SUGGESTED SOLUTION TO EXERCISE 29.

8
Page 1 of 3 pages
Out of Africa (Pty) Limited

Suggested Solution to Part 1

The correcting journal entries and explanations are as follows:
Sales to local customers
No adjustment is required for the output tax accounted for on sales to local customers. Value-added tax is levied at the 15% standard
rate on these sales.
Sales to foreign customers
Value-added tax output Dr 7 500
To Sales 7 500

Being the reversal of output tax incorrectly determined at 15% instead of at 0% on the export sales.
Export sales are a zero-rated supply (section 11(1)(a)) and output of nil tax should be accounted for on the R57 500.
Interest on current account
Value-added tax output tax Dr 120
To Interest 120
Being the reversal of output tax incorrectly accounted for on the interest earned.
Interest is a ‘financial service’ as defined (section 2) and is therefore an exempt supply (section 12(a)).
Indemnity award
Indemnity award Dr 35 100
To Value-added tax output tax 35 100
Being output tax accounted for on the receipt of an indemnity award.
The receipt of the indemnity award is a deemed supply (section 8(8)) and output tax of R35 100 (R269 100 × 15 / 115) must be
accounted for. Out of Africa (Pty) Limited would have enjoyed an input tax deduction on the purchase of the delivery vehicle (because it
is not a ‘motor car’ as defined). The proviso to section 8(8) does not apply.
Purchases
No adjustment is required for the input tax deducted on the trading stock purchased. These goods are purchased in the course of making
taxable supplies.
Pamphlets
No adjustment is required for the input tax deducted for the printing of the pamphlets for distribution since input tax on the amount
incurred is deductible. These goods are purchased in the course of making taxable supplies.
Cocktail party
Advertising and marketing Dr 525
To Value-added tax input 525
Being the reversal of input tax incorrectly deducted on a cocktail party hosted for customers.
The input tax for the cocktail party is not, however, deductible since these expenses constitute the supply of ‘entertainment’. Input tax of
R525 (R4 025 × 15 / 115) is therefore denied under section 17(2)(a). The exception in section 17(2)(a)(i)(aa)(i) does not apply since Out
of Africa (Pty) Limited does not continuously or regularly supply this entertainment to its customers for a consideration.
Telephone and internet charges
No adjustment is required for the input tax deducted for telephone and internet charges. These goods and services are purchased in the
course of making taxable supplies.
Depreciation
No adjustment is required for depreciation. Depreciation in an accounting book entry and, therefore, does not have value-added tax
consequences.
Motor vehicles
Motor vehicles Dr 78 750
To Value-added tax input tax 78 750
Being the reversal of the input tax incorrectly deducted on the purchase of the double
cab light delivery vehicle.
Value-added tax input tax Dr 22 500
To Motor vehicles 22 500
Being a ‘notional’ or ‘deemed’ input tax deduction on the purchase of the second-hand delivery vehicle.
**2023** /continued on page 2
 SUGGESTED SOLUTION TO EXERCISE 29.8
Page 2 of 3 pages
The double cab light delivery vehicle is a ‘motor car’ as defined and no input tax is deducted on its purchase (section 17(2)(c)).
No adjustment is required for the input tax deducted on the new delivery vehicle purchased since this vehicle is not a ‘motor car’ as
defined.
The second-hand delivery vehicle purchased under a non-taxable supply qualifies for a ‘notional’ or ‘deemed’ input tax deduction of
R22 500 (R172 500 × 15 / 115) since it is not a ‘motor car’ as defined and it has been paid for in cash.
Fringe benefit
Salaries Dr 411
To Value-added tax output 411
Being output tax raised on the ‘company car’ fringe benefit granted to the managing director.
The use of the double cab light delivery vehicle by the managing director is a Seventh Schedule taxable benefit under the Income Tax
Act. A deemed supply therefore arises for value-added tax purposes (section 18(3)) determined as follows:
