Faculty of Commerce

Taxation 3
COTX302
Examination A – November 2017

Internal Examiner: Stanford Kasai

External Examiner: Carien Cass
Total Marks: 100
Duration: 3 Hours
Sub-Minimum: 40%
Section A: VAT 20 Marks
Section B: Business Entities 30 Marks
Section C: General Deduction Formula 20 Marks
Section D: Capital Gains Tax 30 Marks

Instructions to Candidates:
Read each question carefully

1. Answer all questions in the answer book provided. Start every question on a new page.
2. All rough work should be done in the back of the answer book and indicated as such.
3. This examination paper should not be removed from the examination venue.
4. Please scratch out all blank spaces
5. DO NOT USE CORRECTION FLUID (Tip-Ex). If you make a mistake, neatly cross out the
mistake.
6. Use a non-programmable calculator ONLY.

NB This examination paper consists of 7 pages

EXAM COTX302 November 2017 V17.1 Page 1 of 7
Pearson Institute of Higher Education
Formerly Midrand Graduate Institute
Section A
VAT 20 Marks
Answer the following questions in your answer book.
Question One
Chelsea (Pty) Ltd (Chelsea) is a retail shop dealing in fertilizer supplies for the local market. The
company’s first VAT period ended 31 December 2016 and the second period 28 February 2017.
The financial year-end of the company is 28 February 2017. All amounts include VAT, where
applicable.

1. Chelsea (Pty) Ltd issued an invoice to Eden hazard (Pty) Ltd on 1 February 2017 for
R6 840 000 in respect of supplies to be made for the period 1 March 2017 to 28 February
2018.

2. In an attempt to increase sales, Chelsea bought a brand new Toyota Hilux 2.8
GD-6 4x4 Raider Diesel Single Cab (a motor vehicle as defined) as a competition prize for
the local farmers who purchased fertilizer during the months of January and February
2017. The car was purchased from a local car dealership at a special price of R436 506.
The market value of the car was R536 826. The motor car was won and delivered to the
winning customer at the end of the competition on 28 February 2017.

3. The manager at Chelsea is provided with the free use of a delivery truck for domestic
purposes (not a motor car) since 1 December 2016. The determined value (for VAT
purposes) of the truck is R85 500. Chelsea pays for all fuel and maintenance to the vehicle,
except when the manager is on holiday. During February 2017, the manager went on a
three-week holiday with the truck (to tow his caravan). The manager used the company’s
petrol card during the holiday. On his return he paid the company an amount of R800
consisting of R450 for the use of the truck and R350 for fuel.

4. On 2 January 2017 Chelsea purchased a second-hand delivery vehicle from Mr.Gibbs

Smalling (a non-vendor) for R36 480 and paid the amount immediately. The company’s
original intention was to use the vehicle for deliveries, but on 3 January 2017 the company
received an offer from a client in Portugal (Josefa Mario) to purchase the vehicle from
Chelsea for an amount in Portuguese currency equivalent to R68 400 (correctly
converted) that Chelsea could not refuse. They accepted the offer and the vehicle was
EXAM COTX302 November 2017 V17.1 Page 2 of 7
Pearson Institute of Higher Education
Formerly Midrand Graduate Institute
 immediately delivered to Portugal on 5 January 2017, before they brought the vehicle into
use. The transaction was correctly recorded as a debtor for R68 400, payable on 31
January 2017. By 15 February 2017 no payment was received from the debtor. Chelsea
tried in vain to trace the debtor and had to eventually write off the outstanding debt as bad
debt on 28 February 2017.

YOU ARE REQUIRED TO:

Determine the VAT implications for Chelsea (Pty) Ltd for the year of assessment ended on
28 February 2017 and show the necessary calculations of the input and output tax on the above
transactions.
Provide brief reasons where no VAT is calculated.
You may assume that the supply of the motor car is a deemed disposal in terms of section 8(13).
NB: Round off your final answers to the nearest rand. (20)

[20]

SUBTOTAL: [20]

EXAM COTX302 November 2017 V17.1 Page 3 of 7

Pearson Institute of Higher Education
Formerly Midrand Graduate Institute
Section B
Business Entities 30 Marks
Answer the following questions in your answer book.

Question One
Forester (Pty) Ltd (VAT vendor) is a manufacturing company and it is not a small business
corporation as defined in the Income Tax Act. The following transactions relate to the company’s
trading activities for the year of assessment ended 31 March 2017. All amounts exclude VAT,
unless stated otherwise):
1. Taxable income amounted to R1 820 545, before taking into account the following
information
2. The stock figures for the year were as follows:
01/04/2016 31/03/2017
Cost Price Market Value Cost Price Market Value
Raw material R292 874 R292 936 R576 719 R436 137
Manufactured R150 771 R157 734 R310 541 R234 843

3. Purchases of raw materials made during the year of assessment amounted to R780 567.
4. The company developed a design to be used in the manufacturing process. The registration
of the design was renewed under the Designs Act 195 of 1993 on 1 January 2017, at a cost
of R18 200.
5. The company acquired a patent on 1 April 2016 at a cost of R550 000 and immediately
brought it into use in its income-producing operations. .
6. The following information relates to the transactions regarding fixed assets:
o Factory A was erected for R3 000 000 and brought into use on 1 June 2014.
o A new computer, which is used for running the business, was purchased for R34 200
on 1 June 2016 and brought into use on the same date.
o A motorcycle was purchased on 1 November 2016 for R43 200, for making ad hoc
deliveries. On 31 January 2017, the motorcycle was scrapped after having been
damaged in an accident.
7. Forester (Pty) Ltd acquired a special XFG machinery for R80 000 under an agreement
(formally and finally signed by every party to it ) on 1 October 2016, and brought into use
on that date for the purpose of research and development as defined in the Act s 11D.

