older) increases from R6 750 to R7 110; and
Tertiary rebate (75 years of age or older) increases from R2 250 to R2 367.

MEDICAL REBATES (section 6A)

Benefits to the taxpayer: R242 increases to R257;
Benefits to the taxpayer and one dependant: R484 increases to R514;
Benefits to each additional dependant: R162 increases to R172.

INTEREST EXEMPTION (section 10(1)(i))

Natural persons younger than 65 years: R23 800 remains unchanged;
Natural persons 65 years and older: R34 500 remains unchanged.

CHANGES TO RATES of NORMAL TAX

 Natural persons, estates and special trusts
Taxable Income Rate of Tax

0 – 174 550 18% of each R1

174 551 – 272 700
272 701 – 377 450
377 451 – 528 000
528 001 – 673 100
673 101 and above
31 419 + 25% of the amount above 174 550
55 957 + 30% of the amount above 272 700
87 382 + 35% of the amount above 377 450
140 074 + 38% of the amount above 528 000
195 212 + 40% of the amount above 673 100

 Small Business Corporation (as defined in s12E)

(Applicable in respect of years of assessment ending on or after 1 April 2014)
Taxable Income Rate of Tax

0 – 70 700 Nil
70 701 - 365 000 7% of the amount above R70 700
365 000 - 550 000 R20 601 + 21% of the amount above R365 000
550 001 and above R59 451 + 28% of the amount above R550 000

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TRAVEL ALLOWANCE

Value of the vehicle Fixed cost Fuel cost Maintenance

cost

(R) (R p.a.) (c/km) (c/km)

0 - 80 000 25 946 92.3 27.6

80 001 - 160 000 46 203 103.1 34.6
160 001 - 240 000 66 530 112.0 38.1
240 001 - 320 000 84 351 120.5 41.6
320 001 - 400 000 102 233 128.9 48.8
400 001 - 480 000 120 997 147.9 57.3
480 001 - 560 000 139 760 152.9 71.3
exceeding 560 000 139 760 152.9 71.3

Alternative fixed rate for certain re-imbursive travel allowances: 330 cents per kilometer

SUBSISTENCE ALLOWANCE

 Local travel:
o Allowance for incidental costs only – R103 (previously R98) for each day.
o Allowance for meals and incidental costs – R335 (previously R319) for each day.
 Overseas travel:
o Actual accommodation plus a prescribed amount based on the relevant country
(which amount will be provided in the 2014 ITC if necessary).

REPO RATE (for purposes of calculating the “official rate of interest”)

5.75% with effect from 1 August 2014

RESIDENTIAL ACCOMODATION
The amount of the abatement in the formula increased to R70 700 from 1 March 2014.

LOW COST HOUSING

Definition of low cost residential unit – cost of apartment threshold increases to R350 000
from 1 April 2013.
Definition of low cost residential unit – cost of buildings threshold increases to R300 000 from
1 April 2013.

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