R525 000 it excludes value-added tax) × 0,3% × 15 / 115 × 2 months = R411.
Value-added tax suspense account (land) Dr 240 000
To Value-added tax input 240 000
Being the reversal of the input tax incorrectly for the land purchased.
Land purchased
The input tax on the land purchased from the property developer is deductible only when payment (that has the effect of reducing or
discharging the obligation for the purchase price) has been made (section 9(3)(d) and section 16(3)(a)(iiA)). Since only one instalment of
five instalments has been paid by 28 February 2023, only a proportionate amount of the input tax may be deducted. The balance of the
input tax of R240 000 (R300 000 – (1 / 5 × R300 000)) is debited to a value-added tax suspense account.
Salaries
No adjustment is required for salaries. It is not a ‘taxable supply’ and, therefore, does not have value-added tax consequences.
Bad debt
No adjustment is required for the bad debt of R13 800 that has been written off. Input tax of nil is deductible since the original sale was
an export to a foreign customer. It was zero rated, with the result that output tax of nil would have been accounted for.
Employees’ subsistence
Employees’ subsistence Dr 210
To Value-added tax input 210
Being the reversal of the input tax deducted for employees’ subsistence.
Employees’ subsistence expenses comprise the supply of ‘entertainment’ and no input tax may be deducted (section 17(2)(a)).
Printing and stationery
No adjustment is required for the input tax deducted for the printing and stationery expenses. These goods and services are purchased in
the course of making taxable supplies.
Rentals
Rentals Dr 45
To Value-added tax input 45
Being the reversal of input tax incorrectly deducted on the rental of a water machine.
Input tax for the water machine is not deductible since it is the supply of ‘entertainment’ (section 17(2)(a)).
No adjustment is required for the input tax deduction for the rental of the buildings, the facsimile machine or the photocopying machine.
These goods and services are purchased in the course of making taxable supplies.
Petrol
Petrol Dr 1 260
To Value-added tax input 1 260
Being the reversal of the incorrect amount of input tax deducted on petrol purchases.
Petrol is a zero-rated supply (section 11(1)(h)). This means that value-added tax of nil would have been paid and therefore input tax of nil
is deducted.
Insurance
No adjustment is required for the input tax deducted for the insurance premiums. Although they include insurance premiums for the
double cab light delivery vehicle (a ‘motor car’), the full amount is available since section 17(2)(c) does not prohibit an input tax
deduction for the running expenses of a ‘motor car’.
**2023** /continued on page 3
 SUGGESTED SOLUTION TO EXERCISE 29.8
Page 3 of 3 pages
Buyer’s out of town expenses
Buyer’s out of town expenses Dr 87
To Value-added tax output 87
Being correction to the amount of input tax deducted on the buyer’s out of town trip.
Deductible input tax on the expenditure of R5 897 is as follows:
Airfare 90
Airport taxes –
Accommodation (away from his ‘usual place of residence’) 294
Rental of car (a ‘motor car’ as defined) –
Fuel (zero–rated supply) 0
Insurance 42
Services fee 9
Subsistence allowance –
Deductible input tax 435
Input tax deducted 522
Adjustment for amount incorrectly claimed 87
Suggested Solution to Part 2
Refund due under the preliminary determinations 408 225
Add further input tax deductions or output tax reversals (see above):
 Export sales 7 500
 Interest 120
 Motor vehicle (second-hand delivery vehicle) 22 500 30 120
438 345
Less input tax deduction reversals and further output taxes (see above):
 Indemnity award 35 100
 Advertising and marketing 525
 Motor car (double cab light delivery vehicle) 78 750
 Land 240 000
 Employees’ subsistence 210
 Rentals 45
 Petrol 1 260
 Fringe benefit 411
 Buyer’s out of town trip 87 356 388
Amount due from the Commissioner 81 957

The refund due from the Commissioner for Out of Africa (Pty) Limited’s first two-month tax period 1 January 2023 to 28 February 2023
is R81 957 (see the above workings).

**2023**