EXAM COTX302 November 2017 V17.1 Page 4 of 7

Pearson Institute of Higher Education
Formerly Midrand Graduate Institute
 8. A manufacturing machine was destroyed in a fire on 31 May 2016. It cost R352 500 on 1
November 2014. Its tax value at 31 March 2016 was R141 000. Proceeds from its insurer
were R270 000. This machine was replaced by a used machine, which was purchased for
R190 000 cash on 1 July 2016, and brought into use on the same day.
9. An amount of R60 000 (including VAT), relating to trading debtors, was written off as
irrecoverable.
10. Other expenditure incurred on 1 January 2017:

o Repairs to the factory building amounted to R180 000

o A donation of R16 000 to Simunye Children Hospital (A section 18A certificate was
obtained.)

11. Other information:

o Forester (Pty) Ltd has elected the section 11(o) allowance.

o Binding general ruling (BGR) No. 7 lists the following write-off periods (apply them
where applicable):

 Computers 3 years
 Motorcycles 4 years

YOU ARE REQUIRED TO:

Calculate the tax liability of Forester (Pty) Ltd for the year of assessment ended 31 March 2017.
Round off your answers to the nearest Rand.
(30)

[30]

SUBTOTAL: [30]

EXAM COTX302 November 2017 V17.1 Page 5 of 7

Pearson Institute of Higher Education
Formerly Midrand Graduate Institute
Section C
General Deduction Formula 20 Marks
Answer the following questions in your answer book.

Question One
Lizzanie (Pty) Ltd is a management consulting company operating in Randburg. The company is
a registered VAT vendor. Lizzanie (Pty) Ltd has concluded the following transactions for the year
of assessment ended 28 February 2017 and requires your advice on the correct tax treatment of
each of the transactions below:
1.1. R8 600 paid to Homebuilders on 15 December 2016 to repair the roof of the office
building hat had collapsed due to a violent storm. The full amount was recovered from
the company’s insurance. (2)
1.2. R875 was paid to SARS on 31 October 2016 for administrative penalties relating to the
late submission of the annual income tax return for the 2014 year of assessment (2).
1.3. Monthly rental of R1 540 (including VAT) was paid during the year of assessment on
office equipment used exclusively in the business, payable on the first of each
month (10).
1.4. R450 000 paid to Homebuilders on 30 November 2016 for the construction of residential
flats. The flats will be rented out to Lizzanie (Pty) Ltd.’s employees as from
1 January 2017 (6)

YOU ARE REQUIRED TO:

Briefly discuss whether or not the expenses relating to the above transactions (1.1-1.4.) would be
deductible by Lizzanie (Pty) Ltd for the 2017 year of assessment in terms of the general deduction
formula (section 11(a)) and section 23 (prohibited deductions) of the Income Tax Act. Refer to
relevant case law if applicable and list the requirements where necessary. (20).

[20]

SUBTOTAL: [20]

EXAM COTX302 November 2017 V17.1 Page 6 of 7

Pearson Institute of Higher Education
Formerly Midrand Graduate Institute
Section D
Capital Gains Tax 30 Marks
Answer of the following questions in your answer book.

Question One
Abbibus (Pty) Ltd is a company that manufactures soccer balls. The company’s year of assessment
ends on 30 June 2017.
The Factory Building
Abbibus (Pty) Ltd’s factory building was destroyed in a fire on 15 January 2017. The factory
building was insured against losses from fire, and the insurer paid Abbibus (Pty) Ltd an indemnity
payment of R2 400 000 (excluding VAT) on 15 February 2017. The building was originally
erected by Abbibus (Pty) Ltd during March 2001 at a cost of R1 500 000, and it was brought into
use immediately. The total amount of tax allowances claimed in respect of this building for the
2002 to 2016 years of assessment was R1 050 000.
The market value of the building was R1 000 000 on 1 October 2001, and the TAB cost was
R1 187 500.
The Portable Generator
Abbibus (Pty) Ltd purchased a portable generator from a South African company for R85 000 on
1 December 2016 and brought it into use on the same day. Binding general ruling: No 7 (BGR7)
accepts a five-year write-off period for portable generators. Abbibus (Pty) Ltd sold the generator
on 31 May 2017 for R180 000, as the company decided to purchase a more powerful generator in
the next year.

Abbibus (Pty) Ltd has an assessed capital loss from the prior year of assessment of R65 000.

YOU ARE REQUIRED TO:

Calculate Abbibus (Pty) Ltd’s taxable capital gain/loss for the 2017 year of assessment. (30).

[30]

SUBTOTAL: [30]

TOTAL: [100]

EXAM COTX302 November 2017 V17.1 Page 7 of 7

Pearson Institute of Higher Education
Formerly Midrand Graduate Institute